Datatec audited provisional results for the year ended 29 February 2020

Adoption of IFRS 16

as at 29 February 2020

New and amended standards adopted by the Group

The Group was required to amend its accounting policies as a result of adopting IFRS 16 Leases. The impact of the adoption of this standard and the amended accounting policies are disclosed below.

Change in significant accounting policy

This standard introduces a single, on-balance sheet lease accounting model for lessees. A lessee is required to recognise right-of-use assets representing its right to use the underlying assets and lease liabilities representing its obligation to make lease payments. Lessor accounting remains similar to former practice; i.e. lessors continue to classify leases as finance or operating leases.

The Group leases various property, plant and equipment. Rental contracts are typically entered for fixed periods but may have extension options. Lease terms are negotiated on an individual basis and contain a range of terms and conditions. The Group recognises a right-of-use asset and a corresponding lease liability with respect to all lease agreements in which it is the lessee, except for short-term leases (defined as leases with a lease term of 12 months or less) and leases of low value assets. For these leases, the Group recognises the lease payments as an operating expense on a straight-line basis over the term of the lease.

Items of low value have been determined based on the nature of the assets. Similar items are categorised and assessed to determine whether items are considered to be low value. Low value items include assets such as laptops and phones.

Right-of-use assets presented within current assets capture right-of-use assets on leases with a term of 12 months or less. As the Group has elected to expense short-term leases, it does not present such amounts.

The lease liability is measured initially at the present value of the lease payments that are not paid at commencement date, discounted at the incremental borrowing rate, unless the rate implicit in the lease is readily determinable. The lease liability is subsequently increased by interest costs and decreased by lease payments made. Incremental borrowing rates have been determined based on country-specific factors and vary across the Group.

The right-of-use asset is measured initially at cost and subsequently at cost less any accumulated depreciation and impairment losses. Impairment losses are determined in accordance with IAS 36. Right-of-use assets are depreciated over the shorter period of the lease term and useful life of the underlying asset. If a lease transfers ownership of the underlying asset or the cost of the right-of-use asset reflects that the Group expects to exercise a purchase option, the related right-of-use asset is depreciated over the useful life of the underlying asset. The depreciation starts at the commencement date of the lease.

Up to and including the FY19 financial year, leases for property, plant and equipment were accounted for under IAS 17 Leases and classified as either finance or operating leases. Payments made under operating leases (net of any incentives received from the lessor) were charged to profit or loss on a straight-line basis over the period of the lease.

The Group has elected to apply the practical expedient in IFRS 16 and accounts for lease and non-lease components as a single lease.

Adjustments recognised on adoption of IFRS 16

The Group adopted IFRS 16 using the modified retrospective approach, under which the cumulative effect of initial application is recognised in retained earnings as at 1 March 2019.

Accordingly, the comparative information presented for FY19 has not been restated.

In applying IFRS 16 for the first time, the Group used the following practical expedients permitted by the standard in the application of the initial accounting:

the application of a single discount rate to a portfolio of leases with reasonably similar characteristics;
reliance on previous assessments in determining whether leases are onerous;
not reassessing whether a contract is, or contains, a lease at the date of initial application;
the use of hindsight in determining the lease term where contracts contain options to extend or terminate the lease;
accounting for leases that, at 1 January 2019, had a remaining lease term of 12 months or less on a straight-line basis over the remaining lease term;
accounting for leases for which the underlying asset is of low value on a straight-line basis over the lease term; and
exclusion of initial direct costs from the measurement of the right-of-use asset at 1 January 2019.

The Group has also made the election to recognise the right-of-use assets on adoption of IFRS 16, at an amount equal to the lease liability, adjusted by the amount of any accrued or prepaid lease payments relating to that lease recognised in the statement of financial position immediately before the date of initial appreciation.

On adoption of IFRS 16, the Group recognised lease liabilities in relation to leases which had previously been classified as "operating leases" under the principles of IAS 17. These liabilities were measured at the present value of the remaining lease payments, discounted using the lessees incremental borrowing rates as at 1 March 2019. Incremental borrowing rates have been determined based on country-specific factors and vary across the Group. The weighted average incremental borrowing rates applied to the lease liabilities on 1 March 2019 were:

Westcon International: 4.79% and 10%
Logicalis: 9%
Management Consulting: 2.75%
Corporate: 9.25%

Reconciliation between operating lease commitments and lease liabilities recognised at the date of initial application

	Audited 1 March 2019
US$'000	Land and buildings	Office furniture, equipment and motor vehicles	Computer equipment	Total
Operating lease commitments disclosed as at 28 February 2019	116 720	5 191	1 814	123 725
Discounted using the lessees' incremental borrowing rates at the date of initial application	(12 246)	(353)	(50)	(12 649)
Less: Low value leases recognised on a straight-line basis as expense	72	(167)	(123)	(218)
Less: Short-term leases recognised on a straight-line basis as expense	(286)	(76)	(325)	(687)
Less: Adjustments as a result of a different treatment of extension and termination options	(1 407)	(3)	–	(1 410)
Less: Translation and other movements	(8 149)	(450)	(535)	(9 134)
Lease liabilities recognised as at 1 March 2019	94 704	4 142	781	99 627

Lease liabilities at 28 February 2019 amounted to US$30.982 million. Total lease liabilities as at 1 March 2019 amounted US$130.609 million.

Right-of-use assets were measured at an amount equal to the lease liability, adjusted by the amount of any prepaid or accrued lease payments relating to that lease recognised in the statement of financial position as at 28 February 2019. There were no onerous lease contracts that would have required an adjustment to the right-of-use assets as at 1 March 2019.

Previous guidance issued by the Group estimated that lease liabilities of between US$110 million and US$125 million would be recognised. However, only US$95 million was recognised due to exchange rate fluctuations as well as an overestimation in Logicalis Europe.

The change in accounting policy affected the following items in the statement of financial position:

US$'000	Audited 1 March 2019 Increase/ (decrease)
ASSETS
Right-of-use assets	94 570
Office furniture, equipment and motor vehicles	7 362
Computer equipment	298
Leasehold improvements	–
Land and buildings	86 910
Prepaid expenses	46
EQUITY AND LIABILITIES
Lease liabilities	99 627
Operating lease smoothing liabilities	(5 011)
Distributable reserves	–

Pro forma information

The adoption of IFRS 16 from 1 March 2019 complicates performance comparison between the results of the current and prior financial year. To provide a more meaningful assessment of the Group's performance, pro forma information has been presented for the year ended 29 February 2020. The pro forma financial information as set out has been prepared for illustrative purposes and reflects the impact of IFRS 16 on the numbers disclosed on the statement of comprehensive income and statement of financial position as at 29 February 2020. The pro forma numbers represent the results and balance sheet position showing the impact on FY20 as if IFRS 16 had not been applied at 1 March 2019. IFRS 16 balances have been removed from the reported figures in order to determine the pro forma figures. These adjustments have been made to enable a like-for-like comparison to FY19 where IFRS 16 had not been applied.

The pro forma IFRS 16 information, which is the responsibility of the Datatec directors, has been compiled taking into account the applicable criteria as detailed in paragraphs 8.15 to 8.34 of the JSE Listings Requirements and the SAICA Guide on Pro forma Financial Information, revised and issued in September 2014 (applicable criteria). The pro forma information does not constitute financial statements fairly presented in accordance with IFRS. The pro forma information has been prepared for illustrative purposes only and because of its nature may not fairly present the Group's statement of comprehensive income, salient financial features and statement of financial position. The Group's external auditor, Deloitte & Touche, has issued an unmodified assurance report on the pro forma IFRS 16 information on 26 May 2020. A copy of its report is available for inspection at the registered office of the Company.

Impact on current year results

The following tables show the impact of IFRS 16 on the numbers disclosed on the statement of comprehensive income and statement of financial position as at 29 February 2020. The pro forma numbers represent the results and balance sheet position showing the impact on FY20 as if IFRS16 had not been applied at 1 March 2019. IFRS 16 balances have been removed from the reported figures in order to determine the pro forma figures to enable a like-for-like comparison to FY19 where IFRS 16 had not been applied.

US$'000	Year ended February 2020 Pro forma	Year ended February 2020 Adjustments	Audited Year ended February 2020 Reported	Audited Year ended February 2019 Reported
Statement of comprehensive income
Gross profit	736 365	5 213	741 578	687 744
Operating costs	(601 542)	29 944⁽¹⁾	(571 598)	(569 896)
EBITDA	123 500	35 157	158 657	86 761
Depreciation	(29 456)	(30 546)⁽²⁾	(60 002)	(25 889)
Operating profit	77 926	4 611	82 537	48 423
Finance costs	(36 197)	(4 588)⁽³⁾	(40 785)	(32 145)
Profit before taxation	58 465	23	58 488	24 215
Profit for the year	27 964	47	28 011	14 950
Basic earnings per share from continuing operations (US cents)	6.1	0.1	6.2	0.6
Statement of financial position
Total assets	2 517 562	78 964	2 596 526	2 722 307
Property, plant and equipment and right-of-use assets	47 455	79 798⁽⁴⁾	127 253	60 306
Prepaid expenses and other receivables	238 145	(834)	237 311	232 965
Total equity	(643 046)	(47)⁽⁵⁾	(643 093)	(712 230)
Total liabilities	(1 874 516)	(78 917)	(1 953 433)	(2 010 077)
Long-term interest-bearing liabilities and leases	(50 361)	(63 425)⁽⁶⁾	(113 786)	(31 383)
Trade and other payables	(1 264 836)	5 823	(1 259 013)	(1 358 928)
Short-term interest-bearing liabilities and leases	(88 156)	(21 314)⁽⁶⁾	(109 470)	(109 751)
Salient financial features
Headline earnings per share (US cents)	5.9	0.0	5.9	0.7
Underlying earnings* per share (US cents)	9.9	0.0	9.9	6.6
Net asset value per share (US cents)	288.3	0.0	288.3	297.5

⁽¹⁾	Includes operating lease rentals that would have been incurred.
⁽²⁾	Excludes depreciation of right-of-use assets of US$27.0 million. Depreciation of assets previously held under finance lease agreements has been included.
⁽³⁾	Excludes IFRS 16-related finance costs.
⁽⁴⁾	Excludes right-of-use assets and includes assets previously held under finance lease agreements.
⁽⁵⁾	Total adjustments made to statement of comprehensive income.
⁽⁶⁾	Excludes lease liabilities recognised as a result of IFRS 16.

The number of shares in issue excluding treasury shares was 198 million and the weighted average number of shares in issue was 210 million.

These adjustments are of a continuing nature.

Impact on segmental reporting

EBITDA, operating profit and profit before taxation, segmental assets and liabilities increased for the period ended 29 February 2020, as a result of the change in accounting policy. The following segments were affected by the change:

	Westcon International	Logicalis	Corporate, Management Consulting and Financial Services	Datatec Group Total
US$'000	Audited Year ended February 2020	Audited Year ended February 2020	Audited Year ended February 2020	Audited Year ended February 2020
EBITDA	13 002	19 914	2 241	35 157
Depreciation	(11 591)	(16 927)	(2 028)	(30 546)
Operating profit	1 411	2 987	213	4 611
Finance costs	(1 872)	(2 398)	(318)	(4 588)
(Loss)/profit before taxation	(461)	589	(105)	23
Total assets	30 346	39 835	8 783	78 964
Total liabilities	(30 807)	(39 246)	(8 864)	(78 917)