Nitl 2011 annual report


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NITL 2011 Annual Report

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Nitl 2011 annual report

  1. 1. The National Investment Trust Limited The National Investment Trust Limited (Incorporated in Malawi on 20 September 2001 under registration number 6024) Annual Report 2011Annual Report 2011
  2. 2. The National Investment Trust LimitedContentsInvestment policy 2Fund Manager’s report 3Directors’ report 5Statement of Directors’ responsibilities 8Independent Auditor’s report 9Statement of financial position 10Statement of comprehensive income 11Statement of changes in equity 12Statement of cash flows 13Notes to the financial statements 14Details of shareholders 33Notice of Annual General Meeting 34Proxy Form 35Annual Report 2011 1
  3. 3. The National Investment Trust LimitedInvestment PolicyThe principal objective of the Company is to provide a vehicle to facilitate broad public participation in a diverseportfolio of equity investments in Malawi.The Company’s investment portfolio is managed by an independent fund manager, First Merchant Bank Limited,whose management is subject to the overall direction of the Board of Directors of the Company. First Merchant BankLimited has day-to-day control and discretion in the management of the investment portfolio in accordance with theinvestment policy. The investment portfolio is managed with a view to providing shareholders with a return by way ofboth annual income and capital growth. Subject to cash flow considerations, net after tax income, other than incomefrom investment switches and unrealised net gains on the investment portfolio, is distributed to shareholders.The Board of Directors recognizes that there will always be risk present in any portfolio of investments but hasadopted an investment policy which seeks to minimize that risk by defining permitted investments and placinglimits on the extent of exposure to individual investments as follows:-EquitiesUp to 100% of the investment portfolio may be invested in equities provided that no more than 40% of the portfoliomay be invested in any single listed company and no more than 10% of the portfolio may be invested in any singleunlisted company. Further limitations on investment in equities of property companies are set out below.BondsUp to 25% of the investment portfolio may be invested in public or private sector bonds provided that no more than10% of the portfolio may be invested in any single bond issue or series of bonds of a single private sector issuer. Itis a requirement that bonds must have a fixed redemption date and period to redemption of not more than tenyears. Private sector bonds must be fully secured and public sector bonds must be guaranteed by the Governmentof Malawi.Property and Equity of Property CompaniesUp to 25% of the investment portfolio may be invested in properties or equity of property companies provided thatno more than 10% of the investment portfolio may be invested in any single property investment.Cash EquivalentsNo restrictions are placed on short-term investments in the form of Treasury Bills, Reserve Bank Bills or depositswith licensed financial institutions.RestrictionsThe Fund Manager may not without the consent of the majority of the Board of Directors: acquire or dispose of anyunlisted equities or bonds or enter into a contract on behalf of the Company to acquire or dispose of any unlistedequities or bonds, borrow money in the name of the Company, or pledge any property or assets belonging to theCompany or create charges or mortgages thereon. 2 Annual Report 2011
  4. 4. The National Investment Trust LimitedFund Manager’s ReportReview of the YearThe Malawi equity market remained stubbornly bearish throughout the period under review. As anticipated, foreigninvestment sentiment remains negative, largely on the basis of perceived macroeconomic risk. It was, however, moredisappointing that the enactment of compulsory pension legislation did not see any appreciable demand for equitiesfrom the growing pool of domestic investment capital, particularly when viewed against the background of a sharpdecline in money market yields.A persistent foreign exchange shortage has led to a significant increase in domestic liquidity from an ever increasingpipeline of funds awaiting remittance. The resultant downward pressure on money market yields outweighed the pulleffect of an increased Government domestic borrowing requirement. Accordingly, the benchmark 91 day treasurybill yield fell sharply from 7.14% to 5.09% over the course of the year.Our portfolio showed marginal capital growth with an overall net fair value gain of K30million representing 1.2% ofthe opening portfolio valuation, broadly in line with the movement in the MSE domestic share index over the sameperiod.Individual portfolio company performance was mixed but portfolio diversification mitigated individual companyrisk with the overall outcome that the dividend income returned by the portfolio continues to grow, increasing by19% over the prior year. Dividend yield of 6.92% when measured against the closing portfolio valuation is well abovethe 30 September 2011 MSE domestic weighted average yield of 5.48%.Our financial sector investments enjoyed varying fortunes, with Standard Bank and National Bank, not achievingthe remarkable 74% growth in profits reported by NBS Bank. Nevertheless National Bank maintained its level ofdividend and Standard Bank dividends increased by 50% due to a higher payout ratio. Dividends received from NBSBank doubled over the previous year. NBS Bank was also the main driver of growth in group profit of its holdingcompany NICO which also achieved satisfactory growth in its general and life insurance businesses.Press Corporation reported a 62% increase in net profit attributed to its ordinary shareholders with most companiesin this diversified group registering significant earnings growth despite challenges posed by erratic fuel supplies andshortage of foreign exchange.Unseasonable wet weather conditions impacted negatively on both cane sucrose content and factory operationalefficiency of Illovo with a consequent 10% drop in profit after tax and dividends.Both our property investments, MPICO and Kang’ombe saw significant capital appreciation in the value of theirinvestment properties but the economic downturn led to a marked increase in the collection period for rentaldebtors and dividend payments were reduced or deferred due to cash flow constraints.A major oversupply of Malawi tobacco and resultant drop in prices was key among the many issues affecting thetobacco industry which led to a 43% drop in profits of the Auction Holdings group. However, dividend levels weremaintained and dividend cover remains healthy at above two times, though group liquidity is heavily burdened withthe financing of carryover tobacco stocks.Dairibord facing challenges of low raw milk supplies and declining consumer disposable incomes achieved modestgrowth but continues to struggle to turn around its loss making subsidiary Mulanje Peak Foods Limited.Telekom Networks enjoyed a 38% growth in subscriber numbers translating into a 4% market share increase but itsaverage revenue per subscriber declined as penetration takes place into the lower income market segment.During the year our shareholding in Packaging Industries was acquired by its majority shareholder in a scheme ofarrangement approved by shareholders and sanctioned by the courts. This company subsequently delisted from theMSE.Annual Report 2011 3
  5. 5. The National Investment Trust LimitedFund Manager’s ReportWith interest income, despite declining yields, remaining at the same level as prior years and the overall increasein expenditure of 3.7% being contained well below the national inflation rate, the 19% increase in dividend incometranslated into a 22% increase in NITL’s distributable profit for the year. This is reflected in a significant increase from45 tambala to 65 tambala in the proposed final dividend recommended by the directors.OutlookThe future direction of the equity market will depend to a great degree on government policy responses to thecountry’s current macroeconomic difficulties. Acute pressure on the value of the local currency coupled withprevailing increasingly negative real interest rates should see a shift in investor focus to real assets including equities,particularly equities of companies with an inbuilt currency/inflation hedge.However, foreign investors may well adopt a cautious approach until certain that all major macroeconomicadjustments are through. Likewise, domestic investors, having endured a three year bear market, remain extremelyaverse to the risks attached to equity investment in Malawi.There are myriad permutations of possible outcomes, too numerous to elaborate. On balance, it is hoped that thecoming year should see some firming in the equity market though a number of counters may be relatively moreexposed to external economic shocks.First Merchant Bank Limited10 November 2011 4 Annual Report 2011
  6. 6. The National Investment Trust LimitedDirectors’ ReportNature of BusinessThe Company is a closed end collective investment scheme established with the objective of providing investors withthe opportunity to invest in a diversified portfolio of equity investments in Malawi. The Company is licenced by theRegistrar in accordance with the Securities Act. The Company’s investment policy, which has been fully compliedwith during the year, appears on page 2.Share capitalDetails of the current authorised and issued share capital are set out in note 8. An analysis of shareholders by typeand holding is set out on page 33.DividendsAn interim dividend of 27 tambala per share (2010: 25 tambala) was paid on 24 June 2011 to shareholders registeredin the Company’s share register on 17 June 2011. The directors recommend a final dividend of 68 tambala per share(2010: 45 tambala) for declaration at the forthcoming annual general meeting.DirectorsThe following directors served in office during the year under review and four Board meetings were held. Attendance Attendance Record %D. J. Kamwaza (Chairman) 3/4 75A. T. Konyani 4/4 100R. E. Mdeza 4/4 100V. H. Masikini 4/4 100W. G. Nyengo 4/4 100M. Sosola 2/4 50B. Movete 4/4 100All directors are non-executive.The regulations governing collective investment schemes stipulate that the majority of directors of the Companymust not be affiliated persons. None of the directors are affiliated persons.In terms of the Company’s articles of association Mr. D.J. Kamwaza, Mrs V.H. Masikini and Ms A.T. Konyani retireat the forthcoming annual general meeting and being eligible offer themselves for re-election. The Nomination andRemuneration Committee of the Board recommends the re-election of the retiring directors.Other than as disclosed in note 18 to the financial statements, none of the directors held a direct or indirect interestin the shares of the Company as at the reporting date.Statement on corporate governanceThe Company has a unitary board of directors comprising seven non-executive directors. There are no executivedirectors.The board complies with the major principles of modern corporate governance as contained in the Code of BestPractice for Corporate Governance in Malawi (The Malawi Code II).The board meets at least four times a year. Adequate and efficient communication and monitoring systems arein place to ensure that the directors receive all relevant information to guide them in making necessary strategicdecisions, and providing effective leadership, control and strategic direction over the Company’s operations, and inensuring that the Company fully complies with relevant legal, ethical and regulatory requirements.In accordance with the Code of Best Practice for Corporate Governance in Malawi, the Board regularly assesses itsperformance and effectiveness as a whole and that of individual Directors.Annual Report 2011 5
  7. 7. The National Investment Trust LimitedDirectors’ Report (cont’d)Board Committeesa) Audit Committee The Audit Committee comprises Mr. R. Mdeza, B. Comm, FCCA, CPA(Mw), Mrs. V. Masikini, CIMA and Mr. W. Nyengo, B. Comm, M. Acc. The Committee, which conducts its business in accordance with detailed terms of reference does the following: • onitors the integrity of the financial statements of the Company and any formal announcements relating m to the Company’s financial performance, including reviewing significant financial reporting judgements contained in them; • eviews the Company’s internal financial controls to ensure the operation of adequate systems and control r processes to safeguard the Company’s assets; • eviews the Company’s policies and procedures to ensure they adequately address compliance and regulatory r issues; • versees the Company’s relationship with its external auditor and reviews and monitors the external o auditor’s independence and objectivity and the effectiveness of the audit process; • akes recommendations to the Board, for it to put to shareholders for their approval in general meeting, in m relation to the appointment and remuneration of external auditors.During the year under review the Audit Committee held four meetings. There were no disagreements between theAudit Committee and the Board of Directors. Attendance Attendance Record % R. E. Mdeza 4/4 100 W. G. Nyengo 4/4 100 V. H. Masikini 4/4 100b) Investment Committee The Board has appointed an Investment Committee whose role is to supervise and assist the managers of the Company in their investment decisions. Messrs Nyengo and Sosola and Ms Konyani serve on the Investment Committee. The managers report to the Investment Committee on all investment purchases and disposals and they also have to seek prior authorisation from the Committee before undertaking transactions with a value in excess of K20 million. Transactions with a value in excess of K40 million require approval of the Board of Directors. During the year under review, six Investment Committee meetings were held. Attendance Attendance Record % M. Sosola 5/6 83 A. T. Konyani 4/6 66 W. G. Nyengo 6/6 100c) Nomination and Remuneration Committee This Committee comprises four non-executive directors namely: Mr. D.J. Kamwaza, Mrs B. Movete, Ms A.T. Konyani and Mrs V. H. Masikini. The Committee reviews on a regular basis the composition, size and balance of the full Board to ensure that the Board is not lacking in skills or experience and adequately represents the interests of the shareholders as a whole. Additionally, the Committee deliberates on the appropriate level of remuneration of directors to be recommended for approval by the shareholders in general meeting. This Committee also makes recommendations to the Board on the appointment and contractual terms of appointment of the Fund Manager. During the year under review, two meetings of the Nomination and Remuneration Committee were held. 6 Annual Report 2011
  8. 8. The National Investment Trust LimitedDirectors’ Report (cont’d) Attendance Attendance Record % D. J. Kamwaza 2/2 100 A. T. Konyani 2/2 100 V. H. Masikini 2/2 100 B. Movete 2/2 100Ethical StandardsThe Board is fully committed to ensuring the Company’s affairs are conducted with integrity and that the highestethical standards are maintained.Directors’ feesCurrently, the chairman receives an annual fee of K635,000 and directors receive an annual fee of K580,000 each,together with sitting allowances at the rate of K30,250 per meeting for the chairman and K27,500 per meeting forother directors.At the forthcoming annual general meeting, it will be proposed that fees and sitting allowances be increased basedon recommendations from the Nomination and Remuneration Committee of the Board.ManagementThe Company had an agreement for a period of one year commencing from 1 January 2011 with First MerchantBank Limited (FMB) under the terms of which FMB is contracted as sole manager of the Company.Subject to the overall policy and direction of the Board, FMB has day-to-day administrative and general controland discretion in the management, in accordance with the investment policy, of the funds and investments of theCompany throughout the term of the agreement.Specific duties of FMB include: • o ensure adequate administrative, secretarial, accounting, financial and internal control systems are t maintained. • o ensure the establishment of acceptable custodial arrangements to ensure the safe custody of the Company’s t assets.FMB Limited is a commercial bank, licensed in Malawi under the Banking Act, and also licensed as an investment/portfolio manager by Reserve Bank of Malawi under the authority vested in it by the Securities Act.Independent auditorsThe auditors, KPMG, have signified their willingness to continue in office and a resolution to confirm their re-appointment as auditors in respect of the year ending 30 September 2012, is to be proposed at the forthcomingannual general meeting.D. J. Kamwaza R. E. MdezaChairman Director10 November 2011 Annual Report 2011 7
  9. 9. The National Investment Trust LimitedStatement of Directors’ responsibilitiesfor the year ended 30 September 2011The Malawi Companies Act, 1984, Cap. 46:03, requires the directors to prepare financial statements for each financialyear, which give a true and fair view of affairs of the company as at the end of the financial year and of the operatingresults and cash flows for that year. The directors are responsible for preparing the company’s financial statements inaccordance with Malawi Companies Act, 1984, Cap: 46:03, and International Financial Reporting Standards (IFRS).In preparing those financial statements, the directors are required to: • select suitable accounting policies and then apply them consistently; • make judgments and estimates that are reasonable and prudent; • omply with IFRS when preparing financial statements subject to any material departures disclosed and c explained in the financial statements • repare the company’s financial statements on the going concern basis unless it is inappropriate to presume p that the company will continue in business.The directors confirm that they have complied with the above requirements in preparing the financial statements.The directors are responsible for keeping proper accounting records that disclose with reasonable accuracy at anytime the financial position of the company. They are also responsible for safeguarding the assets of the company andtaking reasonable steps for the prevention and detection of fraud and other irregularities.Nothing has come to the attention of the directors to indicate that the company will not remain a going concern forat least the next twelve months from the date of this statement.The directors are of the opinion that the financial statements give a true and fair view of the financial affairs of thecompany and of their operating results and cash flows.Approval of the financial statementsThe financial statements of the company as indicated above, were approved by the board of directors on 10 November2011 and are signed on its behalf by:D.J. Kamwaza R.E. MdezaChairman Director 8 Annual Report 2011
  10. 10. The National Investment Trust LimitedAnnual Report 2011 9
  11. 11. The National Investment Trust LimitedStatement of financial positionas at 30 September 2011In thousands of Malawi Kwacha Notes 2011 2010AssetsEquity investments 5 2,566,378 2,540,628Income notes 6 1 1Dividends receivable 17,062 6,814Prepaid expenses 895 766Cash and cash equivalents 7 118,429 76,443Total assets 2,702,765 2,624,652Equity and liabilitiesShareholders’ equityShare capital 8 2,700 2,700Share premium 169,550 169,550Retained earnings 2,479,038 2,417,190Total shareholders’ equity 2,651,288 2,589,440LiabilitiesNon-currentDeferred tax liability 9 4,616 4,856Current liabilitiesAccrual for withholding tax on dividends 1,706 496Current income tax liability 4,514 4,351Trade and other payables 10 40,641 25,509Total current liabilities 46,861 30,356Total liabilities 51,477 35,212Total equity and liabilities 2,702,765 2,624,652The financial statements of the Company were approved by the Board of Directors on 10 November 2011 and weresigned on its behalf by:D. J. Kamwaza R.E. MdezaChairman Director 10 Annual Report 2011
  12. 12. The National Investment Trust LimitedStatement of Comprehensive Incomefor the year ended 30 September 2011In thousands of Malawi Kwacha Notes 2011 2010IncomeDividend income 11 177,526 149,168Interest income 12 3,765 3,827Fair value gain on equity investments 13 29,764 15,603Total net income 211,055 168,598ExpenditureAuditor’s remuneration - fee 1,452 1,320 - other expenses 240 218Directors’ remuneration - fees 4,115 3,725 - allowances 1,675 1,072Management fees 14 16,079 15,718Listing expenses 3,300 3,132Transfer secretarial fees 1,938 3,611Communication costs 2,526 3,426Consultancy fees 1,247 -Licence fees 150 -Other 987 291Total expenditure 33,709 32,513Profit before taxation 177,346 136,085Income tax expense 15 (18,298) (2,115)Profit and total comprehensive income for the year 159,048 133,970Attributable to:Equity holders of the Company 159,048 133,970Earnings per share (tambala)Basic and diluted 16 118 99Annual Report 2011 11
  13. 13. The National Investment Trust LimitedStatement of changes in equityfor the year ended 30 September 2011In thousands of Malawi Kwacha Share Share Retained capital premium earnings TotalAt 1 October 2009 2,700 169,550 2,353,420 2,525,670Dividends paid to Shareholders - - (70,200) (70,200)Profit and total comprehensive income for the year - - 133,970 133,970At 30 September 2010 2,700 169,550 2,417,190 2,589,440At 1 October 2010 2,700 169,550 2,417,190 2,589,440Dividends paid to Shareholders - - (97,200) (97,200)Profit and total comprehensive income for the year - - 159,048 159,048At 30 September 2011 2,700 169,550 2,479,038 2,651,288 12 Annual Report 2011
  14. 14. The National Investment Trust LimitedStatement of cash flowsfor the year ended 30 September 2011In thousands of Malawi Kwacha Note 2011 2010Cash flows from operating activitiesDividends received 167,278 145,583Interest received 3,765 3,827 171,043 149,410Operating expenditure (22,539) (31,209) 148,504 118,201Taxes paid (17,165) (14,074)Net cash from operating activities 131,339 104,127Cash flows from investing activitiesPurchase of shares (7,101) (14,114)Proceeds from sale of shares 11,115 -Net cash utilised in investing activities 4,014 (14,114)Cash flows from financing activitiesDividends paid (93,367) (65,293)Net increase in cash and cash equivalents 41,986 24,720Cash and cash equivalents at beginning of year 76,443 51,723Cash and cash equivalents at end of year 7 118,429 76,443Annual Report 2011 13
  15. 15. The National Investment Trust LimitedNotes to the financial statementsfor the year ended 30 September 2011In thousands of Malawi Kwacha1. Reporting entity National Investment Trust Limited is a limited liability company domiciled and incorporated in Malawi under the Malawi Companies Act, 1984. The address of the Company’s registered office is Livingstone Towers, Private Bag 122, Blantyre, Malawi.2. Basis of preparation(a) Statement of compliance The financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS) and provisions of the Malawi Companies Act; 1984.(b) Nature of business To provide a vehicle to facilitate broad public participation in a diverse portfolio of equity investments in Malawi.(c) Basis of measurement The financial statements are prepared on the historical cost basis except for financial instruments at fair value through profit or loss, which are measured at fair value. The methods used to measure fair values are discussed further in note 4.(d) Functional and presentation currency These financial statements are presented in Malawi Kwacha, which is the Company’s functional currency. Except as indicated, financial information presented in Malawi Kwacha has been rounded to the nearest thousand.(e) Use of estimates and judgements The preparation of financial statements in conformity with IFRSs requires management to make judgements, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income and expenses. Actual results may differ from these estimates. Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised and in any future periods affected. In particular, information about significant areas of estimation uncertainty and critical judgements in applying accounting policies that have the most significant effect on the amount recognised in the financial statements are described in note 19.3. Significant accounting policies The accounting policies set out below have been consistently applied by the Company and are consistent with those used in the previous year.(a) Financial instruments Financial assets and financial liabilities are recognised on the Company’s statement of financial position when the Company becomes a party to the contractual provisions of the instrument. Financial instruments are subsequently measured as described below: 14 Annual Report 2011
  16. 16. The National Investment Trust LimitedNotes to the financial statementsfor the year ended 30 September 20113. Significant accounting policies (continued)(a) Financial instruments (continued) (i) Fair value measurement The determination of fair values of financial assets and financial liabilities is based on quoted market prices or dealer price quotations for financial instruments traded in active markets. For all other financial instruments fair value is determined by using valuation techniques. The Company uses widely recognised valuation models for determining the fair value of common and more simple financial instruments. For these financial instruments, inputs into models are market observable. The value produced by a technique is adjusted to allow for a number of factors as appropriate, because valuation techniques cannot appropriately reflect all factors market participants take into account when entering into a transaction. Management believes that these valuation adjustments are necessary and appropriate to fairly state financial instruments carried at fair value on the statement of financial position. (ii) Identification and measurement of impairment At each reporting date the Company assesses whether there is objective evidence that financial assets not carried at fair value through profit or loss are impaired. Financial assets are impaired when objective evidence demonstrates that a loss event has occurred after the initial recognition of the asset, and that the loss event has an impact on the future cash flows from the asset that can be estimated reliably. The Company considers evidence of impairment of financial instruments at amortised cost at both a specific asset and collective level. All individually significant financial assets and those known to be impaired are assessed for specific impairment. All assets assessed but found not to be specifically impaired are then collectively assessed for any impairment that has been incurred but not yet identified together with all other assets not individually assessed by grouping together financial assets with similar risk characteristics. Objective evidence that financial assets are impaired can include default or delinquency by a borrower, restructuring of a loan or advance by the Company on terms that the Company would not otherwise consider, indications that a borrower or issuer will enter bankruptcy, the disappearance of an active market for a security, or other observable data relating to a group of assets such as adverse changes in the payment status of borrowers or issuers in the group, or economic conditions that correlate with defaults in the group. Impairment losses on assets carried at amortised cost are measured as the difference between the carrying amount of the financial assets and the present value of estimated cash flows discounted at the assets’ original effective interest rate. Losses are recognised in profit or loss and reflected in an allowance account against the related financial asset. Interest on the impaired asset continues to be recognised through the unwinding of the discount. When a subsequent event causes the amount of impairment loss to decrease, the impairment loss is reversed through profit or loss. (iii) Derecognition Financial assets are derecognized when the Company has substantially transferred all the risks and rewards of ownership of the asset. Financial liabilities are derecognised when the obligation is extinguished. (iv) Cash and cash equivalents Balances with banks comprise demand deposits and other short term highly liquid instruments that are readily convertible to a known amount of cash and are subject to an insignificant risk of changes in value.Annual Report 2011 15
  17. 17. The National Investment Trust LimitedNotes to the financial statementsfor the year ended 30 September 20113. Significant accounting policies (continued)(a) Financial instruments (continued) (v) Treasury bills Treasury bills (including repos) are classified as held for trading and are initially and at subsequent reporting dates measured at fair value. Gains or losses arising from changes in fair value are included in profit or loss. (vi) Other financial assets Other financial assets which include dividends receivable are measured at initial recognition at fair value, and are subsequently measured at amortised cost using the effective interest method. (vii) Trade and other payables Creditors are initially measured at fair value, and are subsequently measured at amortised cost, using the effective interest method. (viii) Equity investments Equity investments are recognised and derecognised on a trade date basis where the purchase or sale of an investment is under a contract whose terms require delivery of the investment within the time frame established by the market, and are initially measured at fair value. The Company’s equity investments are classified as investments held for trading, and are measured at subsequent reporting dates at fair value. Gains or losses arising from changes in fair value are included in profit or loss. (ix) Offsetting Financial assets and liabilities are set off and the net amount presented in the statement of financial position when, and only when the company has a legal right to set off the amounts and intends to either to settle on a net basis or to realize the asset and settle the liability simultaneously.(b) Revenue recognition Interest income is recognised in profit or loss for all interest bearing instruments on an accrual basis using the effective interest basis. Dividend income is recognised when the Company has an unconditional right to receive the income (usually the date on which trading in the underlying investment becomes “ex-dividend”).(c) Expenses All expenses, including management fees are recognised in profit or loss on an accrual basis.(d) Taxation Taxation on the profit or loss for the year comprises current tax (including taxation withheld on dividend income) and deferred tax. Current tax is the expected tax payable or receivable on the taxable income or loss for the year, using tax rates enacted or substantively enacted at the reporting date, and any adjustment to tax payable in respect of previous years. Deferred tax is provided using the full liability method, providing for temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. The amount of deferred tax provided is based on the expected manner of realisation or settlement of the carrying amount of assets and liabilities, using tax rates enacted or substantively enacted at the reporting date. 16 Annual Report 2011
  18. 18. The National Investment Trust LimitedNotes to the financial statementsfor the year ended 30 September 20113. Significant accounting policies (continued)(d) Taxation (continued) Current tax and deferred liabilities and assets are offset in the statement of financial position only if the Company has a legal right to settle on a net basis and they relate to the same tax authority. Deferred tax assets are recognised only to the extent that it is probable that taxable profits will be available against which the asset will be utilised.(e) Earnings per share The Company is listed on the Malawi Stock Exchange and therefore presents basic and diluted earnings per share data for its ordinary shares. Basic earnings per share is calculated by dividing the profit or loss attributable to ordinary shareholders of the Company by the weighted average number of shares outstanding during the year. Diluted earnings per share is determined by adjusting the profit or loss attributable to ordinary shareholders and the weighted average number of shares outstanding for the effects of all dilutive potential ordinary shares.(f) New standards and interpretations not yet effective IAS 24 Related party Disclosures (revised 2009) The revised IAS 24 amends the definition of a related party and modifies certain related party disclosure requirements for government-related entities. This is effective from 1 January 2011. IFRIC 14 Prepayments of a Minimum Funding Requirement These amendments remove unintended consequences arising from the treatment of prepayments where there is a minimum funding requirement. These amendments result in prepayments of contributions in certain circumstances being recognised as an asset rather than an expense. This is effective from 1 January 2011. IFRS 1 First-time Adoption of IFRSs The amendments: • larify that IAS 8 is not applicable to changes in accounting policies occurring during the period covered c by an entity’s first IFRS financial statements; • ntroduce guidance for entities that publish interim financial information under IAS 34 Interim Financial i Reporting and change either their accounting policies or use of the IFRS 1 exemptions during the period covered by their first IFRS financial statements; • xtend the scope of paragraph D8 of IFRS 1 so that an entity is permitted to use an event-driven fair value e measurement as deemed cost for some or all of its assets when such revaluation occurred during the reporting periods covered by its first IFRS financial statements; and • ntroduce an additional optional deemed cost exemption for entities to use the carrying amounts under i previous GAAP as deemed cost at the date of transition to IFRSs for items of property, plant and equipment or intangible assets used in certain rate-regulated activities. This is effective from 1 January 2011. Annual Report 2011 17
  19. 19. The National Investment Trust LimitedNotes to the financial statementsfor the year ended 30 September 20113. Significant accounting policies (continued)(f) New standards and interpretations not yet effective (continued) IFRS 7 Financial Instruments: Disclosures The amendments add an explicit statement that qualitative disclosure should be made in the context of the quantitative disclosures to better enable users to evaluate an entity’s exposure to risks arising from financial instruments. In addition, the IASB amended and removed existing disclosure requirements. This is effective from 1 January 2011. IAS 1 Presentation of Financial Statements The amendments clarify that disaggregation of changes in each component of equity arising from transactions recognised in other comprehensive income also is required to be presented, but may be presented either in the statement of changes in equity or in the notes. This is effective from 1 January 2011. IAS 34 Interim Financial Reporting The amendments add examples to the list of events or transactions that require disclosure under IAS 34 and remove references to materiality in IAS 34 that describes other minimum disclosures. This is effective from 1 January 2011 IFRIC 13 Customer Loyalty Programmes The amendments clarify that the fair value of award credits takes into account the amount of discounts or incentives that otherwise would be offered to customers that have not earned the award credits. This is effective from 1 January 2011 IFRS 7 Disclosures – Transfers of Financial Assets The amendments introduce new disclosure requirements about transfers of financial assets, including disclosures for: • financial assets that are not derecognised in their entirety; and • nancial assets that are derecognised in their entirety but for which the entity retains continuing fi involvement. This is effective from 1 July 2011 IFRS 1 Severe Hyperinflation and Removal of Fixed Dates for First-time Adopters The amendments: • eplace the fixed dates in the derecognition exception and the exemption related to the initial fair value r measurement of financial instruments with date of transition; and • dd a deemed cost exemption to IFRS 1 that an entity can apply at the date of transition to IFRSs after a being subject to severe hyperinflation. This is effective from 1 July 2011 18 Annual Report 2011
  20. 20. The National Investment Trust LimitedNotes to the financial statementsfor the year ended 30 September 20113. Significant accounting policies (continued)(f) New standards and interpretations not yet effective (continued) Amendments to IAS 12 - Deferred tax: Recovery of Underlying Assets The amendments introduce an exception to the general measurement requirements of IAS 12 Income Taxes in respect of investment properties measured at fair value. The measurement of deferred tax assets and liabilities, in this limited circumstance, is based on a rebuttable presumption that the carrying amount of the investment property will be recovered entirely through sale. The presumption can be rebutted only if the investment property is depreciable and held within a business model whose objective is to consume substantially all of the asset’s economic benefits over the life of the asset. This is effective from 1 January 2011. Amendments to IAS 1- Presentation of Items of Other Comprehensive Income The amendments: • equire that an entity present separately the items of other comprehensive income that would be reclassified r to profit or loss in the future if certain conditions are met from those that would never be reclassified to profit or loss; • o not change the existing option to present profit or loss and other comprehensive income in two d statements; and • hange the title of the statement of comprehensive income to the statement of profit or loss and other c comprehensive income. However, an entity is still allowed to use other titles. The amendments do not address which items are presented in other comprehensive income or which items need to be reclassified. The requirements of other IFRSs continue to apply in this regard. This is effective from 1 July 2012. IFRS 9 Financial Instruments IFRS 9 (2009) is the first standard issued as part of a wider project to replace IAS 39. It retains but simplifies the mixed measurement model and establishes two primary measurement categories for financial assets: amortised cost and fair value. The basis of classification depends on the entity’s business model and the contractual cash flow characteristics of the financial asset. The guidance in IAS 39 on impairment of financial assets and hedge accounting continues to apply. Prior periods need not be restated if an entity adopts the standard for reporting periods beginning before 1 January 2012. This is effective from 1 January 2013. IFRS 9 Financial Instruments IFRS 9 (2010) adds the requirements related to the classification and measurement of financial liabilities, and de-recognition of financial assets and liabilities to the version issued in November 2009. It also includes those paragraphs of IAS 39 dealing with how to measure fair value and accounting for derivatives embedded in a contract that contains a host that is not a financial asset, as well as the requirements of IFRIC 9 Reassessment of Embedded Derivatives. This is effective from 1 January 2013. Annual Report 2011 19
  21. 21. The National Investment Trust LimitedNotes to the financial statementsfor the year ended 30 September 20113. Significant accounting policies (continued)(f) New standards and interpretations not yet effective (Continued) IFRS 10 Consolidated Financial Statements IFRS 10 introduces a new approach to determining which investees should be consolidated and provides a single model to be applied in the control analysis for all investees. An investor controls an investee when: • it is exposed or has rights to variable returns from its involvement with that investee; • it has the ability to affect those returns through its power over that investee; and • there is a link between power and returns. Control is re-assessed as facts and circumstances change. IFRS 10 supersedes IAS 27 (2008) and SIC-12 Consolidation – Special Purpose Entities. This is effective from 1 January 2013. IFRS 11 Joint Arrangements IFRS 11 focuses on the rights and obligations of joint arrangements, rather than the legal form (as is currently the case). It: • distinguishes joint arrangements between joint operations and joint ventures; and • lways requires the equity method for jointly controlled entities that are now called joint ventures; they are a stripped of the free choice of using the equity method or proportionate consolidation. IFRS 11 supersedes IAS 31 and SIC-13 Jointly Controlled Entities – Non Monetary Contributions by Venturers. This is effective from 1 January 2013. IFRS 12 Disclosure of Interests in Other Entities IFRS 12 contains the disclosure requirements for entities that have interests in subsidiaries, joint arrangements (i.e. joint operations or joint ventures), associates and/or unconsolidated structured entities, aiming to provide information to enable users to evaluate: • the nature of, and risks associated with, an entity’s interests in other entities; and • the effects of those interests on the entity’s financial position, financial performance and cash flows. This is effective from 1 January 2013. IFRS 13 Fair Value Measurement IFRS 13 replaces the fair value measurement guidance contained in individual IFRSs with a single source of fair value measurement guidance. It defines fair value, establishes a framework for measuring fair value and sets out disclosure requirements for fair value measurements. It explains how to measure fair value when it is required or permitted by other IFRSs. It does not introduce new requirements to measure assets or liabilities at fair value, nor does it eliminate the practicability exceptions to fair value measurements that currently exist in certain standards. This is effective from 1 January 2013. IAS 19 Employee Benefits (amended 2011) The amended IAS 19 includes the following requirements: • ctuarial gains and losses are recognised immediately in other comprehensive income; this change will a 20 Annual Report 2011
  22. 22. The National Investment Trust LimitedNotes to the financial statementsfor the year ended 30 September 20113. Significant accounting policies (continued)(f) New standards and interpretations not yet effective (Continued) remove the corridor method and eliminate the ability for entities to recognise all changes in the defined benefit obligation and in plan assets in profit or loss, which currently is allowed under IAS 19; and • xpected return on plan assets recognised in profit or loss is calculated based on the rate used to discount e the defined benefit obligation. This is effective from 1 January 2013. IAS 27 Separate Financial Statements (2011) IAS 27 (2011) supersedes IAS 27 (2008). IAS 27 (2011) carries forward the existing accounting and disclosure requirements for separate financial statements, with some minor clarifications. This is effective from 1 January 2013. IAS 28 Investments in Associates and Joint Ventures (2011) IAS 28 (2011) supersedes IAS 28 (2008). IAS 28 (2011) makes the following amendments: • FRS 5 applies to an investment, or a portion of an investment, in an associate or a joint venture that meets I the criteria to be classified as held for sale; and • n cessation of significant influence or joint control, even if an investment in an associate becomes an o investment in a joint venture or vice versa, the entity does not re-measure the retained interest. This is effective from 1 January 2013. It is anticipated that, other than IFRS 9 and IFRS 13, these standards and interpretations in future periods will not have a significant impact on the financial statements of the entity. IFRS 9 will impact the measurement of financial instruments.(g) Segment reporting The fund manager reports to the Board on a quarterly basis the income and expenditure and investment portfolio performance of the Company as a whole. Based on the nature of the business there is only one segment and there are no separate geographical or operational segments. 4. Determination of fair values The company’s equity investments and disclosures require determination of fair value for both financial assets and liabilities. Fair values have been determined for measurement and for disclosure purposes as described in note 19. When applicable, further information about the assumptions made in determining fair value is disclosed in the notes specific to that asset or liability. • Other receivables The fair value of other receivables and cash and cash equivalents is estimated as the present value of the future cash flows discounted at market rate of interest at the reporting date. This fair value is determined for disclosure purposes. • Equity investments The fair value of equity investments traded on the stock market is determined with the reference to the quoted prices of the securities at the reporting date. Valuation of unquoted equity securities is determined using valuation techniques. Annual Report 2011 21
  23. 23. The National Investment Trust LimitedNotes to the financial statementsfor the year ended 30 September 2011In thousands of Malawi Kwacha 2011 20105. Equity investments Cost 346,976 342,433 Cumulative adjustment to fair value 2,219,402 2,198,195 Fair value 2,566,378 2,540,628 Fair value of equity investments is analysed as: Listed: Illovo Sugar (Malawi)Limited 891,837 891,837 Malawi Property Investment Company Limited 23,220 19,057 National Bank of Malawi 284,543 333,769 NBS Bank Limited 345,694 360,250 Nico Holdings Limited 105,173 73,621 Packaging Industries Malawi Limited - 8,964 Press Corporation Limited 356,264 316,008 Standard Bank Limited 284,715 271,157 Telekom Networks Malawi Limited 5,251 5,251 2,296,697 2,279,914 Unlisted: Auction Holdings Limited 27,430 27,430 Dairibord Malawi Limited 17,251 8,284 Kang’ombe Investment Limited 225,000 225,000 269,681 260,714 Total 2,566,378 2,540,628 Adjustment to fair value: At beginning of year 2,198,195 2,182,592 Fair value gains during year 29,764 15,603 Realised on disposal (8,557) - At end of year 2,219,402 2,198,195During the year 1,434,205 shares in Packaging Industries Malawi Limited were disposed for gross proceeds of K11.12million. Capital gains tax of K0.65 million was paid on the transaction.The company received a dividend of K5.93 million net of tax from Dairiboard Malawi Limited which was appliedto acquire 28,000 shares in the same company. The company also purchased 410,258 shares in Malawi PropertyInvestment Company Limited at a cost of K1.17 million.22 Annual Report 2011
  24. 24. The National Investment Trust LimitedNotes to the financial statementsfor the year ended 30 September 20115. Equity investments (cont’d) At the reporting date the equity investment portfolio comprised: Percentage shareholding Number of shares 2011 2010 2011 2010 African Lotteries Limited 0.8 0.8 300,000 300,000 Auction Holdings Limited 5.0 5.0 45,716,970 45,716,970 Dairibord Malawi Limited 22.8 20.0 228,000 200,000 Illovo Sugar (Malawi) Limited 1.1 1.1 8,107,611 8,107,611 Kang’ombe Investment Limited 25.0 25.0 500,000,000 500,000,000 Malawi Property Investment Company Limited 0.7 0.6 7,739,977 7,329,719 National Bank of Malawi 1.2 1.2 5,690,853 5,690,853 NBS Bank Limited 6.6 6.6 34,569,445 32,750,000 Nico Holdings Limited 0.8 0.8 8,413,800 8,413,800 Packaging Industries Malawi Limited - 2.1 - 1,434,205 Press Corporation Limited 1.7 1.7 2,012,791 2,012,791 Standard Bank Malawi Limited 1.3 1.3 2,711,574 2,711,574 Telekom Networks Malawi Limited <0.1 <0.1 2,763,500 2,763,5006. Income notes African Lotteries Limited – at cost 2,850 2,850 Impairment allowance (2,849) (2,849) 1 1 The company holds 22,800 income notes of nominal value US$1 each in African Lotteries Limited which bear interest at a variable rate ranging from 12% to 20% per annum. There is no specific repayment date. The impairment is necessitated as explained under note 17.7. Cash and cash equivalents Funds at call and on deposit 76,067 61,698 Balances with banks 42,362 14,745 Total cash and cash equivalents 118,429 76,4438. Capital and reserves The holders of ordinary shares are entitled to receive dividends as declared from time to time and are entitled to one vote per share at meetings of the Company. All shares rank equally with regard to the Company’s residual assets. Share capital 2011 2010 K K Authorised share capital 150,000,000 ordinary shares of 2 tambala each 3,000 3,000 Issued and fully paid 135,000,000 ordinary shares of 2 tambala each 2,700 2,700Annual Report 2011 23
  25. 25. The National Investment Trust LimitedNotes to the financial statementsfor the year ended 30 September 20118. Capital and reserves (continued) Retained earnings Included in the reported retained earnings are unrealised gains on the changes in fair value of equity investments held at fair value through profit or loss net of related deferred taxation totalling K2,216,244,000 (2010: K2,197,556,000), which are not distributable in terms of the Companies Act and profits on investments switches totaling K147,508,818 (2010: 138,950,796) which are not distributable in terms of the company’s investment policy.9. Deferred tax liabilities Deferred tax is calculated, in full, on all temporary differences under the liability method using the enacted tax rate of 30% (2010: 30%). The movement on the deferred tax account is as follows: 2011 2010 Asset Liability Net Asset Liability Net Investment in listed shares - (4,482) (4,482) - (207) (207) Investment in unlisted shares - (134) (134) - (4,649) (4,649) - (4,616) (4,616) - (4,856) (4,856) Recognised Recognised in other Balance in profit comprehensive Balance Deferred tax movement 2010 1/10/2009 or loss income 30/09/2010 Investment in listed shares 5,601 (5,394) - 207 Investment in unlisted shares 11,777 (7,128) - 4,649 17,378 (12,522) - 4,856 Deferred tax movement 2011 Investment in listed shares 207 4,275 - 4,482 Investment in unlisted shares 4,649 (4,515) - 134 4,856 (240) - 4,616 Deferred tax liabilities (Net) The company applies the policy of making full provision of deferred tax, both in respect of timing differences and in respect of the additional tax which would arise if the revalued assets were sold at their carrying values.10. Trade and other payables 2011 2010 Accrued operating expenses 22,031 13,009 Value added tax 3,077 800 Unclaimed dividends payable to shareholders 15,533 11,700 Total creditors payable within one year 40,641 25,509 Share premium Share premium represents the amount paid for the shares in excess of the nominal value of the shares.24 Annual Report 2011
  26. 26. The National Investment Trust LimitedNotes to the financial statementsfor the year ended 30 September 201111. Dividend income 2011 2010 Auction Holdings Limited 10,000 10,500 Dairibord Malawi Limited 6,593 - Illovo Sugar (Malawi) Limited 51,078 56,753 Kang’ombe Investment Limited 8,250 11,250 Malawi Property Investment Company Limited 435 352 National Bank of Malawi 25,495 23,788 NBS Bank Limited 37,572 18,013 NICO Holdings Limited 6,983 5,132 Packaging Industries Malawi Limited 179 358 Press Corporation Limited 9,380 9,380 Standard Bank Malawi Limited 21,340 13,477 Telekom Networks Malawi Limited 221 165 Total dividend income 177,526 149,16812. Interest income Funds at call and on deposit 3,765 3,82713. Fair value gain / (loss) on equity investments Net increase / (decrease) in fair value of unlisted equity investments 3,033 (5,874) Net increase in fair value of listed equity investments 26,731 21,477 Net increase in fair value of equity investments 29,764 15,603 Represented by: Increase / (decrease) in fair value of unlisted equity investments 3,033 (5,874) Increase in fair value of listed equity investments 90,513 124,099 Decrease in fair value of listed equity investments (63,782) (102,622) Net increase in fair value of listed equity investments 26,731 21,477 Net increase in fair value of equity investments 29,764 15,60314. Management fees Fee payable 13,802 13,492 Value added tax 2,277 2,226 16,079 15,718 Management fees are computed in accordance with the Fund Manager’s agreement. The fees are computed as a percentage of the net assets of NITL and the total dividends declared by NITL to its shareholders in each financial year. 75% of the annual fees determined on the basis of quarterly management accounts is payable within one month of each quarter, and the balance is payable upon certification by the independent auditors of NITL.Annual Report 2011 25
  27. 27. The National Investment Trust LimitedNotes to the financial statementsfor the year ended 30 September 201115. Income tax expense 2011 2010 Current income tax 915 898 Deferred income tax (240) (12,522) Capital gains tax 645 - Dividend tax 16,978 13,739 18,298 2,115 Income tax using company income tax rate of 30% (2010: 30%) 53,204 40,825 Non deductible expenditure 9,898 9,504 Non taxable element of fair value increase in investments (9,169) (17,203) Dividends received (53,258) (44,750) 675 (11,624) Capital gains tax 645 - Tax withheld on dividends 16,978 13,739 Income tax in profit or loss 18,298 2,115 The Company is currently appealing against a ruling by the Malawi Revenue Authority (MRA) to not allow a deduction for tax purposes of certain expenditure incurred for the purposes of its trade. The income tax and deferred tax provisions in these accounts have been calculated on the basis of the Malawi Revenue Authority ruling and if the appeal is successful income tax and deferred tax provisions of K10,245,000 and K4,616,000 will not be required.16. Earnings per share Basic earnings per share The calculation of basic earnings per share at 30 September 2011 was based on the profit attributable to ordinary shareholders of K159,048,000 (2010: K133,970,000) and the number of ordinary shares in issue at 30 September 2011 of 135,000,000 (2010: 135,000,000). 2011 2010 Profit attributable to ordinary shareholders 159,048 133,970 Number of ordinary shares in issue (‘000) 135,000 135,000 Earnings per share (tambala) 118 99 Diluted earnings per share The diluted earnings per share are equal to the basic earnings per share as there are no dilutive potential ordinary shares.26 Annual Report 2011
  28. 28. The National Investment Trust LimitedNotes to the financial statementsfor the year ended 30 September 201117. Financial risk management Overview The Company has exposure to the following risks from its use of financial instruments: • Credit risk; • Liquidity risk; and • Market risk. This note presents information about the Company’s exposure to each of the above risks, the Company’s objectives, policies, and processes for measuring and managing risk, and the Company’s management of capital. Further quantitative disclosures are included throughout these financial statements. The Board of Directors has overall responsibility for the establishment and oversight of the Company’s risk management framework. The Board has developed risk management policies principal among which is the Investment Policy outlined on page 2 of this Annual Report. The Investment Committee and the Fund Manager are expected to adhere at all times to the Investment Policy. The Investment Committee reports regularly to the Board of Directors on its activities. The Company’s risk management policies are established to identify and analyse the risks faced by the Company, to set appropriate risk limits and controls, and to monitor risks and adherence to limits. Risk management policies and systems are reviewed regularly to reflect changes in market conditions and the Company’s activities. The Company’s Audit Committee oversees how management monitors compliance with the Company risk management policies and procedures and reviews the adequacy of the risk management framework in relation to the risks faced by the Company. The Company Audit Committee is assisted in its oversight role by the Fund Managers’ internal audit department which undertakes reviews of risk management controls and procedures, the results of which are reported to the Audit Committee. Credit risk Credit risk is the risk of financial loss to the Company if a counterparty to a financial instrument fails to meet its contractual obligations and arises principally from the Company’s dividend receivable and cash and cash equivalents. Money market investments are limited to deposits with licensed financial institutions. The table below shows the maximum credit exposure as at the reporting date: Note 2011 2010 Dividends receivable 17,062 6,814 Funds on call 7 76,067 61,698 Cash and bank balances 7 42,362 14,745 135,491 83,257 Impairment losses The Company’s policy for recognition of impairment losses is described in note 3a(ii). An impairment loss allowance of K2,849,000 (2010:K2,849,000) is being carried in respect of an investment in African Lotteries Limited, an unlisted company which, despite a restructuring in 2008, has incurred significant losses since it commenced its operations. Annual Report 2011 27
  29. 29. The National Investment Trust LimitedNotes to the financial statementsfor the year ended 30 September 201117. Financial risk management (continued) Liquidity risk Liquidity risk is the risk that the Company will not be able to meet its financial obligations as they fall due. The Company’s approach to managing liquidity risk is to ensure, as far as possible, that it has sufficient liquidity to meet liabilities when they fall due, under both normal and stressed conditions, without incurring unacceptable losses or risking damage to the Company’s reputation. The Company maintains sufficient funds in liquid money market investments to meet foreseeable operating expenses. The Company’s financial instruments include investments in unlisted equity investments, which are not traded in an organised public market and which generally may be illiquid. As a result, the Company may not be able to liquidate quickly some of its investments in these instruments at an amount close to fair value in order to meet its liquidity requirements, or to respond to specific events such as a deterioration in the financial position of any particular issuer. Unlisted investments represent 10.5% (2010: 10.3%) of the year end investment portfolio valuation. The Company’s Investment Policy sets maximum permitted limits for investments in unlisted equities. Compliance position as at 30 September 2011 Permitted Current limit Position 1. Equities % of portfolio invested in equities 100% 96% % of portfolio in individual listed company 40% 33% % of portfolio in individual unlisted company 10% 8% 2. Bonds % of portfolio invested in bonds 25% Nil % of portfolio in bonds of single private sector issues 10% Nil 3. Property % of portfolio invested in property companies/equities 25% 10% % of portfolio in a single property investment 10% 9% 4. Cash equivalents 100% 4% 5. Speculative investments Nil Nil Due Within Fair 30 September 2011 1 month Total Value Financial liabilities Trade and other payables 40,641 40,641 40,641 30 September 2010 Financial liabilities Trade and other payables 25,509 25,509 25,50928 Annual Report 2011
  30. 30. The National Investment Trust LimitedNotes to the financial statementsfor the year ended 30 September 201117. Financial risk management (continued) Market risk Market risk is the risk that changes in market prices, such as foreign exchange rates, interest rates and equity and commodity prices will affect the Company’s income or the value of its holdings of financial instruments. The objective of market risk management is to manage and control market risk exposures within acceptable parameters, while optimising the return on risk. The Company’s market risk is managed on a daily basis by the Fund Manager in accordance with policies and procedures in place. The Company’s overall market positions are monitored by the Audit Committee and reported on a quarterly basis to the Board of Directors.(a) Currency risk As the Company has no significant foreign denominated financial assets, save for a full impaired US dollar denominated income note, and has no foreign denominated financial liabilities, the Company’s income and operating cash flows are substantially independent of changes in foreign exchange rates.(b) Interest rate risk The Fund Manager is not permitted to borrow funds without the sanction of the Board of Directors who, in turn, may not, unless sanctioned by an ordinary resolution of shareholders, borrow in excess of the aggregate of the Company’s share capital and reserves. However, since incorporation, the Directors have not exercised their borrowing powers and, accordingly, the Company is not exposed to interest risk on borrowings. At the reporting date, the Company has only invested in fixed rate financial instruments. The company does not account for any fixed rate financial instruments at fair value as the debt securities market is fairly illiquid. Therefore, a change in interest rates at the reporting date would not affect profit and loss or equity.(c) Equity price risk Equity price risk arises from the Company’s held for trading equity securities. The Company seeks to manage individual equity risk through diversification of its investments within its Investment Policy guidelines on individual investments and/or broad classes of investments. The Fund Manager and the Investment Committee manage risk on an ongoing basis. Due to the nature of its business, the Company is always exposed to overall market price risk. Sensitivity analysis – equity price risk The carrying value, at latest trading price, of shares listed on the Malawi Stock Exchange (MSE) represents 86% (2010: 87%) of the Company’s total asset value. Although not directly correlated, it could be expected that the overall value of this portfolio would move broadly in line with movements in the MSE Domestic Share Index. The domestic share index on 30 September 2011 was 3966.49 (2010: 3904.68). An overall increase of 0.5% in share prices would have resulted in a capital gain of K12.8 m (2010: K12.7m) recognised in profit or loss and an identical change in equity. An overall decrease of 0.5% in share prices would have resulted in a capital loss of identical magnitude. The small percentage has been used because the market has been relatively illiquid over the past twelve months. The analysis is performed on the same basis for 2010 and assumes that all other variables remain the same. Capital management The Board’s policy is to maintain a strong capital base to maintain investor and market confidence. Capital consists of share capital, share premium and retained earnings. It also monitors the level of dividends to shareholders.Annual Report 2011 29
  31. 31. The National Investment Trust LimitedNotes to the financial statementsfor the year ended 30 September 201117. Financial risk management (continued) Market risk (continued) The Board’s policy is to maintain its capital base in real terms by not distributing unrealised fair value gains on revaluation of equities or realised profit on sale of equity investments.18. Related parties Fund Manager The Company entered into a management agreement with First Merchant Bank Limited, a licenced commercial bank and licenced investment/portfolio manager. Management fees for the year amounted to K13.8 million (2010:K13.5 million). Included in trade and other payables at 30 September 2011, is management fees payable of K16 million (2010: K3.7 million). The fund manager provides banking services to the Company. Balances amounting to K32.77 million (2010: K9.02 million) were held at First Merchant Bank Limited. Interest earned on these balances during the year was K0.03 million (2010: K0.07 million). The transactions are done at arm’s length. At various times during the year, funds have been placed on short-term deposit at normal commercial rates of interest with The Leasing and Finance Company of Malawi Limited, a subsidiary of First Merchant Bank Limited. Interest earned on these balances during the year was K2.7 million (2010: K2.5 million). At the reporting date the Company had no investments (2010: nil) with The Leasing and Finance Company of Malawi Limited. As required by the Malawi Stock Exchange listing rules, First Merchant Bank Limited as fund manager are required to hold a minimum of 5% of the issued share capital of the Company. At 30 September 2011, 25,358,209 (2010: 11,767,447) issued shares of the Company were held by First Merchant Bank Limited which represented 18.79% (2010: 8.72%). At 30 September 2011, FMB Pension Fund whose assets are managed by First Merchant Bank Limited held 7,777,814 (2010: 9,277,814) shares in the Company. In addition at 30 September 2011, directors of First Merchant Bank Limited and related parties thereto had beneficial interests in a further 4,148,190 (2010: 4,369,690) issued shares of the Company. Directors’ fees Total directors’ fees are disclosed in the statement of comprehensive income. Directors’ interests As at 30 September 2011, the total direct and indirect interests of the directors and related parties thereto in the issued share capital of the Company were as follows: 2011 2010 D.J. Kamwaza 110,000 110,000 R.E. Mdeza 95,200 32,70019. Critical accounting estimates and judgements19.1 Fair values of financial instruments Many of the Company’s financial instruments are measured at fair value on the statement of financial position and it is usually possible to determine their fair values within a reasonable range of estimates.30 Annual Report 2011
  32. 32. The National Investment Trust LimitedNotes to the financial statementsfor the year ended 30 September 201119. Critical accounting estimates and judgements (continued)19.1 Fair values of financial instruments (continued) For the majority of the Company’s financial instruments, quoted market prices are readily available. However, certain financial instruments for example, unlisted equity investments are fair valued using valuation techniques, including reference to the current fair values of other instruments that are substantially the same (subject to the appropriate adjustments). Fair value estimates are made at a specific point in time, based on market conditions and information about the financial instruments. These estimates are subjective in nature and involve uncertainties and matters of significant judgement and, therefore, cannot be determined with precision. Fair value hierarchy The table below analyses financial instruments carried at fair value by valuation. The different levels have been defined as follows:- • Level 1: quoted prices (unadjusted) in active markets. • evel 2: nputs other than quoted prices included within level 1 that are observable for the asset or liability L i either directly or indirectly (i.e. derived from prices). • Level 3: nputs for the asset or liability that are not based on observable data. I Level 1 Level 2 Total 30 September 2011 Listed equity investments 2,296,697 - 2,296,697 Unlisted equity investments - 269,681 269,681 2,296,697 269,681 2,566,378 30 September 2010 Listed equity investments 2,279,914 - 2,279,914 Unlisted equity investments - 260,714 260,714 2,279,914 260,714 2,540,628 For certain financial instruments, including other receivables and other payables, the carrying amounts approximate fair value due to the immediate or short–term nature of these financial instruments. The carrying amounts of all the Company’s financial assets and financial liabilities at the reporting date approximated their fair values.19.2 Impairment of financial assets The company follows the guidance of IAS 39 to determine when a financial asset is impaired. This determination requires significant judgement. In making this judgement, the company evaluates, among other factors, the duration and extent to which the fair value of an investment is less than its cost; and the financial health of and short-term business outlook for the investee, including factors such as industry and sector performance, changes in technology and operational and financing cashflow.19.3 Income taxes The company is subject to income taxes. Significant judgement is required in determining the provision for income taxes. There are many transactions and calculations for which the ultimate tax determination is uncertain. The company recognizes liabilities for anticipated tax audit issues based on estimates of whether additional taxes will be due. Whether the final tax outcome of these matters is different from the amounts that were initially recorded, such differences will impact the current and deferred income tax assets and liabilities in the period in which such determination is made. Annual Report 2011 31
  33. 33. The National Investment Trust LimitedNotes to the financial statementsfor the year ended 30 September 201120. Contingencies At the reporting date there were no contingent assets or contingent liabilities.21. Capital commitments At the reporting date there were no capital commitments which were authorized or contracted.22. Segment reporting Income and expenditure of the company is reported in the statement of comprehensive income. The company only has one segment due to the nature of its business..23. Exchange rates and inflation rates 2011 2010 2009 K K K United States Dollars (USD) 166 151 141 South African Rand (ZAR) 21 22 19 Inflation rates as at 30 September 7.7% 7.0% 7.5% At the time of signing these financial statements the exchange rates had not significantly moved from the above.24. Subsequent events There have been no events subsequent to the reporting date requiring disclosure in the financial statements.32 Annual Report 2011