Woolworths Holdings Limited
Registration number: 1929/001986/06
JSE Code: WHL
Impact of SAICA Circular 7/2005
Following the recent press releases from both the South African Institute of
Chartered Accountants (SAICA) and the JSE Limited, SAICA has issued a circular,
number 7/2005 explaining the requirements of IAS17 (AC105) - Leases in respect
of operating leases which include fixed rental increases. The process of using
International Financial Reporting Standards (IFRS) has focussed attention on the
way in which standards are applied and it has become apparent that in South
Africa lease expenditure and income with fixed rental increases have generally
been applied on a basis which is inconsistent with international practice.
IAS 17(AC105) states that lease payments/income should be recognised as an
expense/income on a straight-line basis over the lease term unless another
systematic basis is more representative of the time pattern of the user's
benefit. Many South African lessees and lessors have recognised rental expenses
and income respectively, based on the cash flows in the lease agreement on the
basis that it was considered that the increased cash flows arose as a result of
the increased benefits arising from the leased asset. It is now considered that
the definition of "user's benefit" is only affected by factors which impact the
physical usage of the property.
The straight-line method results in similar impact in the income statement in
each reporting period irrespective of the fact that cashflows differ. In the
case of a lessee with aggregate leases tending towards the beginning of the
lease terms, this would result in a charge to the income statement higher than
the cash flows, giving rise to a lease accrual. Aggregate leases tending
towards the end of the lease terms would result in a lower charge to the income
statement with a concomitant release of the accrual.
Woolworths have assessed the impact of the change in interpretation of the
statement and advise that the impact is not material on a year on year basis.
The impact will be a decrease in earnings per share and headline earnings per
share of 2.9 cents on the financial results to be released for the year ended 30
June 2005. For the comparative year ended 30 June 2004, headline earnings per
share will be restated by 3.1 cents, from 78.6 cps to 75.5 cps. The impact of
the lease accrual on opening retained income at 1 July 2003 is a negative R243m.
As the change in interpretation has no cash impact, it will have no effect on
the cash distribution declaration.
The full accounting impact of the change will be provided in the financial
results issued on the 25th August 2005.
5 August 2005
Norman Thomson, Finance Director - 083 251 6354
Ralph Buddle, Group Finance Executive - 083 412 4923
Cherrie Lowe, Head of Corporate Governance - 021 407 3160
RAND MERCHANT BANK (A division of FirstRand Bank Limited)
Date: 05/08/2005 10:01:07 AM Produced by the JSE SENS Department