Leases

Determining the respective discount rates

In determining the respective discount rates, management has considered the group borrowing rate as a base rate and made adjustments to the rate based on the type of asset, the term of the lease and factors specific to the lessee company and the economic environment in which the asset is leased. The rate that the respective entity may have recently obtained on funding for a similar asset and over a similar term will also be considered in the adjustments made to the rate.

The discount rates applied to the lease commitments range from 9.75% to 10.25%, due to the multiple jurisdictions within which the group operates.

Determining the lease terms

In determining the lease term, management considers all facts and circumstances that create an economic incentive to exercise an extension option, or not exercise a termination option. The extension options (or periods after termination options) have been considered and where certain, have been included in the lease term. All future cash outflows have been included in the lease liability. The assessment is reviewed if a significant event or a significant change in circumstances occurs which affects this assessment and that is within the control of the lessee.

Determining the low-value leases

In determining the low-value leases, management assessed the value of the underlying individual assets at the original date of acquisition and whether they would individually have a material impact on the balance sheet. Low-value assets comprise IT equipment and small items of office furniture.

Sandton Hotels lease agreement

During the year under review the group entered into a new arrangement effective 1 November 2019 with the owners of the Sandton Sun, Garden Court Sandton City and the InterContinental Sandton Towers (the ‘Sandton Hotels’). The group classified this arrangement as a lease contract and accounted for it in terms of the requirements of IFRS 16. Significant judgement was applied regarding the assessment of economic benefits between the different parties, and control over the relevant activities, being the day-to-day operations of the hotels.

In exercising our judgement the following facts were considered:

• On the face of it the agreements entered into provide for 98% of Ebitdar after management fees to flow to the lessors. However, where the lessee directs all cash flow generated from the asset and pays the lessor a percentage of such flows, paragraph B23 of IFRS 16 provides for such cash flows to be included in the benefit received by the lessee.
• The group has sole use of the hotels and brands.
• The group retains the majority of turnover and the return made by the group on these hotels is consistent with owner-managed hotels.
• The group has downside risk in the event of an economic downturn as a minimum basic rental is still payable.
• The key differences between the previous management agreements and the current agreements is that the group now has the ability to direct the relevant activities of the hotels because the group makes decisions on the pricing of the hotel services, engages with suppliers and distribution channels as well as managing the costs of the hotel.

Based on the above, the hotel lease agreements in our assessment do contain a lease. The group used a 20% minimum rental as stipulated in the agreements to calculate the lease liability and right-of-use asset. The remaining lease payments based on a percentage Ebitdar are considered to be variable lease payments. The discount rate applied has been determined in a manner that is consistent with that of the other leases within the group where IFRS 16 has been applied.

Investment property

Classification of investment properties

Investment property represented a large proportion of the group’s asset base. Therefore, the judgements made in determining their classification and fair values affect the group’s financial position and performance.

In determining the classification of the properties as investment properties, the group considered its exposure to the risks of running a hotel business and its associated exposure to the variability of the cash flows of the underlying operations. The group took the following factors into account:

• Intention to hold land and buildings for rental income and capital appreciation and its role as a passive investor;
• The duration of the lease agreements;
• Control over the decision-making powers of the relevant hotel operations;
• The present value of the minimum lease payments in relation to the fair value of the investment properties; and
• Various financial ratios to determine its exposure to the variability in cash flows of the hotel operations.

Based on the above, the group concluded that the properties meet the definition of investment property.

Valuations of investment properties

Use is made of independent professionally qualified valuers. Valuations are currently performed on an annual basis on the entire portfolio of investment properties but will move to a three-year rotation from the next financial year, and will be fair valued by internal management for the intervening years. Refer note 18 for the valuation methodology applied.

Estimated impairment of goodwill and property, plant and equipment

The group tests annually whether goodwill has suffered any impairment in accordance with the accounting policy stated in note 1(d). The recoverable amounts of CGUs have been determined based on value-in-use calculations. These calculations require the use of estimates as noted in note 19 of the consolidated annual financial statements.

The group tests property, plant and equipment when there is an indicator for impairment in accordance with the accounting policy stated in note 1(p). The recoverable amounts of the assets have been determined based on the higher of fair value less costs to sell and the value-in-use calculations. These calculations require the use of estimates as noted in note 16 of the consolidated annual financial statements.

Fair value of financial instruments that are not traded in an active market

The fair value of financial instruments that are not traded in an active market (for example, unlisted investments) is determined by using valuation techniques. The group uses its judgement to select a variety of methods and make assumptions that are mainly based on market conditions existing at the end of each reporting period.