Areas of critical judgements and estimates (continued)
5. Finance costs and income from investments
Costs
€m Income
€m
Net income /(costs)
€m Twelve months ended 30 September 2017
Dividends received – 8 8
Finance costs and income
(Bank overdrafts)/Cash and cash equivalents (87) 16 (71)
Convertible bonds (76) – (76)
Instalment sale agreements (23) – (23)
Loans (172) 9 (163)
Other* (82) 22 (60)
(440) 55 (385)
Restated fifteen months ended 30 September 2016
Dividends received – 2 2
Finance costs and income
(Bank overdrafts)/Cash and cash equivalents (40) 15 (25)
Convertible bonds (94) – (94)
Instalment sale agreements (29) – (29)
Loans (177) 22 (155)
Other* (112) 22 (90)
(452) 61 (391)
* Included in ‘Other’ is interest of €6 million (2016: €4 million) on the loan receivable from Fulcrum. Refer to note 11 and note 30.
Interest income, finance costs and other finance income and costs
Borrowing costs that are not directly attributable to the acquisition, construction or production of a qualifying asset are recognised in profit or loss using the effective interest method.
Other net finance income and costs comprise unwinding of the discount on provisions and impairment losses recognised on investments and interest on the net defined benefit obligation.
Dividend income is recognised in the statement of profit or loss on the date that the Group’s right to receive payment is established.
6. Taxation
Steinhoff N.V. is a South African tax resident.
For periods ending 30 September 2017 and 30 September 2016 the corporate taxation rate in South Africa is 28%. Capital gains is taxed at 22.4% (changed from 18.6% to 22.4% in the prior period).
Current taxation
Included within the tax charge are charges relating to:
• Normal corporate taxation;
• Capital gains taxation; and
• Dividends withholding taxation.
Current tax is the expected tax payable on the taxable income for the period, using tax rates enacted or substantively enacted at the reporting date, and any adjustment to tax payable in respect of previous periods.
The Group is subject to income taxes in numerous jurisdictions and the calculation of the Group’s tax charge and worldwide provisions for income tax necessarily involves a substantial degree of estimation and judgement. At any given time the Group typically has a number of open tax returns with various tax authorities and engages in active dialogue to resolve these. Taxation provisions relating to these open items are recognised based on the Group’s estimate of the most likely outcome, after taking into account external advice where appropriate.
Where the final tax outcome of these matters are different from the amounts that were initially recognised, such differences will impact profit or loss, current and deferred income tax assets and liabilities in the period such determination is made.
Deferred taxation
Deferred tax is recognised in respect of 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.
Deferred tax assets are recognised for tax losses carried forward only to the extent that realisation of the related tax benefit is probable, on the basis of all available evidence it is considered more likely than not, that there will be suitable taxable profits against which the reversal of the deferred tax asset can be deducted.
Temporary differences have arisen as a result of the translation of the consolidated financial statements of the Group’s subsidiaries.
A deferred tax liability has not been recognised as the liability will only crystallise in the event of disposal of the subsidiary and no such disposal was expected at the end of the reporting period.
Certain subsidiaries in the Group have undistributed earnings which if paid out as dividends, would be subject to tax in the hands of the recipient. An assessable temporary difference exists, but no deferred tax liability has been recognised as the parent entity is able to control the timing of distributions from these subsidiaries and is not expected to distribute these profits in the foreseeable future.
Significant accounting estimate and judgements Uncertain tax positions
There is uncertainty regarding the tax impact of the accounting irregularities given their nature. A comprehensive tax review of the consequences of these accounting irregularities across all the relevant jurisdictions remains in progress and has not been completed. This could result in further restatements.
Management have estimated the tax consequences associated with these accounting irregularities and where specific items that could result in an increase in taxable profit have been identified, these have been recognised. Where specific items that could result in a reduction of taxable profit have been identified these have been ignored where it is uncertain whether they will be allowed by the relevant tax authorities.
The tax position of the single entities impacted by the restatement is still uncertain in multiple jurisdictions. Due to the uncertainty associated with such tax items, there is a possibility that the final outcome may differ significantly from the current estimate.
6. Taxation
(continued)Significant accounting estimate and judgments (continued) Uncertain tax positions (continued)
The Group is currently subject to ongoing general transfer pricing investigation by tax authorities in various jurisdictions. If a tax authority in any jurisdiction in which the Group operates, reviews any of the Group's practices and determines that the transfer prices and terms that the Group has applied are inappropriate or that income of a division of the Group should be taxed in that jurisdiction, the Group may incur increased tax liability, including accrual of interest and penalties which can cause the Group's tax expense to increase.
The Group operates in numerous jurisdictions, resulting in transfer pricing being an important consideration, both at a Group and entity level. The Group is currently in the process of performing a transfer pricing review.
Due to the number of jurisdictions in which the Group operates, there may be uncertainty in respect of the place of effective management of certain individual Group entities. Although the level of risk is difficult to assess this may result in a potential future outflow of resources. The Group is currently addressing this risk in consultation with advisors.
The Group is currently being investigated by Austrian and German tax authorities which may result in a potential outflow of resources. The Group is currently addressing this risk in consultation with its advisors.
Recoverability of deferred tax assets
Deferred tax assets have been recognised for the carry forward amount of unused tax losses relating to the Group’s operations where there is compelling evidence that it is probable that sufficient taxable profits will be available in the future to utilise the tax losses carried forward, either by the specific company to which it relates or the wider Group. Management has carefully assessed the entities ability to generate future taxable profits against which the recognised tax losses can be utilised. Such assessments are based on the approved budgets and the forecasts of the entities including its ability to raise funding to maintain and support its operations.
6. Taxation
(continued)Twelve months ended 30 September 2017
€m
Restated Fifteen months ended 30 September 2016
€m 6.1 Income tax expense recognised in profit or loss
Major components of the tax expense:
Current tax Income tax
Current period 162 251
Prior period adjustments 5 9
Capital gains tax – 21
Withholding tax 8 12
175 293
Deferred taxation
Originating and reversing temporary differences – current period (365) (118)
Changes in taxation rates 54 37
Adjustments relating to prior period 1 1
(310) (80)
Total taxation (income)/expense recognised in profit or loss (135) 213
Reconciliation of rate of taxation
Loss before income tax (4 129) (24)
South African standard rate of taxation at 28% 1 156 7
Effect of different statutory taxation rates of subsidiaries in other jurisdictions1 161 197
Withholding taxes (8) (12)
Effect of non-deductible expenses relating to one-off or exceptional items (prior year: restatements)2 (1 137) (429)
Effect of non-deductible expenses and tax exempt income 113 137
Utilisation of previously unrecognised tax losses and temporary differences3 54 56
Unrecognised tax losses4 (202) (152)
Effect of profit of equity accounted companies 30 24
Prior period adjustments (6) (10)
Change in rate adjustments (54) (37)
Previously unrecognised tax losses raised5 38 –
Other reconciling items (10) 6
Total taxation income/(expense) recognised in profit or loss 135 (213)
1 The foreign tax rate differential relates predominantly to Mattress Firm and the corporate tax rate in the USA of 35%.
2 Refer to note 4.2.1. This amount represents the tax effect of the one-off or exceptional items.
3 Previously unrecognised tax losses were utilised by the Conforama group in Switzerland, Spain and Italy.
4 The unrecognised tax losses relate predominantly to Mattress Firm, the Conforama group and Ainsley Holdings.
5 Pekor Austalia recognised tax losses which were previously not recognised.
6.2 Tax provisions
Tax provisions are included in the taxation payable balance in note 17. Taxation receivable balances are disclosed in note 12.
6. Taxation
(continued)6.3 Deferred tax assets and liabilities
Assets Liabilities Net
30 September 2017
€m
Restated 30 September 2016€m
30 September 2017€m
Restated 30 September 2016€m
30 September 2017€m
Restated 30 September 2016€m
Recognised deferred tax assets and liabilities attributable to the following categories:
Intangible assets and goodwill (23) (6) (547) (920) (570) (926)
Property, plant and equipment 23 19 (162) (231) (139) (212)
Provisions 126 104 82 17 208 121
Equity component of convertible
bonds – – (32) (38) (32) (38)
Share-based payments – 19 – – – 19
Taxation losses 49 122 2 1 51 123
Other 46 29 (95) (24) (49) 5
Balance at end of the period 221 287 (752) (1 195) (531) (908)
Notes
30 September 2017€m
Restated 30 September 2016€m
Reconciliation of movement in deferred tax (liability)/asset
Balance at beginning of period (908) (512)
Deferred tax of businesses acquired 24.1 &
24.5 (19) (479)
Deferred tax of subsidiaries derecognised 1.2.3b 75 –
Amounts charged directly to other comprehensive income:
Cash flow hedging reserve and fair value reserves 8 11
Exchange differences on transaction of foreign operations (7) 22
Amounts charged directly to equity:
Convertible bond, actuarial gains reserve and share-based payment reserves (12) (24)
Current period charge 310 80
Exchange difference on translation of foreign operations 22 (6)
Balance at end of the period (531) (908)
Analysis of deferred tax balances
The impact of the impairment of the Mattress Firm goodwill and brands resulted in the release of a deferred tax liability of
€359 million during the period. Refer to note 8 for details regarding these impairments.
During the period the Group derecognised POCO as a subsidiary (refer note 1.2.3b and note 10). This resulted in the derecognition of a deferred tax liability relating to POCO's brand of €72 million.
The decrease in the recognised tax losses during the period relates mainly to the utilisation of tax losses by Pepkor.
The deferred tax acquired in the previous period relates primarily to the deferred tax liabilities raised on brands, recognised with the aquisition of Mattress Firm and Poundland. Refer to note 24.
6. Taxation
(continued)30 September 2017€m
30 September 2016€m
Unrecognised deferred taxation assets
Deferred taxation assets have not been recognised in respect of the following items:
Unrecognised taxation losses 1 876 1 001
Deferred taxation assets have not been recognised in respect of these items because it is not yet certain that future taxable profits will be available against which the group can realise the benefits therefrom.
Taxation losses
Estimated recognised taxation losses available for offset against future taxable income 182 565 As stated above, there is uncertainty regarding the tax impact of the accounting irregularities and transfer pricing
investigations. The comprehensive tax review of the consequences of the accounting irregularities and the investigation by tax authorities on transfer pricing could result in a restatement of unrecognised taxation losses.
6.4 Expiry profile of taxation losses
Majority of the unrecognised tax losses relate to operations in Europe where certain jurisdictions have expiry dates regarding utilisation. The remaining balance relates to other jurisdictions and do not have expiry dates regarding utilisation.