Notes to the interim condensed consolidated financial statements

for the six months ended 31 January 2020

1. REPORTING ENTITY

EOH Holdings Limited (‘EOH’ or the ‘Company’) is a holding company domiciled in South Africa that is listed on the JSE Limited under the category Technology: Software and Computer Services. EOH is one of the largest information and communications technology (‘ICT’) services provider in South Africa and is committed to providing the technology, knowledge, skills and organisational ability critical to the adaptation, development and growth of the markets it serves. The interim condensed consolidated financial statements of EOH, as at 31 January 2020 and for the six months ended 31 January 2020, comprise the Company and its subsidiaries (together referred to as ‘the Group’) and the Group’s investments in associates and joint ventures.

2. STATEMENT OF COMPLIANCE

The interim condensed consolidated financial statements have been prepared in accordance with the framework concepts and the measurement and recognition requirements of International Financial Reporting Standards (‘IFRS’) and its interpretations adopted by the International Accounting Standards Board (‘IASB’) and comply with the SAICA Financial Reporting Guides as issued by the Accounting Practices Committee and Financial Pronouncements as issued by the Financial Reporting Standards Council, and contain at a minimum the information required by IAS 34: Interim Financial Reporting, the requirements of the Companies Act 71 of 2008 of South Africa and the JSE Limited Listings Requirements.

3. BASIS OF PREPARATION

The accounting policies and methods of computation applied in the preparation of these interim condensed consolidated financial statements are consistent with those applied in the previous consolidated annual financial statements, other than for the adoption of IFRS 16 – Leases as described below.

The interim condensed consolidated financial statements do not include all the notes of the type normally included in a set of consolidated annual financial statements. Accordingly, this report is to be read in conjunction with the consolidated annual financial statements for the year ended 31 July 2019.

The interim condensed consolidated financial statements have been prepared on the historical cost basis, except for certain financial instruments that are measured at fair value through profit or loss at the end of each reporting period.

The interim condensed consolidated financial statements are presented in South African Rand, which is the Group’s presentation currency, rounded to the nearest thousand except for when otherwise indicated. The going concern basis has been used in preparing the interim condensed consolidated financial statements as the directors have a reasonable expectation that the Group will continue as a going concern for the foreseeable future.

The comparative financial information in the interim condensed consolidated financial statements has been restated based on information available at 31 January 2020. Refer to notes 4 and 5 for further information.

The interim condensed consolidated financial statements have not been audited or reviewed by the Group’s external auditor.

4. NEW AND AMENDED STANDARDS ADOPTED BY THE GROUP

The Group has applied the following standards and amendments for the first time to their annual reporting period commencing 1 August 2019:

IFRS 16 – Leases

IFRS 16 supersedes IAS 17 Leases, IFRIC 4 Determining whether an Arrangement contains a Lease, SIC-15 Operating Leases-Incentives and SIC-27 Evaluating the Substance of Transactions Involving the Legal Form of a Lease. The standard sets out the principles for the recognition, measurement, presentation and disclosure of leases and requires lessees to account for all leases under a single on- balance sheet model.

Lessor accounting under IFRS 16 is substantially unchanged under IAS 17. Lessors will continue to classify leases as either operating or finance leases using similar principles as in IAS 17. Therefore, IFRS 16 did not have an impact for leases where the Group is the lessor.

The Group has adopted IFRS 16 retrospectively from 1 August 2019 but has not restated comparatives for the 2019 reporting period, as permitted under the standard’s transitional provisions. The impact arising from the new leasing rules are therefore recognised in the statement of financial position on 1 August 2019. Right-of-use assets are measured at the amount of the lease liability on adoption. The Group has elected to apply the practical expedient to not reassess the lease definition.

The Group primarily has operating property leases, which has been impacted by the adoption of IFRS 16. Payments associated with short-term leases and leases of low-value assets are recognised on a straight-line basis as an expense in profit or loss and represent no change from the previous reporting period’s accounting treatment. Short-term leases have a term of 12 months or less. Low-value assets comprise leases such as IT equipment (tablets and personal computers), office furniture or telephones. Non-lease components are recognised as an expense in operating expenses as they are incurred.

For leases previously classified as finance leases, the Group recognised the carrying amount of the lease asset and lease liability as the carrying amount of the right-of-use asset and the lease liability at the date of initial application. At the date of transition, there was no indication that the right-of-use assets were impaired.

Operating lease commitments disclosed as at 31 July 2019 amounted to R414 million. On adoption of IFRS 16, these existing operating lease commitments, excluding short-term and low-value commitments, have now been recognised as right-of-use assets and obligations to make lease payments in the interim condensed consolidated statement of financial position. The Group has recorded the lease liability, measured at the present value of the remaining lease payments payable over the remaining lease term, discounted at an average incremental borrowing rate of 9.3%. This has resulted in an increase in current and non-current liabilities, and a corresponding increase in non-current assets of R367 million as at 1 August 2019. The total adjustment to retained earnings as at 1 August 2019, due to previously recognised operating lease straight-lining reserves at 31 July 2019, was R31 million.

The right-of-use assets are subsequently measured at cost less any accumulated depreciation and impairment losses and adjusted for certain remeasurements of the lease liability. The right-of-use assets are depreciated over the shorter of the assets’ useful lives and the lease term on a straight-line basis. After the commencement date, the amount of lease liabilities is increased to reflect the accretion of interest and reduced for the lease payments made.

5. RESTATEMENT OF INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The previously reported January 2019 half-year results took in to account a number of required restatements due to transactions that appeared to had been processed incorrectly. Those January 2019 results were, however, prepared prior to the finalisation of the restatements, which finalisation only occurred during the year ended 31 July 2019. Consequently, the January 2019 results have now been restated to align with the final conclusions and restatements set out in the 2019 consolidated annual financial statements.

During the half-year reporting period ended 31 January 2019 and the year ended 31 July 2019, management identified a number of transactions that appeared to have been processed incorrectly in both the 2019 and prior periods; the impact of these transactions spanned various accounting topics, including revenue recognition, asset capitalisation and subsequent recovery, and timing of recognition of liabilities and other provisions for impairment.

During 2019, in assessing whether the identified adjustments should have been processed as prior period errors or recognised in the 2019 year, management considered whether the facts that gave rise to the adjustments existed in prior years, or whether those events only arose due to information that came to light in the 2019 year. The 2018 consolidated annual financial statements and the consolidated statement of financial position as at 1 August 2017 had been restated to correct the prior period errors. The 2019 interim condensed consolidated statement of profit or loss and other comprehensive income has also now been restated. As a result of the extent and complexity of the restatements required to correct these errors, management have grouped the restatements according to the nature of these errors.

A brief explanation of each group of errors is provided below, following which an analysis is included of the financial impact on the affected financial statement line items:

Revenue

Under IAS 18 – Revenue, revenue could only be recognised once it was probable that the economic benefits associated with the transaction would flow to the seller and the amount of revenue could be measured reliably, among other requirements. A number of revenue transactions had been recognised in prior years, for which it was not probable that benefits would flow to the Group due to a lack of valid and enforceable rights to the benefits, as valid contracts or other binding agreements were not in place at the time. These transactions primarily related to arrangements in the public sector. The requirements to recognise revenue for these transactions under IAS 18 were not met in prior years, based on the facts and circumstances that existed in prior years. The Group had therefore corrected for these errors through the reversal of revenue, trade receivables and work-in-progress (unbilled revenue) balances in periods prior to 2019.

In addition, a number of revenue transactions, for which the Group would have been considered to be an agent using information available in prior years had been incorrectly recognised on a gross basis in prior years due to the lack of an assessment of the Group’s agent/principal status in prior periods. This incorrect application of the accounting principles in the prior years has also been adjusted as a prior period error through the reversal of revenue and cost of sales and only recognising the margin as revenue.

Internally generated intangible assets

IAS 38 – Intangible Assets distinguishes between research and development costs with regards to internally generated intangible assets. Costs related to research activities are expensed and costs related to development activities are capitalised if they meet certain specified criteria. Further, if an entity cannot distinguish the research phase from the development phase of an internal project, the entity treats the expenditure on that project as if it were incurred in the research phase only. The Group had capitalised certain costs incurred on internally generated intangible assets, for which the criteria for capitalisation as development costs had not been demonstrated in prior years. For the majority of these intangible assets, business plans had not been prepared and the ability of the assets to generate future economic benefits had not been demonstrated; the specified criteria set out in IAS 38 were therefore not met at the time of initial recognition of the intangible assets based on factors that existed at that time. The costs incurred should therefore never have been capitalised but, instead, recognised as research costs as incurred. Correction of this error had resulted in the reversal of capitalised intangible assets together with the reversal of any related amortisation of the capitalised intangible assets and an increase in research costs expensed in periods prior to 2019.

Inventory licences

IAS 2 – Inventories requires that for items to be capitalised as inventory, it should first meet the definition of an asset. The Conceptual Framework defines an asset as a resource controlled by the entity as a result of past events and from which future economic benefits are expected to flow to the entity. Costs were incurred and capitalised as inventory in prior years even though it was doubtful, at the time of incurring the costs, that future economic benefits would flow to the Group; this relates largely to acquired licences that were assigned to specified potential customers which, once assigned, could only be sold to that potential customer, but for which the Group had no commitment from the potential customer that it would acquire the licence. Management believe that the costs incurred to acquire these licences should therefore have been recognised as an expense when incurred, taking into account the information that existed at the time of initial recognition. Accordingly, correction of this error had resulted in the reversal of inventory and an increase in expenses in periods prior to 2019.

Unrecorded liabilities/recoverability of assets

The Group had identified certain tax liabilities pertaining to prior periods that should have been recognised in prior years, but for which there was no accounting at the time. Such tax liabilities include liabilities which were assessed as a result of the ENS investigations. These tax liabilities arose from obligations that existed in prior years and not from reassessments of the Group’s tax liability position, and should have been recognised in prior periods based on information that existed at that time.

Additionally, management has identified cases in which revenue had been recognised for work performed in prior periods, without proper accrual of related costs incurred.

Recognition of these liabilities and accruals had been accounted for as a prior period error, resulting in increases in tax liabilities and trade and other payables, as well as increases in the expenses in the periods to which it relates.

The identified errors had been corrected by retrospective restatement in the period to which it related. In most cases, it was impracticable to distinguish the period-specific effects of the error, due to changes in management and the lack of availability of information, in which case the error was corrected in the 2018 consolidated financial statements. The portion of the tax liabilities related to the ENS investigations pertaining to financial periods ended before 1 August 2017 had been adjusted for against the opening balances of liabilities and equity as at 1 August 2017.

The errors have been corrected by restating each of the affected financial statement line items for the prior periods as follows:

Interim condensed consolidated statement of profit or loss and other comprehensive income (extract) for the six months ended 31 January 2019

         Correction of prior period errors                
Figures in Rand thousand  31 January 
2019 
   Revenue  Internally 
generated 
intangible 
assets 
Inventory  Unrecorded 
liabilities/ 
recoverability 
of assets 
   Reclassified 
as 
discontinued 
operations 
(note 9)
   Restated 
31 January 
2019 
  
Continuing operations                                  
Revenue  8 428 280     (468 138) –  –  –     (2 458 062)    5 502 080    
Cost of sales  (6 761 030)    341 629  18 964  –  33 224     1 732 940     (4 634 273)   
Gross profit  1 667 250     (126 509) 18 964  –  33 224     (725 122)    867 807    
Net financial asset impairment losses  (513 986)    –  –  –  –     16 295     (497 691)   
Operating expenses  (4 031 562)    –  365 864  42 916  316 946     527 347     (2 778 489)   
Operating loss before interest and equity-accounted loss  (2 878 298)    (126 509) 384 828  42 916  350 170     (181 480)    (2 408 373)   
Investment income  22 575     –  –  –  –     (5 639)    16 936    
Share of equity-accounted loss  (13 950)    –  –  –  –     4 449     (9 501)   
Finance costs  (203 246)    –  –  –  –     4 082     (199 164)   
Loss before taxation  (3 072 919)    (126 509) 384 828  42 916  350 170     (178 588)    (2 600 102)   
Taxation  (199 422)    –  –  –  –     111 686     (87 736)   
Loss for the period from continuing operations  (3 272 341)    (126 509) 384 828  42 916  350 170     (66 902)     (2 687 838)   
Loss for the period from discontinued operations  (41 194)    –  –  –  –     66 902     25 708    
Loss for the period  (3 313 535)    (126 509) 384 828  42 916  350 170     –     (2 662 130)   
Other comprehensive income  28 236     –  –  –  –     –     28 236    
Total comprehensive income for the period  (3 285 299)    (126 509) 384 828  42 916  350 170     –     (2 633 894)   
Loss attributable to:                                  
Owners of EOH Holdings Limited  (3 304 029)                         (2 658 770)   
Non-controlling interest  (9 506)                         (3 360)   
Total  (3 313 535)                         (2 662 130)   
Total comprehensive income attributable to:                                  
Owners of EOH Holdings Limited  (3 283 119)                         (2 637 860)   
Non-controlling interest  (2 180)                         3 966    
Total  (3 285 299)                         (2 633 894)   
  31 January 
2019 
  Restated 
31 January 
2019 
 
From continuing and discontinued operations (cents)        
Loss per share (2 099)   (1 689)  
Diluted loss per share (2 099)   (1 689)  
Headline loss per share (993)   (827)  
Diluted headline loss per share (993)   (827)  
From continuing operations (cents)        
Loss per share (2 073)   (1 702)  
Diluted loss per share (2 073)   (1 702)  
Headline loss per share (973)   (840)  
Diluted headline loss per share (973)   (840)  

The above restatements have no impact on any line item in the statement of financial position as at 31 July 2019 and therefore the statement of financial position at 31 July 2019 remains as previously reported. The restatement adjustments are all non-cash adjustments and therefore do not impact cash generated before working capital changes or any other line items on the interim condensed consolidated statement of cash flows.

6. REVENUE

Disaggregated revenue


Figures in Rand thousand Unaudited
for the
six months to
31 January 2020
  Unaudited
restated* for
the six months to
31 January 2019
 
Revenue by sector        
Public sector 21%   16%  
Private sector 79%   84%  
Total 100%   100%  
Major revenue types        
Hardware maintenance 53 286   45 792  
Hardware sales 822 587   1 418 693  
Managed services 1 624 181   1 680 058  
Sale of goods – other 5 762   38 390  
Services 2 970 756   3 661 331  
Software/licence contracts 419 151   627 598  
Software maintenance 411 416   487 462  
Rentals 46 439   168 662  
Total 6 353 578   8 127 986  
Timing of revenue recognition        
Goods or services transferred to customers:        
– at a point in time 1 247 500   2 084 681  
– over time 5 106 078   6 043 305  
Total 6 353 578   8 127 986  
Continuing operations 4 544 173   5 502 080  
Discontinued operations 1 809 405   2 625 906  
Total 6 353 578   8 127 986  

* Refer to note 5 – Restatement of interim condensed consolidated financial statements for the impact on profit or loss.

7. HEADLINE LOSS PER SHARE


Figures in Rand thousand  Unaudited 
for the 
six months to 
31 January 2020 
   Unaudited 
restated* for 
the six months to 
31 January 2019 
  
Loss attributable to owners of EOH Holdings Limited  (1 159 108)    (2 658 770)   
Adjusted for:             
Loss on disposal of subsidiaries and property, plant and equipment  128 275     –    
   Loss on disposal of property, plant and equipment  6 591     –    
   Loss on disposal of subsidiaries sold (discontinued) 121 684     –    
Loss on deemed disposal and disposal of subsidiaries and associates (continuing) 87 478     156 686    
Impairment of goodwill  211 978     1 138 413    
Impairment of equity-accounted investments: continuing operations  38 175     100 293    
Impairment of equity-accounted investments: discontinued operations  24 430     –    
Impairment of intangibles  4 489     95 863    
Total tax effects on adjustments  (1 257)    (134 546)   
Headline loss from continuing and discontinued operations  (665 540)    (1 302 061)   
Loss attributable to owners of EOH Holdings Limited  (1 159 108)    (2 658 770)   
Adjust for discontinued operations (note 9) 269 907     (19 562)   
Continuing loss attributable to ordinary share holders  (889 201)    (2 678 332)   
Continuing operations adjustments:             
Loss on disposal of property, plant and equipment  6 470     –    
Loss on deemed disposal and disposal of subsidiaries  87 478     156 686    
Impairment of assets  58     95 863    
Impairment of goodwill  114 219     1 138 413    
Impairment of equity-accounted investments  38 175     100 293    
Total tax effect on adjustments  –     (134 546)   
Headline loss from continuing operations  (642 801)    (1 321 623)   
From continuing and discontinued operations (cents)            
Headline loss per share  (395)    (827)   
Diluted headline loss per share  (395)    (827)   
From continuing operations (cents)            
Headline loss per share  (381)    (840)   
Diluted headline loss per share  (381)    (840)   
Ordinary shares (in thousands)            
Total number of shares in issue  176 545     176 545    
Weighted average number of shares in issue  168 610     157 384    
Weighted average diluted number of shares in issue**  169 903     158 612    
* Refer to note 5 – Restatement of interim condensed consolidated financial statements for the impact on profit or loss.
** The impact of shares to be issued to vendors, share options and EOH A shares has been excluded from the weighted average diluted number of shares as they would be anti-dilutive.

8. FINANCIAL ASSET IMPAIRMENT

Impairment losses on financial assets recognised in profit or loss from continuing operations were as follows:


Figures in Rand thousand Unaudited
for the
six months to
31 January 2020
  Unaudited
restated for
the six months to
31 January 2019
 
Impairment loss on trade and other receivables 122 375   385 747  
Impairment loss on other financial assets 49 695   73 722  
Impairment loss on contract assets 26 613   38 222  
  198 683   497 691  

9. DISCONTINUED OPERATIONS

Identification and classification of discontinued operations

There were a number of businesses that were approved for sale at 31 January 2020, and for which the sale is expected to be completed within 12 months from the reporting date, as well as businesses that were already sold during the current and previous reporting periods that have met the requirements to be presented as discontinued operations and have accordingly been presented as such.

Judgement was applied in determining whether a component is a discontinued operation by assessing whether it represents a separate major line of business or geographical area of operations or is part of a single plan to dispose of a separate major line of business or geographical area of operations.

The Group’s intention to dispose of these non-core assets triggered an initial impairment assessment on the underlying assets at 31 January 2020, and the resulting impairment was allocated to the identified disposal groups (refer to note 13: Assets held for sale).


Figures in Rand thousand Unaudited 
for the 
six months to 
31 January 2020 
  Unaudited 
restated*# for 
the six months to 
31 January 2019 
 
Revenue 1 809 405    2 625 906   
Expenses (1 837 250)   (2 493 987)  
Other income 9 331    5 655   
(Loss)/profit before tax (18 514)   137 574   
Tax expense (9 065)   (111 866)  
Remeasurement to fair value less costs to sell (126 620)   –   
Loss on disposal (121 684)   –   
Total (loss)/profit from discontinued operations (275 883)   25 708   
Attributable to:        
Equity-holders of the parent (269 907)   19 562   
Non-controlling interest (5 976)   6 146   
Earnings per share (cents)        
(Loss)/earnings per share from discontinued operations (160)   12   
Diluted (loss)/earnings per share from discontinued operations (160)   12   
Net cash flows in relation to discontinued operations:        
Cash inflow from operating activities 16 305    27 893   
Cash outflow from investing activities (76 543)   (77 556)  
Cash inflow/(outflow) from financing activities 97 471    (39 034)  

                                      31 January 2020      
Figures in Rand thousand iOCO  NEXTEC  IP    Total   
Revenue 342 059  933 251  534 095    1 809 405   
Expenses (349 834) (1 037 671) (449 745)   (1 837 250)  
Other income 3 143  3 688  2 500    9 331   
Profit before tax (4 632) (100 732) 86 850    (18 514)  
Tax expense (1 048) 18 836  (26 853)   (9 065)  
Remeasurement to fair value less costs to sell (41 430) (85 190) –    (126 620)  
Loss on disposal (44 473) (44 083) (33 128)   (121 684)  
Total (loss)/profit from discontinued operations (91 583) (211 169) 26 869   (275 883)  
* Refer to note 5 – Restatement of interim condensed consolidated financial statements for the impact on profit or loss.
# Comparative figures previously reported have been amended to reflect continuing operations prevailing for the period ended 31 January 2020.

10. PROPERTY, PLANT AND EQUIPMENT AND INTANGIBLE ASSETS

The Group acquired property, plant and equipment at a value of R66 million (2019: R108 million) and intangible assets at a value of R68 million (2019: R98 million). The Group disposed of property, plant and equipment with a carrying value of R69 million (2019: R14 million) and intangible assets with a carrying value of R38 million (2019: R98 million). Included in property, plant and equipment is R367 million capitalised as right-of-use assets under IFRS 16, at 1 August 2019.

An impairment charge of Rnil against property, plant and equipment and R4,5 million against intangible assets has been recognised at the period end.

11. GOODWILL

Figures in Rand thousand  Unaudited at 
31 January 2020 
   Audited at 
31 July 2019 
  
Opening balance  2 173 086     4 255 281    
Acquired in business combinations  –     70 877    
Foreign currency translation  560     27 874    
Disposals  (140 427)    (325 605)   
Impairment: discontinued operations  (97 759)    (506 762)   
Impairments: continuing operations  (114 219)    (1 348 579)   
Closing balance before current assets held for sale  1 821 241     2 173 086    
Current assets held for sale (note 13) (466 439)    (322 232)   
Closing balance  1 354 802     1 850 854    

The aggregate carrying amounts of goodwill were allocated to the following reportable segments:

Figures in Rand thousand  Unaudited at 
31 January 2020 
   Audited at 
31 July 2019 
  
iOCO  810 539     966 000    
NEXTEC  424 701     831 544    
IP  586 001     375 542    
   1 821 241     2 173 086    
Current assets held for sale  (466 439)    (322 232)   
   1 354 802     1 850 854    

A challenging economic environment during the period ended 31 January 2020 had an impact on EOH’s market capitalisation and certain underlying businesses. The Group has performed impairment assessments on CGUs having had an indicator of impairment, this coupled with the sale and discontinuation of certain non-core business activities, has resulted in an impact on the carrying value of goodwill. Assessments performed have highlighted impairments of R212 million (R47 million in the iOCO segment and R165 million in the NEXTEC segment).

The impairments to goodwill relate mainly to the write down of held for sale CGUs to their fair value less costs to sell. Of the total impairment in iOCO and NEXTEC R17 million and R113 million is attributed to this fair valuation respectively.

Within iOCO a further R30 million in impairments were driven by lost or delayed contracts and projects as a result of ongoing challenging market conditions.

The NEXTEC segment is currently going through a restructuring process to unlock and realise the segment’s value potential.

Goodwill within the NEXTEC segment was impaired by a further R52 million as a result of the declining profitability of certain businesses within the health and learning and development cluster. Larger international players have been entering the South African health sector, putting pressure on local players, resulting in margin squeeze and loss of major contracts. Working capital constraints in the learning and development space has restricted the ability of this cluster to expand into new markets as well as certain businesses struggling to retain key customers. Owing to the above, the Group is in the process of restructuring these clusters in order to unlock and realise their value potential.

Impairment testing

For the purpose of impairment testing, goodwill is allocated to the Group’s cash-generating units. The recoverable amount of these cash-generating units was determined based on value-in-use calculations, discounting the future cash flows expected to be generated from the continuing operations of each cash- generating unit. Impairment tests on assets held for sale were based on fair value less costs of disposal. Cash-generating units have been identified to reflect the various solution clusters in EOH based on the strategic review of the Group. Comparatives have been aligned to this structure.

Key assumptions used in discounted cash flow projection calculations

The assumptions below have been applied to calculate the recoverable amount of cash-generating units based on a level 3 fair value less costs of disposal calculation. The discount rates used in the discounted cash flow models are calculated using the principles of the capital asset pricing Model, taking into account current market conditions.

A pre-tax weighted-average cost of capital rate was used in discounting the projected cash flows depending on the nature of business and operating markets (including country specific factors). The cash flow projections were based on 2020 budgeted results and a reasonable growth rate applied for a further four years based on market conditions and historic trends. A perpetuity growth rate was applied based on conservative historical market trends and operating markets (including country specific factors).

Key assumptions used represent management’s assessment of future trends in the industry and are based on past experience and both external and internal data.

12. EQUITY-ACCOUNTED INVESTMENTS

Figures in Rand thousand  Unaudited at 
31 January 
2020 
   Audited at 
31 July 
2019 
  
Opening balance  300 535     530 861    
Additions  –     190 454    
Foreign currency translation  (2 169)    (83 304)   
Foreign currency translation recognised in profit or loss  –     94 547    
Disposals  (6 135)    (146 460)   
Capital contribution  –     3 243    
Impairment: continuing operations  (38 175)    (146 500)   
Impairment: discontinued operations  (24 430)    (121 405)   
Share of equity-accounted profit/(losses) from continuing operations  5 480     (9 814)   
Share of equity-accounted losses from discontinued operations  (2 178)    (11 087)   
Closing balance before current assets held for sale  232 928     300 535    
Current assets held for sale (note 13) (37 000)    (72 468)   
Closing balance  195 928     228 067    

Impaired equity-accounted investments form part of iOCO segment. The recoverable amount was based on fair value less cost of disposal. Virtuoso, aSAY and Cozumevi have been impaired to the fair value less cost of disposal. Acron and Bessertec have been sold.

The equity-accounted investments are as follows:

Figures in Rand thousand Unaudited at
31 January
2020
  Audited at
31 July
2019
 
Computer Construction Software 195 923    190 453   
aSAY Group    24 538   
Cozumevi    13 071   
Other: continuing 5   5  
  195 928   228 067  
Equity-accounted investments held for sale          
Virtuoso Consulting 26 000    64 175   
Bessertec Group    896   
Cozumevi 4 000      
aSAY Group 7 000      
Other: held for sale   7 397  
  37 000   72 468  

13. ASSETS HELD FOR SALE

The Group has refined its operational structure into three distinct operating units to allow for leaner and more agile core businesses with separate capital and governance structures. On 11 December 2018, the Group announced that opportunities would be explored for the sale of certain non-core assets, of which many have been sold during the reporting period. There continues to be a number of businesses approved for sale and for which the sale is expected to be completed within 12 months from the reporting date. These businesses are classified as disposal groups held for sale and the assets and liabilities of these disposal groups have been presented as held for sale.

The major classes of assets and liabilities of the disposal groups, per reportable segment, classified as held for sale are as follows:


Figures in Rand thousand  iOCO  NEXTEC  IP     31 January 
2020 
  
Assets                   
Property, plant and equipment  61 909  93 026  89 062     243 997    
Goodwill and intangible assets  19 262  272 886  365 595     657 743    
Equity-accounted investments  37 000  –  –     37 000    
Other financial assets  –  7 763  43 208     50 971    
Deferred taxation  450  3 085  7 925     11 460    
Lease receivable  4 137  798  2 606     7 541    
Inventory  6 820  19 405  32 456     58 681    
Current taxation receivable  6 830  11 629  6 879     25 338    
Trade and other receivables  144 553  232 025  320 659     697 237    
Cash and cash equivalents  56 398  97 363  153 835     307 596    
Assets held for sale  337 359  737 980  1 022 225     2 097 564    
Liabilities                   
Other financial liabilities  (35 608) (1 860) (115 128)    (152 596)   
Lease liabilities  (4 872) (29 535) (15 366)    (49 773)   
Deferred taxation  –  (25 813) (26 263)    (52 076)   
Current taxation payable  (9) (6 882) (9 432)    (16 323)   
Trade and other payables  (107 584) (175 682) (246 559)    (529 825)   
Deferred income  720  (6 895) (12 636)    (18 811)   
Liabilities directly associated with the assets held for sale  (147 353) (246 667) (425 384)    (819 404)   
Net assets directly associated with the disposal groups  190 006  491 313  596 841     1 278 160    
Cumulative amounts recognised in other comprehensive income                   
Foreign currency translation reserve  (791) (13) (291)    (1 095)   
Impairment loss for write-down to fair value less costs to sell                   
Continuing operations – operating expenses  38 175  32 350  –     70 525    
Discontinued operations (note 9) 41 430  85 190  –     126 620    
   79 605  117 540  –     197 145    

Figures in Rand thousand  iOCO  NEXTEC  IP  31 July 
2019
 
  
Assets                
Property, plant and equipment  85 122  128 076  4 027  217 225    
Goodwill and intangible assets  795  358 272  12 853  371 920    
Equity-accounted investments  72 468  –  –  72 468    
Other financial assets  –  7 710  (421) 7 289    
Deferred taxation  261  24 734  2 220  27 215    
Inventory  4 980  30 166  –  35 146    
Current taxation receivable  575  2 584  –  3 159    
Trade and other receivables  99 625  526 698  88 239  714 562    
Cash and cash equivalents  47 919  221 110  41 344  310 373    
Assets held for sale  311 745  1 299 350  148 262  1 759 357    
Liabilities                
Other financial liabilities  (978) (4 433) (3 837) (9 248)   
Lease liabilities  –  –  (240) (240)   
Deferred taxation  (233) (467) (1 873) (2 573)   
Current taxation payable  330  (11 566) (2 614) (13 850)   
Trade and other payables  (105 586) (331 133) (32 222) (468 941)   
Deferred income  –  (67 980) (2 048) (70 028)   
Liabilities directly associated with the assets held for sale  (106 467) (415 579) (42 834) (564 880)   
Net assets directly associated with the disposal groups  205 278  883 771  105 428  1 194 477    
Cumulative amounts recognised in other comprehensive income                
Foreign currency translation reserve  4 709  2 021  (926) 5 804    
Impairment loss for write‑down to fair value less costs to sell                
Continuing operations – operating expenses  –  (22 172) –  (22 172)   
Discontinued operations  (135 374) (450 994) (41 799) (628 167)   
   (135 374) (473 166) (41 799) (650 339)   

14. DISPOSAL OF SUBSIDIARIES AND EQUITY-ACCOUNTED INVESTMENTS

On 11 December 2018, the Group announced that opportunities would be explored for the sale of certain non-core assets. In line with this strategy the Group has disposed of its investments in a number of subsidiaries as well as joint ventures during the reporting period.

Entity disposed Treatment
before
disposal
Percentage
holding
Date of
disposal
Consideration
received or
receivable
Gain/(loss)
on disposal 
 
Afon Subsidiary 100% 01 May 19 (35 244)  
Clearline Group Subsidiary 100% 01 Aug 19 8 000 (58 540)  
Enablemed Group Subsidiary 100% 01 Aug 19 17 364 (28 273)  
Moropa Site Solutions (Pty) Ltd Subsidiary 100% 01 Aug 19 (5 109)  
Telebo Construction (Pty) Ltd Subsidiary 100% 01 Aug 19 3 000 (10 927)  
WRP Consulting Engineers (Pty) Ltd Subsidiary 100% 01 Aug 19 16 950 (6 560)  
Bessertec Joint venture 50% 01 Aug 19 612   
Healthshare Group Subsidiary 100% 01 Sep 19 4 000 (10 236)  
D.Code Mobility (Pty) Ltd Subsidiary 100% 01 Sep 19 3 098 (1 386)  
EOH Turkey Software Services* Subsidiary 100% 01 Oct 19 255   
Rinedata UK Subsidiary 100% 01 Nov 19 9 498 (4 379)  
VILT Group Subsidiary 100% 01 Nov 19 64 869 (36 614)  
Cool Ideas (Pty) Ltd Subsidiary 100% 30 Nov 19 732   
Data World Group Subsidiary 100% 30 Nov 19 55 000 (33 128)  
Isilumko Group Subsidiary 100% 01 Dec 19 22 000 (26 054)  
MSO Group Subsidiary 100% 01 Dec 19 21 000 (23 587)  
Acron Bilsim A.S. Joint venture 50% 01 Dec 19 (4 348)  
Mehleketo Group* Subsidiary 100% 01 Dec 19 92 592   
Transaction costs         (18 966)  

* Mehleketo Group and EOH Turkey Software Services have been disposed of by way of liquidation.

Net cash flows in relation to disposal of businesses

Figures in Rand thousand 31 January 
2020 
 
Cash received from disposal of businesses 181 409   
Less cash balances of businesses disposed (125 736)  
Net cash inflow from disposal of businesses 55 673   

15. STATED CAPITAL

Figures in Rand thousand Unaudited at
31 January 2020
  Audited at
31 July 2019
 
Stated capital        
Opening balance 4 239 621   3 443 223  
Shares issued for cash   713 115  
Shares issued as a result of the acquisition of businesses   48 427  
Shares issued to the Group’s share incentive and retention schemes   1 170  
Treasury shares 10 288   33 686  
  4 249 909   4 239 621  

16. OTHER FINANCIAL LIABILITIES

Figures in Rand thousand  Unaudited at 
31 January 2020 
   Audited at 
31 July 2019 
  
Interest-bearing liabilities  2 855 362     2 980 602    
Interest-bearing bank loans secured through security SPV*  2 498 089     2 292 881    
Unsecured interest-bearing bank loans  347 775     675 219    
Interest-bearing bank loans secured by certain property  9 498     12 502    
Non-interest-bearing liabilities  244 895     352 603    
Vendors for acquisition  203 930     303 313    
Other non-interest-bearing liabilities  40 965     49 290    
Current assets held for sale (note 13) (152 596)    (9 248)   
  2 947 661     3 323 957    
Non-current financial liabilities  2 026 727     2 255 825    
Current financial liabilities  920 934     1 068 132    
  2 947 661     3 323 957    
Reconciliation of other financial liabilities            
Balance at the beginning of the year  3 333 205     4 103 996    
Proceeds from other financial liabilities  –     967 307    
Repayment of other financial liabilities  (99 927)    (1 745 982)   
Disposal of subsidiaries  (127 799)    (64 406)   
Net changes in fair value  11 292     33 199    
Other non-cash items  (16 514)    39 090    
Liabilities directly associated with assets held for sale (note 13) (152 596)    (9 248)   
  2 947 661     3 323 957    
Financial instruments          
Measured at amortised cost  2 743 731     3 020 644    
Financial liabilities carried at fair value through profit or loss  203 930     303 313    
  2 947 661     3 323 957    
* The loans secured through Security SPV have the following security provided trade and other receivables and cash of at least 80% of each class of asset which are required to be pledged and in terms of security arrangements through the Security SPV.

17. FINANCIAL INSTRUMENTS

Other financial liabilities

Financial liabilities measured at fair value through profit or loss, in terms of the hierarchy, are classified as level 3 as the valuation techniques used are based on unobservable inputs for the liability.

Figures in Rand thousand Unaudited at
31 January 2020
  Audited at
31 July 2019
 
Fair value through profit or loss:        
Vendors for acquisition – level 3 203 930   303 313  
  203 930   303 313  

Vendors for acquisition

The balance in respect of vendors for acquisition relates to the contingent consideration where business combinations are subject to profit warranties. The profit warranties allow for a defined adjusted value to the consideration payable in the event that the warranted profit after tax is not achieved, or in the event that it is exceeded, an agreed sharing in the surplus. The fair value of the contingent arrangement is initially estimated by applying the income approach assuming that the relevant profit warrant will be achieved. Subsequent measurement uses the income approach to calculate the present value of the expected settlement payment using the latest approved budgeted results and reasonable growth rates for the remainder of the relevant warranty periods taking into account any specific circumstances.

Profit warrant periods normally extend over a 24-month period.

Upwardly revised performance expectations would result in an increase in the related liability, limited to the terms of the applicable purchase agreement.

Unobservable inputs include budgeted results based on margins and revenue growth rates historically achieved by the various segments. Changing such inputs to reflect reasonably possible alternative assumptions does not significantly change the fair value of the vendors for acquisition liability.

The EOH Group has an established control framework with respect to the measurement of fair values. This includes a valuation team that reports directly to the Group Chief Financial Officer who oversees all significant fair value measurements.

Figures in Rand thousand  Unaudited at 
31 January 2020 
   Audited at 
31 July 2019 
  
Vendors for acquisition          
Reconciliation of movement:          
Balance at the beginning of the period  303 313     633 709    
Disposals  (88 171)    –    
Discharged to vendors  (22 505)    (366 413)   
Foreign exchange effects  33     2 818    
Net changes in fair value  11 260     33 199    
Balance at the end of the period  203 930     303 313    

The Group does not have any financial instruments that are subject to offsetting.

All short-term receivables and payables carrying amounts approximate their fair values due to their short-term nature.

There have been no transfers between levels of the fair value hierarchy.

Non-recurring fair value measurements

Disposal groups classified as held for sale are measured at the lower of their carrying amount and fair value less costs to sell. The fair values were determined based on sales agreements that are in place for each of the disposal groups that are held for sale. The total of such fair values is R1,743 million. The discounted cash flow method (‘DCF’) is used to determine their values, when the sales amount from the sale agreements was discounted using the adjusted weighted average cost of capital specific to that cash-generating unit. These fair values are categorised as level 3, based on inputs used.

18. CASH GENERATED FROM OPERATIONS

Cash generated from operations includes payments relating to OEM licence settlements of R115 million accrued for at 31 July 2019, advisory costs paid of R66 million and severance costs paid of R42 million.

19. RELATED PARTIES

The Group entered into related party transactions, the substance of which is disclosed in the Group’s 2019 annual financial statements. Intragroup adjustments relate to the sales of products and services between companies in the Group.

20. CONTINGENCIES AND COMMITMENTS

Commitments

Commitments relate to amounts for which the Group has contracted, but that have not yet been recognised as obligations in the interim condensed consolidated statement of financial position.

Contingencies 

Guarantees

The Group has issued guarantees and performance bonds from various Group companies as well as through available third-party facilities. At this stage, the Group is not aware of any guarantees orbonds issued which may be exercised by holders. The balance at 31 January 2020 was R286 million (31 July 2019: R358 million).

Legal claims

The Company and its subsidiaries are involved in various litigation matters arising in the ordinary course of business. Although at this stage it is not possible to predict what the outcome of the various matters will be, nor what portion of any costs will be attributable to the Company, or whether all or any portion of such costs will be covered by insurance or will be recoverable from other, management has no reason to believe that the disposition of these matters will have a materially adverse effect on the consolidated financial position of the Company.

Uncertain tax exposures

The Group operates in numerous tax jurisdictions and the Group’s interpretation and application of the various tax rules applied in direct and indirect tax filings may result in disputes between the Group and the relevant tax authority. The outcome of such disputes may not be favourable to the Group. At year end there were a number of tax disputes ongoing in various of the Group’s operating entities, the most significant of which related to a PAYE dispute which the Group is contesting. At 31 January, the Group had provided for R220 million on the PAYE liability assessed, and is in the process of preparing an objection to be submitted to the tax authority and based on internal and external legal and technical advice obtained, the Group remains confident that it has a strong legal case to contest the remaining exposure. There is further uncertainty regarding historical taxes as a result of the impact of the fraudulent transactions identified in the forensic investigation performed by ENS during the 2019 financial year, detailed investigations into the impact of such transactions is ongoing. Provisions based on best estimates were recognised at 31 July 2019 and no changes were made during the period ended 31 January 2020.

21. EVENTS AFTER REPORTING DATE

Continued disposal of non-core assets

The Group is considering disposing of certain businesses. A business previously deemed non-core to the Group’s strategy in future, was sold subsequent to 31 January 2020. Provisional liquidators were appointed for the liquidation of CSV Water Consulting Engineers (Pty) Ltd on 17 February 2020.

Various disposal processes are expected to be realised, but have not met the criteria to be recognised as assets held for sale by 31 January 2020.

Debt reduction plan

The banks have adjusted and extended the deleverage plan for the Group by making the first target date 31 July 2020 to deleverage by R500 million (previously 31 January 2020). The Group had deleveraged by million at 31 January 2020 and by R362 million at the date of releasing these results of 7 April 2020. The Group has a further R68 million in the sales proceeds account to apply against the first deleverage target of R500 million. During the December 2019 pinch period the lenders gave the Group access to funds originally destined for deleveraging for a total amount of R236 million.

In light of the above extension as well as the current COVID-19 uncertainty, a slightly updated deleveraging plan has subsequently been agreed by the Group and its various lenders, increasing the amount of deleveraging marginally from R1 500 million to R1 600 million over a period extended by three months. These changes are not included in the allocation of liabilities between current and non- current, but should, in net be helpful to the Group achieving its deleveraging targets, should disposals envisaged proceed. In total, R894 million has been classified as current liabilities in the interim condensed consolidated financial statements.

COVID-19

Subsequent to the reporting date there has been a global outbreak of COVID-19. On 15 March 2020, the President of the Republic of South Africa announced a national state of disaster and on 23 March 2020 a 21-day National Lockdown was announced to run from midnight on 26 March 2020 to midnight on 16 April 2020. These actions will have a financial impact on the Group going forward and are expected to be felt almost immediately. The core ICT business is classified as an essential service and will continue operating during the lockdown period.

The Group has a crisis management team in place consisting of all the representatives from the executive committee, as well as key operational and support functions to monitor the situation on a daily basis and ensure adequate risk management and mitigation actions are taken as well as communications and engagement with clients, staff and other stakeholders.