PHOE.zw | 2012 annual report

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PHOE.zw | 2012 annual report

  1. 1. INDEX TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 OCTOBER 2012 PageCORPORATE INFORMATION 1NOTICE OF ANNUAL GENERAL MEETING 2REPORT OF THE DIRECTOR 3-4CORPORATE GOVERNANCE 5FINANCIAL HIGHLIGHTS 6CHAIRMANS STATEMENT 7INDEPENDENT AUDITORS REPORT 8STATEMENTS OF FINANCIAL POSITION 9STATEMENT OF COMPREHENSIVE INCOME 10STATEMENT OF CHANGES IN EQUITY 11STATEMENT OF CASH FLOWS 12NOTES TO THE FINANCIAL STATEMENTS 13 - 34SHAREHOLDERS ANALYSIS AND CALENDAR 35 ANNUAL REPORT 2012
  2. 2. CORPORATE INFORMATIONThe public limited liability company, which is incorporated and domiciled in Zimbabwe and is listed on the Zimbabwe Stock Exchangeis involved in the manufacture, distribution and sales of plastics and allied products and steel and allied products in Bulawayo andHarare.Companys StructurePlastics and Allied Steel and AlliedWilliam Smith and Gourock division Scandia Wire divisionPhoenix Brushware division J W Searcy divisionPOSTAL ADDRESSP.O Box 647, HarareREGISTERED OFFICEStand 3332, Birmingham RoadSoutherton, HarareSECRETARIESCorpserve (Private) LimitedAUDITORPricewaterhouseCoopersChartered Accountants (Zimbabwe)Building No. 4, Arundel Office ParkNorfolk RoadMount PleasantHararePRINCIPAL BANKERSStanbic Bank LimitedMBCA LimitedDIRECTORATEM D Frudd (Chairman)F J Rodrigues (Chief Executive)T N Chiganze (Non-Executive)A B C Chinake (Non-Executive)W G Khumalo (Non-Executive)T N Sibanda (Non-Executive)AUDIT COMMITTEET N Sibanda (Chairman)M D FruddT N ChiganzeREMUNERATION COMMITTEEA B C Chinake (Chairman) ANNUAL REPORT 2012 1
  3. 3. NOTICE OF ANNUAL GENERAL MEETING Notice is hereby given that the twelfth Annual General Meeting of the members of the company will be held on Tuesday 30 April 2013 at 12pm in the offices of the company, No. 25 Birmingham Road, Southerton, Harare, for the purpose of transacting the following business: Ordinary business1 To receive, consider and adopt the annual financial statements for the year ended 31 October 2012, together with the report of the auditors.2 To approve the remuneration of the auditor for the past audit and elect auditor for the current year.3 To approve the directors fees and remuneration for the past year.4 To confirm the re-appointment of Messrs T.N Sibanda and M.D Frudd, who retire by rotation in accordance with Article 94 of the companys Articles, and being eligible, offer themselves for re-election. By order of the Board Corpserve (Private) Limited Secretaries Harare 8 March 2013 NOTE: A member entitled to vote at the above meeting is entitled to appoint a proxy to attend, vote and speak in his or her stead. A proxy need not be a member. ANNUAL REPORT 2012 2
  4. 4. REPORT OF THE DIRECTORS The directors have pleasure in submitting their report to the shareholders, together with the audited financial statements for the year ended 31 October 2012.1 SHARE CAPITAL Authorised: As at 31 October 2012, the authorised share capital of the company remained at 160 million (2011 - 160 million) ordinary shares. Issued: As at 31 October 2012, the issued share capital was 87 475 000 (2011 - 87 475 000) ordinary shares. Directors Interest As at 31 October 2012, the directors held directly and indirectly 2 351 167 shares being 2.69% (2011- 2.50%) of the issued share capital of the company. This holding is detailed in note 12 to the financial statements. No change in the interests of the directors have taken place between the financial year- end and the date of this report.2 RESERVES Share premium and non-distributable There is no movement in the share premium and the non-distributable reserves during the year ended 31 October 2012 Distributable reserves Movements in the distributable reserves are set out in the statement of changes in equity in the financial statements on page 11.3 FINANCIAL RESULTS Results for the year ended 31 October 2012 are summarised below: 2012 STATEMENT OF COMPREHENSIVE INCOME US$000 Revenue: Continuing operations 9 772 Continuing operations Operating loss before depreciation (260) Depreciation (494) Net finance cost (446) Fair value adjustment (2) Profit before tax (1 202) Income tax expense 495 Total comprehensive income (707) Discontinued opeartions Loss for the year from discontinued operations (660) Total comprehensive loss (1 367) Shares in issue 87 475 000 Basic earnings per share (US cents) (1.56) Fully diluted earnings per share (US cents) (1.56) The profit attributable to shareholders for the year ended 31 October 2012 was dealt with as follows: 2012 US$000 Retained earnings as at 31 October 2011 207 Loss for the year (1 367) Accumulated loss as at 31 October 2012 (1 160) ANNUAL REPORT 2012 3
  5. 5. REPORT OF THE DIRECTORS REPORT OF THE DIRECTORS (CONTINUED)4 PLANT, EQUIPMENT & MOTOR VEHICLES Capital expenditure for the year ended 31 October 2012 was US$180 000 (2011 - US$578 845). Capital expenditure for the year ended 31 October 2012 has been authorised at US$905 000 (2010 - US$905 000), none of which had been committed as at 31 October 2012.5 PENDING LITIGATION The directors are not aware of any material litigation outstanding or any claims of any material importance pending or threatened against the Company, which have not been disclosed in this report.6 CONTINGENT LIABILITY At the date of this report, no asset of the Company had been pledged as security for the liabilities of any other organisation since the end of the financial year. No contingent liability or any other liability has become enforceable or is likely to become enforceable within the succeeding period of twelve months which will or may substantially affect the ability of the Company to meet its obligations as and when they fall due. As at the date of this report there are no contingent liabilities which have arisen since the end of the financial year and there are no circumstances not otherwise dealt with in this report or the financial statements which render any amounts stated in the financial statements misleading.7 DIRECTORATE In accordance with article 94 of the Companys Articles of Association, Messrs T.N Sibanda and M D Frudd retire by rotation, but being eligible, offer themselves for re-election.8 DIVIDEND The directors have decided not to declare a dividend this year (2011 - Sunil).9 AUDITOR The auditor Mess, PricewaterhouseCoopers hold office until conclusion of the Annual General Meeting, at which members will be asked to re-appoint them as auditor for the ensuing year.10 FINANCIAL STATEMENTS The directors are responsible for the preparation and integrity of the financial statements and related financial information of the Company disclosed in this report. The financial statements of the company have been drawn up in accordance with International Financial Reporting Standards ("IFRS"). The directors are satisfied that the financial statements present fairly the results of the operations for the year ended 31 October 2012. The financial statements have been approved by the Board of Directors.11 ANNUAL GENERAL MEETING The Annual General Meeting of the company will be held at 12pm on Tuesday 30 April 2013 at No. 25 Birmingham Road, Southerton, Harare. By order of the Board Corpserve (Private) Limited Secretaries Harare 8 March 2013 ANNUAL REPORT 2012 4
  6. 6. CORPORATE GOVERNANCEIntroductionPhoenix Consolidated Industries Limited is committed to a code of corporate practices and conduct based on the principles laid downin the King Report and the Principles of Corporate Governance in Zimbabwe as laid out in the manual of Best Practice. The directorsrecognise the need to conduct the affairs of the Company with principles of transparency, integrity and accountability in accordancewith generally accepted corporate practices, in the interests of its shareholders, employees and other stakeholders. All directors andsenior personnel are required to declare any interests that could materially affect the Company.DirectorateThe Board of Directors presently comprises of seven members, six of whom are non-executive. A non-executive director chairs theBoard, which meets at least four times per annum.Audit CommitteeThe Audit Committee of the Board deals, inter-alia, with matters of compliance, internal controls and risk management. It consists ofthree non-executive directors. The committee meets at least twice a year with the external auditors, who, in any event, haveunimpeded access to the Committee.Remuneration CommitteeThe Remuneration Committee consists of two non-executive directors. The Committees responsibility is to measure, compare andreview the remuneration of the Chief Executive, Finance Executive and the operating unit Chief Executives and acts in accordancewith the Boards terms of reference.Directors RemunerationDetails are disclosed under note 19 in the financial statements of this report.Directors Responsibility StatementThe directors are responsible for:1 Presenting the shareholders with a balanced and understandable assessment of the Companys financial position and financial performance and cash flow at the end of each financial year.2 Ensuring that the Company maintains accounting records which disclose, with reasonable accuracy, the financial position and financial performance and cash flows of the Company and which enable them to ensure that the financial statements comply with relevant statutes.3 Taking steps to safeguard the assets of the Company and to prevent and detect fraud and other irregularities.4 Selecting appropriate accounting policies which follow International Financial Reporting Standards and monitoring compliance by the Company.MD Frudd F J RodriguesChairman Chief Executive8 March 2012 ANNUAL REPORT 2012 5
  7. 7. CHAIRMANS STATEMENTPhoenix incurred a loss after tax of $1 367 000 for the year of which $660 000 related to discontinued operations. During the yearboth McMeekan Founders and Precision Grinders were sold as Phoenix was unable to raise the required funds to recapitalise thesebusinesses. Both units were sold at a marginal gain to net asset value. Finance costs remain a major concern and alternative cheaper,longer term funds are currently being sourced. Turnover declined by 3% year on year due to tighter credit control and the generallack of spending power in the economy. Sales to government and parastatals, previously major customers, were again low. Costs havebeen tightly controlled. J W Searcy and William Smith & Gourock are now under common management which will result in furthercost reductions going forward.OPERATIONSPlastic and Allied (Incorporating William Smith & Gourock and Phoenix Brushware)Both units attained profits with William Smith & Gourock again being the best performer in the group. Turnover remained constant atPhoenix Brushware but increased at William Smith & Gourock.Steel and Allied (Incorporating Scandia Steel & Wire, J W Searcy)Turnover improved at J W Searcy but Scandia experienced a significant reduction. The reduction is due to restricted sales to somemajor hardware outlets and mining concerns arising from poor payment performance. This resulted in Scandia recording a loss forthe year.Financial PositionThe net worth of the company reduced by $1 367 000 due to the loss incurred. The company continues to be in a net current assetposition. Fixed assets have reduced by $724 000 as a result of the disposal of McMeekan and Precision Grinders, and annualdepreciation.OutlookThe tight liquidity situation in the country has had a twofold effect on Phoenix, reducing turnover and forcing an increase inborrowings at high interest rates. To combat the above, Phoenix is expanding its export thrust with Scandia already successful in theSouth African, Zambian and Namibian markets and now targeting Mozambique. Cheaper longer term funding is being persued bothon the local and foreign financial markets.In the short term Phoenix expects to benefit from the following: - Temporary infrastructure required for the elections. - Much neede refencing of farms and the road network. - Rehabilitation of water purification and sewerage plants.Corporate GovernancePhoenix is committed to the principles of good Corporate Governance and best practice. The Company’s policies and procedures arecontinually reviewed for compliance with accepted standards. The main board comprises a majority of non executive directors and itand its sub committees meet on a quarterly basis.Declaration of DividendThe board has decided not to declare a dividendMD FruddChairmanHARARE8 March 2012 ANNUAL REPORT 2012 6
  8. 8. THREE YEAR FINANCIAL HIGHLIGHTS FOR THE YEAR ENDED 31 OCTOBER 2012 2012 2011INCOME STATEMENT US$000 US$000Turnover 9 772 11 582Operating (loss)/profit before depreciation (260) 905Profit after tax attributable to equity holders of the company (1 367) 148STATEMENT OF FINANCIAL POSITIONTotal equity 5 011 6 378Total assets 10 727 12 069STATEMENT OF CASH FLOWSNet cash used in operating activities (133) (932)Cash and cash equivalents at the year end (1 515) (1 469)SHARE INFORMATIONNumber of ordinary shares 87 475 000 87 475 000Number of ordinary shareholders 2 284 2 298Year end share price (UScents) 1.80 2.50Net asset value per share (UScents) 5.7 7.3Earnings per share (UScents) (1.56) 0.17FINANCIAL STATISTICSCurrent assets to current liabilities 1.05 1.4Return on shareholders’ equity (%) (2.7) 2.3 ANNUAL REPORT 2012 7
  9. 9. INDEPENDENT AUDITORS REPORTTo the shareholders ofPHOENIX CONSOLIDATED INDUSTRIES LIMITEDWe have audited the financial statements of Phoenix Consolidated Industries Limited (the "Company") which comprise the statementof financial position as at 31 October 2012, and the statements of comprehensive income, changes in equity and cash flows for theyear then ended, and a summary of significant accounting policies and other explanatory information set on pages 9 to 33.Directors responsibility for the consolidated financial statementsDirectors are responsible for the preparation and fair presentation of these financial statements in accordance with InternationalFinancial Reporting Standards and in the manner required by the Zimbabwe Companies Act (Chapter 24:03) and the relevantStatutory Instruments, ("SI"), SI 33/99 SI62/96, and for such internal control as the directors determine is necessary to enable thepreparation of financial statements that are free from material misstatement, whether due to fraud or error.Auditors responsibilityOur responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordancewith International Standards on Auditing. Those standard require that we comply with ethical requirements and plan and perform theaudit to obtain reasonable assurance about whether the financial statement are free from material misstatement.An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. Theprocedures selected depend on the auditors judgement, including the assessment of the risks of material misstatement of thefinancial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevantto the entitys preparation and fair presentation of the financial statements in order to design audit procedures that are appropriatein the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entitys internal control. An auditalso includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made bymanagement, as well as evaluating the overall presentation of the financial statements.We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.OpinionIn our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as at 31 October2012, and of its financial performance and cash flows for the year then ended in accordance with International Financial ReportingStandards and in the manner required by the Zimbabwe Companies Act (Chapter 24:03), and the relevant Statutory Instruments SI33/99 and SI 62/96.PricewaterhouseCoopersChartered Accountants (Zimbabwe)Harare ANNUAL REPORT 2012 8
  10. 10. STATEMENT OF FINANCIAL POSITION AS AT 31 OCTOBER 2012 Notes 2012 2011 ASSETS US$000 US$000 Non-current assets Plant, equipment and motor vehicles 6 5 727 6 451 Other receivables 7 125 - 5 852 6 451 Current assets Inventories 8 1 836 2 389 Trade and other receivables 9 2 726 3 070 Financial assets at fair value through profit and loss 10 55 61 Cash and cash equivalents 11 258 98 4 875 5 618 Total assets 10 727 12 069 EQUITY AND LIABILITIES Capital and reserves Share capital 12 9 9 Share premium 12 60 60 Non-distributable reserve 13 6 102 6 102 (Accumulated loss)/retained earnings ( 1 160) 207 Total equity 5 011 6 378 Non-current liabilities Deferred income tax 14 1 049 1 544 Current liabilities Trade and other payables 15 2 284 2 504 Current income tax liability 76 - Borrowings 16 2 383 1 567 4 667 4 147 Total liabilities 5 716 5 691 Total equities and liabilities 10 727 12 069 ) ) ) DIRECTORS ) )9 March 2013 ANNUAL REPORT 2012 9
  11. 11. STATEMENT OF COMPREHENSIVE INCOME FOR THE YEAR ENDED 31 OCTOBER 2012 Restated 2012 2011 Notes US$000 US$000Continuing operationsRevenue 9 772 10 066Cost of sales 19 (7 016) (6 605)Gross profit 2 756 3 461Distribution costs 19 (969) (872)Administrative expenses 19 (2 767) (2 067)Other income 18 224 204Operating profit (756) 726Finance income 20 17 -Finance expense 20 (463) (214)Net finance expense (446) (214)(Loss)/profit before income tax (1 202) 512Income tax credit/(expense) 21 495 (14)(Loss)/profit for the year from continuing operations (707) 498Discontinued operationsLoss for the year from discontinued operations 26 (660) (350)(Loss)/profit for the year (1 367) 148Other comprehensive (loss)/income - -Total comprehensive (loss)/income for the year (1 367) 148Attributable to:Equity holders of the company (1 367) 148Earnings per share (cents)-basic 22 (1.56) 0.17-diluted 22 (1.56) 0.17-headline 22 (1.64) 0.17 ANNUAL REPORT 2012 10
  12. 12. STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 31 OCTOBER 2012 (Accumulated Non losses)/ Share Share distributable retained Total capital premium reserves earnings equity US$ 000 US$ 000 US$ 000 US$ 000 US$ 000Year ended 31 October 2011As at 1 November 2010 9 60 6 102 59 6 230Profit for the year - - - 148 148As at 31 October 2011 9 60 6 102 207 6 378Year ended 31 October 2012As at 1 November 2011 9 60 6 102 207 6 378Loss for the year - - - (1 367) (1 367)As at 31 October 2012 9 60 6 102 (1 160) 5 011 ANNUAL REPORT 2012 11
  13. 13. STATEMENT OF CASH FLOWS FOR THE YEAR ENDED 31 OCTOBER 2012 Restated Notes 2012 2011 US$000 US$000Cash flows from operating activities:(Loss)/profit before income tax from continuing operations ( 1 202) 512Adjustments for:Depreciation 494 494Bad debts written off 35Impairment of receivables 112 5Profit on disposal of discontinued operations 26 (162) -Extinguishment of liabilities - (175)Profit on disposal of plant, equipment and motor vehicles - (5)Foreign exchange loss 39 12Fair value losses/(gains) on financial assets at fair value through profit or loss 6 (2)Rental income (48)Finance costs- net 446 219Net cash (used in)/generated by operating activities beforechanges in working capital (232) 1 012Changes in working capital:Decrease/(increase) in inventories 553 (404)(Decrease)/increase in trade and other receivables 344 (660)Increase in trade and other payables (259) (236)Cash generated by/(used in) operating activities 406 (288)Interest paid (463) (219)Income tax paid (76) (98)Net cash used in operating activities (133) (605)Cash flows from investing activities:Acquisition of plant, equipment and motor vehicles 6 (180) (167)Acquisition of net assets of Precision Grinders and McMeekan, net of cash 25 - (251)Disposal of net assets of Precision Grinders and McMeekan, net of cash 26 (344) (327)Proceeds from the disposal of plant, equipmentand motor vehicles 1 11Net cash used in investing activities: (523) (734)Cash flows from financing activities:Proceeds from borrowings - 669Repayments of borrowings (459) -Net cash used in financing activities (459) 669Net decrease in cash and cash equivalents (1 115) (670)Cash and cash equivalents at beginning of the year (400) 270Cash and cash equivalents at end of the year 11 (1 515) (400) ANNUAL REPORT 2012 12
  14. 14. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 OCTOBER 20121 GENERAL INFORMATION Phoenix Consolidated Industries Limited ("the Company") has manufacturing plants and operations in Zimbabwe. The Company is a limited liability company incorporated and domiciled in Zimbabwe. The address of its registered office is 25 Birmingham Road, Southerton, Harare, Zimbabwe. The Company is listed on the Zimbabwe Stock Exchange. The financial statements are reported in thousands of the United States of America dollars ("US$000"). The financial statements were authorised for issue by the Board of Directors on 9 March 2013.2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The principal accounting policies adopted in the preparation of the financial statements of the Company, are set out below. These policies have been consistently applied to all the years presented unless otherwise stated.2.1.1 Basis of preparation The Companys financial statements have been prepared in accordance with International Financial Reporting Standards, ("IFRS"), and in the manner required by the Zimbabwe Companies Act (Chapter 24:03) and the revenant statutory Instruments ("SI") SI 33/99 and SI 62/96. The financial statements are based on statutory records that are maintained under the historical cost convention as modified by the revaluation of property, plant and equipment, and financial assets at fair value through profit or loss and the discounting of non current assets and liabilities to present value. The preparation of financial statements in conformity with IFRS requires the use of certain critical accounting estimates. It also requires management to exercise its judgment in the process of applying the Companys accounting policies. The areas involving a higher degree of judgment or complexity, or areas where assumptions and estimates are significant to the financial statements are disclosed in note 4.2.1.2 Changes in accounting policy and disclosures (a) New and amended standards, and interpretations mandatory for the first time for the financial years beginning on or after 1 November 2011 adopted by the Company. There are no IFRSs or IFRIC interpretations that are effective for the first time for the financial year beginning on or after 1 November 2011 that would be expected to have a material impact on the Company. (b) New and amended standards, and interpretations issued but not effective for the financial year beginning 1 November 2011 and not early adopted by the Company. IFRS 7, Financial Instruments: disclosures, Assets and Liability offsetting, amended and effective 1 January 2013. The IASB has published an amendment to IFRS 7, reflecting the joint requirements with the FASB to enhance current offsetting disclosures. These new disclosures are intended to facilitate comparison between those entities that prepare IFRS financial statements to those that prepare financial statements in accordance with US GAAP. This amendment has no impact to the Company. IFRS 9, Financial Instruments, amended and effective 1 January 2013. 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 Company is still to assess how this amendment will affect the Company. In addition, The IASB has updated IFRS 9 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 Company is still to assess how this amendment will affect the Company. IFRS 13, Fair Value Measurement, effective 1 January 2013. 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 IFRSs. The requirements, which are largely aligned between IFRSs 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 IFRSs or US GAAP. This will have an impact on future revaluations of plant, equipment and motor vehicles, as well as financial assets at fair value through profit and loss. IAS 19, Employee Benefits, amended and effective 1 January 2013. The IASB has issued an amendment to IAS 19, which makes significant changes to the recognition and measurement of defined benefit pension expense and termination benefits, and to the disclosures for all employee benefits. This amendment has no impact to the Company. ANNUAL REPORT 2012 13
  15. 15. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 OCTOBER 2012 (CONTINUED)2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)2.1.2 Changes in accounting policy and disclosures (continued) (b) New and amended standards, and interpretations issued but not effective for the financial year beginning 1 November 2011 and not early adopted by the Company (Continued) IAS 32, Financial Instruments: Presentation, amended and effective 1 January 2014. The IASB has issued amendments to the application guidance in IAS 32, that clarify some of the requirements for offsetting financial assets and financial liabilities on the balance sheet. However, the clarified offsetting requirements for amounts presented in the statement of financial position continue to be different from US GAAP. This amendment has no impact to the Company.2.2 Segment reporting Operating segments are reported in a manner consistent with the internal reporting provided to the chief operating decision-maker. The chief operating decision-maker, who is responsible for allocating resources and assessing performance of the operating segments, has been identified as the Group Chief Executive Officer who makes strategic decisions.2.3 Foreign currency translation (a) Functional and presentation currency Items included in the financial statements of the Company are measured using the currency of the primary economic environment in which the entity operates ("the functional currency"). The financial statements are presented in the United States of America dollar, ("US$"), which is the Companys functional and presentation currency. (b) Transactions and balances Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in the statement of comprehensive income in profit and loss.2.4 Common control transactions. A combination involving entities or businesses under common control is a business combination in which all of the combining entities or businesses are ultimately controlled by the same party or parties both before and after the business combination, and that control is not transitory and is excluded from the scope of IFRS 3 Business Combinations. Management made a policy choice to use predecessor accounting for common control transactions. No assets or liabilities are restated to their fair values. Instead, the acquirer incorporates predecessor carrying values. These are the carrying values that are related to the acquired entity. They are generally the carrying amounts of assets and liabilities of the acquired entity from the consolidated financial statements of the highest entity that has common control for which consolidated financial statements are prepared. These amounts include any goodwill recorded at the consolidated level in respect of the acquired entity. If no consolidated financial statements are produced, the values used are those from the financial statements of the acquired entity. The acquired entity’s results and statement of financial position are incorporated prospectively from the date on which the business combination between entities under common control occurred. Consequently, the financial statements do not reflect the results of the acquired entity for the period before the transaction occurred. The corresponding amounts for the previous year are also not restated.2.5 Plant, equipment and motor vehicles Plant, equipment and motor vehicles are shown at valuation, based on periodic but at least triennial valuations, less subsequent accumulated depreciation. Valuations are performed with sufficient regularity to ensure that the fair value of a revalued asset does not differ materially from its carrying amount. Any accumulated depreciation at the date of revaluation is eliminated against carrying amount of the asset, and the net amount is restated to the revalued amount of the asset. Subsequent costs are included in the assets carrying amount or recognised as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the Company and the cost of the item can be measured reliably. The carrying amount of the replaced part is derecognised. All other repairs and maintenance are charged to the statement of comprehensive income in profit and loss during the financial period in which they are incurred. Increases in the carrying amount arising on revaluation of plant, equipment and motor vehicles are credited to other reserves in shareholders equity. Decreases that offset previous increases of the same asset classes are charged against other reserves directly in equity; all other decreases are charged to the statement of comprehensive income in profit and loss. ANNUAL REPORT 2012 14
  16. 16. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 OCTOBER 2012 (CONTINUED)2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)2.5 Plant, equipment and motor vehicles (continued) Depreciation on plant, equipment and motor vehicles is calculated using the straight-line method to allocate their revalued amounts to their residual values over their estimated useful lives, as follows: Plant and machinery 15 years Motor vehicles 5 years Furniture, fittings and equipment 5 - 10 years The assets residual values and useful lives are reviewed, and adjusted if appropriate, at each reporting date. An assets carrying amount is written down immediately to its recoverable amount if the assets carrying amount is greater than its estimated recoverable amount. Gains and losses on disposals are determined by comparing the proceeds with the carrying amount and are recognised in the statement of comprehensive income in profit and loss. When revalued assets are sold, the amounts included in revaluation reserves are transferred to retained earnings.2.6 Impairment of non financial assets Assets that have an indefinite useful life – for example, goodwill or intangible assets not ready to use – are not subject to amortisation and are tested annually for impairment. 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. An impairment loss is recognised for the amount by which the asset’s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset’s fair value less costs to sell and value in use. For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows (cash-generating units). Non-financial assets other than goodwill that suffered an impairment are reviewed for possible reversal of the impairment at each reporting date.2.7 Financial assets2.7.1 Classification The Company classifies its financial assets in the following categories: loans and receivables, and financial assets at fair value through profit or loss. The classification depends on the purpose for which the financial assets were acquired. Management determines the classification of its financial assets at initial recognition. (a) Loans and receivables Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They are included in current assets, except for maturities greater than 12 months after the balance sheet date. These are classified as non-current assets. The Companys loans and receivables comprise trade and other receivables and cash and cash equivalents. (b) Financial assets at fair value through profit or loss Financial assets at fair value through profit and loss are financial assets held for trading. A financial asset is classified in this category if acquired principally for the purpose of selling in the short term. Assets in this category "are classified as current assets if expected to be settled within 12 months, otherwise they are classified as" non-current.2.7.2 Recognition and measurement Regular purchases and sales of financial assets are recognised on the trade-date - the date on which the Company commits to purchase or sell the asset. Financial assets are initially recognised at fair value plus transaction costs for all financial assets not carried at fair value through profit or loss. Financial assets at fair value through profit and loss are initially carried at fair value and transaction costs are expensed to the statement of comprehensive income in profit and loss. Financial assets are derecognised when the rights to receive cash flows from the investments have expired or the Company has transferred substantially all risks and rewards of ownership. Financial assets at fair value a through profit or loss are subsequently carried at fair value. Loans and receivables are subsequently carried at amortised cost using the effective interest method. Gains or losses arising from changes in the fair value of the financial assets at fair value through profit or loss category are presented in the statement of comprehensive income in profit and loss in the period in which they arise. Dividend income from financial assets at fair value through profit or loss is recognised in the statement of comprehensive income in profit and loss as part of other income when the Company’s right to receive payments is established. The Company assesses at each reporting date whether there is objective evidence that a financial asset is impaired. Impairment testing of trade receivables is described in the relevant accounting policy. ANNUAL REPORT 2012 15
  17. 17. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 OCTOBER 2012 (CONTINUED)2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)2.8 Offsetting financial instruments Financial assets and liabilities are offset and the net amount reported on the statement of financial position when there is a legally enforceable right to offset the recognised amounts and there is an intention to settle on a net basis or realise the asset and settle the liability simultaneously.2.9 Impairment of financial assets (a) Assets carried at amortised cost The Company assesses at the end of each reporting period whether there is objective evidence that a financial asset or group of financial assets is impaired. A financial asset or a group of financial assets is impaired and impairment losses are incurred only if there is objective evidence of impairment as a result of one or more events that occurred after the initial recognition of the asset (a "loss event") and that loss event (or events) has an impact on the estimated future cash flows of the financial asset or group of financial assets that can be reliably estimated. Evidence of impairment may include indications that the debtors or a group of debtors is experiencing significant financial difficulty, default or delinquency in interest or principal payments, the probability that they will enter bankruptcy or other financial reorganisation, and where observable data indicate that there is a measurable decrease in the estimated future cash flows, such as changes in arrears or economic conditions that correlate with defaults. For loans and receivables category, 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 (excluding future credit losses that have not been incurred) 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 the statement of comprehensive income in profit and loss. If a loan or held-to-maturity investment has a variable interest rate, the discount rate for measuring any impairment loss is the current effective interest rate determined under the contract. As a practical expedient, the Company 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 an improvement in the debtor’s credit rating), the reversal of the previously recognised impairment loss is recognised in the income statement.2.10 Inventories Inventories are stated at the lower of cost and estimated net realizable value. The cost is based on a first in, first out basis calculated as follows: - Raw materials and consumable stores - landed cost. - Finished goods and work in progress - direct raw material and labour cost, other direct costs and related production overheads (based on appropriate operating capacity) and, where applicable, excise duty paid. Net realizable value is the estimate of the selling price in the ordinary course of business, less applicable variable costs of completion and selling expenses.2.11 Trade receivables Trade receivables are amounts due from customers for goods sold in the ordinary course of business. If collection is expected in one year or less (or in the normal operating cycle of the business if longer), they are classified as current assets. If not, they are presented as non-current assets. Trade receivables are recognised initially at fair value and subsequently measured at amortised cost using the effective interest method, less provision for impairment.2.12 Cash and cash equivalents in the statement of cash flows Cash and cash equivalents comprise cash on hand, deposits held at call with banks, other short term highly liquid investments with original maturities of three months or less, and bank overdrafts. Bank overdrafts are shown within borrowings in current liabilities.2.13 Share capital and dividends Ordinary shares are classified as equity. Incremental cost directly attributable to the issue of new shares or options are shown in equity as a deduction, net of tax, from the proceeds. Ordinary shares with discretionary dividends are classified as equity. Dividend distribution to the companys shareholders is recognised as a liability in the companys financial statements in the period in which the dividends are declared. ANNUAL REPORT 2012 16
  18. 18. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 OCTOBER 2012 (CONTINUED)2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)2.14 Trade payables Trade payables are obligations to pay for goods or services that have been acquired or rendered in the ordinary course of business from suppliers. Trade payables are classified as current liabilities if payment is due within one year or less (or in the normal operating cycle of the business if longer). lf not, they are presented as non-current liabilities. Trade payables are recognised initially at fair value and subsequently measure at amortised cost using the effective interest method.2.15 Provisions Provisions are recognised when: the Company has a present legal or constructive obligation as a result of past events; it is probable that an outflow of resources will be required to settle the obligation; and the amount has been reliably estimated. Provisions are not recognised for future operating losses. Where there are a number of similar obligations, the likelihood that an outflow will be required in settlement is determined by considering the class of obligations as a whole. A provision is recognised even if the likelihood of an outflow with respect to any one item included in the same class of obligations may be small. Provisions are measured at the present value of the expenditures expected to be required to settle the obligation using a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the obligation. The increase in the provision due to passage of time is recognised as interest expense.2.16 Borrowings Borrowings are recognised initially at fair value, net of transaction costs incurred. Borrowings are subsequently stated at amortised cost; any difference between the proceeds (net of transaction costs) and the redemption value is recognised in the statement of comprehensive income in profit and loss over the period of the borrowings using the effective interest method. Fees paid on the establishment of loan facilities are recognised as transaction costs of the loan to the extent that it is probable that some or all of the facility will be drawn down. In this case, the fee is deferred until the draw-down occurs. To the extent there is no evidence that it is probable that some or all of the facility will be drawn down, the fee is capitalised as a pre-payment for liquidity services and amortised over the period of the facility to which it relates. Borrowings are classified as current liabilities unless the Company has an unconditional right to defer settlement of the liability for at least 12 months after the end of the reporting period.2.17 Current and deferred income tax The income tax expense for the year comprises current and deferred income tax. Tax is recognised in thestatement of comprehensive income, except to the extent that it relates to items recognised in other comprehensive income or directly in equity. In this case, the tax is also recognised in other comprehensive income or directly in equity, respectively. The current income tax charge is calculated on the basis of the tax laws enacted or substantively enacted at the reporting date in Zimbabwe. Management periodically evaluates positions taken in tax returns with respect to situations in which applicable tax regulation is subject to interpretation. lt establishes provisions where appropriate on the basis of amounts expected to be paid to the tax authorities. Deferred income tax is provided for in full using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts. However if the deferred income tax arises from the initial recognition of an asset or liability in a transaction other than a business combination that affects neither accounting nor taxable profit or loss, it is not accounted for. Deferred income tax is determined using tax rates that have been enacted or substantially enacted by the reporting date and are expected to apply when the related deferred income tax asset is realised or liability settled. Deferred income tax assets are recognised to the extent that is it probable that future taxable profit will be available against which the temporary differences can be utilised. Deferred income tax assets and liabilities are offset when there is a legally enforceable right to offset current tax assets against current tax liabilities and when the deferred income tax assets and liabilities relate to income taxes levied by the same taxation authority on either the taxable entity or different taxable entities where there is an intention to settle the balances on a net basis. ANNUAL REPORT 2012 17
  19. 19. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 OCTOBER 2012 (CONTINUED)2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)2.18 Employee benefits (a) Pension obligations The Company has a defined contribution plan. A defined contribution plan is a pension plan under which the Company pays fixed contributions into a separate entity. The Company has no legal or constructive obligations to pay further contributions if the fund does not hold sufficient assets to pay all employees the benefits relating to employee service in the current and prior periods. For defined contribution plans, the Company pays contributions to privately administered pension plans on a mandatory basis. The contributions are recognised as employee benefit expense when they are due. Prepaid contributions are recognised as an asset to the extent that a cash refund or a reduction in the future payments is available. The Company and its employees also contribute to the National Social Security Authority Scheme. This is a social security scheme which was promulgated under the National Social Security Statutory Instrument 393 of 1993. The Companys obligations under the scheme are limited to specific contributions as legislated from time to time. The contributions are recognised as employee benefit expenses in the income statement when they are due. (b) Bonus plans The Company recognises a liability and an expense for bonuses based on a formula that takes into consideration the profit attributable to the Companys shareholders after certain adjustments. The Company recognises a provision where contractually obliged or where there is a past practice that has created a constructive obligation.2.19 Share based payments The Company operates an equity-settled, share-based compensation plan, under which the entity receives services from employees as consideration for equity instruments (options) of the Company. The fair value of the employee services received in exchange for the grant of the options is recognised as an expense. The total amount to be expensed is determined by reference to the fair value of the options granted: - including any market performance conditions; - excluding the impact of any service and non-market performance vesting conditions (for example, profitability, sales growth targets and remaining an employee of the entity over a specified time period); and - excluding the impact of any non-vesting conditions (for example, the requirement for employees to save). Non-market vesting conditions are included in assumptions about the number of options that are expected to vest. The total expense is recognised over the vesting period, which is the period over which all of the specified vesting conditions are to be satisfied. At the end of each reporting period, the entity revises its estimates of the number of options that are expected to vest based on the non- marketing vesting conditions. It recognises the impact of the revision to original estimates, if any, in the statement of comprehensive income in profit and loss, with a corresponding adjustment to equity. When the options are exercised, the company issues new shares. The proceeds received net of any directly attributable transaction costs are credited to share capital (nominal value) and share premium when the options are exercised.2.20 Revenue recognition Revenue comprises the fair value of the consideration received or receivable for the sale of goods in the ordinary course of the Companys activities. Revenue is shown net of value-added tax, returns, rebates and discounts and after eliminating sales within the Company. The Company recognises revenue when the amount of revenue can be reliably measured, it is probable that future economic benefits will flow to the entity and specific criteria have been met for each of the Companys activities as described below. The amount of revenue is not considered to be reliably measurable until all contingencies relating to the sale have been resolved. The Company bases its estimates on historical results, taking into consideration the type of customer, the type of transaction and the specifics of each arrangement. (a) Sales of goods Sales of goods are recognised when the Company has delivered products to the customer, the customer has full discretion over the channel and price to sell the products, and there is no unfulfilled obligation that could affect thecustomers acceptance of the products. Delivery does not occur until the products have been delivered to the specifiedlocation, the risks of obsolescence and loss have been transferred to the customer, and either the customer has accepted the products in accordance with the sales contract, the acceptance provisions have lapsed, or the Company has objective evidence that all criteria for acceptance have been satisfied. (b) Interest income Interest income is recognised on a time-proportion basis using the effective interest method. When a receivable is impaired, the Company reduces the carrying amount to its recoverable amount, being the estimated future cash flow discounted at the original effective interest rate of the instrument, and continues unwinding the discount as interest income. Interest income on impaired loans is recognised using the original effective interest rate. ANNUAL REPORT 2012 18
  20. 20. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 OCTOBER 2012 (CONTINUED)2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)2.20 Revenue recognition (Continued) (c) Dividend income Dividend income is recognised when the right to receive payment is established.2.21 Leases Leases in which a significant portion of the risks and rewards of ownership are retained by the lessor are classified as operating leases. Payments made under operating leases (net of any incentives received from the lessor) are charged to the statement of comprehensive income in profit and loss on a straight-line basis over the period of the lease.3 FINANCIAL RISK MANAGEMENT3.1 Financial risk factors The risk management function within the Company is carried out in respect of financial risks. Financial risks are risks arising from financial instruments to which the Company is exposed during or at the end of the reporting period. Financial risks comprise market risk (including currency, interest and other price risks) credit risk and liquidity risk. The primary objectives of the financial risk management function are to establish risk limits, and then ensure that exposure to risks stays within limits. Risk management is carried out by the Board of Directors, (the "Board"). The Board identifies and evaluates financial risks in close cooperation with the operating units. The Board provides principles for overall risk management. Key risk management reports are produced monthly at operating unit level and provided to the key management personnel of the Company. (a) Market risk Market risk is the risk that the fair value or future cash flows of financial instruments will fluctuate because of changes in the market prices. The Companys market risks arise from open positions in (a) foreign currencies and (b) interest bearing assets and liabilities, to the extent that these are exposed to general and specific marketmovements as at 31 October 2012. (i ) Foreign exchange risk Foreign exchange risk arises from recognised assets and liabilities and future commercial transactions that are denominated in a currency that is not the entitys functional currency. The Company trades internationally and is exposed to foreign exchange risk arising from various currencies, the main exposure is primarily with respect to the South African rand, ("ZAR"). Total As at 31 October 2011 ZAR$000 US$000 Equivalent Financial assets 1 555 210 Financial liabilities (4 191) ( 524) (2 636) (314) As at 31 October 2012 Financial assets 1 382 167 Financial liabilities (3 697) (447) Net exposure (2 315) (280) The Company’s primary method of managing foreign currency risk is to match the Companys principal cash outflows to the currency in which the principal cash inflows are denominated. This is generally achieved by converting all currencies received into US$. As at 31 October 2012, if the US$ weakened / strengthened by 10% against the ZAR with all other variables held constant, post-tax profit for the year would have been US$ 19 000 (2011: US$21 000) lower/higher, mainly as a result of foreign exchange gains/(losses) on translation of ZAR-denominated trade receivables and payables. ANNUAL REPORT 2012 19
  21. 21. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 OCTOBER 2012 (CONTINUED)3 FINANCIAL RISK MANAGEMENT (Continued) (a) Market risk (Continued) (ii) Price risk The Company is exposed to equity securities price risk because of investments held by the Company and classified on the statement of financial position as financial assets at fair value through profit or loss. At year end, the Company was not exposed to commodity price risk. To manage the price risk arising from investments in equity securities, the Company uses an asset manager whose mandate is to hold a diversified portfolio. The equity securities are listed on the Zimbabwe Stock Exchange ("ZSE"). The tables below summarises the impact of decreases of the ZSE index on Companys post-tax loss for the year and on equity. The analysis is based on the assumption that the equity index, decreased by 10 % with all other variables held constant and all the Companys equity instruments moved according to historical correlation with the index. Impact on post-tax loss 2012 2011 US$ US$ ZSE index movement of 10% 4.5 4.2 Post-tax loss for the year would increase as a result of losses on equity securities classified as at fair value through profit or loss. (iii) Cash flow and fair value interest rate risk The Companys interest rate risk arises from short term borrowings. Borrowings issued at variable rates expose the Company to cash flow interest rate risk which is partially offset by cash held at variable rates. The impact on post tax loss of a 10% shift would be a maximum increase/decrease of US$23 000 (2011: US$18 000). Trade receivables and payables are interest free and have settlement dates within one year. (b) Credit risk Credit risk is the risk that one party to a transaction will cause financial loss to another party by failing to discharge an obligation. Credit risk arises from cash and cash equivalents and deposits with banks and financial institutions, as well as credit exposures to customers, including outstanding receivables and committed transactions. If banks, financial institutions and customers are independently rated, these ratings are used to assess risk. Otherwise, if there is no independent rating, management assesses the credit quality of the customer; banks and financial institutions taking into account their financial position, past experience and other factors. Individual customer risk limits are based on internal ratings in accordance with limits set by the management. The utilisation of credit limits is regularly monitored. Such risks are subject to a quarterly review. Cash balances are held only with financial institutions with sound capital adequacy cover. The Companys maximum exposure to credit risk by class of financial asset is as follows 2012 2011 US$000 US$000 Trade receivables, net of impairment allowance: - Receivables from third parties 1 258 2 004 - Receivables from related parties 183 23 Loans to related parties 390 317 Other receivables excluding prepayments 566 761 Receivable from disposal of discontinued operations 192 - Cash and cash equivalents 258 98 2 847 3 203 Analysis by credit quality of financial assets is as follows: Neither past due nor impaired: Trade receivables: -Receivables from large companies 322 654 -Receivables from small or medium sized companies 135 207 Total neither past due nor impaired 457 861 ANNUAL REPORT 2012 20
  22. 22. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 OCTOBER 2012 (CONTINUED)3 FINANCIAL RISK MANAGEMENT (continued) 2012 2011 US$000 US$0003.1 Financial risk factors (continued) (b) Credit risk (continued) Past due but not impaired -less than 30 days past due 164 395 -30 to 90 days past due 637 748 Total past due but not impaired 801 1 143 Loans to related parties (note 29) 390 317 Receivable from disposal of discontinued operations (note 25) 192 - This relates to the disposal of Precision Grinders and McMeekan Founders to reputable companies. The amount is still within the contractual terms and appropriate discounting has been made for deferred payments using a rate of 20%. The fair value of cash and cash equivalents at 30 September 2012 approximates the carrying amount. There is no significant concentration of credit risk with respect to cash and cash equivalents as the Company holds cash accounts with large financial institutions with sound financial and capital bases. The financial institutions holding the cash and cash equivalents of the Company have the following external credit ratings: AA- 258 98 The ratings have been obtained from the latest published financial information of the financial institutions. (c) Liquidity risk Prudent liquidity risk management principles implies maintaining sufficient cash and the availability of funding through an adequate amount of committed credit facilities. Due to the dynamic nature of the underlying businesses, Company treasury maintains flexibility in funding by maintaining availability under committed credit lines. The Companys policy is to negotiate borrowing facilities with approved financial institutions based on the existing asset base of the Company sufficient for its purposes. The borrowing powers of the company are limited by the Articles of Association (Section 59). The unutilised facilities available to the Company are set out below: Borrowing limits Maximum permissible year end borrowings 10 022 12 756 Committed borrowing facilities (2 900) (3 500) Unutilised borrowing capacity 7 122 9 256 Committed borrowing facilities 2 900 3 500 Actual borrowings comprise: - Current bank borrowings (2 383) (1 567) - Bank and cash balances 258 98 Unutilised committed borrowing capacity 775 2 031 The Memorandum and Articles of Association stipulate that the maximum permissible borrowings be no more than twice the shareholders equity. ANNUAL REPORT 2012 21
  23. 23. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 OCTOBER 2012 (CONTINUED)3 FINANCIAL RISK MANAGEMENT (continued)3.1 Financial risk factors (continued) (c) Liquidity risk (continued) The table below analyses the Companys financial liabilities into relevant maturity groupings based on the remaining period at the reporting date to the contractual maturity date. The amounts disclosed in the table are the contractual undiscounted cash flows. A maturity analysis of financial instruments as at 31 October 2012 is as follows; On demand and less From From From From From than one 1 to 3 3 to 6 6 to 9 9 to 12 1 to 5 month months months months months years Total US$000 US$000 US$000 US$000 US$000 US$000 US$000 Assets Cash and cash equivalents 258 258 Related party receivable 213 213 Loans to related parties - 390 390 Trade and other receivables 2 009 - 370 - 238 200 2 817 2 267 390 370 213 238 200 3 678 Liabilities Trade and other payables 675 1 204 1 879 Borrowings 1 773 - 610 - - - 2 383 2 448 1 204 610 - - - 4 262 Liquidity gap (181) (814) (240) 213 238 200 (584) Cumulative gap (181) (995) (1 235) (1 022) (784) (584) The Company has sufficient head room on its committed borrowing facilities to meet its operational cash needs, if own cash resources are inadequate. Based on budgets for 2013, management expects to return to profitability and retain improved positive cash flows. Management also disinvested in two divisions that impacted negatively on operational cash flows. A maturity analysis of financial instruments as at 31 October 2011 is as follows: On demand and less From From From From From than one 1 to 3 3 to 6 6 to 9 9 to 12 2 to 5 month months months months months years Total US$000 US$000 US$000 US$000 US$000 US$000 US$000 Assets Cash and cash equivalents 98 - - - - - 98 Loans to related parties - 317 317 Trade and other receivables 861 580 211 - 340 - 1 992 Total assets 959 897 211 - 340 - 2 407 Liabilities Trade and other payables 2 352 228 - - - - 2 580 Borrowings 498 1 069 - - - - 1 567 Total liabilities 2 850 1 297 - - - - 4 147 Liquidity gap (1 891) (400) 211 - 340 - (1 740) Cumulative gap (1 891) (2 291) (2 080) (2 080) (1 740) (1 740) - ANNUAL REPORT 2012 22
  24. 24. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 OCTOBER 2012 (CONTINUED)3 FINANCIAL RISK MANAGEMENT (continued)3.2 Capital risk management The Companys objectives when managing capital are to safeguard the Companys ability to continue as a going concern in order to provide returns for shareholders and benefits for other stakeholders and to maintain an optimal capital structure to reduce the cost of capital. In order to maintain or adjust the capital structure, the Company may adjust the amount of dividends paid to shareholders, return capital to shareholders, issue new shares or sell assets to reduce debt. Consistent with others in the industry, the Company monitors capital on the basis of the gearing ratio. This ratio is calculated as net debt divided by total capital. Net debt is calculated as total borrowings (including current and non-current borrowings as shown in the statement of financial position) less cash and cash equivalents. Total capital is calculated as "equity" as shown in the statement of financial position plus net debt. 2012 2011 US$000 US$000 Total borrowings (note16) (2 383) (1 567) Less cash and cash equivalents 258 98 Net debt (2 125) (1 469) Total equity 5 011 6 378 Gearing ratio 40% 23%3.3 Fair value hierarchy IFRS 7 specifies a hierarchy of valuation techniques based on whether the inputs to those valuation techniques are observable or unobservable. Observable inputs reflect market data obtained from independent sources: unobservable inputs reflect the companys market assumptions. These two types of inputs have created the following fair value hierarchy; Level one - Quoted prices (unadjusted) in active market for identical assets or liabilities. This level includes listed equity securities. Level two - Inputs other than quoted prices included within level 1 that are observable for the asset or liability, either directly (that is, as prices) or indirectly (that is, derived from prices). Level three - Inputs for the asset or liability that are not based on observable market data (unobservable inputs). This level includes equity investments and debt instruments with significant unobservable components. This level includes non listed equity investments. The hierarchy requires the use of observable market data when available. The company considers relevant and observable market prices in its valuations where possible. The Companys financial assets at fair value through profit or loss are carried at level one fair value and as at 31 October 2012 amount to US$55 000 (2011 : US$61 000). The Company had no financial assets or liabilities carried at level two or three.4 CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS Estimates and judgments are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances.4.1 Critical accounting estimates and assumptions The Company makes estimates and assumptions concerning the future. The resulting accounting estimates will, by definition, rarely equal the related actual results. The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are outlined below. (a) Income taxes The Company recognises liabilities for anticipated tax audit issues based on estimates of whether additional taxes will be due. Where the final tax outcome of these matters is different from the amounts that were initially recorded, such differences will impact the income and deferred income tax liabilities in the period in which such determination is made. ANNUAL REPORT 2012 23
  25. 25. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 OCTOBER 2012 (CONTINUED)4 CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS (continued)4.1 Critical accounting estimates and assumptions (continued) (b) Useful lives of plant, equipment and motor vehicles The Companys management determines the estimated useful lives and related depreciation charges for its plant, equipment and motor vehicles. This estimate is based on projected product life cycles of these assets. It could change significantly as a result of technical innovations and competitor actions in response to severe industry changes. Management will increase the depreciation charge where useful lives are less than previously estimated lives, or it will write off or write down technically obsolete or non-strategic assets that have been abandoned or sold. (c) Impairment of plant and equipment Impairment of property plant and equipment is tested by comparing the carrying amount to the value-in-use. As at 31 October 2012, property plant and equipment was not considered impaired, as the value-in-use was higher than the carrying amount. The value-in-use was calculated based on the Company’s estimated pre-tax cash flows for its Cash Generating Units (CGUs) for the next five years, discounted at a rate of 20%. These estimations require the use of critical judgement. (d) Going concern The Companys operations have been significantly affected, and may continue to be affected by the challenging economic environment. The Directors have assessed the ability of the Company to continue operating as a going concern and believe that the preparation of these financial statements on a going concern basis is still appropriate. However, the Directors believe that under the current economic environment, a continuous assessment of the ability of the Company to continue to operate as a going concern will need to be performed to determine the continued appropriateness of the going concern assumption that has been applied in the preparation of these financial statements. Then Company has taken measures to curb further losses made by non profitable divisions by disinvesting in the two divisions with the biggest losses. Management is confident that there is adequate funding available from bankers should the need arise for additional funding to meet operational requirements. (e) Revaluation of plant and equipment The directors did not perform a valuation in the current year as they believe that the fair value of the assets does not differ materially from the carrying amount. However the directors will continually assess the fair values to determine if a need to revalue would have arisen.5 SEGMENT ANALYSIS For the financial year ended 31 October 2012, segment reporting by the Company was prepared in accordance with IFRS 8 Operating segments. Following the management approach of IFRS 8, operating segments are reported in accordance with the internal reporting provided to the Company Chief Executive Officer (the Chief operating decision-maker), who is responsible for allocating resources to the reportable segments and assesses its performance. All the operating segments used by the Company meet the definition of a reportable segment under IFRS 8. The Company has two main business segments: • Plastic and allied • Steel and allied All revenue allocated to the segments is from external customers who are domiciled in Zimbabwe and Malawi. There were no revenues from transactions with a single external customer that amounted to 10% or more of the Companys revenues. The Company has no operations nor assets outside Zimbabwe5.1 Segment results of operations The segment information provided to the Company Chief Executive Officer for the segments for the year ended 31 October 2012 is as follows: Plastics Steel Revenue: and Allied and Allied Total US$000 US$000 US$000 Sale of goods Local 3 937 4 664 8 601 Exports - 1 171 1 171 3 937 5 835 9 772 ANNUAL REPORT 2012 24

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