NOTES TO THE ANNUAL FINANCIAL STATEMENTS
for the year ended 31 August 2010

    Long-term
incentive
scheme
(note 21.1)
Share
appreciation
rights
(note 21.2)
Post-retirement
medical
obligations
(note 21.3)
Total
    R’000 R’000 R’000 R’000

21

Employee benefits

       
  Long-term employee benefits        
  Balance at 1 September 2008 89 929 15 051 25 886 130 866
  Change in fair value of cash-settled obligation taken to profit 20 323 20 323
  Current service cost 74 398 1 029 75 427
  Benefit payments (637) (637)
  Interest cost 16 836 2 142 18 978
  Actuarial (gain)/loss (31 092) 2 765 (28 327)
  Reclassification to short-term employee benefits (91 920) (33 576) (125 496)
  Balance at 31 August 2009 58 151 1 798 31 185 91 134
  Change in fair value of cash-settled obligation taken to profit 53 591 53 591
  Current service cost 57 273 1 815 59 088
  Benefit payments (534) (534)
  Interest cost 12 112 2 364 14 476
  Actuarial loss 966 966
  Reclassification to short-term employee benefits (67 058) (55 389) (122 447)
  Balance at 31 August 2010 61 444 34 830 96 274
           
 
21.1 Long-term incentive scheme
  During 2010, the group issued 4.3 million (2009: 5.2 million) cash-settled appreciation rights to management. The value of these appreciation rights are linked to the performance of diluted headline earnings per share (“HEPS”) over a three-year period. The amount to be provided in the current year is based on a three-year projection of diluted HEPS.
   
  Any difference between projected performance and actual performance is recognised through an actuarial loss/(gain) based on the projected unit credit method which is taken to profit or loss.
   
  The exercise price of each appreciation right was determined as R19.91 (2009: R15.83) per right (“base value”). In order to determine the amount to be provided a fixed factor of 12 is applied to the HEPS at the end of the three-year period. The differential between the factor x HEPS and the base value is the amount that will be paid out per right.
   
  Should employees leave during the vesting period the rights will be forfeited.
   
21.2 Share appreciation rights
  During 2005, the group made six million share appreciation rights available to certain employees. Three million of these rights vested during 2008 and the remaining three million vested during the current year due to performance conditions being met. During 2006, the group made a further one million share appreciation rights available to certain employees.
   
  In the 2007 financial year, 450 000 share appreciation rights relating to the second issue of share appreciation rights were cancelled, leaving 550 000 of this issue to vest. Of these rights, 275 000 expired in the prior year when the performance conditions were not met. The remaining 275 000 vest after a period of five years from the grant date.
   
  The “exercise price” of the share appreciation rights varies depending on the performance of the company’s share price on the JSE and is more fully detailed below.
   
 
  7 April 2005 tranche 11 May 2006 tranche
      Exercise     Exercise
  Share price on vesting date price Share price on vesting date price
Five-year rights greater than R16.81 R8.36 greater than R21.22 R10.55
  greater than R20.80 R4.18 greater than R26.25 R5.27
  greater than R25.51 R0.01 greater than R32.20 R0.01
   
  As the group’s liability in respect of these share appreciation rights is dependent on the future performance of the company’s share price on the JSE, a derivative hedge was acquired to limit the extent of the exposure. The hedging instrument covers all exposure where the notional exercise price is R4.18 per share or above or R5.27 per share or above in respect of the 7 April 2005 and 11 May 2006 tranches respectively.
   
  In addition to the cost of the hedge detailed in note 16, in the event that the highest target share price is achieved, the group’s maximum further exposure in terms of the share appreciation rights is R1.4 million (2009: R14.0 million).
   
  The obligation in respect of these cash-settled share-based payments has been computed based on the fair value of the notional options at year-end as determined by independent external professional valuators using the Binomial option pricing model, amortised over the vesting period of the rights.
   
  The following key assumptions have been made:
   i) The expected volatility is the historic annualised standard deviation of the continuously compounded rates of return on the share, based on the most recent period as of the grant date that is commensurate with the expected term of the share option.
  ii) The risk-free rate on the valuation date of the financial institution who performed the valuation’s swap rate for the expected life of the option.
  iii) A dividend yield of 2.36% was assumed.
  iv) The volatilities were considered appropriate for the duration of the options value and an employee exit rate prior to and post vesting date of 0%.
   
21.3 Post-retirement medical obligations
  The group subsidises a portion of the medical aid contributions of certain retired employees.
   
  An actuarial valuation of the Clicks post-retirement medical aid scheme has determined that the unfunded liability in respect of pensioner post-retirement medical benefits amounts to R34.8 million (2009: R31.2 million). Provision has been made for the full unfunded liability.
   
  The principal actuarial assumptions at the last valuation date (31 August 2009) are:
  i) A discount rate of 8.7% per annum
  ii) General increases to medical aid contributions of 7.2%
  iii) A retirement age of 65
  iv) Husbands are on average three years older than their spouses
  v) Mortality of pensioners determined in accordance with PA90 ultimate tables
  vi) Mortality of in-service members determined in accordance with SA 85-90 ultimate table, with females rated down three years
   
  The post-retirement medical aid provision is sensitive to assumptions around medical aid inflation and retirement age. A change in either of those factors would have a significant impact on the amount to be provided (expense/(credit) to profit or loss):
   
 
  R'000
– Medical aid inflation increases by 1% per annum over assumptions made (5 894)
– Medical aid inflation decreases by 1% per annum over assumptions made 7 663
– Retirement age decreases by five years 13 066
   
 
  Long-term incentive scheme (note 21.1) Share appreciation rights (note 21.2) Leave pay accrual (note 21.4) Bonus accrual (note 21.5) Overtime accrual (note 21.6) Total
  R’000 R’000 R’000 R’000 R’000 R’000
Short-term employee benefits .          
Balance at 1 September 2008 1 343 41 582 58 733 2 604 104 262
Reclassification from long-term employee benefits 91 920 33 576 125 496
Acquisition of business 888 1 205 2 093
Benefit payments (4 817) (9 455) (74 795) (1 729) (90 796)
(Release)/charge included in profit  or loss (1 343) 16 270 82 268 2 346 99 541
Balance at 31 August 2009 87 103 33 576 49 285 67 411 3 221 240 596
Reclassification from long-term employee benefits 67 058 55 389 122 447
Benefit payments (89 838) (80 557) (10 024) (86 141) (2 260) (268 820)
Charge included in profit or loss 8 184 97 321 2 841 108 346
Balance at 31 August 2010 64 323 8 408 47 445 78 591 3 802 202 569
   
21.4 The leave pay accrual is based on actual leave days by employee multiplied by the employee’s current total daily cost to company.
   
21.5 The bonus accrual includes a guaranteed thirteenth cheque and an incentive bonus based on the group’s performance.
  The bonus is provided for all employees who qualify in respect of the expected cash payment.
   
21.6 The overtime accrual is in respect of overtime worked in August 2010 which is paid in September 2010.
   
Pension and provident funds
Four funds, which are registered and governed in terms of the Pension Funds Act, 24 of 1956, are operated by the group. These funds are:
 
– the Clicks Group Retirement Fund;
– the Clicks Group Negotiated Pension Fund;
– the Clicks Group Negotiated Provident Fund; and
– the New UPD Corporate Selection Pension Fund.
 
In addition to the above funds, employees of f UPD can elect to join the SACCAWU National Provident Fund or Chemical Industries National Provident Fund, which are not operated by the group.
 
These are retirement umbrella funds. Employees who were members of the Rainmaker Pension or Provident Fund are now members of one of the three Clicks Group funds.
 
All permanent full-time staff members are obliged to join, at their choice, one of the funds. The funds are all defined contribution funds.
 
Employee and company contributions to the above funds are included in employment costs detailed in note 5.
 
    Group           
    2010 2009
    R'000 R'000

22

Lease commitments

   
  Operating lease liability    
  Operating lease liability 115 311 105 840
       
  Operating leases with fixed escalations are charged to the statement of comprehensive income on a straight-line basis.    
       
  The associated provision will reverse during the latter part of each lease term when the actual cash flow exceeds the profit or loss charge.    
       
  Operating lease commitments    
  The group leases all its retail premises and certain of its pharmaceutical distribution centre sites under operating leases. The lease agreements provide for minimum payments together, in certain instances, with contingent rental payments determined on the basis of achieving a specified threshold turnover.    
       
  Future minimum lease payments under non-cancellable operating leases due:    
  – Not later than 1 year 316 439 279 762
  – Later than 1 year, not later than 5 years 912 591 788 248
  – Later than 5 years 340 672 274 156
    1 569 702 1 342 166
  Future minimum lease payments receivable under non-cancellable operating leases due:    
  – Not later than 1 year 12 456 11 923
  – Later than 1 year, not later than 5 years 60 059 57 053
  – Later than 5 years 12 426 27 979
    84 941 96 955
       
  Of the future minimum lease payments receivable disclosed above, the following amounts receivable relate to Intercare Management Healthcare (Proprietary) Limited:    
  – Not later than 1 year 12 456 11 427
  – Later than 1 year, not later than 5 years 60 059 56 962
  – Later than 5 years 12 426 27 979
    84 941 96 368
       
  The net future minimum lease payments under non-cancellable operating leases due:    
  – Not later than 1 year 303 983 267 839
  – Later than 1 year, not later than 5 years 852 532 731 195
  – Later than 5 years 328 246 246 177
    1 484 761 1 245 211
       
  Generally, leases are taken out on a ten-year lease term with an option to extend for a further five years in the instance of Clicks while shorter periods are committed to for Musica and The Body Shop.
     
 
22.1 Finance lease liability
  The finance lease liability is payable as follows:
      Future minimum lease payments 2010 Interest2010 Present value of minimum lease payments 2010 Future minimum lease payments

2009
Interest 2009 Present value of minimum lease

payments

2009
 
 
 
 
      R’000 R’000 R’000 R’000 R’000 R’000
  Not later than 1 year 1 935 132 1 803 2 292 361 1 931
  Later than 1 year, not later than 5 years 19 6 13 1 950 149 1 801
      1 954 138 1 816 4 242 510 3 732
                 
    Group            
    2010 2009
    R'000 R'000

23

Trade and other payables

   
  The following are included in trade and other payables:    
  Trade payables 1 686 519 2 078 130
  ClubCard deferred income (see note 23.1) 66 509 58 921
  Non-trade payables and accruals 537 855 271 066
    2 290 883 2 408 117
       
 
23.1 ClubCard deferred income
  The deferred income relating to ClubCard discount is determined based on the value of unredeemed vouchers in issue, as well as the value of discount on qualifying sales that have not been converted into vouchers.
   
  Based on the historic redemption rate, it is assumed that 85% of all vouchers in issue are ultimately redeemed.
   
  Estimates are made based on historic trends regarding the value of discount on qualifying sales that will ultimately convert into vouchers issued.
   
       

24

Provisions

   
  Provision for onerous contracts    
  Balance at the beginning of the year 6 254 7 630
  Movement in provision during the year recognised in occupancy costs (10) (1 376)
  Balance at the end of the year 6 244 6 254
       
  Onerous contracts are identified where the present value of future obligations in terms of the contracts in question exceeds the estimated benefits accruing to the group from the contracts.    
       
  The provision relates to certain leases where the site is either vacant or the commercial activity on the site is incurring losses.    
       
  Future cash flows are determined in accordance with the contractual lease obligations and are adjusted by market-related sub-let rentals and discounted at the group’s risk adjusted pre-tax weighted average cost of capital rate.    
       
  The provision is further reduced to the extent that an operating lease accrual has already been recognised (see note 22).    
       

25

Distributions to shareholders

   
  Previous year final cash distribution – 59.5 cents per share paid 15 January 2010 comprising 59.5 cents per share out of share premium (2009: 42.3 cents per share paid 15 December 2008) 163 907 137 111
  Current year interim cash distribution out of share premium – 30.5 cents per share paid 5 July 2010 (2009: 24.5 cents per share paid 13 July 2009) 85 872 74 202
  Total distributions to shareholders 249 779 211 313
  Distributions on treasury shares (5 068) (20 214)
  Distributions paid outside the group 244 711 191 099
  On 20 October 2010, the directors approved the final proposed distribution of 75.7 cents per share.    
       
  The source of such a distribution will be a capital reduction out of share premium.    
       
  Distribution policy    
  The board of directors have maintained the distribution cover at 2.0 times.    
       
  For further details refer to the Directors’ Report and the Shareholders’ Diary.    
       

26

Cash flow information

   
  26.1 Profit before working capital changes    
    Profit before taxation 770 360 647 220
    Adjustment for: 27 883 123 414
    Depreciation and amortisation 136 775 121 917
    Reversal of previous unrealised foreign exchange losses (16 966) (3 057)
    Unrealised foreign exchange loss 7 745 16 966
    Movement in operating lease liability 9 471 7 747
    Loss on disposal of property, plant and equipment 6 476 7 177
    Impairment of intangible asset 7 685
    Fair value adjustment – derivatives (123 354) (28 053)
    Equity-settled share option costs 51 717
    Net financing costs 38 751 54 773
      836 994 825 407
         
  26.2 Working capital changes    
    Increase in inventories (136 180) (43 460)
    Decrease/(increase) in trade and other receivables 36 498 (99 543)
    Disposal of derivative financial instruments 72 420
    (Decrease)/increase in trade and other payables (128 856) 556 108
    (Decrease)/increase in employee benefits (47 364) 77 854
    Decrease in provisions (10) (1 376)
      (203 492) 489 583
         
  26.3 Taxation paid    
    Income tax payable at the beginning of the year (30 547) (73 994)
    Acquisition of business 128
    Current tax charged to profit or loss (189 675) (185 839)
    Income tax payable at the end of the year 45 292 30 547
      (174 930) (229 158)
         
  26.4 Cash and cash equivalents    
    Current accounts 152 052 409 754
      152 052 409 754
         
  26.5 Acquisition of business    
    26.5.1 During the year the group acquired the remaining 40% of the shares of Clicks Direct Medicines (Proprietary) Limited and Direct Patient Support (Proprietary) Limited, effective 30 August 2010, for an amount of R3.5 million. The initial acquisition of the first 60% was effective 1 December 2008.    
           
      Total identifiable assets acquired and liabilities assumed 1 486 2 887
      Goodwill on acquisition (refer to note 11) 2 014 10 313
      Cost of business combination 3 500 13 200
           
      The net cost of the business combination comprised the following:    
      Cash paid 3 500 13 200
      Less: cash acquired as part of business combination 3 276
      Total cost of acquisition 3 500 9 924
           
    26.5.2 The group acquired the pharmacy business of Amalgamated Pharmacy Group (Proprietary) Limited, effective 1 April 2010, for an amount of R32.7 million.    
      Total identifiable assets acquired and liabilities assumed 14 492
      Goodwill on acquisition (refer to note 11) 7 197
      Cost of business combination 21 689
      The net cost of the business combination comprised the following:    
      Cash paid 21 689
      Purchase consideration still owing 11 087
      Total cost of acquisition 32 776
           

27

Financial risk management

 

The group’s activities expose it to a variety of financial risks: market risk (including currency risk, interest rate risk and price risk), credit risk and liquidity risk.

This note presents information about the group’s exposure to each of the above risks, the group’s objectives, policies and processes for measuring and managing risk, and the management of capital. Further quantitative disclosures are included throughout these consolidated financial statements.

The group’s overall risk management programme focuses on the unpredictability of financial markets and seeks to minimise potential adverse effects on the group’s financial performance. The group uses derivative financial instruments to hedge certain risk exposures.

The group treasury functions within the parameters of the treasury policy and reports to a sub-committee of management as outlined in the Risk Management Report.

Market risk
Market risk is the risk that changes in market prices, such as foreign exchange rates, interest rates and equity prices will affect the group’s income or the value of its holdings of financial instruments.

The objective of market risk management is to manage and control market risk exposures within acceptable parameters, while optimising the return on risk.

The group buys and sells derivatives in the ordinary course of business, and also incurs financial liabilities, in order to manage market risks.

Currency risk
The group is exposed to foreign exchange risk through its imports of merchandise.

The currencies in which these transactions primarily are denominated are Euro, USD and GBP.

The group’s treasury risk management policy is to take out forward exchange contracts, to cover committed exposures and anticipated exposures.

The impact of a 10% strengthening or weakening of the currency against the USD, Euro and GBP with all other variables held constant is disclosed in note 28. The effect of this movement is based on the outstanding forward foreign exchange contracts held by the group at year-end.

The group has entered into a hedge with a requirement to purchase/accrue a certain amount of USD over a specific time period at a certain level with the potential to double this.

For every day until maturity of the contract that USD/ZAR fixes below the barrier rate the group will accrue an amount at the strike rate to be delivered on settlement date. If at maturity the USD/ZAR fixes below the strike rate the accrual amount is doubled at the strike rate.

The details of the contracts are as follows:
 
Purchase amount: USD500 000 USD250 000 USD250 000
Accrual start date: 29 Oct 2009 31 Aug 2010 31 Aug 2010
Accrual end date: 28 Sept 2010 31 Mar 2011 29 Apr 2011
Strike rate: 7.69 7.34 7.36
Barrier rate: 9.00 8.22 8.32
The value of currency purchases at 31 August 2010 was: USD457 447 USD31 250 USD27 778
   
 

Interest rate risk
As the group has no significant interest-bearing assets, the group’s income and operating cash flows are substantially independent of changes in market interest rates.

The group’s interest rate risk arises from long-term and short-term borrowings. Borrowings issued at variable rates expose the group to cash flow interest rate risk. Borrowings issued at fixed rates expose the group to fair value interest rate risk. During 2009 and 2010, the group’s borrowings at variable rates were denominated in Rand.

The impact of a 1% increase/decrease in variable interest rates on borrowings is disclosed in note 28.3.

Price risk
The group is exposed to equity securities price risk due to certain derivative investments held by the group related to the share price of Clicks Group Limited. This derivative is primarily held to fund the share appreciation rights and the long-term incentive scheme. Due to the nature of the recognition of the liability, over a period of time there may be a mismatch between the derivative and the liability. However on realisation of the liability, the derivative and liability should not be materially different. With respect to the derivative, all gains and losses are recognised immediately, whereas the liabilities are recognised over the period which they accrue.

Equity price sensitivity analysis
The sensitivity analysis below has been determined based on the exposure to equity price risks at the reporting date.

The impact of a 10% strengthening or weakening of the Clicks Group Limited share price at the reporting date is disclosed below, along with the corresponding impact on the related liability and derivative financial asset.
   
 
  2010 2009
  R’000 R’000
Share price increases by 10%    
Derivative financial asset 23 066 18 734
Share appreciation rights (1 675) (10 006)
Net gain 21 391 8 728
Share price decreases by 10%    
Derivative financial asset (21 716) (13 466)
Share appreciation rights 1 572 7 767
Net loss (20 144) (5 699)
   
 

The group is exposed to fuel price risk due to fuel hedges held by the group. This hedge is primarily held to manage the variability in the retail purchase price of fuel for the distribution network.

The total premium of R256 300 is paid upfront and settlement is against the average of the daily Intercontinental Exchange Gasoil settlement prices calculated monthly. At 31 August 2010 the mark-to-market valuation of the hedge was a gain of R43 000.

Credit risk
Credit risk is the risk of financial loss to the group if a customer or counterparty to a financial instrument fails to meet its contractual obligations, and arises primarily from the group’s receivables. Credit risk is managed on a group basis. Credit risk arises from cash and cash equivalents, derivative financial instruments and deposits with banks and financial institutions, as well as credit exposures to wholesale and retail customers, including outstanding receivables and committed transactions.

Trade and other receivables
The group’s exposure to credit risk is influenced mainly by the individual characteristics of each customer. In relation to the retail business trade receivables primarily relate to recoverables from vendors with which the group has a trading relationship and medical aids with respect to pharmacy recoverables, while in wholesale, customers (excluding intercompany) are primarily with hospitals and independent pharmacists.

In relation to the wholesale business, the risk management has been delegated to the management of the subsidiary business. Management has a credit policy in place and the exposure to credit risk is monitored on an ongoing basis. Credit evaluations are performed on all customers.

Credit Guarantee Insurance Corporation of Africa Limited is utilised to cover the majority of customers with a credit balance over a predetermined amount.

Goods are sold subject to retention of title clauses, so that in the event of non-payment the group may have a secured claim. The group requires collateral in respect of certain trade and other receivables.

The group establishes an allowance for impairment that represents its estimate of incurred losses in respect of trade and other receivables and investments. The main components of this allowance are specific loss components that relate to individually significant exposures, and a collective loss component established for groups of similar assets in respect of losses that have been incurred but not yet identified. The collective loss allowance is determined based on historical data of payment statistics of similar financial assets.

The group has furnished guarantees to external parties – see note 30.

Liquidity risk
Liquidity risk is the risk that the group will not be able to meet its financial obligations as they fall due.

The group’s approach is to ensure, as far as possible, that it will always have sufficient liquidity to meet its liabilities when due, under both normal and stressed conditions, without incurring unacceptable losses or risk damage to the group’s reputation. Due to the dynamic nature of the underlying businesses, group treasury maintains flexibility in funding by holding availability through credit lines.

See note 28.6 for details for maturity analysis of the group’s financial liabilities.

Capital risk management
The group’s objectives when managing capital are to safeguard the group’s ability to continue as a going concern in order to provide returns for shareholders and benefits for other stakeholders and to maintain an optimal capital structure to reduce the cost of capital.

In order to maintain or adjust the capital structure, the group may adjust the amount of dividends paid to shareholders, return capital to shareholders, issue new shares or sell assets to reduce debt. The group’s target of maintaining a ratio of shareholders’ interest to total assets is in the range of 30% to 35%. This is obtained through achieving the group’s earnings targets, management of working capital, through share buy-backs and distributions.

In 2010 the shareholders’ interest to total assets was 27.8% (2009: 26.9%). Excluding the impact of the share buy-back brought forward from the 2011 financial year, the shareholders’ interest to total assets would have been 29.5%.
   

28

Financial instruments

 
28.1 Treasury risk management
  The treasury committee meets on a regular basis to analyse currency and interest rate exposures and re-evaluate treasury management strategies. The group entered into an interest rate swap agreement in respect of certain floating rate short-term borrowings. The group has measured this instrument at fair value and included the value in derivative financial instruments (see note 16).
   
28.2 Foreign exchange risk management
 

The group is exposed to foreign currency risk as it imports merchandise. This risk is mitigated by entering into forward exchange contracts. These contracts are matched with anticipated future cash flows in foreign currencies.

The group does not use forward exchange contracts for speculative purposes.

The group has measured these instruments at fair value (see note 16).

   
 
  31 August 2010 31 August 2009
  Euro USD GBP Euro USD GBP
  ’000 ’000 ’000 ’000 ’000 ’000
Exposure to currency risk            
Annual forecast purchases for ensuing year 2 637 41 017 3 338 4 307 38 766 2 952
Forward exchange contracts 1 618 27 153 977 2 998 27 593 2 053
Net exposure 1 019 13 864 2 361 1 309 11 173 899
             
The following exchange rates applied during the year:            
          Reporting date
      Average rate mid-spot rate
      2010 2009 2010 2009
USD     7.27 9.05 7.34 7.78
GBP     11.70 14.09 11.33 12.61
Euro     10.23 12.20 9.28 11.00
   
  Foreign exchange rate sensitivity analysis
The following table details the group’s sensitivity to a 10% strengthening in the South African Rand against the relevant foreign currencies. 10% is the sensitivity rate used when reporting foreign currency risk internally to management personnel and represents management’s assessment of the reasonably possible change in foreign exchange rates. The sensitivity analysis includes only outstanding foreign currency denominated monetary items and their adjusted translation for a 10% change in foreign currency rates.
   
 
  USD impact GBP impact Euro impact
  2010 2009 2010 2009 2010 2009
  R’000 R’000 R’000 R’000 R’000 R’000
Loss (20 947) (23 439) (1 137) (2 755) (1 718) (3 479)
   
  For a 10% weakening of the South African Rand against the relevant currency, there would be an equal but opposite increase in profit.
   
28.3 Interest rate risk
 

The group is exposed to interest rate risk as entities in the group borrow funds at both fixed and floating interest rates. The risk is managed by maintaining an appropriate mix of fixed and floating rate borrowings and by the use of interest rate swap contracts.

Hedging activities are evaluated regularly to align with interest rate views and defined risk appetite ensuring optimal hedging strategies are applied.

The group’s exposure to interest rates on financial assets and financial liabilities are detailed in the liquidity risk management section of this note.

Interest rate sensitivity analysis

The sensitivity analysis has been determined based on the exposure to interest rates for both derivative and non-derivative financial instruments on the statement of financial position. For floating rate liabilities, the analysis is prepared assuming the amount of liability outstanding at the financial reporting date was outstanding for the whole year. A 100 basis point increase or decrease is used when reporting interest rate risk internally to key management personnel and represents management’s assessment of the reasonably possible change in interest rates.

If interest rates had been 100 basis points higher/lower and all other variables were held constant as at year-end, the group’s profit for the year ended 31 August 2010 would be R3.3 million lower/higher (2009: R2.9 million lower/higher). This is mainly attributable to the group’s exposure to interest rates on its variable rate borrowings.
   
28.4 Fair values of financial instruments
  The fair values of financial assets and liabilities, together with the carrying amounts shown in the statement of financial position, are as follows:
 
31 August 2010 31 August 2009
Carrying Fair Carrying Fair
value value value value
R’000 R’000 R’000 R’000
Financial assets          
Trade receivables (note 15) Loans and receivables 716 362 716 362 758 270 758 270
Loans receivable (excluding loan  receivable from Intercare) (note 13) Loans and receivables 8 345 8 456 16 908 16 975
Loan receivable from Intercare  (note 13) Loans and receivables 30 211 30 387 40 156 41 605
Cash and cash equivalents Loans and receivables 152 052 15 2052 409 754 409 754
Share option hedge (note 16) Assets at fair value through profit or loss 119 192 119 192 68 301 68 301
Options used for fuel hedge (note 16) Assets at fair value through profit or loss 43 43
Financial liabilities          
Secured bank loans (note 20) Financial liabilities measured at amortised cost 16 040 14 528
Unsecured bank loans (note 20) Financial liabilities measured at amortised cost 100 000 116 537
Finance lease liability – fixed rate (note 20) Financial liabilities measured at amortised cost 1 714 2 398 3 204 4 273
Finance lease liability – variable rate  (note 20) Financial liabilities measured at amortised cost 102 102 528 528
Forward exchange contracts used  (note 16) Financial liabilities at fair value for hedging through profit or loss 7 414 7 414 16 537 16 537
Foreign exchange options  (note 16) Financial liabilities at fair value used for hedging through profit or loss 331 331 429 429
Interest rate swaps used for  (note 16) Financial liabilities at fair value hedging through profit or loss 1 246 1 246 3 064 3 064
Unsecured loan (note 20) Financial liabilities measured at amortised cost 1 144 1 144 1 801 1 801
Trade and other payables  (note 23) Financial liabilities measured at amortised cost 2 290 883 2 290 883 2 408 117 2 408 117
Loan advanced related to Intercare (note 20) Financial liabilities measured at amortised cost 30 211 30 387 40 156 40 465
Put/call option relating to  Direct Medicines (note 20) Financial liabilities measured at amortised cost 5 576 5 576
           
 

Basis for determining fair values
The following summarises the significant methods and assumptions used in estimating the fair values of financial instruments reflected in the table above.

Derivatives
Fair values of currency and interest rate derivatives are calculated using standard market calculation conventions with reference to the relevant closing market spot rates, forward foreign exchange and interest rates.

The fair value of the share option hedge is determined by external, independent valuators using the external valuator’s Binomial option pricing model.

Refer to note 21.2 for the key assumptions used in the Binomial option pricing model.

Non-derivative financial liabilities
Fair value is calculated based on the present value of future principal and interest cash flows, discounted at the market rate of interest at the reporting date. In respect of the liability component of convertible notes, the market rate of interest is determined by reference to similar liabilities that do not have a conversion option. For finance leases the market rate of interest is determined by reference to similar lease agreements.

Trade and other receivables
The fair value of trade and other receivables is estimated as the present value of future cash flows, discounted at the market rate of interest at the reporting date.

Interest rates used in determining fair value
The interest rates used to discount estimated cash flows, where applicable, are based on the government yield curve at the reporting date plus an adequate constant credit spread, and were as follows:
 
  2010 2009
  % %
Borrowings 10.0 10.5
Leases 9.0 9.5
     

Fair value hierarchy
IFRS 7 specifies a hierarchy of valuation techniques for assets and liabilities measured at fair value based on whether the inputs to those techniques are observable or unobservable. Observable inputs reflect market data obtained from independent sources and unobservable inputs reflect the group’s market assumptions.

The table below provides the valuation method of financial instruments carried at fair value. The different levels have been defined as follows:
Level 1 – Quoted prices (unadjusted) in active markets for identical assets and liabilities.
Level 2 –
 
Inputs other than quoted prices included within level 1 that are observable for the asset or liability, either directly (i.e. prices) or indirectly (i.e. derived from prices).
Level 3 – Inputs for the asset or liability that are not based on observable market data (unobservable inputs).
 
  The fair value of financial instruments that are not traded in an active market is determined by using valuation techniques. These valuation techniques maximise the use of observable market data where it is available and rely as little as possible on entity-specific estimates. If all significant inputs required to fair value an instrument are observable, the instrument is included in level 2. If one or more of the significant inputs is not based on observable market data, the instrument is included in level 3.
   
  Assets and liabilities measured at fair value
 
  Group 2010
  Level 2 Total
  R’000 R’000
Financial assets    
Assets at fair value through profit or loss    
  Options used for fuel hedge (note 16) 43 43
  Share option hedge (note 16) 119 192 119 192
Total 119 235 119 235
Financial liabilities    
Financial liabilities at fair value through profit or loss    
  Forward exchange contracts used for hedging (note 16) 7 414 7 414
  Foreign exchange options used for hedging (note 16) 331 331
  Interest rate swaps used for hedging (note 16) 1 246 1 246
Total 8 991 8 991
   
  Group 2009
  Level 2 Total
  R’000 R’000
Financial assets    
Assets at fair value through profit or loss    
  Share option hedge (note 16) 68 301 68 301
Total 68 301 68 301
Financial liabilities    
Financial liabilities at fair value through profit or loss    
  Forward exchange contracts used for hedging (note 16) 16 537 16 537
  Foreign exchange options used for hedging (note 16) 429 429
  Interest rate swaps used for hedging (note 16) 3 064 3 064
Total 20 030 20 030
   
28.5 Credit risk management
 

Credit risk refers to the risk that a counterparty may default on its contractual obligation resulting in financial loss to the group. The group is exposed to credit risk arising from cash equivalents, derivative financial instruments and deposits with banks and financial institutions, as well as credit exposures to wholesale and retail customers, including outstanding receivables and committed transactions. Management have a formal credit policy in place as a means of mitigating the risk of financial loss to the group.

The carrying amount of financial assets represents the maximum credit exposure. The maximum exposure to credit risk at the reporting date was:
   
 
  Carrying amount
  2010 2009
  R’000 R’000
Loans and receivables 868 414 1 168 024
  Trade receivables (note 15) 716 362 758 270
  Cash and cash equivalents (note 26.4) 152 052 409 754
Other loans 38 556 57 064
  906 970 1 225 088
     

Loans and receivables
Loans and receivables consist of trade receivables and cash and cash equivalents.

Trade receivables
The group’s exposure to credit risk is influenced mainly by the individual characteristics of each customer. Management has a credit policy in place and exposure to credit risk is monitored on an ongoing basis. Credit evaluations are performed on all customers who purchase from the group.

Trade receivables can be categorised into wholesale customers and retail customers.

The maximum exposure to credit risk, after impairment, for trade receivables at the reporting date by type of customer was:
   
 
  Carrying amount
  2010 2009
  R’000 R’000
Retail customers* 41 157 44 249
Wholesale customers** 675 205 714 021
  716 362 758 270
 
   
 
Retail customers*            
The ageing of trade receivables at the reporting date was:
  Gross Impairment Net Gross Impairment Net
  2010 2010 2010 2009 2009 2009
  R’000 R’000 R’000 R’000 R’000 R’000
Not past due 22 937 22 937 44 317 (1 877) 42 440
Past due 0 – 30 days 18 404 (1 717) 16 687 8 395 (6 586) 1 809
Past due 31 – 120 days 18 559 (17 026) 1 533 472 (472)
Total 59 900 (18 743) 41 157 53 184 (8 935) 44 249
             
 

Retail trade receivables mainly relate to receivables from medical aids with respect to pharmacy debtors.

Trade debtors are classified as past due when they have passed their payment date by one day.

Wholesale customers**
The ageing of trade receivables at the reporting date was:
   
 
  Gross Impairment Net Gross Impairment Net
  2010 2010 2010 2009 2009 2009
  R’000 R’000 R’000 R’000 R’000 R’000
Not past due 598 460 598 460 615 480 615 480
Past due 0 – 30 days 46 216 46 216 59 085 59 085
Past due 31 – 120 days 46 551 (16 022) 30 529 46 660 (7 204) 39 456
Total 691 227 (16 022) 675 205 721 225 (7 204) 714 021
   
 

Trade debtors are classified as past due when they have passed their payment date by one day.

Wholesale customers are primarily with hospitals and independent pharmacists.

UPD minimises its exposure to credit risk by insuring debtors with balances greater than a predetermined amount.

There is an excess (which varies between hospitals and independent pharmacists) that is carried by UPD with the balance being covered by Credit Guarantee Insurance Corporation of Africa Limited as from 1 January 2010, previously Lombard Insurance Company.

The split between insured and uninsured debtors is as follows:
 
  Gross amount
  2010 2009
  R’000 R’000
Insured 480 849 605 439
Uninsured 210 378 115 786
  691 227 721 225
     
  Uninsured debtors consist mainly of a concentration of debtors with a monthly turnover of less than R100 000 and low risk debtors such as government debtors. The increase in the uninsured portion is as a result of a business decision to increase the excess in relation to insured debtors.
   
  The exposure to credit risk in respect of these debtors is managed through credit evaluations and security taken out where appropriate.
 
* Includes Clicks Direct Medicines.
** Prior-year balances restated to exclude Clicks Direct Medicines.
 
 

Impairment loss
The impairment is determined based on information regarding the financial position of each trade receivable at year-end. No consideration is taken of trade receivables that may become doubtful in the future.

The group’s trade receivables are stated net of impairment losses. An analysis of impairment losses are as follows:
 
  Retail* Wholesale**
  2010 2009 2010 2009
  R’000 R’000 R’000 R’000
Balance at the beginning of the year (8 935) (4 843) (7 204) (25 775)
Acquisition of business (710)
Additional allowances made (16 018) (6 928) (9 121) (5 818)
Trade receivables written off during the year as uncollectible 6 210 3 546 303 24 389
Balance at the end of the year (18 743) (8 935) (16 022) (7 204)
         
 

The creation of impairment losses have been included in “other costs” in the statement of comprehensive income (note 6).

Amounts charged to the allowance account are generally written off to the profit or loss when there is no expectation of recovery.

Cash and cash equivalents
The group’s banking facilities are with reputable institutions all of which have a strong credit rating.

Other loans
Other loans are reviewed at least on an annual basis to assess their recoverability. None of the loans are considered to be impaired at the end of the financial year.
 
28.6 Liquidity risk management
 

Liquidity risk is the risk that the group will not be able to meet its financial obligations as they fall due. The group’s approach to managing liquidity is to ensure, as far as possible, that it will always have sufficient liquidity to meet its liabilities when due, under both normal and stressed conditions, without incurring unacceptable losses or risk damage to the group’s reputation.

Liquidity and interest risk tables
The following tables detail the group’s remaining contractual maturity for its financial liabilities, including interest payments and excluding the impact of netting agreements:
 
    Group 2010
  Interest terms Carrying
amount
R’000
Contractual
cash flows
R’000
1 year or less
R’000
1 to 5 years
R’000
Over 5 years
R’000
Non-derivative liabilities            
Interest-bearing borrowings
(see note 20)
Variable in relation to prime 18 829 20 951 7 749 13 202
Interest-bearing borrowings
(see note 20)


Fixed
114 342 123 249 119 018 4 231
Trade and other payables
(see note 23)
  2 290 883 2 290 883 2 290 883
    2 424 054 2 435 083 2 417 650 17 433
Derivative financial liabilities          
Forward exchange contracts (note 16) 7 414 238 025 238 025
Total financial liabilities   2 431 468 2 673 108 2 655 675 17 433
             
    Group 2009
  Interest terms Carrying
amount
R’000
Contractual
cash flows
R’000
1 year or less
R’000
1 to 5 years
R’000
Over 5 years
R’000
Non-derivative liabilities            
Interest-bearing borrowings
(see note 20)
Variable in relation to prime 23 632 27 956 8 010 19 946
Interest-bearing borrowings
(see note 20)


Fixed
43 673 51 133 28 028 23 105
Trade and other payables
(see note 23)
  2 408 117 2 408 117 2 408 117
    2 475 422 2 487 206 2 444 155 43 051
Derivative financial liabilities          
Forward exchange contracts
(see note 16)
16 537 296 729 296 729
Total financial liabilities   2 491 959 2 783 935 2 740 884 43 051
    Group          
    2010 2009
    R'000 R'000

29

Capital commitments

   
  Capital expenditure approved by the directors    
    Contracted 6 755 11 156
    Not contracted 243 078 213 299
    249 833 224 455
  The capital expenditure will be financed from borrowings and internally generated funds.    
       

30

Financial guarantees

   
 

The company has furnished guarantees to bankers in respect of liabilities of R200 million recognised on the statement of financial position of certain subsidiary companies. The net liability recognised on the group statement of financial position in respect of these liabilities is R100 million.

The company has guaranteed a R30 million facility given to Intercare by their bankers as detailed in notes 13.3 and 20.1.

Group companies provide surety for other group companies to the value of R939.3 million with respect to facilities held with various banks. At year-end R100 million of these facilities had been drawn down by group companies.

A group subsidiary has issued a deed of suretyship on behalf of another subsidiary in relation to a trade payable in the amount of R10 million.

In the opinion of the directors, the possibility of loss arising from these guarantees is remote.
   

31

Related party transactions

 

Group
Clicks Group Limited is the ultimate holding company of the group.

Transactions between group subsidiaries
During the year, in the ordinary course of business, certain companies within the group entered into transactions. These intragroup transactions have been eliminated on consolidation. See here for a list of the group’s subsidiaries.

Directors and key management
A number of directors of the company hold positions in other entities, where they may have significant influence over the financial or operating policies of these entities. Accordingly, the following is considered to be such an entity:

Director Entity
DM Nurek Investec Bank Limited (“Investec”)


Transactions between the group and this entity have occurred under terms and conditions that are no more favourable than those entered into with third parties in arm’s length transactions.

These transactions include:

i) Investec manages certain cash on call on behalf of group companies.
   
ii) Investec has provided funding to group companies.
   
iii) A group company holds a derivative instrument from Investec. Refer note 16.


Certain non-executive directors are also non-executive directors of other public companies which transact with the group. Except as disclosed above, the relevant directors do not believe that they have control, joint control or significant influence over the financial or operating policies of those companies. Those entities are not disclosed above.

Executive directors’ employment contracts do not provide for a defined period of employment, but specify a notice period for the chief executive officer of 12 months and six months for the other executive directors. During this notice period, all standard benefits accrue to the directors in question. Contracts do not provide for predetermined compensation on termination other than that accorded to employees in terms of the group’s remuneration policies.

Employee benefits paid to directors are detailed in the Remuneration Report.

Shares held by directors and their related entities
The percentage of shares held by directors of the company and their related entities at year-end are disclosed in the Remuneration Report.

Company
A schedule of the loans and investments in related parties is included here.

The company received dividends from New Clicks South Africa (Proprietary) Limited, a wholly-owned subsidiary, of R1.3 billion, comprising cash dividends of R575 million, a dividend in substance of R697 million and a dividend in specie of R55 million. The company in turn paid distributions on treasury shares held by that subsidiary to that subsidiary of R3.6 million (2009: R17.4 million).

In addition, the company paid distributions to the Share Trust on shares held by the Share Trust of R1.5 million (2009: R2.8 million). Details regarding distributions relating to treasury shares are included in note 25.

   

32

Borrowing powers

  In terms of the articles of association, the borrowing powers of the company are unlimited.
   

33

Operating segments

 

The group has adopted IFRS 8 “Operating Segments” with effect from 1 September 2009. IFRS 8 requires operating segments to be identified on the basis of internal reports about components of the group that are regularly reviewed by the chief operating decision-maker in order to allocate resources to the segments and to assess their performance. In contrast, the predecessor standard (IAS 14 “Segment Reporting”) required an entity to identify two sets of segments, using a risks and returns approach, with the entity’s system of internal financial reporting to key management personnel serving only as a starting point for the identification of such segments. As a result, following the adoption of IFRS 8, the identification of the group’s reportable segments has changed.

The group has identified four reportable segments, as described below, based on its operating brands. The operating brands offer different products and services, and are managed separately. For each of the operating brands, the group’s chief decision-makers review internal management reports on a monthly basis. The following describes the operations in each of the group’s reportable segments:

  • Clicks – is a specialist health, beauty and homeware retailer with stores within the Republic of South Africa, Namibia and Swaziland.
  • Musica – is a retailer of entertainment-related merchandise, with stores in the Republic of South Africa, Namibia and Botswana.
  • The Body Shop – specialises in naturally-inspired luxury toiletries, cosmetics, gifting and grooming, with stores in the Republic of South Africa and Namibia.
  • UPD – national full-range pharmaceutical wholesaler and also provides distribution capability for the Clicks Group. UPD operates within the Republic of South Africa and in Botswana.

Other operations include Clicks Direct Medicines. Clicks Direct Medicines was previously disclosed under the Distribution operating segment. Clicks Direct Medicines uses Clicks as a distribution channel and its strategy is aligned with Clicks’ strategy, it is therefore appropriate with the adoption of IFRS 8 “Operating Segments”, that Clicks Direct Medicines be disclosed within the Clicks reportable segment.

The information regarding the results of each reportable segment is included here. Performance is measured based on segment operating profit, as included in the internal management reports that are reviewed by the group’s chief operating decision-makers. Segment profit is used to measure performance as management believes that such information is the most relevant in evaluating the results of certain segments relative to other entities that operate within these industries. Inter-segment transactions are on an arm’s length basis.
   
  Major customers
There are no external customers that account for more than 10% of the group’s revenue.
   

34

Business acquisition

  34.1 Amalgamated Pharmacy Group (Proprietary) Limited    
   

The group acquired the pharmacy businesses from Amalgamated Pharmacy Group (Proprietary) Limited (“APG”), effective 1 April 2010, for an amount of R32.7 million. At that date, the fair value of the identifiable assets and liabilities was R30.1 million and R4.7 million respectively. The pharmacy businesses acquired from APG had no significant contingent liabilities at that date.

The following reflects the businesses’ assets and liabilities at 1 April 2010 together with their fair values:

         
      Carrying Fair
      amount value
      R'000 R'000
    Non-current assets 16 674
    Intangible assets    
    Current assets    
    Inventories 13 573 13 573
    Total assets 13 573 30 247
    Non-current liabilities    
    Deferred tax liabilities 4 669
    Total liabilities 4 669
         
  34.2 Clicks Direct Medicines (Proprietary) Limited and Direct Patient Support (Proprietary) Limited
    In the previous year, the group acquired 60% of the shares of Clicks Direct Medicines (Proprietary) Limited and Direct Patient Support (Proprietary) Limited (“Direct Medicines”), effective 1 December 2008, for an amount of R13.2 million. At that date, the fair value of Direct Medicines’ identifiable assets and liabilities was R28.8 million and R24 million respectively. The carrying amount of those assets and liabilities were equal to its fair value. Management performed an exercise considering the fair value versus the carrying amount of Direct Medicines. The result was that the difference between fair value and carrying amount was not considered material.
         
    Direct Medicines had no significant contingent liabilities at that date.
         
    The following reflects Direct Medicines’ statement of financial position at  1 December 2008 together with the fair value of the identifiable assets and liabilities:
         
      Carrying
      amount and
      fair value
      R'000
    ASSETS    
    Non-current assets   3 890
      Property, plant and equipment   1 269
      Loan receivable   2 611
      Shareholders’ loans   10
    Current assets   24 934
      Inventories   7 147
      Trade and other receivables   14 511
      Cash and cash equivalents   3 276
         
    Total assets   28 824
    EQUITY AND LIABILITIES    
    Equity   4 813
      Share capital   1
      Distributable reserve   4 812
    Current liabilities    
      Trade and other payables   24 011
    Total equity and liabilities   28 824
     
    The group’s acquisition was not in terms of the put and call to acquire the remaining 40% of the shares in Direct Medicines effective 30 August 2010. The amount paid was separately agreed at R3.5 million.
     

35

Impact of reclassification of operating expenses

  The results for the year ended 31 August 2009 have been restated for the reclassification of certain expenses between occupancy costs and other costs within the UPD business. The impact on the statement of comprehensive income for the year ended 31 August 2009 is a R13.3 million decrease in occupancy costs and a corresponding increase of R13.3 million in other operating costs. There is a nil net impact on the statement of comprehensive income and statement of financial position for the year ended 31 August 2009.
     
 
The impact of the reclassification is as follows:      
  Previously Reclassifi- Restated
  reported cation amount
  R’000 R’000 R’000
Statement of comprehensive income      
Gross profit 2 517 382 2 517 382
Other income 564 482 564 482
Expenses (2 372 694) (2 372 694)
  Depreciation and amortisation (113 665)   (113 665)
  Occupancy costs (352 055) 13 269 (338 786)
  Employment costs (1 156 928)   (1 156 928)
  Other costs (750 046) (13 269) (763 315)
       
Operating profit 709 170 709 170