Note 2: Basis of preparation and accounting policies

for the six months ended 30 September 2015

Basis of preparation

The condensed consolidated interim financial statements have been prepared in accordance with IAS 34 Interim Financial Reporting and in compliance with the Listings Requirements of the JSE Limited, the South African Companies Act, 2008, the SAICA Financial Reporting Guide as issued by the Accounting Practices Committee and the Financial Reporting Standards Council.

The condensed consolidated interim financial statements are presented in South African Rand, which is the Group's functional currency. All financial information presented in Rand has been rounded off to the nearest million.

The condensed consolidated interim financial statements are prepared on the historical cost basis, with the exception of certain financial instruments initially (and sometimes subsequently) measured at fair value. The results of the interim period are not necessarily indicative of the results for the entire year and these reviewed financial statements should be read in conjunction with the audited financial statements for the year ended 31 March 2015.

The preparation of the condensed consolidated interim financial statements requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting periods. Although these estimates are based on management’s best knowledge of current events and actions that the group may undertake in the future, actual results may differ from those estimates.

Significant accounting judgements, estimates and assumptions

In preparing these condensed consolidated interim financial statements, the significant judgements made by management in applying the Group's accounting policies and the key sources of estimation uncertainty were consistent with those applied to the consolidated financial statements for the year ended 31 March 2015.

Significant accounting policies

The condensed consolidated interim financial statements have been prepared in accordance with the accounting policies adopted in the Group's last annual financial statements for the year ended 31 March 2015 with the exception of the accounting treatment of Telkom Retirement Fund.

The accounting policies have been applied consistently throughout the Group for the purposes of preparation of these condensed consolidated interim financial statements.

The Group has not early adopted any other standard, interpretation or amendment that has been issued but is not yet effective.

Reassessment of the Telkom Retirement Fund Defined Benefit (DB) Members

During the current reporting period, the Group reassessed the accounting treatment of the Telkom Retirement Fund (TRF). The rules of the fund provide employees who were appointed prior to 1 September 2009 retiring from the defined contribution with an option to receive a pension from the fund.

Should a retiree elect to receive the pension, the employer is thereafter exposed to longevity and other actuarial risk. However, the pension is calculated based on the defined contribution plan assets available at the point of retirement. The classification rules within IAS 19 require that, where the employer is exposed to any actuarial risk, the entire fund be classified as a defined benefit plan (DB). This change in classification impacted the statement of financial position, the statement of profit or loss and other comprehensive income. At 30 September 2015 the obligation balance is R1,652 billion.

It should, however be noted that there is a difference between the IAS 19 valuation and the Fund actuaries’ valuation which reflects that the assets of the TRF are sufficient to cover the TRF's liabilities towards active members and pensioners. The TRF is in a sound financial condition as at the valuation date in terms of section 16 of the Pension Funds Act, as amended. As at the latest statutory valuation date there was a surplus of R536 million in the pensioners account per the statutory valuation(after taking into account the solvency reserve of R2.3 billion).

At 1 April 2014, non current employee provisions increased by R86 million and retained earnings decreased with the same amount. Refer to tables 2.1 and 2.2 for the impact of the reassessment for the comparatives.

2.1 Adjustments to the consolidated statement of profit or loss and other comprehensive income
for the year ended 31 March 2015
for the period ended 30 September 2014
  Reclassification of Trudon Group as not held for sale* Reassessment of Telkom Retirement Fund** Restated Reassessment of Telkom Retirement Fund** Restated
Rm Rm Rm
Continuing operations          
Operating revenue 1 085 - 32 760 - 15 911
Payments to other operators - - 2 930 - 1 446
Cost of sales 462 - 3 249 - 1 166
Net operating revenue 623 - 26 581 - 13 299
Other income 32 - 731 - 272
Operating expenses 174 54 23 976 24 12 006
Employee expenses 54 54 9 462 24 4 986
Selling, general and administrative expenses 43 - 4 755 - 2 431
Service fees 7 - 3 219 - 1 596
Operating leases 43 - 1 035 - 504
Depreciation, amortisation, impairment, write-offs and losses 27 - 5 505 - 2 489
Operating profit 481 (54) 3 336 (24) 1 565
Investment income 10 - 293 - 127
Finance charges and fair value movements 2 - 473 - 227
Interest 2 - 562 - 286
Foreign exchange gains and fair value movements - - (89) - (59)
Profit before taxation 489 (54) 3 156 (24) 1 465
Taxation 122 (6) (52) 54 387
Profit from continuing operations 367 (48) 3 208 (78) 1 078
Profit from discontinuing operations (367) - - - -
Profit for the period - (48) 3 208 (78) 1 078
Other comprehensive income          
Items that will not be reclassified to profit or loss          
Defined benefit plan actuarial losses - (684) (1 628) (1 059) (2 365)
Defined benefit plan asset ceiling limitation - (454) (6) (1 011) 15
Income tax relating to components of other comprehensive income - (6) 133 54 132
Other comprehensive loss for the period, net of taxation - (1 144) (1 501) (2 016) (2 218)
Total comprehensive income for the period - (1 192) 1 707 (2 094) (1 140)
*Refer to note 9.
**Refer to significant accounting policies.

2.2 Adjustments to the consolidated statement of financial position
at 31 March 2015
at 30 September 2014
  Reclassification of Trudon Group as not held for sale* Reassessment of Telkom Retirement Fund** Restated Reassessment of Telkom Retirement Fund** Restated
  Rm   Rm   Rm
Assets          
Non-current assets 301 - 30 855   30 466
Property, plant and equipment 92 - 24 479 - 24 493
Intangible assets 189 - 2 982 - 2 779
Other investments - - 2 231 - 2 891
Employee benefits - - 452 - 38
Other financial assets - - 28 - 56
Finance lease receivables - - 413 - 193
Deferred taxation 20 - 270 - 16
Current assets 616 - 11 127   11 011
Inventories 86 - 638 - 738
Income tax receivable 10 - 11 - 27
Current portion of finance lease receivables - - 200 - 111
Trade and other receivables 493 - 5 388 - 5 589
Current portion of other financial assets - - 1 247 - 634
Cash and cash equivalents 27 - 3 643 - 3 912
Assets of disposal group classified as held for sale (917) - - - -
Total assets - - 41 982 - 41 477
Equity and liabilities          
Equity attributable to owners of the parent - (1 192) 24 398 (2 094) 21 540
Share capital - - 5 208 - 5 208
Treasury shares     - - (771)
Share-based compensation reserve - - 126 - 53
Non-distributable reserves - - 1 507 - 2 711
Retained earnings - (1 192) 17 557 (2 094) 14 339
Non-controlling interest     363 - 354
Total equity - (1 192) 24 761 (2 094) 21 894
Non-current liabilities 39 1 192 5 738 2 094 8 242
Interest-bearing debt - - 3 244 - 3 398
Employee related provisions 15 1 192 1 730 2 094 3 872
Non-employee related provisions 22 - 61 - 53
Deferred revenue - - 687 - 899
Deferred taxation 2 - 16 - 20
Current liabilities 80 - 11 483   11 341
Trade and other payables 64 - 5 635 - 5 114
Shareholders for dividend - - 19 - 20
Current portion of interest-bearing debt - - 1 612 - 1 612
Current portion of employee related provisions 15 - 1 882 - 1 652
Current portion of non-employee related provisions 1 - 303 - 434
Current portion of deferred revenue - - 1 502 - 1 511
Income tax payable - - 344 - 861
Current portion of other financial liabilities - - 185 - 131
Credit facilities utilised - - 1 - 6
Liabilities of disposal group classified as held for sale (119) - - - -
Total liabilities - 1 192 17 221 2 094 19 583
Total equity and liabilities - - 41 982 - 41 477
*Refer to note 9.
**Refer to significant accounting policies.

2.3 Adjustments to the statement of cash flows

for the year ended 31 March 2015
  Reclassification of Trudon Group as not held for sale* Restated
  Rm Rm
Cash flows from operating activities 55 6 281
Cash receipts from customers 1 100 32 952
Cash paid to suppliers and employees (943) (26 153)
Cash generated from operations 157 6 799
Interest received 32 502
Finance charges paid (2) (493)
Taxation paid (132) (406)
Cash generated from operations before dividend paid 55 6 402
Dividend paid - (121)
Cash flows from investing activities (55) (5 168)
Proceeds on disposal of property, plant and equipment and intangible assets - 253
Proceeds on disposal of investment - 750
Additions for capital expansion (55) (5 070)
Increase in repurchase agreements - (1 101)
Cash flows from financing activities - 685
Loans raised - 1000
Loans repaid - (310)
Finance lease capital repaid - (170)
Settlement of derivatives - 165
Net increase in cash and cash equivalents - 1 798
Net cash and cash equivalents at beginning of period - 1 841
Trudon cash and cash equivalents classified as held for sale 27 -
Effect of foreign exchange rate differences on cash and cash equivalents - 3
Net cash and cash equivalents at end of period 27 3 642
*Refer to note 9.