Notes to the annual financial statements

for the year ended 30 June

10

Investment properties
    Group
    2008 2007
    Rm Rm
  Balance at the beginning of the year    
     Cost 105.9 109.0
  Current year movements    
     Transfers to land and buildings – (3.1)
  Balance at the end of the year 105.9 105.9
 

No depreciation was recognised on investment properties in the current or prior year as the residual values exceeded the carrying value of all properties classified as investment properties.

At 30 June 2008 investment properties were valued by internal valuers at R134.0m (2007: R128.3m).
  Rental income and expense from investment properties    
  Rental income from investment properties 7.5 7.9
  Direct operating expenses from investment properties that earned rental income during the period 2.9 3.0
       
  No restrictions exist on the sale of investment properties.    
  Refer to note 34 for disclosure on operating leases.    
       

11

Intangible assets
        Computer    
        software Goodwill Total
        Rm Rm Rm
 

Group

      
  2007      
  Balance at July 2006      
      Cost 492.0 – 492.0
      Accumulated amortisation 188.7 – 188.7
  Net book value 303.3 – 303.3
  Current year movements      
    Additions 67.1 23.0 90.1
    Disposals/scrappings – cost (0.6) – (0.6)
    Disposals/scrappings – accumulated amortisation – – –
    Amortisation (48.6) – (48.6)
    Foreign exchange rate differences – cost 5.9 – 5.9
    Foreign exchange rate differences – accumulated amortisation (3.9) – (3.9)
  Balance at June 2007 323.2 23.0 346.2
  Made up as follows:          
      Cost 564.4 23.0 587.4
      Accumulated amortisation 241.2 – 241.2
  Net book value at June 2007 323.2 23.0 346.2
 

2008

          
  Current year movements      
    Additions 66.7 – 66.7
    Disposals/scrappings – cost (4.8) – (4.8)
    Disposals/scrappings – accumulated amortisation – – –
    Amortisation (56.3) – (56.3)
    Reclassifications (41.1) – (41.1)
    Foreign exchange rate differences – cost 17.3 – 17.3
    Foreign exchange rate differences – accumulated amortisation (9.0) – (9.0)
  Balance at June 2008 296.0 23.0 319.0
  Made up as follows:          
    Cost 602.5 23.0 625.5
    Accumulated amortisation 306.5 – 306.5
  Net book value at June 2008     296.0 23.0 319.0
 

Goodwill

      
  The cost of goodwill comprises:      
  Goodwill arising on acquisition of Virtual Market Place (Proprietary) Limited   12.8  
  Repurchase of franchise business   10.2  
          23.0  
 

Goodwill is tested for impairment by calculating the value in use of the cash-generating unit or units to which the goodwill is allocated.

The franchise business generates cash flows that are largely independent from the cash inflows of other assets and thus comprises a cash-generating unit.

The recoverable amounts of the repurchased franchise business is based on value in use calculations. These calculations use cash flow projections based on historical information and financial budgets approved by management covering a 2-year period. Cash flows beyond this period are extrapolated using estimated growth in sales and costs based on historical performance.

The projected cash flows are discounted to their present value using the weighted average cost of capital. This amounted to 14.8% in the current year (2007: 13.4%).

The cash flows generated by Virtual Market Place (Proprietary) Limited are largely dependent on fees received from the Woolworths retail business for administration of the group’s MySchool programme. This programme is aimed at providing financing to participating schools across South Africa. The value of this business is measured by the customer loyalty created by participation in the MySchool programme and the brand awareness that the programme generates.
   

12

Interest in subsidiaries
          Company
          2008 2007
          Rm Rm
  Shares 401.3 383.8
     Cost 401.3 401.3
     Provision for impairment – (17.5)
  Amounts owing (to)/by subsidiaries    
     Woolworths (Proprietary) Limited (424.1) (145.4)
     E-Com Investments 16 (Proprietary) Limited 328.3 337.3
     Woolworths Employee Share Ownership Trust 0.1 –
     iSentials (Proprietary) Limited – –
        Cost 22.1 24.5
        Provision for impairment (22.1) (24.5)
             
  Total net interest 305.6 575.7
  Movements in the provision for impairment of shares in subsidiaries were as follows:    
  Opening balance 17.5 131.8
  Amount reversed during the year (17.5) (114.3)
  Closing balance – 17.5
  Movements in the provision for impairment of loans to iSentials (Proprietary) Limited    
  were as follows:    
  Opening balance 24.5 27.1
  Amount repaid during the year (2.4) (2.6)
  Closing balance 22.1 24.5
 

Shares in subsidiaries are stated at cost less provision for impairment, if any.

Investments in and loans to subsidiaries are considered to be impaired when it is unlikely that the initial investment cost will be recovered or that the loan granted will be repaid.

The loans to and from the other subsidiaries are unsecured, interest free and are repayable on demand.

The carrying values of loans to and from subsidiaries that have not been impaired, approximate their fair values.

The company’s maximum exposure to the credit risk of the loans to subsidiaries is their carrying values.

          Company
          2008 2007
          Rm Rm

13

Prepaid employment costs

    
  Balance at the beginning of the year 61.4 39.5
    Prepayment arising from share loans granted during the year 1.6 24.8
    Unwinding of prepayment on loans repaid during the year (12.6) –
    Current employment costs released to income statement (included in note 3.5) (4.9) (2.9)
  Balance at the end of the year       45.5 61.4
   
  Details of loans granted in terms of the share purchase scheme loans are included in note 15.
             
      Group Company
      2008 2007 2008 2007
      Rm Rm Rm Rm

14

Participation in export partnerships

        
  Balance at the beginning of the year   70.4 71.6 31.0 32.9
    Adjustment to opening balance due to change in tax rate (2.7) – (1.1) –
    Payments received relating to the current year (1.0) (1.1) (0.9) (1.1)
    Current portion included in trade and other receivables (included in note 18) (1.5) (1.4) (1.3) (1.3)
    Notional interest accrued for the year   1.1 1.3 0.3 0.5
  Balance at the end of the year   66.3 70.4 28.0 31.0
 
The group participates as a partner in a number of container export partnerships. The partnerships sold containers in terms of long-term suspensive purchase and credit sale agreements.

Participation in export partnerships is measured at amortised cost using the effective interest rate method. Any impairment to the participation in export partnerships would result in a corresponding reduction in the related deferred taxation liability and thus there would be no impact on the cash flow statement and the net profit of the group.

Due to the terms and conditions attaching to the participation in export partnerships it is not practicable within constraints of timeliness or cost to determine their fair values.

The amount outstanding is considered to be neither past due nor impaired. Refer to note 29.3 for details of the group’s credit risk management policies.
            Group
            2008 2007
            Rm Rm

15

Other loans

    
  Housing and other employee loans 23.6 36.2
    Balance at the beginning of the year 36.2 43.1
    Loans granted during the year 9.9 1.3
    Loans repaid during the year (21.8) (7.1)
    Current portion included in trade and other receivables (included in note 18) (3.4) (4.0)
    Interest accrued for the year (included in note 2) 2.7 2.9
  Share purchase scheme participant loans and investments 128.9 149.3
    Balance at the beginning of the year 149.3 100.6
    Loans granted during the year 5.7 57.2
    Loans repaid during the year (30.2) (10.6)
    Current portion included in trade and other receivables (included in note 18) (0.8) (0.8)
    Notional interest accrued for the year (included in note 2) 4.9 2.9
  Other       1.1 0.9
            153.6 186.4
  Housing loans bear interest at prime less 2% (2007: 8%). Housing loans are required to be repaid on termination of employment. From September 2007, the group no longer grants housing loans.

The carrying values of the housing loans approximate fair value in the current year. In 2007, the fair value was calculated by discounting the future cash flows arising from settlement of the loans over the expected period of repayment using market-related interest rates. The fair value of housing loans at 30 June 2007 amounted to R32.2m.

Loans to directors and other employees participating directly in the share purchase scheme are interest free and are secured by shares in Woolworths Holdings Limited. The loans will be repaid when participants take delivery of vested shares, over a period not exceeding 10 years.

The fair value of share purchase loans amounted to R138.0m (2007: R178.5m) at the balance sheet date. The fair values are calculated by discounting the future cash flows arising from settlement of the loans over the expected period of repayment using market-related interest rates.

Other loans are not considered to be past due or impaired. The credit risk management policies of the group are discussed in note 29.3.
          Group Company
          2008 2007 2008 2007
          Rm Rm Rm Rm

16

Deferred tax

        
  The movement in the deferred tax account is as follows:        
  Balance at the beginning of the year 269.6 177.8 (37.0) (39.4)
  Amount (debited)/credited to the income statement (56.3) 80.2 9.1 2.4
  Adjustment to the opening balance resulting from the reduction in the tax rates        
    – income tax rate (6.7) – 1.2 –
    – secondary tax on companies rate (3.8) – – –
    Property, plant and equipment (48.6) 23.4 – –
    Prepayments (2.5) (6.1) – –
    Working capital and other provisions 9.1 28.3 – –
    Export partnerships 4.9 4.3 2.6 2.6
    Post-retirement medical aid liability 6.7 6.9 – –
    Secondary tax on companies (12.9) 9.0 – –
    Other (2.5) 14.4 5.3 (0.2)
  Amounts credited directly in equity        
    Foreign currency translation reserve adjustment 15.4 (1.0) – –
    Financial instrument revaluation reserve adjustment (1.0) 12.6 – –
  Balance at the end of the year 227.7 269.6 (27.9) (37.0)
  Deferred tax liability (66.3) (73.7) (27.9) (37.0)
  Deferred tax asset 294.0 343.3 – –
  Net deferred tax asset/(liability) 227.7 269.6 (27.9) (37.0)
  Comprising:        
  Property, plant and equipment (65.9) (23.7) – –
  Prepayments (19.9) (17.7) – –
  Working capital and other provisions 308.2 284.1 – –
  Export partnerships (66.2) (73.7) (27.9) (31.6)
  Post-retirement medical aid liability 70.3 66.0 – –
  Secondary tax on companies 2.2 18.9 – –
  Other (1.0) 15.7 – (5.4)
    227.7 269.6 (27.9) (37.0)
  Deferred tax has been calculated at the standard corporate tax rate as at the reporting date as management expects to recover the carrying values of assets and settle the carrying value of liabilities through use. The deferred tax asset relating to STC credits is calculated using the STC rate.

Deferred tax assets are raised after due consideration of future taxable income.
   
  Losses available for set-off against future taxable income for which a deferred tax asset has not been raised (18.4) (20.2)    
   
  No temporary differences arising from investments in subsidiaries for which deferred tax liabilities have not been recognised exist at the balance sheet date (2007: nil).
           

17

Inventories

        
  Merchandise 1 417.8 1 215.0    
  Provision for shrinkage, obsolescence and mark-downs of inventories (62.4) (35.8)    
  Consumables 8.3 9.7    
  Raw materials 7.7 13.7    
    1 371.4 1 202.6    
  Inventories carried at net realisable value included above 177.1 148.6    
  Write-downs of inventories recognised in cost of sales 91.3 68.9    
   
  Inventories to the amount of R217.5m (2007: R179.5m) have been pledged as surety for liabilities in Country Road Limited.
   

18

Receivables
  R2 323.6m of Woolworths card receivables eligible for securitisation were sold to Account On Us (Proprietary) Limited in February 2005 and continue to be sold to Account On Us (Proprietary) Limited on a daily basis.

Woolworths (Proprietary) Limited, the main trading subsidiary, has retained the significant risks and rewards of ownership of the securitised card debtors due to the following factors:
  – Woolworths still bears the risk of first loss due to the provision of funding, if necessary, to Account On Us (Proprietary) Limited through a subordinated loan and a subordinated originator facility;
  – Woolworths holds the preference shares issued by Account On Us (Proprietary) Limited which entitles it to participate in the profits of Account On Us (Proprietary) Limited which are available for distribution quarterly;
  – the basis risk between the funding rates and the interest earned on the securitised debtors is transferred to Woolworths through a total return interest rate swap (refer to note 19); and
  – Woolworths (Proprietary) Limited is exposed to the credit risk and interest rate risk of the securitised debtors.
 
As a result, the securitised Woolworths card debtors are recognised on the group balance sheet.

At the balance sheet date Woolworths card debtors amounting to R3 060.4m (2007: R3 359.0m) are owned by Account On Us (Proprietary) Limited as security for the notes in issue under the asset-backed note programme – refer note 23.
  Notes amounting to R436m (2007: R300m) were redeemed during February 2008.    
              Group
              2008 2007
              Rm Rm
  Woolworths card debtors* 3 707.8 3 742.8
  Provision for impairment (256.2) (182.6)
  Carrying value of Woolworths card debtors (refer to note 35) 3 451.6 3 560.2
  Movements in the provision for impairment of Woolworths card debtors were as follows:    
  Opening balance 182.6 138.0
  Charge for the year 182.1 291.1
  Amounts written off (108.5) (246.5)
  Closing balance 256.2 182.6
  Credit card receivables* 1 065.3 978.2
  Provision for impairment (105.6) (73.4)
  Carrying value of credit card receivables (refer to note 35) 959.7 904.8
  Movements in the provision for impairment of credit card receivables were as follows:    
  Opening balance 73.4 34.8
  Charge for the year 175.5 111.4
  Amounts written off (143.3) (72.8)
  Closing balance 105.6 73.4
  Loans to customers – non-current* 283.3 305.5
  Loans to customers – current* 811.0 823.5
  Provision for impairment (86.0) (58.0)
     – non-current (22.3) (15.7)
     – current (63.7) (42.3)
       
  Carrying value of loans to customers (refer to note 35) 1 008.3 1 071.0
     
  * The carrying amount of Woolworths card debtors, credit card receivables and loans to customers at 30 June 2008 are included in a disposal group, as defined in IFRS 5 – Non-current Assets Held For Trading and Discontinued Operations. Refer to note 35.
 
          Group Company
          2008 2007 2008 2007
          Rm Rm Rm Rm
  Movements in the provision for impairment of loans to customers were as follows:        
  Opening balance 58.0 39.8    
  Charge for the year 102.8 59.9    
  Amounts written off (74.8) (41.7)    
  Closing balance 86.0 58.0    
  Trade and other receivables 709.0 614.5 1.3 2.0
  Provision for impairment (11.6) (39.6) – –
  Trade and other receivables – net 697.4 574.9 1.3 2.0
  Movements in the provision for impairment of trade and other receivables were as follows:        
  Opening balance 39.6 15.7    
  Charge for the year 13.6 71.9    
  Amounts written off (41.6) (48.0)    
  Closing balance 11.6 39.6    
   
  Trade and other receivables are interest free and have payment terms ranging from 7 days to 60 days.

The provision for impairment of trade and other receivables is recognised when there is objective evidence obtained during the collection process, such as an inability to recover long overdue accounts and liquidity problems experienced by the debtors, which indicates that the receivables might not be recoverable.

The carrying value of trade and other receivables is considered to approximate fair value.

Woolworths in-store card debtors and credit card receivables have revolving credit terms. Loans to customers have a maximum repayment period of three years.

Financial services assets are payable on a monthly basis, and are classified as delinquent when a qualifying payment is missed. The minimum monthly qualifying payment amounts to the higher of 10% of the balance owing or R25.

The provisions for impairment of the financial services assets are determined using statistical provisioning models based on historical experience modified for recent changes in economic circumstances to determine the probability that receivables will not be recoverable. These assumptions are reviewed on a monthly basis to ensure their relevance. The key assumptions are net charge-off rates of:
    % %    
  Woolworths card debtors 6.9 4.9    
  Credit card receivables 9.9 7.5    
  Loans to customers 7.9 5.1    
           
  The creation and release of provisions for impaired receivables have been included in other operating costs in the income statement.

Woolworths card debtors and loans to customers attract interest rates as determined by the Usury Act (ranging from 23% to 27%) and National Credit Act (ranging from 25% to 28.5%). Interest rates charged on credit card receivables are market-related.
  During the current year, interest was earned on financial services assets as follows:
              Group
              2008 2007
              Rm Rm
  Woolworths card debtors 856.1 656.7
  Credit card receivables 209.8 147.9
  Loans to customers 245.8 187.9
              1 311.7 992.5
   
  The provision for impairment includes certain financial services balances that have been specifically impaired. Based on historical experience, the group expects a portion of the impaired balances to be recovered.

The carrying values of financial services assets are measured at amortised cost and are considered to approximate their fair values. Fair values are calculated using market related interest rates adjusted for credit risk premium.

At 30 June, the aging analysis of receivables is as follows:
            Past due but not impaired
        Total Neither past due nor impaired < 90 days delinquent 90-120 days delinquent >120 days delinquent
 

2008

          
  Trade and other receivables 597.8 352.0 204.9 11.9 29.0
  Woolworths card debtors 3 451.6 2 368.1 845.2 99.3 139.0
  Credit card receivables 959.7 705.4 183.1 21.6 49.6
  Loans to customers 1 008.3 911.3 72.2 9.6 15.2
  2007          
  Trade and other receivables 492.8 159.6 193.7 5.0 134.5
  Woolworths card debtors 3 560.2 2 449.0 908.2 92.5 110.5
  Credit card receivables 904.8 647.0 214.6 17.8 25.4
  Loans to customers 1 071.0 991.2 60.7 8.9 10.2
 
The maximum exposure to credit risk at the reporting date is the carrying value of each class of receivable mentioned above. The group does not hold any collateral as security. For detailed information regarding the credit quality of financial assets which are neither past due nor impaired, refer to note 29.3.
 
    Group
    2008 2008 2007 2007
    Assets Liabilities Assets Liabilities
    Rm Rm Rm Rm

19

Derivative financial instruments

        
  Interest rate swaps and collars held as hedging instruments        
  –  cash flow hedges 35.1 (23.1) 23.6 (11.7)
  Forward exchange contracts held as hedging instruments        
  –  cash flow hedges 13.7 (25.4) 10.5 (13.5)
  Forward exchange contracts – not hedge-accounted for 4.7 (1.6) – –
    53.5 (50.1) 34.1 ( 25.2)
  Total return interest rate swap included in disposal group at 30 June 2008 – refer to note 35 (20.4) 23.1 – –
    33.1 (27.0) 34.1 (25.2)
  Derivatives mature as follows:        
  Within 12 months 50.4 (50.1) 4.2 (13.5)
  After 12 months 3.1 – 29.9 (11.7)
    53.5 (50.1) 34.1 (25.2)
   
  Total return interest rate swap
The structure of the asset-backed note programme requires that the basis risk be swapped out of the special purpose vehicle, Account On Us (Proprietary) Limited. Account On Us (Proprietary) Limited has entered into a total return swap with the Standard Bank of South Africa Limited, whereby interest earned on the receivables owned by Account On Us (Proprietary) Limited is swapped for a Jibar related return. Woolworths (Proprietary) Limited has entered into a back-to-back swap with the Standard Bank of South Africa Limited.

Interest rate swaps
The notional principal amount of interest rate swap contracts outstanding at 30 June 2008 netted to zero (2007: R1 000.0m). Gains and losses on calculating the fair value of the interest rate swaps are recognised directly in equity. The future cash flow on these swap contracts are expected to occur within three months. Interest rate swap contracts are measured at fair value. Fair value is determined by discounting future cash flows using prevailing market interest rates. The valuation of interest rate swaps is performed by external experts.

Interest rate collars
The notional principal amount of the outstanding interest rate collar contracts at 30 June 2008 was R550.0m (2007: R950.0m). Gains and losses on calculating the fair value of the interest rate collars are recognised directly in equity. The collars are reset every three months and the next payment is expected to take place in August 2008. Interest rate collars are measured at fair value. Fair value is calculated by discounting the future cash flows arising from the collars using prevailing market interest rates. The valuation of interest rate collars is performed by external experts.

Forward exchange contracts
The notional principal amount of the outstanding contracts at 30 June 2008 amounts to R1 104.1m (2007: R734.7m). The related cash flows are expected to occur on the maturity dates of these contracts at various intervals within 21 months. Refer to note 29.4. Gains and losses on forward exchange contracts held as hedging instruments in a designated and effective hedging relationship are recognised directly in equity. Gains and losses on remaining contracts not hedge-accounted for are recognised directly in the income statement. Forward contracts are measured at fair value which is calculated by reference to forward exchange rates for contracts with similar maturity profiles at year end.

These derivative instruments are considered to be neither past due nor impaired.

The maximum exposure to credit risk at the reporting date is the fair value of the above-mentioned derivative instrument assets.