Hyperinflation policy and disclosure, Syria, Sudan and South Sudan

MTN Group Limited – Annual report – 31 December 2018

Industry: telecoms

1 ACCOUNTING FRAMEWORK AND CRITICAL JUDGEMENTS (extracts)
1.1 Basis of preparation
The group financial statements of MTN Group Limited (the company) comprise the company and its subsidiaries and the group’s interest in associates and joint ventures and controlled structured entities (together referred to as the group and individually as group entities).

The group financial statements and company financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB) and Interpretations as issued by the IFRS Interpretations Committee (IFRIC), and comply with the SAICA Financial Reporting Guides as issued by the Accounting Practices Committee (APC), Financial Reporting Pronouncements as issued by the Financial Reporting Standards Council (FRSC), the Johannesburg Stock Exchange (JSE) Listings Requirements and the requirements of the South African Companies Act, No 71 of 2008 (the Companies Act). The group and the company have adopted all new accounting standards that became effective in the current reporting
period. The following standards had an impact on the group:
• IFRS 9 Financial Instruments (IFRS 9); and
• IFRS 15 Revenue from Contracts with Customers (IFRS 15).

The group also implemented a voluntary change in accounting policy on the presentation of cash flows.

Refer to note 11 for details of the change in accounting policies.

The financial statements have been prepared on the historical cost basis adjusted for the effects of inflation where entities operate in hyperinflationary economies and for certain financial instruments that have been measured at fair value, where applicable.

The Sudanese, South Sudanese and Syrian economies have been considered to be hyperinflationary. Accordingly, the results, cash flows and financial position of the group’s subsidiaries, MTN Sudan Company Limited (MTN Sudan), MTN South Sudan Limited (MTN South Sudan) and MTN Syria (JSC) (MTN Syria) have been expressed in terms of the measuring unit current at the reporting date.

Amounts are rounded to the nearest million with the exception of earnings per share and the related number of shares (note 2.7), number of ordinary shares (note 8.1), share-based payments (note 8.4) and directors’ emoluments and interests (note 10.2).

The preparation of financial statements in conformity with IFRS requires management to make judgements, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income and expenses. Actual results may differ from these estimates. Information about significant areas of estimation uncertainty and critical judgements in applying accounting policies that have the most significant effect on the amounts recognised in the financial statements are included in note 1.5.

1.3.2 Foreign currency
Functional and presentation currency
Items included in the financial statements of each entity in the group are measured using the entity’s functional currency. The group financial statements are presented in South African rand, which is the functional and presentation currency of the company.

Transactions and balances
Foreign currency transactions are translated into the functional currency using the exchange rates at the dates of the transactions. Foreign exchange gains or losses resulting from the settlement of such transactions and from the translation at reporting date exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in profit or loss.

Translation of foreign operations
The results, cash flows and financial position of group entities which are not accounted for as entities operating in hyperinflationary economies and that have a functional currency different from the presentation currency of the group are translated into the presentation currency as follows:
• Assets and liabilities, including goodwill and fair value adjustments arising on acquisition, are translated at rates of exchange ruling at the reporting date;
• Specific transactions in equity are translated at rates of exchange ruling at the transaction dates;
• Income and expenditure and cash flow items are translated at weighted average exchange rates for the period or translated at exchange rates at the date of the transaction, where applicable; and
• Foreign exchange translation differences are recognised as other comprehensive income and accumulated in the foreign currency translation reserve, except to the extent the difference is allocated to non-controlling interests.

The results, cash flows and financial position of the group entities which are accounted for as entities operating in hyperinflationary economies and that have functional currencies different from the presentation currency of the group are translated into the presentation currency of its immediate parent at rates of exchange ruling at the reporting date. As the presentation currency of the group or that of the company is that of a non-hyperinflationary economy, comparative amounts are not adjusted for changes in the price level or exchange rates in the current financial year.

An entity may have a monetary item that is receivable from a foreign operation. An item for which settlement is neither planned nor likely to occur in the foreseeable future is, in substance, a part of the entity’s net investment in that foreign operation. On consolidation, exchange differences arising from the translation of the net investment in foreign operations are taken to other comprehensive income and accumulated in the foreign currency translation reserve.

The exchange rates relevant to the group are disclosed in note 7.6.

Disposal of foreign operations
On disposal of a foreign operation, all exchange differences accumulated in equity in respect of that operation attributable to the equity holders of the group are reclassified to profit or loss.

Exchange differences accumulated in equity in respect of a monetary item that is part of the group’s net investment in a foreign operation, are not reclassified to profit or loss on settlement of the monetary item.

In the case of a partial disposal that does not result in the group losing control over a subsidiary that includes a foreign operation, the proportionate share of accumulated exchange differences is reattributed to non-controlling interests and is not recognised in profit or loss. For all other partial disposals, the proportionate share of the accumulated exchange differences is reclassified to profit or loss.

For more details on judgements applied in the selection of exchange rates in countries operating in dual exchange rate economies refer to note 1.5.3.

1.3.3 Hyperinflation
The financial statements (including comparative amounts) of the group entities whose functional currencies are the currencies of hyperinflationary economies are adjusted in terms of the measuring unit current at the end of the reporting period.

As the presentation currency of the group or the company is that of a non-hyperinflationary economy, comparative amounts are not adjusted for changes in the price level in the current year. Differences between these comparative amounts and current year hyperinflation adjusted equity balances are recognised in other comprehensive income.

The carrying amounts of non-monetary assets and liabilities are adjusted to reflect the change in the general price index from the date of acquisition to the end of the reporting period. On initial application of hyperinflation, prior period gains and losses are recognised directly in equity. An impairment loss is recognised in profit or loss if the restated amount of a non-monetary item exceeds its estimated recoverable amount.

Gains or losses on the net monetary position are recognised in profit or loss.

All items recognised in the income statement are restated by applying the change in the general price index from the dates when the items of income and expenses were initially earned or incurred.

At the beginning of the first period of application, the components of equity, except retained earnings, are restated by applying a general price index from the dates the components were contributed or otherwise arose. These restatements are recognised directly in equity as an adjustment to opening retained earnings. Restated retained earnings are derived from all other amounts in the restated statement of financial position. If on initial application of hyperinflation accounting the restated value of the non-monetary assets exceed their recoverable amount, the amount in excess of the recoverable amount is recorded as a reduction in retained earnings. At the end of the first period and in subsequent periods, all components of equity are restated by applying a general price index from the beginning of the period or the date of contribution, if later.

All items in the statement of cash flows are expressed in terms of the general price index at the end of the reporting period.

The Sudanese, South Sudanese and Syrian economies have been classified as hyperinflationary. Accordingly, the results, cash flows and financial position of the group’s subsidiaries; MTN Sudan, MTN South Sudan and MTN Syria, have been expressed in terms of the measuring unit current at the reporting date. For further details, refer to note 1.5.6.

1.5 Critical accounting judgements, estimates and assumptions (extract)
1.5.6 Hyperinflation
Significant judgement
The group exercises significant judgement in determining the onset of hyperinflation in countries in which it operates and whether the functional currency of its subsidiaries, associates or joint ventures is the currency of a hyperinflationary economy.

Various characteristics of the economic environment of each country are taken into account. These characteristics include, but are not limited to, whether:
• the general population prefers to keep its wealth in non-monetary assets or in a relatively stable foreign currency;
• prices are quoted in a relatively stable foreign currency;
• sales or purchase prices take expected losses of purchasing power during a short credit period into account;
• interest rates, wages and prices are linked to a price index; and
• the cumulative inflation rate over three years is approaching, or exceeds, 100%.

Management exercises judgement as to when a restatement of the financial statements of a group entity becomes necessary. Following management’s assessment, the group’s subsidiaries, MTN Sudan, MTN South Sudan and MTN Syria have been accounted for as entities operating in hyperinflationary economies. The results, cash flows and financial positions of MTN Sudan, MTN South Sudan and MTN Syria have been expressed in terms of the measuring units current at the reporting date.

MTN Sudan
The economy of Sudan was assessed to be hyperinflationary effective 1 July 2018, and hyperinflation accounting was applied for the six months ended 31 December 20181. Upon first application of hyperinflation, net prior period gains of R625 million were recognised directly in equity. The uplift of the assets on initial adoption resulted in the net asset value of MTN Sudan exceeding its estimated recoverable amount. As a result of this, the initial adjustment was capped at the recoverable amount and the difference recorded directly to retained earnings. If the initial uplift had not been capped the related increase in opening equity would have been R1,2 billion.

As at 31 December 20171, the historical increase in the asset value as a result of hyperinflation accounting had been fully impaired, which resulted in a R1 690 million decrease in EBITDA2 during 2017. During the six-month period ended 30 June 2018, R306 million of the impairment was reversed, resulting in an increase in EBITDA2. This amount represents the full impairment recognised during 2017, translated at a significantly weaker exchange rate.

The general price index used as published by the International Monetary Fund is as follows:

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The cumulative inflation rate over three years as at 31 December 2018 is 168%. The average adjustment factor used for the period from 1 July 2018 to 31 December 2018 was 1,14.

1 Hyperinflationary accounting was applied previously in Sudan, up until 30 June 2016.
2 EBITDA is defined in note 2.1.

MTN South Sudan
The economy of South Sudan was assessed to be hyperinflationary effective 1 January 2016 and hyperinflation accounting was applied since.

The general price index used as published by the International Monetary Fund is as follows:

mtn2

The cumulative inflation rate over three years as at 31 December 2018 is 2 416%. The average adjustment factor used for 2018 was 1,5.

MTN Syria
The economy of Syria was assessed to be hyperinflationary effective 1 January 2014 and hyperinflation accounting has been applied since. Reliable inflation data could not be obtained on the inflation rate in Syria. The general price index set out below was calculated by reference to the change in the United States dollar (US$):Syrian pound (SYP) exchange rate.

Until 30 June 2017, hyperinflation accounting was applied by estimating Syria’s inflation rate using the change in the US$:SYP exchange rate. The SYP started strengthening against the US$ from October 2017 onwards. Syria’s 2017 and 2018 estimated inflation rate using the change in US$:SYP exchange rate, after the SYP strengthened, was negative, i.e. there was deflation.

However, the characteristics of Syria’s economy continue to indicate that Syria’s economy is hyperinflationary. Recognising deflation was not considered appropriate, due to lack of sufficient available information at 31 December 2018. Therefore, a hyperinflation adjustment factor of 1 was applied from 1 July 2017 to 31 December 2018.

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The cumulative inflation rate over three years as at 31 December 2018 is 30%. The average adjustment factor used for 2018 was 1,0.

As at 31 December 2017, R1 348 million of assets previously written up for hyperinflation have been impaired with the impact being included in EBITDA1 during 2017.

Iran
In 2015, the Iranian economy was assessed to no longer be hyperinflationary and hyperinflation accounting was discontinued effective 1 July 2015. Accordingly, the amounts expressed in terms of the measuring unit at 30 June 2015 were treated as the basis for the carrying amounts with no further hyperinflation adjustments being passed from 1 July 2015 onwards. The group’s results from Iran includes expenses resulting from the discontinuation of hyperinflation accounting mainly relating to the subsequent depreciation of assets that were historically written up under hyperinflation accounting. The additional income statement charge reduced equity-accounted earnings from Iran by R873 million for the year ended 31 December 2018 (2017: R1 328 million).

The cumulative impact of adjusting the group’s results for the effects of hyperinflation is set out below:

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