Accounting policies
for the period ended 30 June 2011

 

1.

Basis of preparation

 

RMI Holdings is an investment holding company. RMI Holdings' separate and group financial statements are prepared in accordance with International
Financial Reporting Standards ("IFRS"), the requirements of the Companies Act and the Listings Requirements of the JSE Limited.

The financial statements are prepared on a going concern basis using the historical cost basis, except for certain financial assets and liabilities where it adopts the fair value basis of accounting.

The preparation of the financial statements necessitates the use of estimates, assumptions and judgements that affect the reported amounts in the statement of financial position and profit or loss. Although estimates are based on management's best knowledge and judgements of current facts as at reporting date, the actual outcome may differ from those estimates. Where appropriate, details of estimates are presented in the accompanying notes to the financial statements.

All monetary information and figures presented in these financial statements are stated in millions of Rand, unless otherwise indicated.

As a result of the fact that this is the first set of financial statements of RMI Holdings, comparative information is not disclosed, except where specific information is disclosed for reference purposes in the management of insurance risk section of the financial statements.

The principal accounting policies applied in the preparation of these consolidated financial statements are set out below and are consistent in all material aspects with those used for predecessor accounting, except for the adoption of certain standards or interpretations effective for the first time in the current period as shown below.

Amendments to IFRS 2: Group cash-settled share-based payment transactions: The amendment clarifies the accounting for group cash-settled share-based payment transactions. The entity receiving the goods or services shall measure the share-based payment transaction as equity settled only when the awards granted are its own equity instruments, or the entity has no obligation to settle the share-based payment transaction. The entity settling a share-based payment transaction when another entity in the group receives the goods or services recognises the transaction as equity-settled only if it is settled in its own equity instruments. In all other cases, the transaction is accounted for as cash-settled. The group has not been impacted by this amendment.
• Amendment to IAS 24: Related party disclosures: This amendment provides partial relief from the requirement for government related entities to disclose details of all transactions with the government and other government related entities. It also clarifies and simplifies the definition of a related party. The group has not been impacted by this amendment.
• Annual improvements: The IASB made amendments to a number of accounting standards. The aim is to clarify and improve the accounting standards. The improvements include those involving terminology or editorial changes with minimal effect on recognition and measurement. The annual improvements project for 2009 is effective for annual periods commencing on or after 1 January 2010. The group has adopted the amendments made as a result of the annual improvements project during the current financial period. These amendments have not had a significant impact on the group's results.

   

2.

Consolidation

  The group financial statements include the assets, liabilities and results of the operations of the holding company and its subsidiaries.

Accounting policies of subsidiaries and associates have been changed where necessary to ensure consistency with the policies adopted by the group.

Subsidiaries: Subsidiaries that have been consolidated are companies in which the group, directly or indirectly, has a long-term interest of more than one half of the voting rights or has power to exercise control over the operations.

The group uses the acquisition method of accounting to account for the acquisition of subsidiaries. The consideration transferred for the acquisition is measured as the fair value of the assets transferred, equity instruments issued and liabilities incurred or assumed at the date of exchange. Acquisition
related costs are expensed as incurred. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at their fair values at the acquisition date. On an acquisition-by-acquisition basis, the group recognises any non-controlling interest in the acquiree either at fair value or at the non-controlling interest's proportionate share of the acquiree's net assets.

The excess of the consideration transferred, the amount of any non-controlling interest in the acquiree and the acquisition date fair value of any previous equity interest in the acquiree over the fair value of the group's share of the identifiable net assets acquired is recorded as goodwill. If this is less than the
fair value of the net assets of the subsidiary acquired, in the case of a bargain purchase, the difference is accounted for directly in profit or loss.

The results of subsidiary companies acquired or disposed of during the period are included in consolidated profit or loss and consolidated comprehensive income from or to the date on which effective control was acquired or ceased. Transactions with owners are recognised in equity only when control is not lost.

Non-controlling interest is presented in the consolidated statement of financial position within equity, separately from the equity of the owners of the group. Profit or loss and each component of other comprehensive income are attributed to the owners of the group and to the non-controlling interests in proportion to their relative holdings even if this results in the non-controlling interest having a deficit balance.

Intergroup transactions, balances and unrealised gains are eliminated on consolidation. Unrealised losses are also eliminated unless the transaction provides evidence of impairment of the asset transferred.

Common control transactions are business combinations in which the combining entities are ultimately controlled by the same party both before and after the business combination, and control is not transitory. The consideration transferred for an acquisition of a subsidiary in a common control transaction is measured at the group carrying value of the assets transferred, equity instruments issued and liabilities incurred or assumed at the acquisition date. The acquirer incorporates the assets and liabilities of the acquiree at their precombination carrying amounts from the date that control is obtained.

Any excess or deficit of the consideration transferred over the cumulative total of the net asset value at acquisition date of the acquiree, the relevant non-controlling interest and the fair value of any previous equity interests held, is recognised directly in equity.

Consolidation of share incentive trusts and collective investment schemes (including policyholders): The group consolidates share incentive trusts and collective investment schemes in which it is considered to have control through its size of investment, voting control or related management contracts.

Associate companies: Associates are entities in which the group has the ability to exercise significant influence, but does not demonstrate control.

The group includes the results of associates in its group financial statements using the equity accounting method, from the effective date of acquisition to the effective date of disposal. The investment is initially recognised at cost. The group's investment in associates includes goodwill identified on acquisition, net of any accumulated impairment loss.

The group's share of associate companies' other comprehensive movements is accounted for in the group's other comprehensive income. The group's share of associate companies' movement in other equity is accounted for directly in equity.

Equity accounting is discontinued from the date that the group ceases to have significant influence over the associate or joint venture. The group measures at fair value any investment it has retained in the entity when significant influence is lost and recognises the resulting gain or loss in profit or loss. The gain or loss is measured as the difference between the fair value of this retained investment and the carrying amount of the original investment at the date significant influence is lost.

Unrealised gains on transactions between the group and its associates are eliminated to the extent of the groups' interest in the entity. Unrealised losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred.

Dilutionary and anti-dilutionary effects of equity transactions by associate companies that the group is not party to, are accounted for directly against equity.

Separate financial statements:
In RMI Holdings' separate financial statements, investments in subsidiaries, joint ventures and associate companies are carried at cost. Transaction costs are separately expensed.
   

3.

Revenue and expenditure recognition

 

Interest income and expense: The group recognises interest income and expense in profit or loss for all instruments measured at amortised cost using the effective interest method. Instruments with characteristics of debt, such as redeemable preference shares, are included in debt securities or long-term liabilities. Dividends received or paid on these instruments are included and accrued in interest income and expense using the effective interest method.

Fair value income: The group includes profits or losses, fair value adjustments, dividends and interest on trading financial instruments, as well as trading related financial instruments designated at fair value through profit or loss as fair value income in profit or loss.

Fee and commission income: The group generally recognises fee and commission income on an accrual basis when the service is rendered. Commission income on acceptances, bills and promissory notes endorsed is credited to income over the lives of the relevant instruments on a time apportionment basis.

Dividends: The group recognises dividends when the group's right to receive payment is established. This is on the last day to trade for listed shares, and on the date of declaration for unlisted shares.

Insurance contracts: Revenue treatment is detailed in note 20 of the accounting policies.

   

4.

Foreign currency translation

 

Functional and presentation currency: The financial statements are presented in South African Rand, which is the functional and presentation currency of RMI Holdings.

Transactions and balances: Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions. Translation differences on non-monetary items, such as equities held at fair value through profit or loss, are reported as part of the fair value gain or loss.

Foreign currency translation differences on monetary items, such as foreign currency bonds, are not reported as part of the fair value gain or loss in other comprehensive income, but are recognised as a translation gain or loss in profit or loss when incurred.

Translation differences on non-monetary items classified as available-for-sale, such as equities, are included in the availablefor- sale reserve in other comprehensive income when incurred.

Group companies: The results and financial position of all the group entities are translated into the South African Rand as follows:
• assets and liabilities for each statement of financial position presented are translated at the closing rate at the date of that statement of financial position;
• income and expenses for each income statement are translated at average exchange rates (unless this average is not a reasonable approximation
  of the cumulative effect of the rates prevailing on the transaction dates, in which case income and expenses are translated at the actual rates
  at the dates of the transactions); and
• all resulting exchange differences are recognised as a separate component of other comprehensive income.

On consolidation, exchange differences arising from the translation of the net investment in foreign entities, and of borrowings and other currency instruments designated as hedges of such investments, are taken to shareholders' equity.

When a foreign operation is partially disposed of or sold, exchange differences that were recorded in equity are recognised in the statement of comprehensive income as part of the gain or loss on sale.

   

5.

Borrowing costs

  The group capitalises borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset up to date on which construction or installation of the assets is substantially completed.

Other borrowing costs are expensed when incurred.
   

6.

Direct taxes

  Direct taxes include South African and foreign jurisdiction corporate tax payable, as well as capital gains tax.

The charge for current tax is based on the results for the period as adjusted for items which are non-taxable or disallowed. It is calculated using taxation rates that have been enacted or substantively enacted by the reporting date, in each particular jurisdiction within which the group operates.

Secondary taxation on companies is provided for in respect of dividend payments, net of dividends received or receivable and is recognised as a taxation charge for the year.
   

7.

Recognition of assets

  Assets: The group recognises assets when it obtains control of a resource as a result of past events, and from which future economic benefits are expected to flow to the group.

Contingent assets: The group discloses a contingent asset where, as a result of past events, it is highly likely that economic benefits will flow to it, but this will only be confirmed by the occurrence or non-occurrence of one or more uncertain future events which are not wholly within the group's control.
   

8.

Recognition of liabilities, provisions and contingent liabilities

  Liabilities and provisions: The group recognises liabilities, including provisions, when it has a present legal or constructive obligation as a result of past events and it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate of the amount of the obligation can be made.

Contingent liabilities: The group discloses a contingent liability where:
• it has a possible obligation arising from past events, the existence of which will be confirmed only by the occurrence or non-occurrence of
   one or more uncertain future events not wholly within the control of the group; or
• it is not probable that an outflow of resources will be required to settle an obligation; or
• the amount of the obligation cannot be measured with sufficient reliability.
   

9.

Financial instruments

 

Financial instruments disclosed in the financial statements include cash and cash equivalents, investments, derivative instruments, debtors and short-term loans, trade and other payables and borrowings. Financial instruments are initially recognised at fair value, including transaction costs, when the group becomes party to the contractual terms of the instruments. The transaction costs relating to the acquisition of financial instruments held at fair value through profit or loss are expensed. Subsequent to initial recognition, these instruments are measured as follows:

Loans and receivables and borrowings: Loans and receivables and borrowings are non-derivative financial instruments with fixed or determinable payments that are not quoted in an active market. These instruments are carried at amortised cost using the effective interest rate method.

Held-to-maturity financial instruments: Instruments with fixed maturity that the group has the intent and ability to hold to maturity are classified as held-to-maturity financial instruments and are carried at amortised cost using the effective interest rate method.

Available-for-sale financial instruments: Other long-term financial instruments are classified as available-for-sale and are carried at fair value. Unrealised gains and losses arising from changes in the fair value of available-for-sale financial instruments are recognised in other comprehensive income in the period in which they arise. When these financial instruments are either derecognised or impaired, the accumulated fair value adjustments are realised and included in profit or loss.

Financial instruments at fair value through profit or loss: These instruments, consisting of financial instruments held for- trading and those designated at fair value through profit or loss at inception, are carried at fair value. Derivatives are also classified as held-for-trading unless they are designated as hedges. Realised and unrealised gains and losses arising from changes in the fair value of these financial instruments are recognised in profit or loss in the period in which they arise.

Financial assets and liabilities are designated on initial recognition as at fair value through profit or loss to the extent that it produces more relevant information because it either:
• results in the reduction of measurement inconsistency (or accounting mismatch) that would arise as a result of measuring assets and liabilities and the gains and losses on them on a different basis; or
• is a group of financial assets and/or financial liabilities that is managed and its performance evaluated on a fair value basis, in accordance with a documented risk management or investment strategy, and this is the basis on which information about the assets and/or liabilities is provided internally to the entity's key management personnel.

The group derecognises an asset when the contractual rights to the asset expires, where there is a transfer of contractual rights that comprise the asset, or the group retains the contractual rights of the assets but assumes a corresponding liability to transfer these contractual rights to another party and consequently transfers substantially all the risks and benefits associated with the asset.

Where the group retains substantially all the risks and rewards of ownership of the financial asset, the group continues to recognise the asset. If a transfer does not result in derecognition because the group has retained substantially all the risks and rewards of ownership of the transferred asset, the group continues to recognise the transferred asset in its entirety and recognises a financial liability for the consideration received. In subsequent periods, the group recognises any income on the transferred asset and any expense incurred on the financial liability.

Where the group neither transfers nor retains substantially all the risks and rewards of ownership of the financial asset, the group shall determine whether it has retained control of the financial asset. Where the group has not retained control it shall derecognise the financial asset and recognise separately as assets or liabilities any rights and obligations created or retained in the transfer. Where the group has retained control of the financial asset, it shall continue to recognise the financial asset to the extent of its continuing involvement in the financial asset.

Financial liabilities (or portions thereof) are derecognised when the obligation specified in the contract is discharged or cancelled or has expired. On derecognition, the difference between the carrying amount of the financial liability, including related unamortised costs, and the amount paid for it is included in profit or loss. The fair value of financial instruments traded in an organised financial market is measured at the bid price for financial assets and ask/offer price for financial liabilities.

The fair value of the financial instruments that are not traded in an organised financial market is determined using a variety of methods and assumptions that are based on market conditions and risk existing at reporting date, including independent appraisals and discounted cash flow methods. Fair values represent an approximation of possible value, which may differ from the value that will finally be realised.

Where a current legally enforceable right of set-off exists for recognised financial assets and financial liabilities, and there is an intention to settle the liability and realise the asset simultaneously, or to settle on a net basis, all related financial effects are offset.

All purchases and sales of financial instruments are recognised at the trade date.

   

10.

Property and equipment

  The group carries property and equipment at historical cost less depreciation and impairment, except for land which is carried at cost less impairment. Historical cost includes expenditure that is directly attributable to the acquisition of the items.

Property and equipment is depreciated on a straight-line basis at rates calculated to reduce the book value of these assets to estimated residual values over their expected useful lives. Freehold properties and properties held under finance leases are further broken down into significant components that are depreciated to their respective residual values over the economic lives of these components.

The periods of depreciation used are as follows:

Freehold property and property held under finance lease
• Buildings and structures 50 years
• Mechanical, electrical and components 20 years
• Computer equipment 3 years
• Furniture, fittings and office equipment 6 years
• Motor vehicles 4 years
   
  The assets' residual values and useful lives are reviewed, and adjusted if appropriate, at each reporting date. Assets that are subject to amortisation are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Repairs and maintenance are charged to profit or loss during the financial period in which they are incurred. Gains or losses on disposals are determined by reference to the carrying amount of the asset and the net proceeds received, and are recorded in profit or loss on disposal.

Leased assets: Assets leased in terms of finance leases, i.e. where the group assumes substantially all the risks and rewards of ownership, are capitalised at the inception of the lease at the lower of the fair value of the leased asset or the present value of the minimum finance lease payments. Leased assets are depreciated over the shorter of the lease period or the period over which the particular asset category is otherwise depreciated. The corresponding rental obligations, net of finance charges, are included in non-current liabilities. Each lease payment is allocated between the liability and finance charges so as to achieve a constant rate on the finance balance outstanding. The finance charges are accounted for in profit or loss over the term of the lease using the effective interest rate method. Hire purchase agreements are accounted for as finance leases.
.
Leases of assets where the lessor substantially retains all the risks and rewards of ownership are classified as operating leases. Payments made under operating leases are accounted for in expenses on a straight-line basis over the period of the lease.
   

11.

Intangible assets

  Goodwill: Goodwill on acquisitions of subsidiaries or businesses is disclosed separately. Goodwill on acquisitions of associates is included in investments in associates.

Other intangible assets are stated at historic cost less accumulated amortisation and any recognised impairment losses. Intangible assets are amortised on a straight-line basis over their expected useful lives. The amortisation charge and impairments of intangible assets are reflected under operating expenditure in profit or loss. The carrying amounts of intangible assets are reviewed for impairment on an annual basis or sooner if there is an indication of impairment.
   

12.

Impairment of assets

 

Impairment: An asset is impaired if its carrying amount is greater than its estimated recoverable amount, which is the higher of its fair value less cost to sell or its value in use. The decline in value is accounted for in profit or loss.

The carrying amounts of subsidiaries, joint ventures and associate companies are reviewed annually and written down for impairment where necessary.

Financial instruments carried at amortised cost: The group assesses whether there is objective evidence that a financial asset is impaired at each reporting date. A financial asset is impaired and impairment losses are incurred only if there is objective evidence of impairment as a result of one or more events that have occurred after the initial recognition of the asset (a 'loss event') and that loss event has an impact on the estimated future cash flows of the financial asset that can be reliably estimated.

If there is objective evidence that an impairment loss on loans and receivables or held-to-maturity investments carried at amortised cost occurred, the amount of the loss is measured as the difference between the asset's carrying amount and the present value of estimated future cash flows discounted at the financial asset's original effective interest rate. The carrying amount of the asset is reduced and the amount of the loss is recognised in profit or loss. If a held-to-maturity investment or a loan has a variable interest rate, the discount rate for measuring any impairment loss is the current effective interest rate determined under contract. As a practical expedient, the group may measure impairment on the basis of an instrument's fair value using an observable market price.

If in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognised, such as improved credit rating, the previously recognised impairment loss is reversed and recognised in profit or loss.

Financial assets carried at fair value: At each reporting date the group assesses whether there is objective evidence of possible impairment of financial assets carried at fair value. In the case of equity investments classified as available-for-sale, a significant or prolonged decline in the fair value of the security below its cost is evidence that the assets are impaired. If any such objective evidence of impairment exists for available-forsale financial assets, the cumulative loss, measured as the difference between the acquisition cost and current fair value, less any impairment loss on the financial asset previously recognised in profit or loss is removed from equity and recognised in profit or loss.

Impairment losses on equity instruments that were recognised in profit or loss are not subsequently reversed through profit or loss – such reversals are accounted for in the statement of other comprehensive income.

Goodwill: Goodwill is assessed annually for possible impairments. For purposes of impairment testing, goodwill is allocated to cash-generating units, being the lowest component of the business measured in the management accounts that is expected to generate cash flows that are largely independent of another business component. Impairment losses relating to goodwill are not reversed.

   

13.

Deferred taxation

  The group calculates deferred taxation on the comprehensive basis using the liability method on a statement of financial position based approach. It calculates deferred tax liabilities or assets by applying corporate tax rates to the temporary differences existing at each reporting date between the tax values of assets and liabilities and their carrying amount, where such temporary differences are expected to result in taxable or deductible amounts in determining taxable income for future periods when the carrying amount of the assets or liabilities are recovered or settled. The group recognises deferred tax assets on unused tax losses if the directors consider it probable that future taxable income will be available against which the unused tax losses can be utilised.
   

14.

Employee benefits

 

Post-employment benefits: The group operates defined benefit (through its associates) and defined contribution schemes, the assets of which are held in separate trusteeadministered funds. The pension plans are generally funded by payments from employees and the relevant group companies, taking account of the recommendations of independent qualified actuaries. For defined benefit plans the pension accounting costs are assessed using the projected unit credit method. These funds are registered in terms of the Pension Funds Act, 1956, and membership is compulsory for all group employees. Qualified actuaries perform annual valuations.

The group writes off current service costs immediately, while it expenses past service costs, experience adjustments, changes in actuarial assumptions and plan amendments over the expected remaining working lives of employees. The costs are written off immediately in the case of retired employees.

For defined contribution plans, the group pays contributions to publicly or privately-administered pension insurance plans on a mandatory, contractual or voluntary basis. The group has no further payment obligations once the contributions have been paid. The contributions are recognised as employee benefit expenses when they are due.

Post-retirement medical benefits: In terms of certain employment contracts, the group provides for post-retirement healthcare benefits to qualifying employees and retired personnel by subsidising a portion of their medical aid contributions. The expected costs of these benefits are accrued over the period of employment using an accounting methodology similar to that for defined benefit pension plans. The entitlement to these benefits is usually based on the employee remaining in service up to retirement age and completing a minimum service period. Qualified actuaries perform annual valuations.

Leave pay: The group recognises, in full, employees' rights to annual leave entitlement in respect of past service.

Bonuses: Management and staff bonuses are recognised as an expense in staff costs as incurred when it is probable that the economic benefits will be paid and the amount can be reliably measured.

Intellectual property bonuses
: In terms of the intellectual property bonus plan operated by a subsidiary, employees were paid intellectual property bonuses at the company's discretion. The beneficiaries under the plan were subject to retention periods and amounts to be repaid should the employee be in breach of the retention period. The intellectual property bonuses are recognised as current service costs over a 2.5 to 3 year period and are originally valued using the projected credit unit method.

   

15.

Borrowings

  The group initially recognises borrowings, including debentures, at the fair value of the consideration received. Borrowings are subsequently measured at amortised cost. Discounts or premiums on debentures issued are amortised on a basis that reflects the effective yield on the debentures over their life span. Interest paid is recognised in profit or loss on an effective interest rate basis.

Instruments with characteristics of debt, such as redeemable preference shares, are included in liabilities.
   

16.

Share capital

 

Share issue costs directly related to the issue of new shares or options are shown as a deduction from equity.

Dividends paid on ordinary shares are recognised against equity in the period in which they are declared. Dividends declared after the reporting date are not recognised in that reporting period but disclosed as a post reporting date event.

Treasury shares: Where the company or other entities within the group purchases the company's equity share capital, the consideration paid is deducted from total shareholders' equity as treasury shares until they are cancelled. Where such shares are subsequently sold or reissued, any consideration received is included in shareholders' equity. These shares are treated as a deduction from the issued number of shares and taken into account in the calculation of the weighted average number of shares.

Distribution of non-cash assets: A dividend payable is recognised when the distributions are appropriately authorised and is no longer at the discretion of the entity. The group measures the liability to distribute the non-cash assets as a dividend to owners at fair value of the asset to be distributed. The carrying amount of the dividend payable is remeasured at the end of each reporting period and on the date of settlement, with changes recognised in equity as an adjustment to the distribution. The difference between the carrying amount of the dividend payable and the fair value of the assets on the date of settlement is recognised in profit or loss for the period.

Distributions of non-cash assets under common control are specifically excluded from the scope of IFRIC 17 and are measured at the carrying amount of the assets to be distributed.

   

17.

Segment reporting

  An operating segment is a component of the group that engages in business activities from which the group may earn revenues and incurs expenses. An operating segment is also a component of the group whose operating results are regularly reviewed by the chief operating decision maker in allocating resources, assessing its performance and for which discrete financial information is available.

The chief operating decision maker has been identified as the chief executive officer of the group. The group's identification and measurement of operating segments is consistent with the internal reporting provided to the chief executive officer. The operating segments have been identified and classified in a manner that reflects the risks and rewards related to the segments' specific products and services offered in their specific markets.

Segments with a majority of revenue earned from charges to external customers and whose revenue, results or assets are 10% or more of all the segments, are reported separately.
   

18.

Share-based payments

  The group operates equity-settled and cash-settled sharebased compensation plans.

Equity-settled: The group expenses the fair value of the employee services received in exchange for the grant of the options, over the vesting period of the options, as employee costs, with a corresponding credit to a share-based payment reserve. The total value of the services received is calculated with reference to the fair value of the options at grant date.

The fair value of the options is determined excluding non-market vesting conditions. These vesting conditions are included in the assumptions of the number of options expected to vest. At each reporting date, the group revises its estimate of the number of options expected to vest.

Cash-settled: The group measures the services received and liability incurred in respect of cash-settled share based payment plans at the current fair value of the liability. The group remeasures the fair value of the liability at each reporting date until settled. The liability is recognised over the vesting period and any changes in the fair value of the liability are recognised in profit or loss.
   

19.

Cash and cash equivalents

 

Cash and cash equivalents are measured at fair value and include cash at hand, short-term deposits held with banks and listed government bonds under resale agreements.

Short-term deposits with banks and listed government bonds under resale agreements are considered instruments that can be liquidated within a period of three months from the reporting date. Short-term deposits which cannot be accessed within this period are classified as financial assets.

   

20.

Insurance contracts

 

Classification of insurance and investment contracts

The group issues investment contracts and contracts that transfer insurance risk:

• Contracts are classified as insurance contracts if the group accepts significant insurance risk. Insurance risk is defined as a risk on the occurrence
   of a defined uncertain insured event. The amount paid may significantly exceed the amount payable should the event not have occurred.
• Investment contracts are contracts that transfer financial risk without significant insurance risk. Financial risk refers to the risk of a possible future
   change in the value of an asset or financial instrument, due to a change in the interest rate, commodity prices, and index of prices, foreign exchange
   rate or other measurable variables (refer note 24).

Once a contract has been classified as an insurance contract the class will remain unchanged for the lifetime of the contract even if the policy conditions change significantly over time. Insurance contracts Insurance contracts are classified into two main categories, depending on the duration of the risk.

 
   
20.1 Short-term insurance
  Short-term insurance is the providing of benefits under shortterm policies which includes property, accident and health, liability, miscellaneous and motor or a contract comprising a combination of any of those policies.

Recognition and measurement

  • Premium revenue
    Gross insurance premium revenue reflects business written during the period, and excludes any taxes or levies payable on premiums. Premium revenue includes all premiums for the period of risk covered by the policy, regardless of whether or not these are due for payment in the accounting period. Premiums are shown before deduction of commission.
  • Unearned premium provision
    The provision for unearned premiums comprises the proportion of gross premium revenue which is estimated to be earned in the following or subsequent financial years, computed separately for each insurance contract using the method most reflective of any variation in the incidence of risk during the period covered by the contract.
  • Unexpired risk provision
    Provision is made for unexpired risks arising from insurance contracts where the expected value of claims and expenses attributable to the unexpired periods of policies in force at the reporting date exceeds unearned premiums provision in relation to such policies after the deduction of any deferred acquisition costs.
  • Provision for claims reported but not paid
    Claims outstanding comprise provisions for the group's estimate of the ultimate cost of settling all claims incurred but unpaid at the reporting date, and, if applicable, related internal and external handling expenses and an appropriate prudential margin. Claims outstanding are assessed by reviewing individual claims and making allowance for claims reported but not yet paid, the effect of both internal and external foreseeable events, such as changes in claims handling procedures, inflation, judicial trends, legislative changes and past experience and trends. Adjustments to claims provisions established in prior years are reflected in the financial statements of the period in which the adjustments are made and disclosed separately if material. The methods used, and the estimates made are reviewed annually.
  • Provision for claims incurred but not reported
    Incurred but not reported reserves represent a provision for claims incurred up to the end of the financial period but not yet reported. The provision for claims incurred but not reported is estimated based on actual reported claims and referring to net premium written.
  • Salvage and subrogation recoveries
    Certain insurance contracts permit the group to sell (usually damaged) property acquired in settling a claim (i.e. salvage) as well as to pursue third parties for payment of some or all costs (subrogation). Salvage and subrogation recoveries are recognised when it is reasonably certain that the amounts will be recovered. The recoveries are credited to claims incurred in profit or loss.
  • Deferred acquisition costs ("DAC")
    Acquisition costs, which represent commission paid in respect of insurance contracts, are recognised as an intangible asset and amortised over the duration of the insurance agreement as premium is earned. All other costs are recognised as expenses when incurred.
  • Deferred acquisition revenue ("DAR")
    Reinsurance commission is recognised as a liability and amortised over the duration of the reinsurance agreement as reinsurance premium is expensed.

Reinsurance contracts held
The group cedes reinsurance in the normal course of business for the purpose of limiting its net loss potential through the diversification of its risks. Only rights under contracts that give rise to a significant transfer of insurance risk are accounted for as reinsurance assets. Rights under contracts that do not transfer significant insurance risk are accounted for as financial instruments.

Amounts recoverable from or due to reinsurers are measured consistently with the amounts associated with the reinsured insurance contracts and in accordance with the terms of each reinsurance contract.

The benefits to which the group is entitled under its reinsurance contracts held are recognised as assets. These assets consist of short-term balances due from reinsurers (classified within loans and receivables) on settled claims, as well as receivables (classified as reinsurance assets) that are dependent on the expected claims and benefits arising under the related reinsured insurance contracts.

Reinsurance premiums paid under reinsurance contracts are recognised as reinsurance assets and expensed as the gross premiums are released to income. Reinsurance liabilities are primarily premiums payable for reinsurance contracts.

The group assesses its reinsurance assets for impairment on a six monthly basis. If there is objective evidence that the reinsurance asset is impaired, the group reduces the carrying amount of the reinsurance asset to its recoverable amount and recognises that impairment loss in profit or loss. The group gathers the objective evidence that a reinsurance asset is impaired using the same process adopted for financial assets held at amortised cost. The impairment loss is also calculated following the same method used for these financial assets.

  • Contingency reserve
    A reserve is made in respect of the group's short-term insurance operations in South Africa as required by the regulatory authorities. Transfers to and from this reserve are treated as appropriation of retained income. The contingency reserve is not distributable. The contingency reserve is calculated as 10% of the net written premiums in terms of the South African Short-Term Insurance Act, 1998.
  • Receivables and payables related to insurance contracts
    Receivables and payables are recognised when due. These include amounts due to and from brokers and insurance contract holders.

    If there is objective evidence that the insurance receivable is impaired, the group reduces the carrying amount of the insurance receivable accordingly and recognises that impairment loss in profit or loss. The group gathers the objective evidence that an insurance receivable is impaired using the same process adopted for loans and receivables. The impairment loss is also calculated under the same method used for these financial assets.
  • Cash bonus provision
    A provision is made for probable future cash bonus payments during the period in which the premium is collected using statistical techniques, past experience and management's expectations regarding future trends in claims experiences. Certain personal lines clients are eligible for this benefit, which returns a contracted percentage of the client's premium paid, upon achievement of a pre-specified claim free period as stipulated in the client's insurance contract.
   
20.2 Long-term insurance
  Long-term insurance provides benefits under various classes of long-term insurance risk. Premium revenue includes all premiums for the period of risk covered by the policy, regardless of whether or not these are for payment in the accounting period. Premiums are shown before the deduction of commission. Benefits are recorded as an expense when they are incurred.

The liabilities under life insurance contracts are valued in accordance with the Actuarial Society of South Africa's guidelines and in particular PGN103 (version 4) and PGN104 (version 6). The operating surpluses or losses arising from life insurance contracts are determined by the annual valuation. These surpluses or losses are arrived at after taking into account the movement in actuarial liabilities under matured policies, provisions for profit commissions accrued and adjustments to other reserves within the policyholder liabilities.

Assets and liabilities were valued on consistent bases. Valuation assumptions regarding future mortality, morbidity, expenses and yields are based on prudent best estimates taking into account the company's expected future experience and allowing for any specific conditions of the various policy classes.
   
20.3 Liability adequacy test
  At each reporting date, liability adequacy tests are performed to ensure the adequacy of the contract liabilities net of related DAC assets. In performing these tests, current best estimates of future contractual cash flows and claims handling and administration expenses are used. Any deficiency is immediately charged to profit or loss initially by writing off DAC and by subsequently establishing a provision for losses arising from liability adequacy tests (the unexpired risk provision). Any DAC written off as a result of this test cannot subsequently be reinstated.

In respect of short-term insurance transactions, provision is made for unexpired risks arising from insurance contracts where the expected value of claims and expenses attributable to the unexpired periods of policies in force at the reporting date exceeds the unearned premiums provision in relation to such policies after the deduction of any deferred acquisition costs.
   
20.4 Accounting for cell captive arrangements
  Certain cell captive arrangements have been entered into by businesses within the group. Per these arrangements, certain risk products marketed and distributed by these companies are underwritten by the company's subsidiary.

The collection of premiums and the payment of claims is a function that is performed by the cell or its administrator. The results of the cell are fully consolidated into the results of the group.

Economic benefits generated by the cell are distributed by way of a bi-annual preference dividend to the preference shareholder, an entity independent of the cell. Losses incurred by the cell are for the group and there is no recourse against the cell for such losses. The group however retains the right to offset such losses against future profits generated by the cell in the determination of any preference dividends to be paid to the preference shareholder.

The profitability of cell captive business is reviewed on a monthly basis to ensure that the group is not exposed to uneconomical risks over which it has no day-to-day management control.

Provisions in relation to insurance contracts, other than the provision for incurred but not reported claims and the provision for unearned premium, concluded by the cell are determined by the cell administrator. The provision for incurred but not reported claims is carried by the group at the statutory rate of 7% of net written premiums.

Recognition and measurement of cell captive arrangements is consistent with the principles applied to other insurance arrangements.
   

21.

Convertible debentures

  Convertible debentures originated by the group are initially recognised as the proceeds, less attributable transaction costs and subsequently carried at this value. The convertible debentures can be converted at the option of the debenture holder to non-redeemable preference shares. The carrying amount equals the amount at which the debentures could be converted to non-redeemable preference shares. The dividend rights to the non-redeemable preference shares have been contractually determined and are non-discretionary. The convertible debentures are classified as long-term liabilities. Interest incurred on the convertible debentures is recognised in profit or loss using the effective yield method.
   

22.

Preference shares

  The group issues fixed and variable rate cumulative redeemable preference shares to fund the statutory capital requirements of its insurance subsidiaries, and whilst the redemption is at the option of the issuer, the group has no intention to defer redemption of the various allotments of shares beyond the duration of the underlying transactions in respect of which the shares were issued. Accordingly, these preference shares are classified as long-term liabilities. The preference shares originated by the group are initially recognised at the proceeds received, less attributable transaction costs and subsequently carried at that value, which equals redemption value. The dividends on these shares are non-discretionary and recognised in profit or loss as a charge against the profit before tax, and disclosed separately. Provision for dividends payable is disclosed separately in the statement of financial position under current liabilities.
   

23.

Policyholders' interest

 

The group and its clients share in the operating results of the insurance business. The entitlement to the participation in the operating results remains contingent until the termination of the agreement with the client or until contractually determined.

During the duration of the profit sharing agreement the estimated entitlement to profit or losses by clients is determined annually and transferred to the policyholder interest liability. Increases and decreases in the estimated entitlement to operating results that may become apparent in future periods are transferred from or to the operating results of that period.

   

24.

Investment contracts

  Policyholder contracts that do not transfer significant insurance risk are classified as investment contracts. The proceeds from payments against these contracts are excluded from profit or loss and recognised directly against the liability. The results from investment contracts included in profit or loss is limited to administration fees earned as well as fair value gains or losses from the revaluation of assets underlying the investment contracts.

Liabilities for individual market related long-term insurance policies where benefits are in part dependent on the performance of underlying investment portfolios are taken as the aggregate value of the policies' investment in the investment portfolio at the valuation date. The liability is based on assumptions of the best estimate of future experience.
   

25.

Standards, interpretat ions and amendments not yet effective

  The group will comply with the new standards and interpretations from the effective date:
 
        Effective date for
annual periods
commencing on
or after
  Amendment to IAS 24 – Related party disclosures   This amendment provides partial relief from the requirement for government
related entities to disclose details of all transactions with the government and
other government-related entities. It also clarifies and simplifies the definition
of a related party.

This amendment addresses disclosure in the financial statements and will not
affect recognition and measurement. The impact of the revised disclosure is
not expected to be significant.
1 January 2011
  Improvements to IFRS (Issued May 2010)   This is a collection of amendments to IFRS. These amendments are the result
of conclusions the IASB reached on proposals made in its annual
improvements project.

There are no significant changes in the improvement projects that are
expected to affect the group.
Unless otherwise specified the amendments are effective for annual periods beginning on or after 1 January 2011
  Amendments to IFRS 1, 'First time adoption' on hyperinflation and fixed dates   The first amendment replaces references to a fixed date of '1 January 2004'
with 'the date of transition to IFRS', thus eliminating the need for companies
adopting IFRS for the first time to restate derecognition transactions that
occurred before the date of transition to IFRS. The second amendment
provides guidance on how an entity should resume presenting financial
statements in accordance with IFRS after a period when the entity was
unable to comply with IFRS because its functional currency was subject to
severe hyperinflation.

This amendment will result in additional disclosures in the financial statements
and will not affect recognition and measurement.
1 July 2011
  Amendment to IFRS 7 Disclosures – Transfer of financial assets   The amendments are intended to address concerns raised during the financial
crisis by the G20, among others, that financial statements did not allow users
to understand the ongoing risks the entity faced due to derecognised
receivables and other financial assets.

This is not expected to have a significant impact on the disclosures provided
by the group.
1 July 2011
  Amendment to IAS 12, 'Income taxes' on deferred tax   Currently IAS 12, 'Income taxes', requires an entity to measure the deferred
tax relating to an asset depending on whether the entity expects to recover
the carrying amount of the asset through use or sale. It can be difficult and
subjective to assess whether recovery will be through use or through sale
when the asset is measured using the fair value model in IAS 40 Investment
Properties. Hence this amendment introduces an exception to the existing
principle for the measurement of deferred tax assets or liabilities arising on
investment properties measured at fair value. As a result of the amendments,
SIC 21, 'Income taxes- recovery of revalued non-depreciable assets', would no
longer apply to investment properties carried at fair value. The amendments
also incorporate into IAS 12 the remaining guidance previously contained in
SIC 21, which is accordingly withdrawn.

This is not expected to have a significant impact on the group.
1 January 2012
  IFRS 9 – Financial Instruments (2009)  

This IFRS is part of the IASB's project to replace IAS 39. IFRS 9 addresses classification and measurement of financial assets and replaces the multiple classification and measurement models in IAS 39 with a single model that has only two classification categories: amortised cost and fair value.

The group is in the process of assessing the impact that IFRS 9 would have on the financial statements. Until the process is completed, the group is unable to determine the significance of the impact of IFRS 9.

1 January 2013
  IFRS 9 – Financial Instruments (2010)  

The IASB has updated IFRS 9, 'Financial instruments' to include guidance on financial liabilities and derecognition of financial instruments. The accounting and presentation for financial liabilities and for derecognising financial instruments has been relocated from IAS 39, 'Financial instruments: Recognition and measurement', without change, except for financial liabilities that are designated at fair value through profit or loss.

The group is in the process of assessing the impact that IFRS 9 would have on the financial statements. Until the process is completed, the group is unable to determine the significance of the impact of IFRS 9.

1 January 2013
  IFRS 10 – Consolidated financial statements  

This standard builds on existing principles by identifying the concept of control as the determining factor in whether an entity should be included within the consolidated financial statements. The standard provides additional guidance to assist in determining control where this is difficult to assess. This new standard might impact the entities that a group consolidates as its subsidiaries.

The group is in the process of assessing the impact that IFRS 10 would have on the financial statements. Until the process is completed, the group is unable to determine the significance of the impact of IFRS 10.

1 January 2013
  IFRS 10 – Consolidated financial statements  

This standard builds on existing principles by identifying the concept of control as the determining factor in whether an entity should be included within the consolidated financial statements. The standard provides additional guidance to assist in determining control where this is difficult to assess. This new standard might impact the entities that a group consolidates as its subsidiaries.

The group is in the process of assessing the impact that IFRS 10 would have on the financial statements. Until the process is completed, the group is unable to determine the significance of the impact of IFRS 10.

1 January 2013
  IFRS 11 – Joint arrangements  

This standard provides for a more realistic reflection of joint arrangements by focusing on the rights and obligations of the arrangement, rather than its legal form. There are two types of joint arrangements: joint operations and joint ventures. Joint operations arise where a joint operator has rights to the assets and obligations relating to the arrangement and hence accounts for its interest in assets, liabilities, revenue and expenses. Joint ventures arise where the joint operator has rights to the net assets of the arrangement and hence equity accounts for its interest. Proportional consolidation of joint ventures is no longer allowed.

The standard is not expected to have a significant impact on the group.

1 January 2013
  IFRS 12 – Disclosures of interests in other entities  

This standard includes the disclosure requirements for all forms of interests in other entities, including joint arrangements, associates, special purpose vehicles and other off balance sheet vehicles. This amendment addresses disclosure in the financial statements and will not affect recognition and measurement.

The group is still in the process of assessing the impact of the revised disclosure.

1 January 2013
  IFRS 13 – Fair value measurement  

This standard aims to improve consistency and reduce complexity by providing a precise definition of fair value and a single source of fair value measurement and disclosure requirements for use across IFRS. The requirements, which are largely aligned between IFRS and US GAAP, do not extend the use of fair value accounting but provide guidance on how it should be applied where its use is already required or permitted by other standards within IFRS or US GAAP.

The group is in the process of assessing the impact that IFRS 13 would have on the financial statements. Until the process is completed, the group is unable to determine the significance of the impact of IFRS 13.

1 January 2013
  IAS 27 (revised 2011) – Separate financial statements  

This standard includes the provisions on separate financial statements that are left after the control provisions of IAS 27 have been included in the new IFRS 10.

This amendment is not expected to have a significant impact on the group's results.

1 January 2013
  IAS 28 (revised 2011) – Associates and joint ventures  

This standard includes the requirements for joint ventures, as well as associates, to be equity accounted following the issue of IFRS 11.

This amendment is not expected to have a significant impact on the group's results.

1 January 2013
  IAS 19 (revised 2011) – Employee benefits  

The main changes include the removal of the corridor approach, which allowed entities the option to defer the recognition of actuarial gains and losses on defined benefit plans. The revised standard requires that all remeasurements arising from defined benefit plans be presented in other comprehensive income. It also includes enhanced disclosure requirements for defined benefit plans

. The group is in the process of assessing the impact the revised IAS 19 would have on the financial statements.

1 January 2013
   
  IFRS 4 Phase II
  The IASB is currently in the process of developing a new standard to ensure comprehensive IFRS is in place for insurance contracts.
The new standard was expected by 30 June 2011. The most recent IASB work plan now indicates that the proposals will be
re-exposed or a review draft will be available some time in 2012. With the proposal to move the mandatory date of IFRS 9 to
1 January 2015, the new insurance contracts standard is now not expected to be effective before this date at the earliest.
   

26.

Critical accounting assumptions

  The group makes estimates and assumptions that affect the reported amounts of assets and liabilities within the next financial period. Estimates and judgements are continually evaluated and based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. Further detail is provided in the "management of insurance risk" section of the financial statements.

The following critical accounting assumptions have been applied by management in the current period accounting for the restructure. For further detail on the restructure refer to the directors' report.

Date of the restructuring transaction: The unbundling was approved by the shareholders of RMBH on 18 February 2011 and RMI Holdings was listed on 7 March 2011. The accounting standards allow an entity to designate the transaction date as a month end where the transaction takes place during a month. On that basis, 28 February 2011 has been used by management as the effective date of the unbundling.
Treatment of OUTsurance: Following the unbundling of RMI Holdings, a two month period elapsed where RMI Holdings held only 45% of OUTsurance's issued share capital. The accounting applied by management is on the basis that RMI Holdings had control over OUTsurance during that two month period in accordance with the agreement to purchase FirstRand's 45% stake and de facto control principles. FirstRand's stake was purchased in April 2011.
Predecessor accounting: Predecessor accounting is based on the carrying value at which the assets, liabilities and noncontrolling interests were transferred across from RMBH at common control following the restructure transaction. This is deemed to be the most appropriate manner to reflect the substance of the transaction in the eyes of the RMBH and new RMI Holdings shareholders.

Critical estimates related to insurance disclosures are disclosed in the "management of insurance risk" section.

 

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