Notes to the Group annual financial statements | Note 3.9

3. Financial risk management and financial instruments
3.9 Leases
 

The Group leases various offices and warehouses. Rental contracts are typically concluded for fixed periods of one to five years but may have extension options. Lease terms are negotiated on an individual basis and contain a wide range of different terms and conditions. The lease agreements do not impose any covenants, but leased assets may not be used as security for borrowing purposes.

Leases are recognised as a right-of-use asset and a corresponding liability at the date at which the leased asset is available for use by the Group. Each lease payment is allocated between the liability and finance cost. The finance cost is charged to profit or loss over the lease period so as to produce a constant periodic rate of interest on the remaining balance of the liability for each period. The right-of-use asset is depreciated over the shorter of the asset's useful life and the lease term on a straight-line basis.

Assets and liabilities arising from a lease are initially measured on a present value basis. Lease liabilities include the net present value of the following lease payments as applicable:

  • fixed payments (including in-substance fixed payments), less any lease incentives receivable;
  • variable lease payments that are based on an index or a rate;
  • amounts expected to be payable by the lessee under residual value guarantees; and
  • the exercise price of a purchase option if the lessee is reasonably certain to exercise that option; and payments of penalties for terminating the lease, if the lease term reflects the lessee exercising that option.

The lease payments are discounted using the interest rate implicit in the lease. If that rate cannot be determined, the lessee's incremental borrowing rate is used, being the rate that the lessee would have to pay to borrow the funds necessary to obtain an asset of similar value in a similar economic environment with similar terms and conditions. To determine this rate, the Group, where possible, uses recent third-party financing received, adjusted to reflect changes in circumstances and financing conditions since financing was obtained.

Right-of-use assets are measured at cost comprising the following:

  • the amount of the initial measurement of the lease liability;
  • any lease payments made at or before the commencement date less any lease incentives received;
  • any initial direct costs; and
  • restoration costs.

Payments associated with short-term leases (12 months or less) and leases of low-value assets (less than R50 000) are recognised on a straight-line basis as an expense in profit or loss.

Retail 
space 
R'000 		 Office 
space 
R'000 		 Warehouse 
space 
R'000 		 Total 
R'000 
Lease liabilities  
Year ended 31 May 2022  
Opening balance   1 000  71 438  687  73 125 
Increase in liabilities   —  4 155  2 706  6 861 
Interest expense  —  5 722  137  5 859 
Repayments   —  (36 278) (1 579) (37 857)
Lease modifications   (1 000) (106) —  (1 106)
Closing balance   —  44 931  1 951  46 882 
Included in non-current liabilities   —  9 008  490  9 498 
Included in current liabilities  —  35 923  1 461  37 384 
Year ended 31 May 2021  
Opening balance   28 623  110 552  1 948  141 123 
Increase in liabilities   —  562  —  562 
Interest expense  —  8 775  140  8 915 
Repayments   (7 724) (40 775) (1 401) (49 900)
Lease modifications   (19 899) (7 676) —  (27 575)
Closing balance   1 000  71 438  687  73 125 
Included in non-current liabilities   —  40 188  77  40 265 
Included in current liabilities  1 000  31 250  610  32 860 

Retail 
space 
R'000 		 Office 
space 
R'000 		 Warehouse 
space 
R'000 		 Total 
R'000 
Lease assets   
Year ended 31 May 2022  
Opening balance   —  58 143  603  58 746 
Additions   —  4 155  2 706  6 861 
Depreciation  —  (27 898) (1 443) (29 341)
Closing balance   —  34 400  1 866  36 266 
Year ended 31 May 2021  
Opening balance   —  86 005  1 847  87 852 
Additions   —  562  —  562 
Depreciation  —  (28 148) (1 244) (29 392)
Impairments  —  (439) —  (439)
Lease modifications   —  163  —  163 
Closing balance   —  58 143  603  58 746 

Critical accounting judgements and assumptions

The term of a lease includes periods covered by an option to extend the lease if the lessee is reasonably certain to exercise that option. The Group did not take into account renewals in the majority of leases as there is material uncertainty as to whether the option to renew will be exercised. Material uncertainty arises in cases where BLT is not locked into renewals, alternative leasing arrangements are available and there is no firm commitment or formal decision to renew.