3. Critical accounting estimates, assumptions and judgement
The estimates and judgements used in the preparation of these financial statements are continuously evaluated by the Group, and are based on historical experience and various other assumptions and factors (including expectations of future events), that the Group believes to be reasonable under the existing circumstances. These estimates and judgements are based on the facts and events, that existed as at the reporting date, or that occurred after that date but provide additional evidence about conditions existing as at the reporting date.
Although the Group regularly assesses these estimates, actual results could differ materially from these estimates (even if the assumptions underlying such estimates were reasonable when made), if these results differ from historical experience or other assumptions do not turn out to be substantially accurate. The changes in estimates are recognised in the financial statements in the year in which they become known.
3.1 Key sources of estimation uncertainty
The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying values of assets and liabilities within the next financial year are discussed below:
Uncertain tax treatments
Uncertainties exist with respect to the interpretation of complex tax regulations. Given the wide range of international business relationships and the long-term nature and complexity of existing contractual agreements, differences arising between the actual results and the assumptions made, or future changes to such assumptions, could necessitate future adjustments to tax income and expense already recorded. The Group establishes provisions/contingencies, based on reasonable estimates, for potential audits by the tax authorities in the respective countries in which it operates as well as where the probability of tax authorities accepting the Group’s treatment is in doubt. The amount of direct tax provisions carried as part of current tax liabilities amounted to $14m and contingencies amounted to $24m (refer to note 28). Reflecting the complexities of tax regulations and international business relationships, as described above, the Group receives from time to time, demands from tax authorities. The Group assesses these demands and estimates whether a provision should be recorded or a contingent liability should be disclosed or whether the matter is considered to be remote. These estimates are based on various factors, such as experience from previous tax audits and the Group’s interpretation of tax regulations by the taxable entity and the relevant tax authority. For those demands where the Group believes that currently there is a remote chance of the demand being successful against the Group, no provision is recorded nor a contingent liability is disclosed. However, these estimates which are uncertain may be subject to a material change within the next financial year which could lead to the recognition of additional material provisions or the disclosure of additional material contingent liabilities.
Contingent liabilities and provisions
The Group is involved in various legal, indirect tax and regulatory matters, the outcome of which may not be favourable to the Group. Management, in consultation with legal, indirect tax and other advisers where required, assess the likelihood that a pending claim will succeed. The Group has applied its judgement and has recognised liabilities based on whether additional amounts will be payable and has included contingent liabilities where economic outflows are considered possible but not probable. The Group carried provisions amounting to $45m in respect of indirect tax, legal and regulatory matters and discloses contingencies amounting to $124m. In recording or disclosing these amounts, the Group has estimated which claims are probable and consequently a provision has been recorded and which are possible for which a contingent liability is disclosed or whether the matter is considered to be remote. However, given the nature of these matters and size of such claims there may be a risk of a material change within the next financial year including the recognition of additional provisions, should the Group not be successful in defending the cases where contingent liabilities are disclosed. For further details, refer to notes 24 and 28 respectively.
3.2 Critical judgements in applying the Group’s accounting policies
In applying the accounting policies, other than those judgements which includes estimation uncertainty and are disclosed in note 3.1 above, the Group has made the following critical judgement:
Devaluation of foreign currency treated as exceptional item
As described in note 5(c) and note 5(f), during the year, the Group incurred significant foreign exchange losses/(gains) due to the devaluation of the Nigerian naira and appreciation of Tanzanian shilling against the US dollar. While applying the accounting policy around the presentation of such impacts as exceptional, the Group has made a judgement to present the foreign exchange losses as a result of the devaluations as exceptional, in accordance with the Group’s accounting policy as described in note 2.23. The critical judgement is therefore whether the foreign exchange losses meet the Group’s policy as exceptional and whether the foreign exchange losses are of a size, nature and incidence that their exclusion is considered necessary to explain the underlying performance of the Group and to improve comparability between periods.
A breakdown of the exceptional items included in the profit and loss for the year is disclosed in note 11.
Hyperinflation
The Group exercises significant judgement in determining the onset of hyperinflation in countries in which it operates and whether the functional currency of its subsidiaries, associates or joint ventures is the currency of a hyperinflationary economy.
In making this assessment, various characteristics of the economic environment of each country are taken into account. These characteristics include, but are not limited to, whether:
- The general population prefers to keep its wealth in nonmonetary assets or in a relatively stable foreign currency.
- Prices are quoted in a relatively stable foreign currency.
- Sales or purchase prices take expected losses of purchasing power during a short credit period into account.
- Interest rates, wages and prices are linked to a price index.
- The cumulative inflation rate over three years is approaching, or exceeds, 100%.
Following management’s assessment, the Group’s subsidiaries with functional currencies as Malawian Kwacha, have been accounted for as entities operating in hyperinflationary economies, accordingly, their results, cash flows and financial positions have been expressed in terms of the measuring units current at the reporting date. Refer to note 5(g).
Further, the group remains vigilant on the cumulative inflation rates in other economies in which it operates to evaluate whether they classify as hyperinflationary economies. Based on the available information, the Group concluded that no other economy, including Nigeria, in which the Group operates, currently classifies as hyperinflationary economy.