Reunert Limited

NOTES

NOTES TO THE INCOME STATEMENT AND BALANCE SHEET

	2006 R million	2005 R million (Restated)	Year ended 30 Sept 2005 R million (Restated)
Note 1
Operating profit
Operating profit is stated after:
– Cost of sales	2 684,4	2 238,0	4 826,6
– Other income	(4,9)	(6,2)	(15,2)
– Other expenses excluding depreciation, amortisation and impairments	680,4	595,6	1 258,7
Note 2
Net interest and dividend income
Interest received	43,4	23,9	60,8
– from RC&C Finance Company	25,5	10,2	30,1
– external	17,9	13,7	30,7
Interest paid	(13,5)	(10,5)	(23,5)
Dividend income other than from associate company	3,3	8,8	12,8
Total	33,2	22,2	50,1
Dividend income from associate company included in share of associate company's profits	48,0	40,0	69,2
Note 3
Abnormal Items
Surplus on sale of investment	3,3	—	6,4
Impairment of plant and equipment	—	—	(4,9)
Negative goodwill taken to profit	—	2,4	2,4
Total before taxation	3,3	2,4	3,9
Taxation	(0.5)	—	1,4
Total	2,8	2,4	5,3
Note 4
Number of shares used to calculate earnings per share
Weighted average number of shares in issue used to determine basic earnings per share,headline earnings per share, normalised basic earnings per share and normalised headline earnings per share (millions of shares)	174,6	172,8	173,4
Adjusted by the dilutive effect of unexercised share options granted (millions of shares)	2,4	2,2	2,1
Weighted average number of shares used to determine diluted basic, normalised diluted basic, diluted headline and normalised diluted headline earnings per share (millions of shares)	177,0	175,0	175,5
Note 5.1
Headline earnings
Headline earnings are determined by eliminating the effect of the following items in attributable earnings:
Profit attributable to equity holders of Reunert Limited	408,8	314,4	713,3
Loss/(surplus) on disposal of property, plant and equipment	0,3	(0,1)	0,2
Surplus on sale of investment	(3,3)	—	(6,4)
Negative goodwill reflected in abnormal items	—	(2,4)	(2,4)
Impairment of plant and equipment	—	—	4,9
Taxation	0.5	—	(1,5)
Headline earnings	406,3	311,9	708,1
Note 5.2
Normalised earnings and headline earnings
Normalised earnings are determined by deducting from attributable earnings the interest in profit that is economically attributable to BEE partners (note 9)
Profit attributable to equity holders of Reunert Limited (basic and diluted)	408,8	314,4	713,3
Interest in profit that is economically attributable to BEE partners	(18,4)	(9,9)	(24,7)
Normalised earnings (basic and diluted)	390,4	304,5	688,6
Normalised headline earnings are determined by deducting from headline earnings the interest in profit that is economically attributable to BEE partners (note 9)
Headline earnings (basic and diluted)	406,3	311,9	708,1
Interest in profit that is economically attributable to BEE partners	(18,4)	(9,9)	(24,7)
Normalised headline earnings (basic and diluted)	387,9	302,0	683,4
Note 6
Investments and loans
Unlisted associate company
– at cost plus equity accounted earnings excluding goodwill	92,1	66,4	86,8
Other unlisted investments
– at cost	0,7	2,4	0,7
Listed investments held for sale
– at market value	—	21,2	7,8
Loans – at cost	14,0	20,2	20,9
Total carrying values	106,8	110,2	116,2
Directors' valuation of unlisted investments
– Unlisted associate company	520,0	520,0	520,0
– Other unlisted investments	0,7	2,4	0,7
Note 7
Long-term borrowings
Total long-term borrowing	122,9	—	130,0
Less:Short-term portion	(14,9)	—	(18,6)
	108,0	—	111,4
Repayment of loan by BEE partner	7,1	—	—
Finance leases	0,3	0,5	0,3
	115,4	0,5	111,7

The group entered into an agreement with Powerhouse Utilities (Pty) Ltd (Powerhouse), whereby on 1 December 2004, 25,1% of the A shares of ATC (Pty) Ltd (ATC) were sold to Powerhouse at a cost of R130 million. IFRS requires that this transaction is not accounted for as a sale, since the bank loan has not been fully paid by Powerhouse and conditions are attached to the unpaid portion, notwithstanding that the economic reality of this transaction is in fact a sale.

The long-term borrowing relates to funding provided by Nedbank Limited (Nedbank) to Powerhouse for their purchase of 25,1% of ATC. The loan is guaranteed by Reunert and, in terms of current accounting practices for this transaction, is recognised on the Reunert balance sheet.

Repayment of the loan by the BEE partner represents a portion of a dividend paid by ATC to Powerhouse, which was used to repay portion of the loan from Nedbank to Powerhouse. In terms of current accounting practice for this transaction, this is to be reflected as a long-term liability on the Reunert balance sheet. When the significant risks and rewards of ownership in the equity of ATC are deemed to have passed to the BEE partner then this portion of the loan repaid by Powerhouse will be transferred to minority interest.

Note 8

RC&C Finance Company bank borrowings

RC&C Finance Company has total bank borrowing facilities of R1 200 million (2005: R900 million).

The banks which have granted these facilities are contractually bound to provide these on a long-term basis, but they may give notice to run down these facilities.

Once notice has been given these facilities reduce to zero in line with the reduction in the underlying rental debtors over a maximum of five years.

Note 9
Black Economic Empowerment (BEE) transactions	2006 R million	2005 R million (Restated)	Year ended 30 Sept 2005 R million (Restated)
As referred to in note 7 certain BEE transactions involving the disposal of equity interests have not been recognised because the significant risks and rewards of ownership of the equity has been deemed not to have passed to the BEE partners. Accordingly,the equity interests in subsidiaries have not been recognised in the group income statement and balance sheet.
The effect of this has been to not recognise the following:
Interest in profit that is economically attributable to BEE partners	18,4	9,9	24,7
Balance sheet interest that is economically attributable to BEE partners	88,7	81,3	96,0

Note 10

Basis of preparation

The group has adopted International Financial Reporting Standards (IFRS) for the year ending 30 September 2006, with a date of transition of 1 October 2004 as required by the Listings Requirements of the JSE Limited. This interim financial report has been prepared and presented in accordance with IFRS, specifically in terms of IAS 34 “Interim Financial Reporting” and the Companies Act of South Africa.

The financial statements for the year ending 30 September 2006 will be the group's first consolidated IFRS-compliant financial statements and hence IFRS 1 "First-time adoption of IFRS" has been applied in preparing this interim report. The group's opening balance sheet on 1 October 2004 and the comparative information for 2005 have been restated to comply with IFRS.

These interim financial statements have been prepared in accordance with those IFRS standards and International Financial Reporting Interpretations Committee (IFRIC) interpretations issued and effective as at the time of preparing these financial statements. The IFRS standards and IFRIC interpretations that will be applicable at 30 September 2006 are not known with certainty at the time of preparing these interim financial statements and may therefore still change.

Note 11

Reconciliation between SAGAAP and IFRS

Notes

31 March
2005
R million

30 Sept
2005
R million

01 October
2004
R million

Reconciliation of profit for the period

( ) = reduction of profit

As previously reported under SA GAAP

– Profit attributable to equity holders of Reunert Limited

313,2

709,2

Adjusted for:

SA GAAP Restatements

17,9

1,2

– IAS 16 – Property,plant and equipment

– reversal of depreciation on land

11.1

0,5

0,7

– IAS 38 – Intangible assets

11.2

(0,3)

(0,2)

– IAS 17 – Leases

11.3

0,3

—

– IAS 11 – Construction contracts

11.4

—

0,7

– Minorities in certain BEE transactions*

11.5

9,3

—

– IFRS 3 – Reversal of negative goodwill*

11.6

2,4

—

– Powerhouse interest*

11.7

5,7

—

IFRS Adjustments

– IAS 16 – Property,plant and equipment

11.1

4,3

10,5

– IFRS 2 – Share-based payments*

11.8

(13,0)

—

– Deferred tax effect of all adjustments

(8,0)

(7,4)

– Impact on minority interest due to adjustments

—

(0,2)

As reported under IFRS

314,4

713,3

Reconciliation of total equity

( ) = reduction of total equity

As previously reported under SA GAAP

– Equity attributable to equity holders of Reunert Limited

1 058,5

1 453,5

983,1

– Minority interest

96,9

42,5

39,7

1 155,4

1 496,0

1 022,8

Adjusted for:

SA GAAP Restatements

2,9

5,8

4,6

– IAS 16 – Property,plant & equipment

– reversal of depreciation on land

11.1

5,4

5,6

4,9

– IAS 38 – Intangible assets

11.2

0,5

0,6

0.8

– IAS 17 – Leases

11.3

(1,2)

(1,5)

– IAS 11 – Construction contracts

11.4

0,4

1,1

0,4

– Minorities in certain

BEE transactions*

11.5

(60,0)

—

– IFRS 3 – Reversal of negative goodwill*

11.6

5,5

—

– Powerhouse interest*

11.7

5,7

—

– Restatement (debtor recourse provision)*

11.9

46,6

—

IFRS Adjustments

– IAS 16 – Property,plant and equipment

11.1

132,0

138,3

127,7

– Deferred tax effect of all adjustments

(36,0)

(35,4)

(28,0)

As reported under IFRS

1 254,3

1 604,7

1 127,1

*	These were adjusted in the September 2005 annual report, but had not been adjusted in the March 2005 report to shareholders

Adjustments to balance sheet line items

( ) = credit

Property, plant and equipment and intangible assets

140,2

144,5

133,4

Goodwill

73,1

—

Deferred taxation

(36,0)

(35,4)

(28,0)

Inventory and contracts in progress

0,6

1,3

(0,8)

Accounts receivable and derivative assets

11.7

(124,3)

—

1,7

Long-term borrowings

(0,5)

(0,3)

(0,5)

Bank overdrafts and short-term portion of long-term borrowings

(0,5)

(0,6)

(1,0)

Accounts payable, derivative liabilities, provisions and taxation

46,3

(0,8)

(0,5)

98,9

108,7

104,3

Restatements and significant changes to the group's accounting policies in comparison to March 2005

11.1
IAS 16 – Property, plant and equipment

The useful lives, residual values, capitalisation of subsequent expenditure and componentisation of property, plant and equipment have been assessed and resulted in a substantial adjustment to the group's carrying amount of property, plant and equipment. The useful lives and residual values of property, plant and equipment will be reassessed annually.

11.2
IAS 38 – Intangible assets

Intangible assets consisting of computer software and a customer list have been separated from property, plant and equipment. The depreciation on these intangible assets is now reflected as amortisation of intangible assets in the income statement.

11.3
IAS 17 – Leases

Income and expenses under operating leases with fixed escalation clauses are now recognised on a straight-line basis in line with Circular 7/2005 issued by The South African Institute of Chartered Accountants. Previously operating lease income and expenses were recognised on a cash basis. A finance lease has also been capitalised.

11.4
IAS 11 – Construction contracts

The group's accounting policy on the recognition of contract revenue and contract costs in certain operations has been aligned with IAS 11 to recognise contract revenue and contract costs by reference to the stage of completion of the contract at the balance sheet date.

11.5
Minorities in certain BEE transactions

Minority interests in subsidiaries where the minority is a BEE partner and the full purchase price has not been paid by the BEE partner have been reversed.

11.6
IFRS 3 – Business combinations

Negative goodwill raised in previous years has been reversed to retained earnings and negative goodwill raised in the period to March 2005 was taken to profit.

11.7
Powerhouse interest

Interest was earned by Reunert on the R130 million loan to Powerhouse financing its purchase of 25,1% of ATC. During May 2005 this loan was refinanced by Nedbank (note 7). In the March 2005 report to shareholders issued last year the loan to Powerhouse was reflected in accounts receivable. In this report, in terms of current accounting practices, this R130 million has been reallocated to be reflected as an investment by Reunert Limited in ATC, and has been eliminated on consolidation in preparing the group results.

11.8
IFRS 2 – Share-based payments

The group decided to early adopt IFRS 2 in 2005. This represents the expense relating to share options granted to certain group employees and the expense relating to an equity instrument which valued the Powerhouse deal (note 7).

11.9
Restatement

The previous year's interim results included a provision for debtors' recourse guarantee. This R46,6 million provision was no longer required following the realisation of RC&C Finance Company's debtors book in December 2003 and has been adjusted in the group statement of changes in equity. This amount had previously been reflected as a provision.

Note 12

Unconsolidated subsidiary

The financial results of Cafca Limited (Cafca), a subsidiary incorporated in Zimbabwe, have not been consolidated in the group results as the directors believe there is a lack of control as defined in IAS 27: ”Consolidated and Separate Financial Statements,“ and the amounts involved are not material.

Note 13

Acquisitions

During the period two small acquisitions of businesses were made at a total cost of R6,3 million. In the opinion of the directors the disclosure requirements of IFRS 3 are not warranted in this report to shareholders due to the immateriality of these acquisitions.