Notes to the annual financial statements

20

Ordinary and preference share capital

Share incentive schemes
Executive incentive scheme
The group operates a share purchase scheme as well as a share option scheme, details of which are given in the remuneration report.

Shares and share options granted in terms of the executive incentive scheme meet the definition of equity-settled share-based payments. The terms and conditions of the schemes are detailed in the remuneration committee section of the corporate governance report.

The options vest in tranches of 20% per annum and expire 10 years after grant date. The options were valued using a binomial model and assuming an option life of 10 years. Other valuation assumptions include volatility set at historic trend levels, a dividend yield of 5% and a risk-free interest rate based on the zero-coupon yield of SA government bonds with a term consistent with the option life.

Shares granted in terms of the executive incentive scheme were granted at a discount to market value up to 1 January 2004. These shares also meet the definition of share-based payments and were valued at intrinsic value. The shares vest in tranches of 20% per annum.

The share appreciation rights offered in terms of the scheme have the substance of an option and meet the definition of an equity-settled share-based payment.

The share appreciation rights are valued using a binomial option pricing model, assuming a life of seven years. Other valuation assumptions include volatility set at historic trend levels, a continuous dividend yield of 7.3% and a risk-free interest rate based on the zero-coupon yield of SA government bonds with a term consistent with the life of the rights.

The long-term incentive plan constitutes an equity-settled share-based payment.

The conditional awards are valued using a Monte Carlo simulation model, assuming a life of three years. Other valuation assumptions include volatility set at historic trend levels, a dividend yield of 6.4% and a risk-free interest rate based on the zero-coupon yield of SA government bonds with a term consistent with the life of the awards.

The fair value is measured on the closing share price of Woolworths Holdings Limited at date of acquisition of the shares by the participant of the scheme.

Woolworths Black Economic Empowerment Employees Share Ownership Scheme
During the current financial year the group’s Black Economic Empowerment scheme, in terms of which convertible, redeemable non-cumulative participating preference shares were issued to qualifying employees of the group, became effective. The preference shares issued are not listed.

The beneficial ownership of the shares, including the voting and dividend rights, resides with the participants of the shares from the date of inception.

The preference shares offered in terms of the scheme have the substance of an option and meet the definition of an equity-settled share-based payment. The terms and conditions of the scheme are detailed in the corporate governance report.

The preference shares are convertible into ordinary shares to the extent that the growth in the Woolworths Holdings Limited share price exceeds a predetermined hurdle rate at the end of the scheme. The preference shares are valued using a Black-Scholes model, assuming a life of eight years. In performing the valuations, the cost of the dividend stream attached to the scheme will be added to the option costs, as a traditional share option does not receive dividends. Other valuation assumptions include volatility set at historic trend levels, a dividend yield of 4.2%, a risk-free interest rate based on the zero-coupon yield of SA Government bonds with a term consistent with the life of the instrument. Staff retention rates are a key assumption and have been modelled, based on historical experience, per category of employees participating in the scheme, namely executive, management and broad-based employees.

21

Share premium

22

Reserves

Nature and purpose of reserves
Foreign currency translation reserve
This reserve is used to record exchange differences arising from the translation of the results of foreign subsidiaries.

Share-based payment reserve
This reserve records the fair value of the vested portion of shares or share options (determined at grant date) granted in terms of the group’s share-based payment schemes. Refer to note 20 for further details of the relevant schemes.

Financial instrument revaluation reserve
This reserve records the effective portion of the fair value movement on hedging instruments which are part of effective cash flow hedges.

Retained profit
Retained profit records the cumulative net profit and loss made by the group after deducting distributions to shareholders and other utilisations of the reserve.

23

Interest-bearing borrowings

Sureties for other borrowings are provided by Woolworths Holdings Limited. The treasury committee is responsible for monitoring ongoing compliance with the group’s financial covenants.

Interest-bearing borrowings bear interest at variable, market-determined rates. These borrowings are measured at amortised cost which approximates fair value. Refer to note 29.2.

Interest on non-current borrowings and secured floating rate notes is payable on a quarterly basis. Interest on unsecured current loans is payable monthly.

There have been no defaults or breaches of principal interest or redemption terms during the current or prior period.

Refer to the group’s liquidity risk management policies in note 29.4.

24

Trade and other payables

25

Retirement benefit information

Country Road Limited provides superannuation benefits for various categories of employees in Australia. All funds are defined contribution funds which are administered externally and provide for benefits for death, total disability, retirement and resignation. All benefits are provided on an accumulation of contributions basis and accordingly no actuarial assessment is required. Contributions vary from employee to employee as determined by various awards and negotiated conditions of employment. Future company contributions required to meet the superannuation guarantee charge and contributions under awards are legally enforceable.

Total group contributions are charged to income as incurred and amounted to R160.5m (2007: R130.8m).

Woolworths subsidises a portion of the medical aid contributions of retired employees. The company values its accrued and future liability in respect of post-retirement medical aid contributions annually in June. The liability was actuarially valued based on the healthcare benefits currently provided to staff using appropriate mortality and withdrawal assumptions. For the purposes of the valuation it was assumed that investment returns would be 8.5% (2007: 8.5%), and would exceed medical inflation by 1.5% (2007: 2.0%) per annum. The discount rate used to value the liability at 30 June 2008 is 10.7% (2007: 8.5%) per annum.

At 30 June 2008, the accrued liability amounted to R251.2m (2007: R227.2m) in respect of those current and retired members of staff who participate in the Wooltru Healthcare Fund, the company’s in-house medical aid scheme. At that date, Woolworths had funded R1.1m (2007: R8.8m) of the liability by means of a long-term insurance policy held with Momentum Ability.

Employees who joined the healthcare fund after 1 November 2000 are not entitled to receive post-retirement healthcare benefits.

The funding status of the Wooltru Healthcare Fund determined in terms of IAS 19 is as follows:

26

Provisions

Leave Pay
The leave pay provision is calculated using the estimated number of leave days due to the employees as at the end of the financial year. The leave pay provision will unwind as employees utilise their leave entitlement.

Provision for onerous lease commitments
The provision for onerous lease commitments is calculated based on the present value of the unavoidable costs in fulfilling lease commitments, net of income receivable from the lease.

The onerous lease commitments provision reverses as the lease term runs down or if conditions change to the extent that the lease is no longer onerous.

Other
Other provisions consist primarily of Australian long-service leave entitlements. This provision is calculated based on the service period worked by each employee and probability assumptions are applied to determine the likelihood that an employee will eventually qualify for the entitlement. The provision unwinds as eligible employees redeem their entitlement or when the balance owing to an employee is paid out on termination of employment.

27

Capital commitments

28

Contingent liabilities

29

Financial risk management

The group attempts to manage financial risk where this involves activities in which it has appropriate competencies. To achieve this, the group’s treasury function is responsible for managing funding and the group’s financial risks within predetermined parameters. In addition, the treasury function is responsible for adding value by reducing costs without unduly increasing risk; and providing specialist financing advice to the business.

The group’s overall treasury policy is reviewed and approved by the finance subcommittee of the Woolworths Holdings Limited board. The policy specifies the hedging level parameters, dealing limits (in terms of size and duration), the types of instruments that may be used, authorised counterparties and procedures for settling and recording transactions.

In addition, a treasury committee reports regularly to the board on the implementation of treasury policies, focusing in particular on the amount of exposure to financial risk; the extent to which this risk is covered; the implications of expected future movement in market interest rates; as well as whether there are any deviations from treasury policy and the treasury function’s performance against budgets.

Financial services credit risk is managed by a credit risk committee attended by two directors of the Woolworths Holdings Limited board.

All the policies, procedures and objectives of risk management is similar between the group and the company.

Transactional foreign exchange risk
The group has transactional currency exposures arising from the acquisition of goods and services in currencies other than the functional currency. It is the group’s policy that business units entering into such transactions must cover all such exposures with forward exchange contracts to hedge the risk of fluctuation in the foreign currency exchange rate (refer to accounting policy note on hedge accounting).

Forward exchange contracts at 30 June 2008 are summarised below. These amounts represent the net rand equivalent of group commitments to purchase and sell foreign currencies.

At 30 June 2008, the group held 316 (2007: 157) forward exchange contracts designated as hedges of expected future purchases from suppliers outside South Africa for which the group has firm commitments. Of these, 160 (2007: 157) are designated cash flow hedges in an effective hedging relationship.

The cash flow hedges resulted in a net unrealised gain of R4.1m (2007: loss of R42.9m) with a related deferred tax asset/(charge) of (R1.0m) (2007: R12.9m) which was included in equity in respect of these contracts.

The remaining 156 (2007: nil) forward exchange contracts are not designated as cash flow hedges. During the year, a gain amounting to R3.1m (2007: nil) was recognised in the income statement in respect of these forward exchange contracts.

The following exchange rates applied during the year:

A reasonably possible change in the group’s material transactional foreign currency, with all other variables being equal, will increase or decrease the profit before tax and equity of the group.

In the table below, the sensitivity of the group’s exposure to foreign currency risk is estimated by assessing the impact that a reasonably possible movement in foreign exchange rates would have had on the profits and equity of the group if the change was effective during the financial year.

Translational foreign exchange risk
Net investments in foreign subsidiaries
The group has investments in foreign subsidiaries whose net assets (including cash) are exposed to foreign currency translation risk. This risk is not hedged.

A reasonably possible change in the group’s material translational foreign currencies, with all other variables being equal, will increase or decrease the profits or equity of the group.

The sensitivity of the group to such changes is presented in the table below. Reasonably possible changes in the group’s material translational foreign currencies will result in movements in equity observed in the foreign currency translation reserve.

Foreign cash
The group has exposure to foreign currency translation risk through cash balances in currencies other than the South African rand. This risk is not hedged. Refer to note 33.5.

In order to hedge the group’s exposure to the cash flow interest rate risk, the group uses derivative instruments such as interest rate swaps and collars.

The sensitivity of the group’s profits or equity to its exposure to interest rate risk is presented below. The analysis considers the impact of a reasonably possible change in the 3 month Jibar, with all other variables held constant. At the balance sheet date, the 3 month Jibar is 12.4% (2007: 9.7%).

The interest rate pricing profile at 30 June 2008 is summarised as follows:

During the financial year the interest rate exposure on the notes maturing in February 2009, totalling R550m (2007: including in February 2008, R950m), was hedged using interest rate collars.

The fair values of the financial instruments at 30 June 2008 are included in note 19. These fair values are supported by observable current market transactions in similar instruments.

The interest rate swaps and collars are designated as cash flow hedges. These hedges were assessed to be highly effective resulting in a net unrealised gain of R0.1m (2007: R1.1m) being recognised in equity. The related deferred tax charged to equity amounted to nil (2007: R0.3m).

The carrying amounts of the group’s financial instruments that are exposed to interest rate risk are as follows:

The group only deposits short-term cash surpluses and enter into derivative contracts with major banks of high quality credit standing. Woolworths card, customer loan debtors and credit card receivables comprise a large, widespread customer base and ongoing credit evaluations are performed. The granting of credit is controlled by entering application information into a statistical scoring model, and the assumptions therein are reviewed and updated on an ongoing basis. These credit-granting procedures are consistent with those applied in the prior year.

Trencor Limited has materially warranted certain important cash flow aspects of the group’s participation in export partnerships, thus the credit quality of this receivable is considered to be high.

Trade and other receivables consist mainly of franchise and property related debtors. Rigorous credit-granting procedures are applied to assess the credit quality of the customer, taking into account its financial position, credit rating and other factors.

Other loans include housing loans to employees and share purchase scheme loans to directors of the group. Security of housing loans is required, while share purchase scheme loans are secured by shares in Woolworths Holdings Limited.

The holding company is exposed to credit risk mainly through amounts owing by subsidiaries and by its participation in export partnerships.

Credit quality of financial assets

The credit quality of financial assets that are neither past due nor impaired can be assessed by reference to external credit ratings (if available) or to historical information about counterparty default rates:

The group has minimised its liquidity risk as shown by its substantial undrawn banking facilities.

The group’s policy is that not all term borrowings should mature in the next 12 months and to maintain a predetermined core of term funding.

Based on the balances reflected in the financial statements, 67% (2007: 45%) of the group’s total borrowings at 30 June 2008 will mature within 12 months.

The undiscounted cash flows of the group’s borrowings, payables and derivative financial liabilities fall into the following maturity profiles:

Borrowing capacity
In terms of the company’s articles of association, there is no limit on the group’s authority to raise interest-bearing debt.

Country Road Limited
The credit standby facilities of Country Road Limited are secured by a registered mortgage debenture over its assets as disclosed in segmental information in note 37.

The carrying values of financial instruments measured at fair value have been determined using available market information and appropriate valuation methodologies.

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Management of capital

The group is subject to triggers set by the agencies rating the securitisation structure. The triggers are based on the performance of the securitised debtors book and the corporate rating of Woolworths Holdings Limited. Performance against these triggers is monitored on an ongoing basis and there has been no breach of these triggers in the current year as well as in the prior year.

The group takes cognisance of certain rating agency ratios that evaluate the ability of the capital to absorb losses as evidenced by the corporate rating. The group monitors capital on the basis of the debt ratio. This ratio is calculated as interest-bearing debt divided by total assets.

31

Comparative figures

The comparatives have been reclassified as follows:

32

Distributions to shareholders

33

Cash flow information

34

Operating leases

35

Disposal Group

At 30 June 2008, the transaction was not completed. However, in the opinion of the directors, conclusion of the transaction is highly probable.

The affected assets and liabilities all form part of the financial services segment and meet the definition of a disposal group in IFRS 5 Non-current Assets Held for Sale and Discontinued Operations. As a result, the affected assets and liabilities are disclosed separately on the face of the balance sheet.

The major classes of assets and liabilities of Woolworths Financial Services (Proprietary) Limited classified as held for sale at 30 June 2008 are as follows:

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Events after the balance sheet date

The directors estimate that the transaction will be concluded by 30 September 2008.

Subsequent to obtaining Competition Tribunal approval, the disposal of 50% plus one share of the group’s interest in Woolworths Financial Services (Proprietary) Limited to Absa Bank Limited meets the definition of a non-adjusting post-balance sheet event in IAS 10 Events After the Balance Sheet Date.

37

Segmental information