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INDEPENDENT AUDITORS' REPORT TO PARLIAMENT AND THE SHAREHOLDER OF SOUTH AFRICAN AIRWAYS SOC LIMITED Report on the consolidated and separate financial statements Introduction We have audited the consolidated and separate financial statements of South African Airways (SOC) Limited and its subsidiaries set out on pages 94 to 166, which comprise the consolidated and separate statement of financial position as at 31 March 2016, the consolidated and separate statement of profit or loss and other comprehensive income, statements of changes in equity, and statements of cash flows for the year then ended, as well as the notes, comprising a summary of significant accounting policies and other explanatory information to the financial statements. Accounting Authority's responsibility for the consolidated and separate financial statements The Board of directors, which constitutes the accounting authority, is responsible for the preparation and fair presentation of these consolidated and separate financial statements in accordance with International Financial Reporting Standards (IFRS), the requirements of the Public Finance Management Act of South Africa (PFMA) and the Companies Act of South Africa, and for such internal control as the accounting authority determines is necessary to enable the preparation of consolidated and separate financial statements that are free from material misstatement, whether due to fraud or error. Auditor's responsibility Our responsibility is to express an opinion on these consolidated and separate financial statements based on our audit. We conducted our audit in accordance with the Public Audit Act of South Africa, 2004 (Act No. 25 of 2004)(PAA), the General Notice issued in terms thereof and International Standards on Auditing. Those standards require that we comply with ethical requirements, and plan and perform the audit to obtain reasonable assurance about whether the consolidated and separate financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated and separate financial statements. The procedures selected depend on the auditor's judgment, including the assessment of the risks of material misstatement of the consolidated and separate financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity's preparation and fair presentation of the consolidated and separate financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity's internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the consolidated and separate financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the consolidated and separate financial statements present fairly, in all material respects, the financial position of the South African Airways SOC Limited and its subsidiaries as at 31 March 2016 and their financial performance and cash flows for the year then ended, in accordance with International Financial Reporting Standards and the requirements of the Public Finance Management Act of South Africa and the Companies Act of South Africa. Other reports as required by the Companies Act. As part of our audit of the consolidated and separate financial statements for the year ended 31 March 2016, we have read the Directors' report, the report of the Audit and Risk Committee and the statement by the Company Secretary for the purpose of identifying whether there are material inconsistencies between these reports and the audited consolidated and separate financial statements. These reports are the responsibility of the respective preparers. Based on reading these reports we have not identified material inconsistencies between these reports and the audited consolidated and separate financial statements. However, we have not audited these reports and accordingly do not express an opinion on these reports. Report on other legal and regulatory requirements In accordance with the Public Audit Act of South Africa, 2004 (Act No. 25 of 2004) and the general notice issued in terms thereof, we have a responsibility to report findings on the reported performance information against predetermined objectives for the selected objectives presented in the Integrated annual report, non-compliance with legislation and internal control. We performed tests to identify reportable findings as described under each subheading but not to gather evidence to express assurance on these matters. Accordingly, we do not express an opinion or conclusion on these matters. Predetermined objectives We performed procedures to obtain evidence about the usefulness and reliability of the reported performance information for the objectives for Revenue, Cost compression, Financial sustainability, Operational profit, Refinement of the LTTS, Human resources, Procurement, Customer focus, Effective internal control and risk management, Good governance and Statutory reporting as presented in the directors' report for the year ended 31 March 2016 on pages 84 to 86. We evaluated the reported performance information against the overall criteria of usefulness and reliability. We evaluated the usefulness of the reported performance information to determine whether it was presented in accordance with the National Treasury's annual reporting principles and whether the reported performance was consistent with the planned objectives. We further performed tests to determine whether indicators and targets were well defined, verifiable, specific, 92 SOUTH AFRICAN AIRWAYS GROUP INTEGRATED ANNUAL REPORT FOR THE YEAR ENDED 2016 ANNUAL FINANCIAL STATEMENTS measurable, time bound and relevant, as required by the National Treasury's Framework for managing programme performance information (FMPPI). We assessed the reliability of the reported performance information to determine whether it was valid, accurate and complete. We did not identify any material findings on the usefulness and reliability of the reported performance information for the selected objectives. Additional matter Although we raised no material findings on the usefulness and reliability of the reported performance information for the selected objectives, we draw attention to the following matter: Achievement of planned targets Refer to the directors' report on pages 84 to 86 for information on the achievement of the planned targets for the year. Compliance with legislation We performed procedures to obtain evidence that the public entity has complied with applicable laws and regulations regarding financial matters, financial management and other related matters. We did not identify any instances of material non-compliance with specific matters in key applicable laws and regulations as set out in the General Notice issued in terms of the Public Audit Act of South Africa, 2004 (Act No. 25 of 2004). Irregular expenditure and Fruitless and wasteful expenditure Without raising a material finding, we draw attention to the disclosure in Note 46 to the annual financial statements on page 166, irregular expenditure to the value of R5,4 million and fruitless and wasteful expenditure to the value of R7,3 million that have been identified and reported in terms of section 55(2)(b)(i) of the Public Finance Management Act. Internal control We considered internal control relevant to our audit of the consolidated and separate financial statements, annual performance report and compliance with laws and regulations. We did not identify any deficiencies in internal control that we considered sufficiently significant for inclusion in this report. Other reports We draw attention to the following engagements that could potentially impact on the public entity's financial, performance and compliance related matters. Our opinion is not modified in respect of these engagements that are either in progress or have been completed. Investigations During the financial year under review the Group employed the services of an independent consulting firm to conduct an investigation into alleged irregularities and fraud. At the reporting date, these investigations are still ongoing. Audit related services The following Factual Findings engagement was conducted: National Treasury Public Entities Consolidation Template. The factual findings report covered the period 1 April 2015 to 31 March 2016, and was issued to the entity and National Treasury on 29 July 2016. Nkonki Inc. T Masasa Registered Auditor Johannesburg 30 September 2016 PricewaterhouseCoopers Inc. P Mothibe Registered Auditor Johannesburg 30 September 2016 Executive Management: Mzi Nkonki CA(SA) Executive Chairman, Sindi Zilwa CA(SA) Chief Executive Officer, DZ Nkonki FIBSA, FCIS, MBA Chief Operating Officer, Mitesh Patel (CA(SA) Managing Partner Chief Executive Officer: TD Shango A detailed list of Registered Auditors and directors is available from website www.nkonki.com The company's principal place of business is at 2 Eglin Road, Sunninghill, where a list of directors' names is available for inspection Reg. no. 2002/017422/21 VAT reg. no. 4850211865 Reg. no. 1998/012055/21 VAT reg. no. 4950174682 Management Committee: SN Madikane, JS Masondo, PJ Mothibe, C Richardson, F Tonelli, C Volschenk SOUTH AFRICAN AIRWAYS GROUP INTEGRATED ANNUAL REPORT FOR THE YEAR ENDED 2016 93 Group and Company statement of profit or loss and other comprehensive income for the year ended 31 March 2016 GROUP R MILLION Notes Total income Airline revenue Other income 5 6 Operating costs Aircraft lease costs Accommodation and refreshments Commissions and network charges Electronic data costs Fuel and other energy costs Employee benefit expenses Maintenance costs Navigation, landing and parking fees Fair value and translation movements Other operating costs 7 10 12 2016 2015 2016 2015 30 385 30 105 28 053 27 831 28 827 1 558 28 513 1 592 26 310 1 743 26 127 1 704 30 034 32 546 27 756 30 278 3 149 1 279 1 629 657 7 344 5 822 4 283 2 384 (875) 4 362 2 840 1 040 1 461 543 10 217 5 687 3 412 2 207 25 5 114 3 095 1 566 1 531 636 6 673 3 810 5 510 2 108 (901) 3 728 2 795 1 416 1 375 530 9 449 3 747 4 491 1 980 11 4 484 Operating profit/(loss) before interest, tax, depreciation and amortisation Depreciation and amortisation Impairments Net loss on disposal of property, aircraft and equipment 7 8 11 9 351 (725) (158) (6) (2 441) (819) (1 894) (9) 297 (649) (98) (2) (2 447) (748) (1 635) (3) Operating loss Finance costs Interest income 13 14 (538) (861) 26 (5 163) (490) 26 (452) (894) 11 (4 833) (523) 16 Loss before taxation Taxation 15 (1 373) (100) (5 627) (12) (1 335) - (5 340) - (1 473) (5 639) (1 335) (5 340) (6) (18) 5 (6) 48 3 (6) (18) 5 (6) (47) 3 Loss for the year Other comprehensive (loss)/income: Remeasurements of defined benefit plans* (Impairments)/gains on property revaluations* Change in value of available-for-sale financial asset** Taxation related to components of other comprehensive income 15 - (25) - - Other comprehensive (loss)/income for the year net of taxation 16 (19) 20 (19) (50) Total comprehensive loss (1 492) (5 619) (1 354) (5 390) Total comprehensive loss attributable to: Owners of the parent (1 492) (5 619) (1 354) (5 390) (1 492) (5 619) (1 354) (5 390) * This item may not subsequently be reclassified to profit or loss. ** This item may subsequently be reclassified to profit or loss. 94 COMPANY SOUTH AFRICAN AIRWAYS GROUP INTEGRATED ANNUAL REPORT FOR THE YEAR ENDED 2016 ANNUAL FINANCIAL STATEMENTS Group and Company statement of financial position as at 31 March 2016 GROUP COMPANY Notes 2016 2015 2016 2015 17 18 19 20 22 23 31 4 552 90 - 281 - 2 056 38 4 623 86 - 380 - 2 184 38 3 224 68 1 032 - 1 476 2 056 38 3 269 70 1 122 - 1 440 2 184 38 7 017 7 311 7 894 8 123 727 84 6 422 16 23 2 409 725 171 4 842 - 18 1 266 101 84 6 186 - 23 2 253 121 171 4 551 - 18 1 212 9 681 7 022 8 647 6 073 63 63 63 63 16 761 14 396 16 604 14 259 12 892 779 (25 935) 12 892 917 (24 352) 13 126 355 (25 691) 13 126 493 (24 246) (12 264) 1 300 (10 543) 1 300 (12 210) 1 300 (10 627) 1 300 (10 964) (9 243) (10 910) (9 327) 6 510 128 2 394 633 3 684 91 2 202 715 6 500 128 2 380 633 3 669 91 2 194 715 9 665 6 692 9 641 6 669 4 - 6 953 486 63 6 248 4 212 94 346 3 6 583 332 63 4 638 3 590 1 392 4 - 6 786 477 - 6 243 4 069 294 346 - 6 291 332 - 4 634 3 415 1 899 18 060 16 947 17 873 16 917 Total liabilities 27 725 23 639 27 514 23 586 Total equity and liabilities 16 761 14 396 16 604 14 259 R MILLION Assets Non-current assets Property, aircraft and equipment Intangible assets Investments in subsidiaries Deferred tax asset Amounts receivable from subsidiaries Non-current prepayments Retirement benefit asset Current assets Inventories Derivatives Trade and other receivables Current tax receivable Investments Cash and cash equivalents Non-current assets classified as held-for-sale and assets of disposal groups 21 24 25 40 26 27 17 Total assets Equity and liabilities Equity Equity attributable to equity holders of parent Share capital Reserves Accumulated Loss Subordinated loan guaranteed by government Non-current liabilities Long-term loans Retirement benefit obligation Provisions Deferred revenue on ticket sales Current liabilities Derivatives Current tax payable Trade and other payables Provisions Other short-term liabilities Current portion of long-term loans Deferred revenue on ticket sales Bank overdraft 28 29 30 31 32 34 24 40 35 32 33 30 34 27 SOUTH AFRICAN AIRWAYS GROUP INTEGRATED ANNUAL REPORT FOR THE YEAR ENDED 2016 95 Group and Company statement of changes in equity for the year ended 31 March 2016 R MILLION Share capital Other reserves Balance at 1 April 2014 Total comprehensive income for the year Dividends paid on government subordinated loan classified as an equity instrument 12 892 - - (94) (3) - Balance at 1 April 2015 Total comprehensive income for the year Dividends paid on government subordinated loan classified as an equity instrument 12 892 - - (97) (1) - - - 12 892 (98) Balance at 1 April 2014 Total comprehensive income for the year Dividends paid on government subordinated loan classified as an equity instrument 13 126 - - (94) (3) - Balance at 1 April 2015 13 126 (97) Total comprehensive income for the year Dividends paid on government subordinated loan classified as an equity instrument - - (1) - Voluntary severance packages paid - - 13 126 (98) 28 16 GROUP Voluntary severance packages paid Balance at 31 March 2016 COMPANY Balance at 31 March 2016 Notes 96 SOUTH AFRICAN AIRWAYS GROUP INTEGRATED ANNUAL REPORT FOR THE YEAR ENDED 2016 ANNUAL FINANCIAL STATEMENTS Revaluation reserve Shareholder restructuring fund Total share capital and reserves Shareholder's interest Subordinated loan guaranteed by government Accumulated loss Total equity 798 23 - 193 - - 13 789 20 - (18 615) (5 639) (98) (4 826) (5 619) (98) 1 300 - - (3 526) (5 619) (98) 821 (18) - 193 - - 13 809 (19) - (24 352) (1 473) (110) (10 543) (1 492) (110) 1 300 - - (9 243) (1 492) (110) - (119) (119) - (119) - (119) 803 74 13 671 (25 935) (12 264) 1 300 (10 964) 444 (47) - 193 - - 13 669 (50) - (18 808) (5 340) (98) (5 139) (5 390) (98) 1 300 - - (3 839) (5 390) (98) 397 193 13 619 (24 246) (10 627) 1 300 (9 327) (18) - - - (19) - (1 335) (110) (1 354) (110) - - (1 354) (110) - (119) (119) - (119) - (119) 379 74 13 481 (25 691) (12 210) 1 300 (10 910) 17 29 SOUTH AFRICAN AIRWAYS GROUP INTEGRATED ANNUAL REPORT FOR THE YEAR ENDED 2016 97 Group and Company statement of cash flows For the year ended 31 March 2016 GROUP COMPANY Notes 2016 2015 2016 2015 39 (86) 26 (861) (1 868) 26 (490) 85 11 (894) (1 865) 16 (523) (40) (158) (20) 205 (173) (24) (40) (158) - 205 (173) - (1 139) (2 324) (996) (2 340) 17 (713) (4 323) (657) (4 232) 17, 18 18 44 (13) 2 781 (32) 36 (1) 2 784 (26) (682) (1 574) (622) (1 474) 6 000 (1 564) (110) 4 342 (442) (98) 6 000 (1 560) (110) 4 341 (438) (98) Net cash inflow from financing activities 4 326 3 802 4 330 3 805 Net increase/(decrease) in cash and cash equivalents 2 505 (96) 2 712 (9) (126) (64) (79) 49 (687) (66) (728) 50 2 315 (126) 1 959 (687) R MILLION Cash flows from operating activities Cash (used in)/generated from operations Interest income Finance costs Realised (losses)/gains from derivative financial instruments Currency and jet fuel option premium spend Tax paid 40 Net cash outflow from operating activities Cash flows from investing activities Additions to property, aircraft and equipment Proceeds on disposal of property, aircraft, equipment and intangible assets Additions to intangible assets Net cash outflow from investing activities Cash flows from financing activities External borrowings raised External borrowings repaid Dividends paid Cash and cash equivalents at the beginning of the year Foreign exchange effect on cash and cash equivalents Cash and cash equivalents at the end of the year 98 27 SOUTH AFRICAN AIRWAYS GROUP INTEGRATED ANNUAL REPORT FOR THE YEAR ENDED 2016 ANNUAL FINANCIAL STATEMENTS Notes to the Group and Company annual financial statements For the year ended 31 March 2016 1. BASIS OF PREPARATION AND SIGNIFICANT ACCOUNTING POLICIES Statement of compliance The Group and company annual financial statements of South African Airways SOC Limited (the Group and the company), have been prepared in accordance with International Financial Reporting Standards (IFRS) , the Companies Act No 71 of 2008 and the Public Finance Management Act No 1 of 1999 (as amended) (PFMA). National Treasury has exempted major public entities under Schedule 2 of the PFMA from preparing financial statements according to SA GAAP (Generally Accepted Accounting Practice) in terms of Treasury Regulation 28.1.6 and section 79 of the PFMA until further notice. The Group and company annual financial statements are presented in South African rand, which is the Group's reporting currency, rounded to the nearest million. The Group and company annual financial statements have been prepared on an historical cost basis, except for measurement at fair value of certain financial instruments and the revaluation of land and buildings as described further in the accounting policy notes below. The financial statements are prepared on the basis of the accounting policies applicable to a going concern. This basis presumes that the company will continue to receive the support of its Shareholder and that the realisation of assets and settlement of liabilities will occur in the ordinary course of business. Full disclosure relating to the directors' going concern assessment can be found in Note 45. These accounting policies are consistent with the previous period. The principal accounting policies adopted in the preparation of these annual financial statements are set out below: Basis of consolidation Subsidiaries Subsidiaries are all entities (including structured entities) over which the Group has control. The Group controls an entity when the Group is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect those returns through its power over the entity. Subsidiaries are fully consolidated from the date on which control is transferred to the Group. They are deconsolidated from the date that control ceases. Goodwill Goodwill represents the excess of the cost of acquisition over the net fair value of the identifiable assets, liabilities and contingent liabilities recognised at the acquisition date. Goodwill is initially recognised as an asset at cost and is subsequently measured at cost less any accumulated impairment losses. On disposal of a subsidiary, the attributable goodwill is included in the determination of the profit or loss on disposal. Foreign currency transactions For the purpose of the Group and company annual financial statements, the results and financial position of each entity are expressed in South African rand, which is the presentation currency for the Group and company annual financial statements. In preparing the annual financial statements of the individual entities, transactions in currencies other than the entity's functional currency (foreign currencies) are recorded at the ruling rates of exchange, which are taken as being the International Air Transport Association (IATA) five day average rate applicable to the transaction month. At each statement of financial position date, monetary items denominated in foreign currencies are retranslated at the rates prevailing on the statement of financial position date. Non-monetary items carried at fair value that are denominated in foreign currencies are retranslated at the rates prevailing on the date when the fair value was determined. Non-monetary items that are measured in terms of historical cost in a foreign currency are not retranslated. Exchange differences arising on the settlement of monetary items and on the retranslation of monetary items are included in profit or loss for the period. Exchange differences arising on the retranslation of non monetary items carried at fair value are included in profit or loss for the period except for differences arising on the retranslation of non-monetary items in respect of which gains and losses are recognised directly in other comprehensive income. For the purpose of presenting the Group and company annual financial statements, the assets and liabilities of the Group's foreign operations (including comparatives) are expressed in rand using exchange rates prevailing on the statement of financial position date. Income and expense items (including comparatives) are translated at the average exchange rates for the period, unless exchange rates fluctuated significantly during that period, in which case the five day average exchange rates are used. Exchange differences arising, if any, are classified as other comprehensive income and transferred to the Group's translation reserve. Such translation differences are recognised in profit or loss in the period in which the foreign operation is disposed of. Goodwill and fair value adjustments on identifiable assets and liabilities acquired arising on the acquisition of a foreign operation are treated as assets and liabilities of the foreign operation and translated at the rate of exchange prevailing at the end of each reporting period. SOUTH AFRICAN AIRWAYS GROUP INTEGRATED ANNUAL REPORT FOR THE YEAR ENDED 2016 99 Notes to the Group and Company annual financial statements (continued) For the year ended 31 March 2016 1. BASIS OF PREPARATION AND SIGNIFICANT ACCOUNTING POLICIES (continued) Revenue Revenue is measured at the fair value of the consideration received or receivable. Revenue is reduced for estimated customer returns, rebates and other similar allowances. Rendering of services Revenue from the rendering of services is recognised by reference to the stage of completion of the transaction at the end of the reporting period. The outcome of a transaction can be estimated reliably when all the following conditions are satisfied: The amount of revenue can be measured reliably; It is probable that the economic benefits associated with the transaction will flow to the entity; The stage of completion of the transaction at the end of the reporting period can be measured reliably; The costs incurred for the transaction and the costs to complete the transaction can be measured reliably, recognised by reference to the stage of completion of the transaction at the end of the reporting date. Revenue consists of passenger airline revenue, freight and mail revenue, revenue from technical services, Voyager income, commission received, the release of unutilised air tickets and fuel levies. Passenger air ticket and cargo air waybill sales, net of discounts, are initially recognised as current liabilities in the Air Traffic Liability account and only recognised as revenue when the transportation service is provided. Commission costs are recognised in the same period as the revenue to which they relate. Air tickets that remain unutilised after a 12-month period in respect of international and regional tickets or a six-month period in respect of domestic tickets are released to revenue. The estimate is based on historical statistics and data that takes into account the terms and conditions for various ticket types. Frequent flyer programme SAA operates a frequent flyer programme, SAA Voyager, which provides a variety of awards to programme members based on a mileage credit for flights on SAA and other airlines that participate in the programme. Members can also accrue and redeem miles with non-airline programme partners. Cargo users accumulate equivalent awards relating to freight transported. Consideration for the provision of Voyager awards consists of annual participation fees, service fees and the sale of miles to Voyager airline and non-airline partners, as well as a portion of the ticket price of SAA flights sold to Voyager members. The participation fees and service fees are recognised as revenue immediately when they become due and payable. The deferred revenue method has been adopted for revenue recognition relating to the sale of airline miles to airline and nonairline partners. Income arising from the sale of miles to airline and non-airline partners is accounted for as deferred revenue in the statement of financial position and only recognised as revenue when SAA fulfils its obligations by supplying free or discounted goods or services on redemption of the accrued miles. SAA accounts for award credits issued on SAA flights as a separately identifiable component of the sales transaction in which they are earned. The consideration in respect of the initial sale is allocated to award credits based on their fair value and is accounted for as a liability (deferred revenue) in the Group and company statement of financial position. The fair value is determined with reference to the value of the awards for which miles have been redeemed during the last 12 months and is not adjusted for future changes in fair value. Revenue is recognised on unredeemed miles when they expire. Technical maintenance Revenue from maintenance services rendered external to the Group on a power by the hour basis is recognised as revenue when services are rendered based on maintenance events. Revenue is deferred until the maintenance event takes place. Other maintenance services rendered on a time and material basis are recognised as revenue when services are rendered by reference to the stage of completion of the transaction. Commission received SAA provides a ticketing service to other airlines. Commission is earned on interline transactions but is only recognised as revenue when the passenger utilises the ticket. Interest income Interest earned on arrear accounts and bank/other investment balances are accrued on a time proportionate basis. 100 SOUTH AFRICAN AIRWAYS GROUP INTEGRATED ANNUAL REPORT FOR THE YEAR ENDED 2016 ANNUAL FINANCIAL STATEMENTS Maintenance costs Owned aircraft Major overhaul expenditure, including replacement spares and labour costs, is capitalised and amortised over the expected life between major overhauls. All other replacement spares and other expenditure relating to maintenance of owned fleet assets is charged to profit or loss on consumption or as incurred. Leased aircraft Provision is made for aircraft maintenance expenditure which the Group incurs in connection with major airframe and engine overhauls on operating leased aircraft, where the terms of the lease imposes obligations on the lessee to have these overhauls carried out. Provision for expenditure to meet the contractual return conditions is also included. The actual expenditure on the overhauls is charged against the provision when incurred. Any residual balance is transferred to profit or loss. All other replacement spares and other expenditure relating to maintenance of leased fleet assets is charged to profit or loss on consumption or as incurred. Power by the hour Expenditure for engine overhaul costs covered by power by the hour (fixed rate charged per hour) maintenance agreements is charged to profit or loss over the life of the contract. Maintenance reserve: Group and Company as lessee Maintenance reserves are payments made to certain lessors in terms of the aircraft lease contract. The lessors are contractually obligated to reimburse the Group and company for the qualifying maintenance expenditure incurred on aircraft if the Group and company has a maintenance reserves credit. Maintenance reserves are recognised as an asset. The recoverability of the asset is assessed annually against the entity's ability to claim against future maintenance events. Where it is deemed that the entity will be unable to claim for a future maintenance event, the maintenance reserve payments are expensed accordingly. Reimbursement amounts are only recognised as assets in respect of maintenance costs to be reimbursed if the work has been performed and it is probable that the amounts claimed are recoverable in terms of the aircraft lease contract and based on the available balance in the maintenance reserve account. The reimbursement amounts claimed from lessors in respect of qualifying maintenance are transferred to receivables until actually received. Maintenance reserve: Company as lessor Where the company leases aircraft to a subsidiary company, appropriate maintenance payments are included in the lease agreements. The maintenance amounts received by the company are recognised as revenue as and when they become due from the lessee. The provision for maintenance claim liability, limited to the maintenance reserves credits, is raised by the company on receipt of a valid claim for reimbursement in respect of qualifying maintenance costs by the lessee. Taxation Income tax expense represents the sum of the current tax and deferred tax. Current tax The current tax is based on taxable profit for the year. Taxable profit differs from profit as reported in the Group and company statement of profit or loss and other comprehensive income because of items of income or expense that are taxable or deductible in other years and items that are never taxable or deductible. The Group's liability for current tax is calculated using tax rates that have been enacted or substantively enacted by the end of the reporting period. Deferred tax Deferred tax is recognised on temporary differences between the carrying amounts of assets and liabilities in the Group and company financial statements and the corresponding tax bases used in the computation of taxable profit. Deferred tax liabilities are generally recognised for all taxable temporary differences. Deferred tax assets are generally recognised for all deductible temporary differences to the extent that it is probable that taxable profits will be available against which those deductible temporary differences can be utilised. Such deferred tax assets and liabilities are not recognised if the temporary difference arises on the initial recognition of goodwill or from the initial recognition (other than in a business combination) of other assets and liabilities in a transaction that affects neither the taxable profit nor the accounting profit. SOUTH AFRICAN AIRWAYS GROUP INTEGRATED ANNUAL REPORT FOR THE YEAR ENDED 2016 101 Notes to the Group and Company annual financial statements (continued) For the year ended 31 March 2016 1. BASIS OF PREPARATION AND SIGNIFICANT ACCOUNTING POLICIES (continued) Taxation (continued) Deferred tax (continued) Deferred tax liabilities are recognised for taxable temporary differences associated with investments in subsidiaries, except where the Group is able to control the reversal of the temporary difference and it is probable that the temporary difference will not reverse in the foreseeable future. Deferred tax assets arising from deductible temporary differences associated with such investments are only recognised to the extent that it is probable that there will be sufficient taxable profits against which to utilise the benefits of the temporary differences and they are expected to reverse in the foreseeable future. The carrying amount of deferred tax assets is reviewed at the end of each reporting period and reduced to the extent that it is no longer probable that sufficient taxable profits will be available to allow all or part of the asset to be recovered. Deferred tax assets and liabilities are measured at the tax rates that are expected to apply in the period in which the liability is settled or the asset realised, based on tax rates (and tax laws) that have been enacted or substantively enacted by the end of the reporting period. The measurement of deferred tax liabilities and assets reflects the tax consequences that would follow from the manner in which the Group expects, at the end of the reporting period, to recover or settle the carrying amount of its assets and liabilities. Current and deferred tax for the year Current and deferred tax are recognised in profit or loss, except when they relate to items that are recognised in other comprehensive income, in which case, the current and deferred tax are also recognised in other comprehensive income. Where current tax or deferred tax arises from the initial accounting for a business combination, the tax effect is included in the accounting for the business combination. Property, aircraft and equipment Owned assets Land and buildings Land and buildings are shown at fair value based on valuations performed by external independent valuers, less subsequent accumulated depreciation and accumulated impairment losses for buildings. 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 and accumulated impairment losses at the date of revaluation is eliminated against the gross carrying amount of the asset and the net amount is restated to the revalued amount of the asset. Aircraft Aircraft are stated at cost less accumulated depreciation and any recognised impairment losses. Cost includes buyer furnished equipment (BFE) costs and is net of manufacturer's discount/credits, with subsequent additions to or renewal of exchangeable units also stated at cost. Cost includes any fair value gains or losses resulting from hedging instruments used to hedge the acquisition of the underlying asset, which qualify for hedge accounting. Where there are deferred payment terms, the cost is the cash price equivalent. Other property, machinery and equipment All other property, machinery and equipment, including unit leading devices, are stated at cost less accumulated depreciation and any recognised impairment losses. Equipment includes major spare parts and standby equipment to the extent that SAA is expected to use them in more than one accounting period. Depreciation Depreciation is not provided on assets in the course of construction or on land. All other property and equipment are depreciated by recording a charge to profit or loss, computed on a straight-line basis so as to write off the cost of the assets less the anticipated residual value over their estimated useful lives. When parts of an item of property, aircraft and equipment have different useful lives, those components are identified and the useful lives and residual values are estimated for each component. Where the useful lives for the identified components are similar, those are aggregated and depreciated as one component by applying the useful life relevant to that significant component. The residual value, depreciation method and the useful life of each asset or component thereof is reviewed at least at each financial year end and any difference is treated as a change in accounting estimate in accordance with IAS 8. 102 SOUTH AFRICAN AIRWAYS GROUP INTEGRATED ANNUAL REPORT FOR THE YEAR ENDED 2016 ANNUAL FINANCIAL STATEMENTS The following annual rates are applicable: Asset class Aircraft and simulators Buildings and structures Furniture Office equipment Computer equipment Light motor vehicles General purpose vehicles Containers Machinery Cabin loaders Leased assets Useful lives 5 to 20 years 10 to 50 years 10 years 5 to 10 years 3 to 5 years 5 years 10 years 5 years 15 to 20 years 10 to 20 years Shorter period of lease or useful life. Residual values The aircraft and its components have useful lives ranging from five to twenty years, with residual values of 20 percent on structures and engines. Residual values of all asset classes are reviewed annually. Capital work in progress Capital work in progress relates to buyer furnished equipment (BFE) and pre-delivery payments (PDPs) relating to aircraft still being constructed. These amounts are released from capital work in progress and recognised as part of the asset when the construction is complete. For further details on PDPs refer \"Pre-delivery payments and other aircraft deposits\". Exchangeable units Exchangeable units are high value components that are classified as equipment and are depreciated accordingly. The cost of repairing such units is charged to profit or loss as and when incurred. Disposal of assets The gain or loss arising from the disposal or retirement of an asset is determined as the difference between the sales proceeds and the carrying amount of the asset and is recognised in profit or loss when the risks and rewards related to the assets are transferred to the buyer. Leasehold improvements Land and buildings Improvements to leased premises are recognised as an asset and depreciated over the period of the lease term, or the useful life of the improvements, whichever is shorter. Aircraft In cases where the aircraft held under operating leases are fitted with BFE at the cost of the company, the BFE acquired is recognised as an asset (leasehold improvements) and depreciated over its useful life or over the period of the lease term, whichever is shorter. Accounting for leases Leases are classified as finance leases whenever the terms of the lease transfer substantially all the risks and rewards of ownership to the lessee. All other leases are classified as operating leases. Group as lessee Assets held under finance leases are initially recognised as assets of the Group at their fair value at the inception of the lease or, if lower, at the present value of the minimum lease payments. The corresponding liability to the lessor is included in the Group and company statement of financial position as a finance lease obligation. Lease payments are apportioned between finance expenses and reduction of the lease obligation so as to achieve a constant rate of interest on the remaining balance of the liability. Finance expenses are recognised immediately in profit or loss. Contingent rentals are recognised as expenses in the periods in which they are incurred. SOUTH AFRICAN AIRWAYS GROUP INTEGRATED ANNUAL REPORT FOR THE YEAR ENDED 2016 103 Notes to the Group and Company annual financial statements (continued) For the year ended 31 March 2016 1. BASIS OF PREPARATION AND SIGNIFICANT ACCOUNTING POLICIES (continued) Leasehold improvements (continued) Group as lessee (continued) Operating lease payments are recognised as an expense on a straight-line basis over the lease term, except where another systematic basis is more representative of the time pattern in which economic benefits from the leased asset are consumed. Contingent rentals arising under operating leases are recognised as an expense in the period in which they are incurred. In the event that lease incentives are received to enter into operating leases, such incentives are recognised as a liability. The aggregate benefit of incentives is recognised as a reduction of rental expense on a straight-line basis, except where another systematic basis is more representative of the time pattern in which economic benefits from the leased assets are consumed. Manufacturers' credits that represent a portion of manufacturers' cash incentives which have not been taken into account in determining the lease rentals payable on operating leased aircraft are initially recognised as liabilities and are amortised on a straight-line basis over the lease term to reduce the net rental expense payable. Initial rentals represent amounts paid to the lessor in advance. These are recognised as prepaid lease payments at the commencement of the lease and are amortised on a straight-line basis over the lease term. Group as lessor Amounts due from lessees under finance leases are recognised as receivables at the amount of the company's net investment in the leases. Finance lease income is allocated to accounting periods so as to reflect a constant periodic rate of return on the company's net investment outstanding in respect of the leases. Rental income from operating leases is recognised on a straight-line basis over the term of the relevant lease. Initial direct costs incurred in negotiating and arranging an operating lease are added to the carrying amount of the leased asset and recognised on a straight-line basis over the lease term. Non-current assets held-for-sale Non-current assets and disposal groups are classified as held-for-sale if their carrying amount will be recovered principally through a sale transaction rather than through continuing use. This condition is regarded as met only when the sale is highly probable and the non-current asset (or disposal group) is available for immediate sale in its present condition. Management must be committed to the sale, which should be expected to qualify for recognition as a completed sale within one year from the date of classification. When the Group is committed to a sale plan involving loss of control of a subsidiary, all of the assets and liabilities of that subsidiary are classified as held-for-sale when the criteria described above are met, regardless of whether the Group will retain a non-controlling interest in its former subsidiary after the sale. Non-current assets (and disposal groups) classified as held-for-sale are measured at the lower of their previous carrying amount and fair value less cost of disposal. Intangible assets Intangible assets acquired separately Intangible assets with finite useful lives that are acquired separately are carried at cost less accumulated amortisation and accumulated impairment losses. Intangible assets with indefinite useful lives that are acquired separately are carried at cost less accumulated impairment losses. Intangible assets acquired in a business combination Intangible assets acquired in a business combination and recognised separately from goodwill are initially recognised at their fair value at the acquisition date (which is regarded as their cost). Subsequent to initial recognition, intangible assets acquired in a business combination are reported at cost less accumulated amortisation and accumulated impairment losses, on the same basis as intangible assets that are acquired separately. 104 SOUTH AFRICAN AIRWAYS GROUP INTEGRATED ANNUAL REPORT FOR THE YEAR ENDED 2016 ANNUAL FINANCIAL STATEMENTS Amortisation Amortisation is recognised on a straight-line basis over their estimated useful lives. The estimated useful life and amortisation method are reviewed at the end of each reporting period, with the effect of any changes in estimate being accounted for on a prospective basis. Intangible assets assessed to have indefinite useful lives and goodwill are not amortised but are tested for impairment at each reporting period. The intangible assets with finite useful lives are amortised from the date they are available for use applying the following rates: Intangible asset class Useful lives Application software Internet booking site 3 to 5 years 5 years Derecognition of intangible assets An intangible asset is derecognised on disposal or when no future economic benefits are expected from use or disposal. Gains or losses arising from derecognition of an intangible asset, measured as the difference between the net disposal proceeds and the carrying amount of the asset, are recognised in profit or loss when the asset is derecognised. Any subsequent expenditure on capitalised intangible assets is capitalised only when it meets the recognition criteria of an intangible asset. All other expenditure is expensed as incurred. Impairments Intangible assets Intangible assets are tested for impairment whenever there are circumstances that indicate that the carrying value may not be recoverable. Intangible assets that have not yet been brought into use or have an indefinite useful life, including goodwill, will be reviewed for impairment at least on an annual basis. Tangible assets The carrying amounts of the Group's tangible assets, which mainly consist of property, aircraft and equipment, are reviewed at each statement of financial position date to determine whether there is any indication that those assets have been impaired. If there is any indication that an asset may be impaired, its recoverable amount is estimated in order to determine the extent of the impairment loss. Where it is not possible to estimate the recoverable amount of an individual asset, the Group estimates the recoverable amount of the cash-generating unit to which the asset belongs. Calculation of recoverable amount The recoverable amount is the higher of the asset's fair value less cost of disposal and its value in use. In assessing the value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. For an asset that does not generate largely independent cash flows, the recoverable amount is determined for the cash-generating unit to which the asset belongs. If the recoverable amount of an asset or cash-generating unit is estimated to be less than its carrying amount, the carrying amount of the asset or cash-generating unit is reduced to its recoverable amount. An impairment loss is recognised as an expense immediately. Reversal of impairments Where an impairment loss subsequently reverses, the carrying amount of the asset (cash-generating unit) is increased to the revised estimate of its recoverable amount. The increased carrying amount does not exceed the carrying amount that would have been determined had no impairment loss been recognised for the asset (cash-generating unit) in prior years. A reversal of an impairment loss is recognised in profit or loss immediately. An impairment loss in respect of goodwill is not reversed in subsequent periods. SOUTH AFRICAN AIRWAYS GROUP INTEGRATED ANNUAL REPORT FOR THE YEAR ENDED 2016 105 Notes to the Group and Company annual financial statements (continued) For the year ended 31 March 2016 1. BASIS OF PREPARATION AND SIGNIFICANT ACCOUNTING POLICIES (continued) Pre-delivery payments (PDPs) and other aircraft deposits PDPs paid to the manufacturers of aircraft in terms of the contractual arrangements governing the purchase of aircraft are initially recognised as part of capital work in progress at the cost of the consideration delivered. In the event that a decision is taken that it is likely that the underlying aircraft will not be purchased at the expected delivery date, but will be leased under an operating lease, then the related PDPs will be remeasured to the present value of the consideration expected to be received from the ultimate lessor. This consideration will, if it is denominated in a foreign currency, be translated to the measurement currency by applying the exchange rate ruling at the reporting date. In calculating the value of the future consideration receivable, any benefit or loss that will result as a consequence of the Group having secured the aircraft at the original contractual price as against the fair value of the aircraft at the date of delivery to the lessor, which is taken into consideration if the future operating lease payments form part of the consideration receivable. Any loss arising on remeasurement is classified as an impairment. Once the operating lease agreement related to the aircraft has been formally concluded, the receivable amount so arising is transferred from capital work in progress to refundable deposits. Where an aircraft is delivered under short-term bridging finance, pending the finalisation of an operating lease, the related PDPs and the final instalment paid to the manufacturer are again remeasured at the present value of the expected consideration from the lessor in the same manner as outlined above. Under these circumstances the full consideration receivable is classified under refundable amounts. Financial instruments Financial assets and financial liabilities are recognised when a Group entity becomes a party to the contractual provisions of the instrument. Financial assets and financial liabilities are initially measured at fair value. Transaction costs that are directly attributable to the acquisition or issue of financial assets and financial liabilities (other than financial assets and financial liabilities at fair value through profit or loss) are added to or deducted from the fair value of the financial assets or financial liabilities, as appropriate, on initial recognition. Transaction costs directly attributable to the acquisition of financial assets or financial liabilities at fair value through profit or loss are recognised immediately in profit or loss. Financial assets Financial assets are classified into the following specified categories: financial assets \"at fair value through profit or loss\" (FVTPL), \"held-to-maturity\" investments, \"available-for-sale\" (AFS) financial assets and \"loans and receivables\". The classification depends on the nature and purpose of the financial assets and is determined at the time of initial recognition. All regular way purchases or sales of financial assets are recognised and derecognised on a trade date basis. Regular way purchases or sales are purchases or sales of financial assets that require delivery of assets within the time frame established by regulation or convention in the marketplace. Loans and receivables Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market, such as trade receivables, loans originated by the Group, fixed deposits and defeasance deposits. Subsequent to initial recognition, loans and receivables are measured at amortised cost using the effective interest rate method, less any impairment. Interest income is recognised by applying the effective interest rate method, except for trade and other receivables when the recognition of interest would be immaterial. Available-for-sale financial assets Available-for-sale financial assets are non-derivative financial assets that are designated as available-for-sale or that are not classified as at fair value through profit or loss, loans and receivables or held-to-maturity investments. This category includes listed and unlisted investments, except for investments in subsidiaries. After initial recognition, available-for-sale financial assets are measured at fair value with unrealised gains or losses being recognised directly in other comprehensive income. With disposal of financial assets, the accumulated gains and losses recognised in other comprehensive income resulting from measurement at fair value are recognised in profit or loss. If a reliable estimate of the fair value of an unquoted equity instrument cannot be made, this instrument is measured at cost less any impairment losses. Dividends received from these investments are recognised in profit or loss when the right of payment has been established. Fair value is determined as stated in Note 43.1. 106 SOUTH AFRICAN AIRWAYS GROUP INTEGRATED ANNUAL REPORT FOR THE YEAR ENDED 2016 ANNUAL FINANCIAL STATEMENTS Held-to-maturity investments Held-to-maturity investments are non-derivative financial assets with fixed or determinable payments and fixed maturity dates that the Group has the positive intent and ability to hold to maturity. Subsequent to initial recognition, held-to-maturity investments are measured at amortised cost using the effective interest rate method less any impairment. Financial assets at fair value through profit or loss Financial assets at fair value through profit or loss include financial assets held-for-trading. These mainly include derivative financial assets and commodity derivatives. A financial asset is classified as held-for-trading if it has been acquired principally for the purposes of selling in the near future, is a derivative that is not designated and effective as a hedging instrument and it is part of an identified portfolio of financial instruments that the Group manages together and has a recent actual pattern of short-term profit-taking. After initial recognition, these financial assets are stated at fair value, with any resultant gain or loss recognised in profit or loss. The net gain or loss recognised in profit or loss incorporates any dividend or interest on the financial asset. Fair value is determined as stated in Note 43.1. Derivative financial instruments The Group uses derivative financial instruments, such as foreign currency contracts, currency options, commodity derivative swaps, options and collars, to manage its risks associated with foreign currency fluctuations and underlying commodity fluctuations. The Group does not hold or issue derivative financial instruments for trading purposes. Derivative financial instruments are classified as held-for-trading financial assets or financial liabilities. The Group's derivatives normally have a maturity period of 12 months or less and are therefore presented as current assets or current liabilities. Embedded derivatives in other financial instruments or other host contracts are treated as separate derivatives when their risks and characteristics are not closely related to those of the host contracts and the host contracts are not measured at fair value with changes in fair value recognised in profit or loss. Investments Investments in subsidiaries are recognised on a trade date basis and are initially recognised at cost. After initial recognition, the company's investments in subsidiaries will continue to be held at cost and are reviewed annually for impairment. Cash and cash equivalents Cash and cash equivalents consist of cash on hand, cash in banks, short-term deposits, bank overdrafts and highly liquid investments and are initially measured at fair value and subsequently measured at amortised cost. Hedge accounting The Group does not hedge account as its hedging activities do not meet the criteria for hedge accounting as set out in IAS 39. Effective interest rate method The effective interest rate method is a method of calculating the amortised cost of a debt instrument and of allocating interest income over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash receipts (including all fees and points paid or received that form an integral part of the effective interest rate, transaction costs and other premiums or discounts) through the expected life of the debt instrument, or, where appropriate, a shorter period, to the net carrying amount on initial recognition. Income is recognised on an effective interest rate method basis for debt instruments other than those financial assets classified as at FVTPL. Impairment of financial assets Financial assets, other than those at FVTPL are assessed for indicators of impairment at each statement of financial position date. Financial assets are impaired where there is objective evidence that, because of one or more events that occurred after the initial recognition of the financial asset, the estimated future cash flows of the investment have been impacted. SOUTH AFRICAN AIRWAYS GROUP INTEGRATED ANNUAL REPORT FOR THE YEAR ENDED 2016 107 Notes to the Group and Company annual financial statements (continued) For the year ended 31 March 2016 1. BASIS OF PREPARATION AND SIGNIFICANT ACCOUNTING POLICIES (continued) Financial instruments (continued) Impairment of financial assets (continued) For categories of financial assets, such as trade receivables, impairment is assessed on an individual basis. Any assets that are assessed not to be impaired on an individual basis are subsequently assessed for impairment on a portfolio basis. The assets are grouped in a portfolio, taking into consideration similar credit risk characteristics. The objective evidence of impairment for a portfolio of receivables normally includes the Group's past experience of collecting payments, an increase in the number of delayed payments in the portfolio past the average credit period of between 60 to 90 days, depending on the defined credit risk assessment for each type of debtor. Any dispute of amount receivable from the debtor is also considered as part of impairment indicators. For more details refer to Note 25. For loans and deposits carried at amortised cost, the amount of the impairment is the difference between the asset's carrying amount and the present value of estimated future cash flows, discounted at the financial asset's original effective interest rate. The carrying amount of the financial asset is reduced by the impairment loss directly for all financial assets with the exception of trade receivables, where the carrying amount is reduced using an allowance account. When a trade receivable is considered uncollectable, it is written off against the allowance account. Subsequent recoveries of amounts previously written off are credited against the allowance account. Changes in the carrying amount of the allowance account are recognised in profit or loss. Derecognition A financial asset is derecognised when the Group loses control over the contractual rights of the asset. This occurs when the rights are realised, expire or are surrendered. A financial liability is derecognised when it is extinguished. When available-for-sale assets and assets held-for-trading are sold, they are derecognised and a corresponding receivable is recognised at the date the Group commits the assets. Loans and receivables are derecognised on the day the risks and rewards of ownership are transferred. If the Group neither transfers nor retains substantially all the risks and rewards of ownership and continues to control the transferred asset, the Group recognises its retained interest in the asset and an associated liability for amounts it may have to pay. If the Group retains substantially all the risks and rewards of ownership of a transferred financial asset, the Group continues to recognise the financial asset and also recognises collateralised borrowing for the proceeds received. On derecognition of a financial asset in its entirety, the difference between the asset's carrying amount and the sum of the consideration received and receivable and the cumulative gain or loss that had been recognised in other comprehensive income and accumulated in equity is recognised in profit or loss. On derecognition of a financial asset other than in its entirety (eg when the Group retains an option to repurchase part of a transferred asset or retains a residual interest that does not result in the retention of substantially all the risks and rewards of ownership and the Group retains control), the Group allocates the previous carrying amount of the financial asset between the part it continues to recognise under continuing involvement and the part it no longer recognises on the basis of the relative fair values of those parts on the date of the transfer. The difference between the carrying amount allocated to the part that is no longer recognised and the sum of the consideration received for the part no longer recognised and any cumulative gain or loss allocated to it that had been recognised in other comprehensive income is recognised in profit or loss. A cumulative gain or loss that had been recognised in other comprehensive income is allocated between the part that continues to be recognised and the part that is no longer recognised on the basis of the relative fair values of those parts. Financial liabilities and equity instruments Debt and equity instruments are classified either as financial liabilities or as equity in accordance with the substance of the contractual arrangement. Equity instruments An equity instrument is any contract that evidences a residual interest in the assets of an entity after deducting all of its liabilities. The Group's equity instruments primarily include a government guaranteed subordinated loan and company shares issued. Equity instruments issued by the Group are recorded at the proceeds received, net of direct issue costs. If the entity reacquires its own equity instruments, these instruments are classified as treasury shares and any consideration paid is recognised as a direct reduction from equity. The gains or losses on purchase, sale, issue or cancellation of treasury shares are recognised directly in other comprehensive income. Interest associated with liabilities classified as equity instruments, are accounted for as dividends. 108 SOUTH AFRICAN AIRWAYS GROUP INTEGRATED ANNUAL REPORT FOR THE YEAR ENDED 2016 ANNUAL FINANCIAL STATEMENTS Financial liabilities Financial liabilities primarily include trade and other payables, bank overdrafts, interest bearing borrowings from financial institutions denominated in local and foreign currency and other liabilities such as finance lease obligations. Other financial liabilities are subsequently measured at amortised cost, with the exception of finance lease obligations, which are measured in terms of IAS 17 Leases (refer to \"Accounting policy on leases\"). Financial liabilities at fair value through profit or loss are classified as held-for-trading. A financial liability is classified as heldfor-trading if it is a derivative not designated and effective as a hedging instrument. Financial liabilities held-for-trading are subsequently stated at fair value, with any gains and losses recognised in profit or loss. Fair value is determined in a manner described in Note 43.1. Interest bearing loans and borrowings All loans and borrowings are initially recognised at fair value, being the fair value of the consideration received net of issue costs associated with the borrowing. After initial recognition, interest bearing loans and borrowings are subsequently measured at amortised cost using the effective interest rate method. Amortised cost is calculated by taking into account any issue costs and any discount or premium on settlement. Derecognition of financial liabilities The Group derecognises financial liabilities when, and only when, the Group's obligations are discharged, cancelled or they expire. The difference between the carrying amount of the financial liability derecognised and the consideration paid and payable is recognised in profit or loss. Inventories Inventories are stated at the lower of cost and net realisable value. In general, the basis of determining cost is the weighted average method. Net realisable value represents the estimated selling price less all estimated costs of completion and costs to be incurred in marketing, selling and distribution. Redundant and slow moving inventories are identified on a regular basis and written down to their realisable values. Consumables are written down with regard to their age, condition and utility. Provisions Provisions are recognised when the Group has a present obligation (legal or constructive) as a result of a past event, it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate can be made of the amount of the obligation. The amount recognised as a provision will be reassessed at each statement of financial position date taking into account the latest estimates of expenditure required and the probability of the outflows. If the effect of the time value of money is material, provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money and, where appropriate, the risks specific to the liability except those that have been taken into account in the estimate of future cash flows. Where discounting is used, the increase in a provision due to the passage of time is recognised as an interest expense. A provision is used only for the expenditures for which the provision was originally recognised. Onerous contracts Present obligations arising under onerous contracts ar