KAKUZI PLC ANNUAL REPORT AND CONSOLIDATED AND COMPANY FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2017 1 Kakuzi Plc Annual Report and Consolidated and Company Financial Statements For the year ended 31 December 2017 Table of Contents Company information Notice of annual general meeting Chairman’s statement Report of the Directors Statement of Directors’ responsibilities Statement on corporate governance Directors’ Remuneration Report Independent Auditor’s Report Financial statements: Consolidated and company statement of profit or loss and other comprehensive income Consolidated statement of financial position Company statement of financial position Consolidated statement of changes in equity Company statement of changes in equity Consolidated and company statement of cash flows Notes Five year record Major shareholders and distribution schedule Form of proxy (Annual General Meeting) Page No 3 4 5 – 7 8 – 9 10 11 – 13 14 15 – 18 19 20 21 22 23 24 25 – 67 68 69 70 2 Kakuzi Plc Company Information For the year ended 31 December 2017 COUNTRY OF INCORPORATION The Company is incorporated in Kenya under the Kenyan Companies Act, 2015. DIRECTORS The Directors who held office during the year and at the date of this report were:- Mr. G H Mclean* Chairman Mr. C J Flowers* Managing Director Mr. K R Shah Mr. K W Tarplee* Mr. N Nganga Mr. D M Ndonye Mr. S N Waruhiu Mr. A N Njoroge * British REGISTERED OFFICE REGISTRARS Main Office Punda Milia Road, Makuyu P O Box 24 01000 THIKA Telephone (060) 2033012 E-mail: mail@kakuzi.co.ke Custody & Registrars Services Limited Bruce House, 6th Floor Standard Street P O Box 8484 00100 NAIROBI Telephone (020) 2230242 Facsimile (020) 2211773 SUBSIDIARY COMPANIES AUDITOR Estates Services Limited Kaguru EPZ Limited (100% holding) (100% holding) Deloitte & Touche Deloitte Place Waiyaki Way, Muthangari P. O. Box 40092 00100 NAIROBI SECRETARY BANKERS John L G Maonga Maonga Ndonye Associates Jadala Place, Ngong Lane, Ngong Road P. O. Box 73248 00200 NAIROBI Telephone (020) 2149923 ORDINARY SHARES KCB Bank Kenya Limited P O Box 30081 00100 NAIROBI Commercial Bank of Africa Limited P O Box 45136 00100 NAIROBI The Company’s ordinary shares are listed on the Nairobi Securities Exchange and the London Stock Exchange. 3 Kakuzi Plc Notice of Annual General Meeting NOTICE is hereby given that the Ninetieth Annual General Meeting of the Members of the Company will be held in the Ballroom at Nairobi Serena Hotel, Nairobi on Tuesday, 15 May 2018 at 12.00 noon for the following purposes:- 1. To read the notice convening the meeting. 2. To table the proxies and confirm the presence of a quorum. 3. To approve the minutes of the Eighty Ninth Annual General Meeting held on 15 May 2017. 4. To receive, consider and adopt the financial statements for the year ended 31 December 2017 together with the reports of the Chairman, the Directors and the Independent Auditors thereon. 5. To declare a first and final dividend of Shs 7.00 per share unit (2016: Shs 6.00) for the Financial Year ended 31 December 2017. 6. To approve the Remuneration Policy of the Company as detailed in the Annual Report. 7. To approve the Remuneration Report of the Board as detailed in the Annual Report for the Financial Year ended 31 December 2017. 8. To re-elect Directors:- i) Mr Kenneth William Tarplee, a Director who is over seventy years old, retires by rotation in accordance with Article 27 of the Company’s Articles of Association and, being eligible in accordance with Article 28 of the Company's Articles of Association, offers himself for re-election. ii) Mr Nicholas Ng’ang’a, a Director who is over seventy years old, retires by rotation in accordance with Article 27 of the Company’s Articles of Association and, being eligible in accordance with Article 28 of the Company's Articles of Association, offers himself for re-election. 9. In accordance with the provisions of Section 769 of the Kenyan Companies Act, 2015: (i) The following Directors, being members of the Board Audit & Risk Committee be re-elected to continue to serve as members of the said Committee:- a) Mr Daniel M Ndonye b) Mr Stephen N Waruhiu c) Mr Andrew N Njoroge d) Mr Nicholas Nganga (ii) Mr Kenneth Tarplee be elected to serve as a member of the said committee. 10. To re-appoint Messrs Deloitte & Touche as Auditors of the Company in accordance with the provisions of Section 721 (2) of the Kenyan Companies Act, 2015 and to authorise the Directors to fix the Auditors’ remuneration for the ensuing Financial Year in accordance with the provisions of Section 724 of the Kenyan Companies Act, 2015. 11. To transact any other business of an Annual General Meeting of which due notice has been received. BY ORDER OF THE BOARD J L G MAONGA COMPANY SECRETARY 22 March 2018 Note: A member entitled to attend and vote at this meeting is entitled to appoint a proxy to attend and vote on his/her behalf and such proxy need not be a member of the Company. 4 Kakuzi Plc Chairman’s Statement For the year ended 31 December 2017 RESULTS A commendable set of results for 2017 showing a pre-tax profit of Shs 849 million against Shs 758 million of last year. The earning per share increased from Shs 28.70 in 2016 to Shs 30.19 in 2017. The increase in profit is as a result of continued market demand for avocado and macadamia throughout the year. Profitability within the tea operations continued to reflect the difficult trading conditions and significant inflationary pressure on labour and other production costs. Kakuzi continues to develop its core crop strategy in line with the Company’s long-term objectives. DIVIDEND Kakuzi’s cash flow and balance sheet are in a good position with which to develop its forthcoming strategic investments. The Company Directors have recommended a dividend of Shs 7.00 per Share compared with Shs 6.00 per Share in 2016. OVERVIEW Kakuzi’s commitment to its custodial philosophy remains a core focus. The future sustainability and improvement of its operations and water resources, as well as the well-being of its employees form the very foundation of the Company’s daily activities and not least also supporting local communities through empowering initiatives. Kakuzi’s operations continue to function and perform well in Kenya’s current business climate. Despite global political uncertainty, climate change and volatile commodity markets, Kakuzi is fully committed to developing its core agricultural strategy; the diversification of our income stream and the continued expansion of our avocado and macadamia footprints. Kakuzi’s diverse cropping portfolio and commitment to the sustainability of its environment over the long-term remain the basis of its commercial objectives. The international markets within which Kakuzi operates remain firm. However, supply and demand dynamics are unclear for 2018 making future projections uncertain. OPERATIONS The dry conditions experienced at the beginning of the year affected Kakuzi’s avocado and macadamia crops resulting in a decline in yield. However, market prices for these crops and, to a lesser extent, tea were favourable in the world markets which led to improved results overall. Avocado export production was down 11% on 2016 due to the dry conditions - a total of 1.59 million cartons were shipped. Market demand in EU countries continued at unprecedented levels with excellent prices being achieved. However, Kenya’s reputation as an origin for quality fruit has been undermined by the export of immature fruit by unscrupulous exporters. This continues to be an ongoing problem which is still to be addressed by the authorities and may eventually have a long term adverse impact on Kenya’s export potential for this product. Logistics improved this year with few delays, resulting in minimal insurance claims. Kakuzi continues to focus on producing a quality product and has extended its orchard footprint to also enhance production volumes. Macadamia production was up on 2016 levels by nearly 30% although this was lower than expected and largely attributable to the dry conditions experienced during the year. Our product performed well in the market with our national and international food safety standards (FSSC 22000) providing a solid base from which to market our product more widely. 5 Kakuzi Plc Chairman’s Statement (continued) For the year ended 31 December 2017 Market prices firmed to new record levels fuelled by continuing deficits in volume from Southern Africa as well as the impact of the drought in East Africa. Kakuzi’s forestry operations performed well with an improvement in sales of both fencing and power supply poles. Sales from our roadside shop continue to surpass expectation. On livestock, the opening of our butchery along the main Nairobi-Nyeri road has also shown encouraging results in terms of sales albeit after only a few months in operation. This initiative is expected to boost sales and promote Kakuzi’s quality beef. The herd numbers were maintained at an average head count of 4,200 throughout the year. Tea prices were up on 2016 as a result of lower national production. However, increased production costs have had an impact on the margins of green leaf sales. A decision was taken to discontinue the fresh pineapple operation in favour of planting the area to Pinkerton avocado. Sales of pineapple will eventually be phased out in 2018. GOVERNANCE Kakuzi implemented various requirements of the new Companies Act and the Capital Markets Authority Code of Corporate Governance practices including the change of the Company name and changes to the Memorandum and Articles of Association of the Company. Kakuzi continues to implement other provisions of the Act and the Code in line with laid-down procedure. CSR & SUSTAINABILITY Kakuzi’s local community initiatives have continued to yield positive results in line with its agenda for economic empowerment. Kakuzi’s avocado smallholder programme suffered a decline in exportable fruit volumes in 2017. However, the initiative continues to be an important strategic CSR programme. The intention in 2018 is to implement further resources into this enterprise, and another campaign will promote the benefits of quality, exportable fruit production. This year’s Kakuzi Avocado Farmer’s Day was attended by over 2,000 smallholders, where farmers were able to receive technical advice on avocado cultivation. Sustainability continues to form an integral part of Kakuzi’s operations. Our association with the Carbon Trust, working towards the reduction of our carbon footprint continues in earnest to include various initiatives from energy-saving technology to environmental enrichment. Water security and conservation remain a critical part of Kakuzi’s daily management activity. Rainwater harvesting and recycling schemes are ongoing, which in turn, support the many Kitchen Garden projects where healthy vegetables are grown by employees. In 2017, Kakuzi supported many local community projects which include education, water, sanitation and community road upgrades. STRATEGIC GOALS & DEVELOPMENTS Positive progress has been made towards achieving Kakuzi’s strategic goals as well as looking at value addition opportunities. The Board continues to review further developments in conjunction with the Company’s strategic objectives. Kakuzi’s development plans are in full swing with significant additional areas of avocado and macadamia being planted. We have also completed a feasibility study into additional crop production and initial trials are expected to take place in 2018. Irrigation developments are also a key part of Kakuzi’s strategy to mitigate the rising risk of adverse weather conditions. 6 Kakuzi Plc Chairman’s Statement (continued) For the year ended 31 December 2017 BOARD ANNOUNCEMENTS In March 2017, Mr Kenneth Tarplee stepped down as Chairman of the Kakuzi Board to remain a Non- Executive Director. Mr Graham McLean was appointed Chairman. STAFF As the business expands we are committed to the recruitment of Kenyan management trainees with an expansion of our robust training programmes at all levels to meet demand. Management at Makuyu continue to show strong commitment to their operations under what can be challenging circumstances and are well supported by their finance, administration and legal associates in Nairobi. Kakuzi has a strong management training programme for university graduates. LOOKING AHEAD Political volatility around the globe, particularly in the US and Europe, impact on currencies in which our commodities are traded. Changing economic trends, resulting from a stabilising global financial environment with a recovering oil price, diminishing quantitative easing and interest rate hikes have a knock-on effect on commodities’ markets and consumer purchasing behaviour. In Kenya the 2017 elections were concluded and national peace maintained. With political uncertainty now diminished and a resumption of normal economic activity, business continues apace. Development projects at Kakuzi provide management with a number of exciting tasks and challenges, not least its continued engagement to conclude further CBA negotiations with the Union. As ever, commodity prices are both unpredictable and volatile. We anticipate that our core crop markets will remain firm for the short-term but beyond that it is difficult to predict. In terms of Kakuzi’s production, it remains largely dependent on the vagaries of the weather which are becoming increasingly unstable as a result of the very real impact of climate change. On behalf of the Board, I would like to thank all staff who have continued their commitment to Kakuzi. The past year has posed a number of unique challenges such as the extended election period, sensitive negotiations with the Kenya Plantations Agricultural Workers Union and issues surrounding the drought conditions in the country – all of which have been handled with professionalism. The Board of Directors have been invaluable in their assistance, direction and support of management, enabling them to progress in a productive and proficient manner, and I have every confidence that this will continue through next year. G H MCLEAN CHAIRMAN 22 March 2018 7 Kakuzi Plc Report of the Directors For the year ended 31 December 2017 The Directors submit their report together with the audited financial statements for the year ended 31 December 2017, which disclose the state of affairs of Kakuzi Plc (the “Group and the Company”). The annual report and financial statements have been prepared in accordance with the Kenyan Companies Act, 2015. PRINCIPAL ACTIVITIES The principal activities of the company comprise: Growing, packing and selling of avocados Growing, cracking and selling of macadamia nuts The cultivation of tea Forestry development Livestock farming Growing and selling of pineapples The two subsidiary companies are dormant. BUSINESS REVIEW A review of the business of the Group is incorporated within the Chairman’s statement on pages 5 to 7. PRINCIPAL RISKS AND UNCERTAINTIES There are a number possible risks and uncertainties that could impact the Group’s operations. The Group regularly monitors the risks. The information on the Group’s financial risks is disclosed in Note 4 of the financial statements. The following risks relating to the Group’s principle operations have been identified: i) ii) iii) iv) Climate change: level of rainfall affecting crop yields and in extreme cases, crop viability. Price volatility: changes in market prices impact profitability each season. Currency fluctuation: profit volatility arising from sales denominated in foreign currency. Cost of labour: increased cost of production and lower profitability. RESULTS AND DIVIDEND The net profit for the year of Shs 591,643,000 (2016: Shs 562,425,000) has been added to retained earnings. The Directors recommend the approval of a first and final dividend of Shs 7.00 (2016: Shs 6.00) per ordinary share. The results for the year are set out on pages 19 to 67 in the attached financial statements. ANNUAL GENERAL MEETING The Ninetieth Annual General Meeting of the Company will be held in the Ballroom at Nairobi Serena Hotel, Nairobi on Tuesday, 15 May 2018 at 12.00 noon. 8 Kakuzi Plc Report of the Directors (continued) For the year ended 31 December 2017 DIRECTORS The Directors who held office during the year and at the date of this report are set out on page 3. The Directors’ interests in the share capital of the company are listed below: - At 31 December 2017 Beneficial At 31 December 2016 Beneficial Non-beneficial Ordinary shares Ordinary shares Ordinary shares Ordinary shares Non-Beneficial Mr. K W Tarplee Mr. G H Mclean Mr. C J Flowers Mr. K R Shah Mr. N Nganga Mr. D M Ndonye Mr. S N Waruhiu Mr. A N Njoroge - 100 - 200 1,000 - - - 75 - - - - - - - - 100 - 200 1,000 - - - 75 - - - - - - - Mr Kenneth William Tarplee, a Director who is over seventy years old, retires by rotation in accordance with Article 27 of the Company’s Articles of Association and, being eligible in accordance with Article 28 of the Company's Articles of Association, offers himself for re-election. Mr Nicholas Ng’ang’a, a Director who is over seventy years old, retires by rotation in accordance with Article 27 of the Company’s Articles of Association and, being eligible in accordance with Article 28 of the Company's Articles of Association, offers himself for re-election. In accordance with the provisions of Section 769 of the Companies Act, 2015, the following Directors, being members of the Board Audit & Risk Committee will be proposed to continue serving as members of the said Committee:- a) Mr Daniel M Ndonye b) Mr Stephen N Waruhiu c) Mr Andrew N Njoroge d) Mr Nicholas Nganga In addition, Mr Kenneth Tarplee will also be proposed to serve as a member of the Board Audit & Risk Committee. DISCLOSURE OF INFORMATION TO AUDITORS Each Director confirms that, so far as he is aware, there is no relevant audit information of which the Company’s auditors are unaware and that each Director has taken all the steps that he ought to have taken as a Director to make himself aware of any relevant audit information and to establish that the Company’s auditors are aware of that information. AUDITOR Deloitte & Touche, having expressed their willingness, continue in office in accordance with the provisions of section 721 of the Kenyan Companies Act, 2015. The Directors monitor the effectiveness, objectivity and independence of the auditor. The Directors also approve the annual audit engagement contract, which sets out the terms of the auditor's appointment and the related fees. BY ORDER OF THE BOARD K R SHAH DIRECTOR 22 March 2018 9 Kakuzi Plc Statement of Directors’ Responsibilities For the year ended 31 December 2017 The Kenyan Companies Act, 2015 requires the Directors to prepare financial statements for each financial year which give a true and fair view of the financial position of the Group and the Company at the end of the financial year and its financial performance for the year then ended. The Directors are responsible for ensuring that the Group and the Company keep proper accounting records that are sufficient to show and explain the transactions of the Group and the Company; disclose with reasonable accuracy at any time the financial position of the the Group and the Company; and that enables them to prepare financial statements of the Group and the Company that comply with prescribed financial reporting standards and the requirements of the Kenyan Companies Act, 2015. They are also responsible for safeguarding the assets of the company and for taking reasonable steps for the prevention and detection of fraud and other irregularities. The Directors accept responsibility for the preparation and presentation of these financial statements in accordance with International Financial Reporting Standards and in the manner required by the Kenyan Companies Act, 2015. They also accept responsibility for: i. Designing, implementing and maintaining internal control as they determine necessary to enable the preparation of financial statements that are free from material misstatements, whether due to fraud or error; ii. Selecting suitable accounting policies and then apply them consistently; and iii. Making judgements and accounting estimates that are reasonable in the circumstances In preparing the financial statements, the Directors have assessed the Group’s and the Company’s ability to continue as a going concern and disclosed, as applicable, matters relating to the use of going concern basis of preparation of the financial statements. Nothing has come to the attention of the Directors to indicate that the Group and the Company will not remain a going concern for at least the next twelve months from the date of this statement. The Directors acknowledge that the independent audit of the financial statements does not relieve them of their responsibility. Approved by the board of Directors on 22 March 2018 and signed on its behalf by: K R SHAH DIRECTOR C J FLOWERS DIRECTOR 10 Kakuzi Plc Statement on Corporate Governance For the year ended 31 December 2017 This statement describes how the Group applies the main principles of The Capital Markets Authority, Code of Corporate Governance Practices for Issuers of Securities to The Public 2015 (“the Code”). The Code succeeded the Guidelines on Corporate Governance Practices by Public Listed Companies in Kenya 2002, with which the Group was compliant with the exception of the following non-prescriptive guidelines: Rule 3.1.3 (i) The nominating committee is constituted as a committee of the entire board, and new board appointments are considered by the full board. Rule 3.1.4 (i) The remuneration of Directors is considered by the nominating committee which comprises the whole board. In implementing the Code, the Directors have taken account of the group’s size and structure and the fact that there is a controlling shareholder, Camellia Plc. The Group acknowledges and continues to consider the recommendations of the code carefully and implement as appropriate. The Board The Board currently comprises eight Directors, three of whom are independent non-executive Directors. Of the remaining Directors, two are executive and three are non-executive, including a non-executive Chairman. The names and brief details of each Director appear on the Group’s website. The Board has a Nomination & Remuneration committee and an Audit & Risk committee. Terms of reference of the Audit & Risk committee have been reviewed and are considered to be in line with the code. Under the code, the Board is advised to undertake a performance evaluation during the year by way of an internal review. The Board is responsible for managing the Group’s business and has adopted a schedule of matters reserved for its approval. The schedule is reviewed annually and covers, inter alia, the following areas: Internal controls Strategy Acquisitions and disposals Financial reporting and control Approval of expenditure above specified limits Approval of transactions and contracts above specified limits Responsibilities for corporate governance Board membership and committees Approval of changes to capital structure Debt financing A report summarising the Group’s financial and operational performance including detailed information on each of its businesses is sent to Directors every three months. Each Director is provided with sufficient information in advance of Board meetings to enable the Directors to make informed judgments on matters referred to the Board. The Board met four times in 2017. 11 Kakuzi Plc Statement on Corporate Governance (continued) For the year ended 31 December 2017 Nomination & Remuneration committee The Nomination & Remuneration committee is chaired by Mr Nicholas Nganga. Its other members are the rest of the Board members. The principal responsibilities of the Nomination & Remuneration committee are set out below: Review the balance and composition (including gender and diversity) of the Board, ensuring that they remain appropriate Be responsible for overseeing the Board’s succession planning requirements including the identification and assessment of potential Board candidates and making recommendations to the Board for its approval Keep under review the leadership needs of, and succession planning for, the Company in relation to both its executive and non-executive Directors and other senior executives. The committee met once during the year. Audit & Risk committee The Audit & Risk committee is chaired by Mr Daniel Ndonye. The other members of the committee are Mr Nicholas Nganga, Mr Stephen Waruhiu and Mr Andrew Njoroge. During 2017, the committee met on two occasions. Principal responsibilities The principal responsibilities of the Audit and Risk committee are set out below and were undertaken during the year: To review and monitor the financial statements of the Group and the audit of those statements – to monitor compliance with relevant financial reporting requirements and legislation To monitor the effectiveness and independence of the external auditor To review effectiveness of the Group’s internal control system. The committee regularly reviews the effectiveness of internal audit activities carried out by the Group’s audit function and senior management To review non-audit services provided by the external auditors. Significant issues in relation to financial statements The audit committee assesses whether suitable accounting policies have been adopted and whether management has made appropriate estimates and judgements. External auditors To assess the effectiveness of the external audit process, the external auditor is required to report to the Audit & Risk committee and confirm their independence in accordance with ethical standards and that they had maintained appropriate internal safeguards to ensure their independence and objectivity. In addition to the steps taken by the Board to safeguard auditor objectivity, the committee has reviewed the non-audit services provided by the external auditor and satisfied itself that the scale and nature of those services were such that the external auditors objectivity and independence were safeguarded. The committee confirms that the annual report and accounts, taken as a whole, are fair, balanced and understandable and provide the information necessary for shareholders to assess the Group’s performance, business model and strategy. Share capital structure The share capital of the Group is set out in note 13 of these financial statements 12 Kakuzi Plc Statement on Corporate Governance (continued) For the year ended 31 December 2017 Internal control and risk management systems The Directors acknowledge that they are responsible for maintaining a sound system of internal control. During the year, the Audit & Risk committee, on behalf of the Board, reviewed the effectiveness of the framework of the Group’s system of internal control. Accountability and delegation of authority are clearly defined with regular communication between the Board and management. The performance of each division is continually monitored centrally including a critical review of annual budgets, forecasts and monthly sales, profits and cash reports. Financial results and key business statistics and variances from approved plans are carefully monitored. However, any system of internal control can provide only reasonable, and not absolute, assurance against material mis-statement or loss. Communication with Shareholders The Group is committed to equitable treatment of its shareholders including the non-controlling and foreign shareholders. The Group ensures that all shareholders receive full and timely information about its performance. This is achieved through the distribution of the annual report and financial statements and a half yearly interim financial report as well as through compliance with the relevant continuing obligations under the Capital Markets Authority Act. The Group’s results are advertised in the press and released to the stock exchange within the prescribed period at each half-year and year end. By order of the Board K R SHAH 22 March 2018 C J FLOWERS 22 March 2018 13 Kakuzi Plc Directors’ Remuneration Report For the year ended 31 December 2017 Directors’ Remuneration Report This report is drawn up in accordance with the Kenyan Companies Act, 2015. Nomination & Remuneration Committee Details of the nomination and remuneration committee are set out on page 12. Policy on Directors Remuneration The details agreed by the Nomination & Remuneration Committee is as follows:- To seek to provide remuneration packages that will attract, retain and motivate the right people for the roles. So far as is practicable, to align the interests of the Executives with those of shareholders. Service Contracts The Managing Director and the Finance Director are the only Executive Directors of the Company. They have service contracts with fellow subsidiary companies within the Parent company, Camellia Plc Group on rolling service contract basis which are terminable at any time by a three months period of notice. Their remuneration is dealt with within the service contracts of those fellow subsidiary companies. Following the initial appointments, non-executive Directors may seek re-election by shareholders on a rotational basis in accordance with the Company’s Articles of Association at Annual General Meetings. Non- executive Directors do not have service agreements. Directors’ Remuneration Directors’ fees are approved by shareholders at the Annual General Meetings and are payable after the occurrence of the Annual General Meetings. The Directors do not receive any performance based remuneration. No pension contributions are payable on their fees. The following section has been audited: Executive Mr C J Flowers Mr K R Shah Non-Executive Mr G H Mclean Mr K W Tarplee Mr N Nganga Mr D M Ndonye Mr S N Waruhiu Mr A N Njoroge By order of the Board K R SHAH 22 March 2018 2017 2016 2017 2016 2017 2016 Directors’ Fees Directors’ Fees Shs’000 Shs’000 Benefits in kind Benefits in kind Shs’000 Shs’000 Total Shs’000 Total Shs’000 - - - - 600 600 600 600 600 600 3,600 300 600 600 600 600 300 3,000 - - - 93 96 96 96 96 477 - - - 69 73 113 73 - 328 - - - - 600 693 696 696 696 696 4,077 300 669 673 713 673 300 3,328 C J FLOWERS 22 March 2018 14 Deloitte● Deloitte & Touche Certified Public Accountants (Kenya) Deloitte Place Waiyaki Way, Muthangari P.O. Box 40092 - GPO 00100 Nairobi Kenya Tel: +254 (0) 20 423 0000 Cell: +254 (0) 719 039 000 Dropping Zone No.92 Email: admin@deloitte.co.ke www.deloitte.com Independent auditor’s report To the Members of Kakuzi Plc Report on the audit of the consolidated and separate financial statements Opinion We have audited the accompanying separate financial statements of Kakuzi Plc (the “Company”) and the consolidated financial statements of the Company and its subsidiaries (together, “the Group”) set out on pages 19 to 67, which each comprise the consolidated and company statements of financial position at 31 December 2017 and the consolidated and company statements of profit or loss and other comprehensive income, consolidated and company statements statement of changes in equity and consolidated and company statement of cash flows for the year then ended, and notes, including a summary of significant accounting policies. In our opinion, the consolidated and company financial statements give a true and fair view of the financial position of the Group and of the Company at 31 December 2017 and of its consolidated and company financial performance and consolidated and company cash flows for the year then ended in accordance with International Financial Reporting Standards and the requirements of the Kenyan Companies Act, 2015. Basis for Opinion We conducted our audit in accordance with International Standards on Auditing ("ISAs"). Our responsibilities under those standards are further described in the Auditor’s Responsibilities for the Audit of the Financial Statements section of our report. We are independent of the Group in accordance with the International Ethics Standards Board for Accountants’ Code of Ethics for Professional Accountants (IESBA Code), together with other ethical requirements that are relevant to our audit of the financial statements in Kenya, and we have fulfilled our other ethical responsibilities in accordance with these requirements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Other matters The consolidated and company financial statements of Kakuzi Plc for the year ended 31 December 2016 were audited by PricewaterhouseCoopers who expressed an unmodified opinion on those statements on 28 March 2017. Key Audit Matters Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the consolidated and company financial statements of the current period. These matters were addressed in the context of our audit of the consolidated and company financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. Partners: S.O. Onyango F.O. Aloo H. Gadhoke* N. R. Hira* B.W. lrungu I. Karim D.M. Mbogho A.N. Muraya R. Mwaura J. Nyang'aya F. Okwiri F. 0. Omondi J. W Wangai *British 15 Independent auditor’s report To the Members of Kakuzi Plc Report on the audit of the consolidated and separate financial statements (continued) Key Audit Matter How Our Audit Addressed the Key Audit Matter Measurement of biological assets The measurement of biological assets at the end of year involves significant judgements and estimates by the Directors, which could have material impact on the financial position and the results of the Group and the Company. At the end of year, the carrying value of the biological assets amounted to Sh 859,584,000 (2016: Sh 804,438,000) as disclosed in note 6 in the consolidated and company financial statements. the As discussed financial in note 6 of statements, biological assets comprise forestry plantations, livestock and growing agricultural produce on bearer plants, which are measured at fair value less costs to sell. The fair value models accrue the additional value related to the biological asset as biological transformation takes place rather than at the time of harvest. As disclosed in Note 3, the key assumptions and estimates include expected future market prices, costs to sell and applicable adjustments for the age and condition of the assets. The these assumptions and determination of estimates require careful judgment by the Directors and any uncertainty could lead to material financial statements. adjustments the to Refer to note 2 (g) on accounting policy on biological assets and note 6, the disclosure on biological assets. We assessed the competence and objectivity of the Group's personnel with the responsibility of determining the valuation of the biological assets. In addition, we discussed the scope of their work and reviewed the fair valuation models used for consistency and mathematical accuracy. We confirmed that the approach and model used has been consistently applied We performed an analysis of the significant assumptions made in the valuation models and tested them against available market information. We subjected the key assumptions to sensitivity analyses. In addition, we tested a selection of data inputs used financial and operational against the company’s information and external sources, the accuracy, reliability and completeness thereof. to assess We checked the consistency of application of the fair value approaches and models over the years. We evaluated the sufficiency and accuracy of the disclosures in the notes of the financial statements. capabilities, objectivity and We assessed competence of independent valuer, where an independent professional valuer determined the fair value. the the We also validated the underlying data of acreage and age of plantations used by the valuer to the company’s including operational management comparison with historical trends. information, We found that the models used for the valuation of the biological assets to be appropriate and reasonable. In the consolidated and addition, company financial statements pertaining to the valuation and measurement were found to be appropriate. the disclosures in Other information The Directors are responsible for the other information which comprises the Company Information, Notice of the Annual General Meeting, Chairman’s Statement, Report of the Directors, and Directors’ Remuneration Report which we obtained prior to the date of this auditor’s report and the Annual Report. The other information does not include the consolidated and company financial statements, and our auditor’s report thereon. Our opinion on the consolidated and separate financial statements does not cover the other information and we do not express an audit opinion or any form of assurance conclusion thereon. In connection with our audit of the consolidated and company financial statements, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the consolidated and separate financial statements or our knowledge obtained in the audit, or otherwise appears to be materially misstated. If, based on the work we have performed on the other information that we obtained prior to the date of this auditor’s report, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard.INDEPENDENT AUDITOR’S REPORT TO THE SHAREHOLDERS OF KAKUZI PLC (AUDITOR’S REPORT TO THE SHAREHOLDERS OF KAKUZI PLC (CONTINUED) 16 Independent auditor’s report To the Members of Kakuzi Plc Report on the audit of the consolidated and separate financial statements (continued) Responsibilities of the Directors and Those Charged With Governance for the Consolidated and separate Financial Statements The Directors are responsible for the preparation and fair presentation of the financial statements in accordance with International Financial Reporting Standards and the requirements of the Kenyan Companies Act, 2015, and for such internal control as the Directors determine are necessary to enable the preparation of consolidated and separate financial statements that are free from material misstatement, whether due to fraud or error. In preparing the consolidated and separate financial statements, the Directors are responsible for assessing the Group’s and Company’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the Directors either intend to liquidate the Group and Company or to cease operations, or have no realistic alternative but to do so. The Board Audit and Risk Committee are responsible for overseeing the Group’s financial reporting process on behalf of the board of Directors. Auditor's Responsibilities for the Audit of the Consolidated and Separate Financial Statements Our objectives are to obtain reasonable assurance about whether the consolidated and separate financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor's report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these consolidated and separate financial statements. As part of an audit in accordance with ISAs, we exercise professional judgement and maintain professional scepticism throughout the audit. We also: Identify and assess the risks of material misstatement of the consolidated and separate financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. Obtain an understanding of internal control relevant to the audit 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 Group’s and the Company’s internal control. Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by the Directors. Conclude on the appropriateness of the Directors' use of the going concern basis of accounting and based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the company and its subsidiaries ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor's report to the related disclosures in the consolidated and separate financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor's report. However, future events or conditions may cause the company and its subsidiaries to cease to continue as going concerns. 17 Independent auditor’s report To the Shareholders of Kakuzi Plc Report on the audit of the consolidated financial statements (continued) Auditor's Responsibilities for the Audit of the Consolidated and Separate Financial Statements (continued) Evaluate the overall presentation, structure and content of the consolidated and separate financial statements, including the disclosures and whether the consolidated and separate financial statements represent the underlying transactions and events in a manner that achieves fair presentation. Obtain sufficient appropriate audit evidence regarding the financial information of the entity or business activities within the Group to express an opinion on the consolidated financial statements. We are responsible for the direction, supervision and performance of the group audit. We remain responsible for our audit opinion. We communicate with the Board Audit and Risk Committee regarding, among other matters, the planned scope and timing of the audit and significant audit findings including any significant deficiencies in internal control that we identify during our audit. We also provide the Board Audit and Risk Committee with a statement that we have complied with the relevant ethical requirements regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards. From the matters communicated with the Board Audit and Risk Committee, we determine those matters that were of most significance in the audit of the consolidated and separate financial statements of the current period and are therefore the key audit matters. We describe these matters in our auditor’s report unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we determine that a matter should not be communicated in our report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication. Report on other matters prescribed by the Kenya Companies Act, 2015 Report of the Directors In our opinion the information given in the Report of the Directors on pages 8 to 9 is consistent with the financial statements. Directors’ Remuneration Report In our opinion the auditable part of the Director’s Remuneration report on page 14 has been prepared in accordance with the Kenyan Companies Act, 2015. The engagement partner responsible for the audit resulting in this independent auditors’ report is CPA Anne Muraya - (P/No 1697). DELOITTE & TOUCHE CERTIFIED PUBLIC ACCOUNTANTS (KENYA) NAIROBI, KENYA 22 March 2018 18 Kakuzi Plc Consolidated and Company Financial Statements For the year ended 31 December 2017 Consolidated and Company statement of profit or loss and other comprehensive income Sales Gains arising from changes in fair value less costs to sell of non-current biological assets Cost of sales Gross profit Other income Distribution costs Operating profit Interest income Finance costs Profit before income tax Income tax expense Profit for the year Other comprehensive income Year ended 31 December Notes 2017 Shs’000 2016 Shs’000 5 6 7 8 8 2,823,926 2,651,199 82,799 67,236 2,906,725 (1,560,515 ) 2,718,435 (1,421,914 ) 1,346,210 1,296,521 6,421 (597,948 ) 6,706 (620,635 ) 754,683 682,592 95,820 (1,380 ) 76,551 (1,364 ) 849,123 757,779 11 (257,480 ) (195,354 ) 591,643 562,425 Items that are not reclassified to profit or loss: Remeasurement of post-employment benefit obligations (net of tax) 11 1,735 5,936 Total comprehensive income 593,378 568,361 Earnings per share (Shs): Basic and diluted earnings per ordinary share 12 30.19 28.70 The notes on pages 25 to 67 are an integral part of these consolidated and company financial statements. 19 Kakuzi Plc Consolidated and Company Financial Statements As at 31 December 2017 Consolidated statement of financial position EQUITY Share capital Other reserves Retained earnings Proposed dividend Total equity Non current liabilities Deferred income tax Post employment benefit obligations Notes 31 December 2017 Shs’000 31 December 2016 Shs’000 13 12 15 16 98,000 16,607 4,070,229 137,200 98,000 14,872 3,615,786 117,600 4,322,036 3,846,258 743,775 63,415 807,190 742,902 58,516 801,418 Total equity and non current liabilities 5,129,226 4,647,676 Non current assets Property, plant and equipment Biological assets Prepaid operating lease rentals Financial assets held to maturity Non current receivables Current assets Biological assets – growing agricultural produce Inventories Receivables and prepayments Current tax recoverable Financial assets held to maturity Cash and bank balances Current liabilities Payables and accrued expenses Current tax payable Post employment benefit obligations 17 6(i) 18 20 22 6(ii) 21 22 11(d) 20 24 23 11(d) 16 2,419,384 663,833 4,384 218,444 32,877 3,338,922 195,751 146,324 291,505 - 124,875 1,648,749 2,407,204 462,339 132,810 21,751 616,900 2,309,714 640,135 4,389 30,768 30,061 3,015,067 164,303 171,112 266,150 1,821 15,385 1,430,576 2,049,347 398,762 - 17,976 416,738 Net current assets 1,790,304 1,632,609 5,129,226 4,647,676 The notes on pages 25 to 67 are an integral part of these consolidated and company financial statements. The consolidated and company financial statements on pages 19 to 67 were approved for issue by the board of Directors on 22 March 2018 and signed on its behalf by: K R SHAH DIRECTOR C J FLOWERS DIRECTOR 20 Kakuzi Plc Consolidated and Company Financial Statements As at 31 December 2017 Company statement of financial position EQUITY Share capital Other reserves Retained earnings Proposed dividend Total equity Non current liabilities Deferred income tax Post employment benefit obligations Notes 31 December 2017 Shs’000 31 December 2016 Shs’000 13 12 15 16 98,000 16,607 4,066,088 137,200 98,000 14,872 3,611,645 117,600 4,317,895 3,842,117 743,775 63,415 807,190 742,902 58,516 801,418 Total equity and non current liabilities 5,125,085 4,643,535 Non current assets Property, plant and equipment Biological assets Prepaid operating lease rentals Investment in subsidiaries Financial assets held to maturity Non current receivables Current assets Biological assets – growing agricultural produce Inventories Receivables and prepayments Current tax recoverable Financial assets held to maturity Cash and bank balances Current liabilities Payables and accrued expenses Current tax payable Post employment benefit obligations 17 6(i) 18 19 20 22 6(ii) 21 22 11(d) 20 24 23 11(d) 16 2,419,384 663,833 4,384 4,295 218,444 32,877 3,343,217 195,751 146,324 291,505 - 124,875 1,648,749 2,407,204 470,722 132,863 21,751 625,336 2,309,714 640,135 4,389 4,295 30,768 30,061 3,019,362 164,303 171,112 266,150 1,768 15,385 1,430,576 2,049,294 407,145 - 17,976 425,121 Net current assets 1,781,868 1,624,173 5,125,085 4,643,535 The notes on pages 25 to 67 are an integral part of these consolidated and company financial statements. The consolidated and company financial statements on pages 19 to 67 were approved for issue by the board of Directors on 22 March 2018 and signed on its behalf by: K R SHAH DIRECTOR C J FLOWERS DIRECTOR 21 Kakuzi Plc Consolidated and Company Financial Statements For the year ended 31 December 2017 Consolidated statement of changes in equity Year ended 31 December 2017 Share capital Shs’000 Other reserves Shs’000 Retained earnings Shs’000 Proposed dividend Shs’000 Total equity Shs’000 At start of year 98,000 14,872 3,615,786 117,600 3,846,258 Total comprehensive income for the year: Profit for the year Other comprehensive income Total Transactions with owners: Dividends: - Final for 2016 - Proposed for 2017 Total - - - - - - - 1,735 591,643 - 1,735 591,643 - - - 591,643 1,735 593,378 - - - - (137,200 ) (117,600 ) 137,200 (117,600 ) - (137,200 ) 19,600 (117,600 ) At end of year 98,000 16,607 4,070,229 137,200 4,322,036 Year ended 31 December 2016 At start of year 98,000 8,936 3,170,961 98,000 3,375,897 Total comprehensive income for the year: Profit for the year Other comprehensive income Total Transactions with owners: Dividends: - Final for 2015 - Proposed for 2016 Total - - - - - - - 5,936 562,425 - 5,936 562,425 - - - 562,425 5,936 568,361 - - - - (117,600 ) (98,000 ) 117,600 (98,000 ) - (117,600 ) 19,600 (98,000 ) At end of year 98,000 14,872 3,615,786 117,600 3,846,258 The notes on pages 25 to 67 are an integral part of these consolidated and company financial statements. 22 Kakuzi Plc Consolidated and Company Financial Statements For the year ended 31 December 2017 Company statement of changes in equity Year ended 31 December 2017 Share capital Shs’000 Other reserves Shs’000 Retained earnings Shs’000 Proposed dividend Shs’000 Total equity Shs’000 At start of year 98,000 14,872 3,611,645 117,600 3,842,117 Total comprehensive income for the year: Profit for the year Other comprehensive income Total Transactions with owners: Dividends: - Final for 2016 - Proposed for 2017 Total At end of year Year ended 31 December 2016 - - - - - - - 1,735 591,643 - 1,735 591,643 - - - 591,643 1,735 593,378 - - - - (137,200 ) (117,600 ) 137,200 (117,600 ) - (137,200 ) 19,600 (117,600 ) 98,000 16,607 4,066,088 137,200 4,317,895 At start of year 98,000 8,936 3,166,820 98,000 3,371,756 Total comprehensive income for the year: Profit for the year Other comprehensive income Total Transactions with owners: Dividends: - Final for 2015 - Proposed for 2016 Total - - - - - - - 5,936 562,425 - 5,936 562,425 - - - 562,425 5,936 568,361 - - - - (117,600 ) (98,000 ) 117,600 (98,000 ) - (117,600 ) 19,600 (98,000 ) At end of year 98,000 14,872 3,611,645 117,600 3,842,117 The notes on pages 25 to 67 are an integral part of these financial statements. 23 Kakuzi Plc Consolidated and Company Financial Statements For the year ended 31 December 2017 Consolidated and company statement of cash flows Operating activities Cash generated from operations Interest received Interest paid Income tax paid Notes 25 8 8 11(d) Year ended 31 December 2016 Shs’000 2017 Shs’000 951,854 95,820 (1,380 ) (122,720 ) 866,421 76,551 (1,364 ) (239,971 ) Net cash from operating activities 923,574 701,637 Investing activities Purchase of property, plant and equipment Purchase of biological assets and development Proceeds from disposal of property, plant and equipment Proceeds from redemption of financial assets Purchase of financial assets 17 6 20 20 (277,824 ) (13,199 ) 388 15,385 (312,551 ) (342,098 ) (22,282 ) 500 15,385 - Net cash used in investing activities (587,801 ) (348,495 ) Financing activities Dividend paid 12 (117,600 ) (98,000 ) Net cash used in financing activities (117,600 ) (98,000 ) Increase in cash and cash equivalents 218,173 255,142 Movement in cash and cash equivalents At start of year Increase 1,430,576 218,173 1,175,434 255,142 At end of year 24 1,648,749 1,430,576 The notes on pages 25 to 67 are an integral part of these financial statements. 24 Kakuzi Plc Consolidated and Company Financial Statements For the year ended 31 December 2017 Notes to the Consolidated and Company Financial Statements 1 General information Kakuzi Plc is incorporated in Kenya under the Kenyan Companies Act as a public limited liability company, and is domiciled in Kenya. The address of its registered office is: Main Office Punda Milia Road, Makuyu P O Box 24 01000 THIKA Kenya The Company’s ordinary shares are listed on the Nairobi Securities Exchange and the London Stock Exchange. For Kenyan Companies Act reporting purposes, the balance sheet is represented by the statement of financial position and the profit or loss by the statement of comprehensive income, in these consolidated and company financial statements. Reference to, “the Group,” in the consolidated and company financial statements covers the separate Company financial statements as well. 2 Accounting policies The principle accounting policies applied in the preparation of these consolidated and company financial statements are set out below. These policies have been consistently applied to all the years presented, unless otherwise stated. (a) Statement of compliance The consolidated and company financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS). The measurement basis applied is the historical cost basis, except where otherwise stated in the accounting policies below. The consolidated and company financial statements are presented in Kenya Shillings (Shs), rounded to the nearest thousand. The preparation of the consolidated and company financial statements in conformity with IFRS requires the use of certain critical accounting estimates. It also requires the Directors to exercise judgement in the process of applying the Group’s accounting policies. The areas involving a higher degree of judgement or complexity, or where assumptions and estimates are significant to the consolidated and company financial statements, are disclosed in Note 3. Application of new and revised IFRSs (i) Relevant new standards and amendments to published standards effective for the year ended 31 December 2017 The following new and revised standards were effective in the current year and had no material impact on the amounts reported in these consolidated and company financial statements. IAS 7 Disclosure Initiative The amendments require an entity to provide disclosures that enable users of financial statements to evaluate changes in liabilities arising from financing activities, including both cash and non-cash changes. The amendments apply prospectively. Entities are not required to present comparative information for earlier periods when they first apply the amendments. 25 Kakuzi Plc Consolidated and Company Financial Statements For the year ended 31 December 2017 Notes to the Consolidated and Company Financial Statements (continued) 2 Accounting policies (continued) (a) Statement of compliance (continued) Application of new and revised IFRSs (continued) (i) Relevant new standards and amendments to published standards effective for the year ended 31 December 2017(continued) IAS 12 Recognition of Deferred Tax Assets for Unrealized Losses The amendments clarify the following: 1. Unrealised losses on a debt instrument measured at fair value for which the tax base remains at cost give rise to a deductible temporary difference, irrespective of whether the debt instrument’s holder expects to recover the carrying amount of the debt instrument by sale or by use, or whether it is probable that the issuer will pay all the contractual cash flows; 2. When an entity assesses whether taxable profits will be available against which it can utilise a deductible temporary difference, and the tax law restricts the utilisation of losses to deduction against income of a specific type (e.g. capital losses can only be set off against capital gains), an entity assesses a deductible temporary difference in combination with other deductible temporary differences of that type, but separately from other types of deductible temporary differences. 3. The estimate of probable future taxable profit may include the recovery of some of an entity’s assets for more than their carrying amount if there is sufficient evidence that it is probable that the entity will achieve this; and 4. In evaluating whether sufficient future taxable profits are available, an entity should compare the deductible temporary differences with future taxable profits excluding tax deductions resulting from the reversal of those deductible temporary differences. The amendments apply retrospectively. Annual Improvements to IFRSs 2014-2016 Cycle The Annual Improvements to IFRSs 2014-2016 Cycle include amendments to a number of IFRSs, one of which is effective for annual periods beginning on or after 1 January 2017: IFRS 12 - The amendments provide clarification of the scope of the standard. IFRS 12 states that an entity need not provide summarised financial information for interests in subsidiaries, associates or joint ventures that are classified (or included in a disposal group that is classified) as held for sale. The amendments clarify that this is the only concession from the disclosure requirements of IFRS 12 for such interests. The amendments apply retrospectively. The application of these amendments has had no effect on the consolidated and company financial statements. 26 Kakuzi Plc Consolidated and Company Financial Statements For the year ended 31 December 2017 Notes to the Consolidated and Company Financial Statements (continued) 2 Accounting policies (continued) (a) Statement of compliance (continued) Adoption of new and revised International Financial Reporting Standards (IFRS) (continued) (ii) Relevant new and amended standards and interpretations in issue but not yet effective in the year ended 31 December 2017 New and Amendments to standards IFRS 9 Financial Instruments IFRS 15 Revenue from contracts with customers IFRS 16 Leases Effective for annual periods beginning on or after 1 January 2018, with earlier application permitted 1 January 2018, with earlier application permitted 1 January 2019, with earlier application permitted Amendments to IFRS 2 Classification and Measurement of Share-based Payment Transactions 1 January 2018, with earlier application permitted Amendments to IFRS 10 and IAS 28 Sale or Contribution of Assets between an Investor and its Associate or Joint Venture Amendments to IAS 40 Transfers of Investment Property Effective for annual periods beginning on or after a date to be determined 1 January 2018, with earlier application permitted IFRIC 22 Foreign Currency Transactions and Advance Consideration 1 January 2018, with earlier application permitted Annual Improvements to IFRS Standards 2014-2016 Cycle Effective for annual periods beginning on or after 1 January 2018 (iii) Impact of new and amended standards and interpretations on the financial statements for future annual periods IFRS 9 Financial Instruments In November 2009, the IASB introduced new requirements for the classification and measurement of financial assets. IFRS 9 was subsequently amended in October 2010 to include requirements for the classification and measurement of financial liabilities and for derecognition, and in November 2013 to include the new requirements for general hedge accounting. Another revised version of IFRS 9 was issued in July 2014 mainly to include a) impairment requirements for financial assets and b) limited amendments to the classification and measurement requirements by introducing a ‘fair value through other comprehensive income’ (FVTOCI) measurement category for certain simple debt instruments. Key requirements of IFRS 9: All recognised financial assets that are within the scope of IFRS 9 are required to be subsequently measured at amortised cost or fair value. Specifically, debt investments that are held within a business model whose objective is to collect the contractual cash flows, and that have contractual cash flows that are solely payments of principal and interest on the principal outstanding are generally measured at amortised cost at the end of subsequent accounting periods. Kakuzi Plc 27 Consolidated and Company Financial Statements For the year ended 31 December 2017 Notes to the Consolidated and Company Financial Statements (continued) 2 Accounting policies (continued) (a) Statement of compliance (continued) Adoption of new and revised IFRSs (continued) (iii) Impact of new and amended standards and interpretations on the financial statements for future annual periods IFRS 9 Financial Instruments (continued) Key requirements of IFRS 9: (continued) Debt instruments that are held within a business model whose objective is achieved both by collecting contractual cash flows and selling financial assets, and that have contractual terms that give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding, are generally measured at FVTOCI. All other debt investments and equity investments are measured at their fair value at the end of subsequent accounting periods. In addition, under IFRS 9, entities may make an irrevocable election to present subsequent changes in the fair value of an equity investment (that is not held for trading nor contingent consideration recognised by an acquirer in a business combination to which IFRS 3 applies) in other comprehensive income, with only dividend income generally recognised in profit or loss. Phase 1: Classification and measurement of financial assets and financial liabilities With regard to the measurement of financial liabilities designated as at fair value through profit or loss, IFRS 9 requires that the amount of change in the fair value of a financial liability that is attributable to changes in the credit risk of that liability is presented in other comprehensive income, unless the recognition of such changes in other comprehensive income would create or enlarge an accounting mismatch in profit or loss. Changes in fair value attributable to a financial liability's credit risk are not subsequently reclassified to profit or loss. Under IAS 39, the entire amount of the change in the fair value of the financial liability designated as fair value through profit or loss is presented in profit or loss. Phase 2: Impairment methodology In relation to the impairment of financial assets, IFRS 9 requires an expected credit loss model, as opposed to an incurred credit loss model under IAS 39. The expected credit loss model requires an entity to account for expected credit losses and changes in those expected credit losses at each reporting date to reflect changes in credit risk since initial recognition. In other words, it is no longer necessary for a credit event to have occurred before credit losses are recognised. Phase 3: Hedge accounting The new general hedge accounting requirements retain the three types of hedge accounting mechanisms currently available in IAS 39. Under IFRS 9, greater flexibility has been introduced to the types of transactions eligible for hedge accounting, specifically broadening the types of instruments that qualify for hedging instruments and the types of risk components of non-financial items that are eligible for hedge accounting. In addition, the effectiveness test has been overhauled and replaced with the principle of an ‘economic relationship’. Retrospective assessment of hedge effectiveness is also no longer required. Enhanced disclosure requirements about an entity’s risk management activities have also been introduced. The Directors of the Group anticipate that the application of IFRS 9 in the future will not have a significant impact on amounts reported in respect of the Group’s and Company’s financial assets and financial liabilities. The Directors do not intend to early apply the standard and intend to use the full retrospective method upon adoption. 28 Kakuzi Plc Consolidated and Company Financial Statements For the year ended 31 December 2017 Notes to the Consolidated and Company Financial Statements (continued) 2 Accounting policies (continued) (a) Statement of compliance (continued) Adoption of new and revised IFRSs (continued) (iii) Impact of new and amended standards and interpretations on the financial statements for future annual periods (continued) IFRS 15 Revenue from Contracts with Customers IFRS 15 establishes a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers. IFRS 15 will supersede the current revenue recognition guidance including IAS 18 Revenue, IAS 11 Construction Contracts and the related Interpretations when it becomes effective. The core principle of IFRS 15 is that an entity should recognise revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Specifically, the Standard introduces a 5-step approach to revenue recognition: Step 1: Identify the contract(s) with a customer Step 2: Identify the performance obligations in the contract Step 3: Determine the transaction price Step 4: Allocate the transaction price to the performance obligations in the contract Step 5: Recognise revenue when (or as) the entity satisfies a performance obligation. Under IFRS 15, an entity recognises revenue when (or as) a performance obligation is satisfied, i.e. when ‘control’ of the goods or services underlying the particular performance obligation is transferred to the customer. Far more prescriptive guidance has been added in IFRS 15 to deal with specific scenarios. Furthermore, extensive disclosures are required by IFRS 15. In April 2017, the IASB issued Clarifications to IFRS 15 in relation to the identification of performance obligations, principal versus agent considerations, as well as licensing application guidance. The Directors of the Group anticipate that the application of IFRS 15 in the future will not have a significant impact on the consolidated and company financial statements. The Directors do not intend to early apply the standard and intend to use the full retrospective method upon adoption. IFRS 16 Leases IFRS 16 introduces a comprehensive model for the identification of lease arrangements and accounting treatments for both lessors and lessees. IFRS 16 will supersede the current lease guidance including IAS 17 Leases and the related interpretations when it becomes effective. IFRS 16 distinguishes leases and service contracts on the basis of whether an identified asset is controlled by a customer. Distinctions of operating leases (off balance sheet) and finance leases (on balance sheet) are removed for lessee accounting, and is replaced by a model where a right-of- use asset and a corresponding liability have to be recognised for all leases by lessees (i.e. all on balance sheet) except for short-term leases and leases of low value assets. The right-of-use asset is initially measured at cost and subsequently measured at cost (subject to certain exceptions) less accumulated depreciation and impairment losses, adjusted for any remeasurement of the lease liability. The lease liability is initially measured at the present value of the lease payments that are not paid at that date. 29 Kakuzi Plc Consolidated and Company Financial Statements For the year ended 31 December 2017 Notes to the Consolidated and Company Financial Statements (continued) 2 Accounting policies (continued) (a) Statement of compliance (continued) Adoption of new and revised IFRSs (continued) (iii) Impact of new and amended standards and interpretations on the financial statements for future annual periods (continued) Subsequently, the lease liability is adjusted for interest and lease payments, as well as the impact of lease modifications, amongst others. Furthermore, the classification of cash flows will also be affected as operating lease payments under IAS 17 are presented as operating cash flows; whereas under the IFRS 16 model, the lease payments will be split into a principal and an interest portion which will be presented as financing and operating cash flows respectively. In contrast to lessee accounting, IFRS 16 substantially carries forward the lessor accounting requirements in IAS 17, and continues to require a lessor to classify a lease as either an operating lease or a finance lease. Furthermore, extensive disclosures are required by IFRS 16. The Directors of the Group anticipate that the application of IFRS 16 in the future will not have a significant impact on the consolidated and company financial statements. The Directors do not intend to early apply the standard. The Directors plan to adopt the standard when it becomes effective. Amendments to IFRS 2 Classification and Measurement of Share-based Payment Transactions The amendments clarify the following: In estimating the fair value of a cash-settled share-based payment, the accounting for the effects of vesting and non-vesting conditions should follow the same approach as for equity-settled share-based payments. Where tax law or regulation requires an entity to withhold a specified number of equity instruments equal to the monetary value of the employee’s tax obligation to meet the employee’s tax liability which is then remitted to the tax authority, i.e. the share-based payment arrangement has a ‘net settlement feature’, such an arrangement should be classified as equity-settled in its entirety, provided that the share-based payment would have been classified as equity-settled had it not included the net settlement feature. A modification of a share-based payment that changes the transaction from cash-settled to equity-settled should be accounted for as follows: i) ii) the original liability is derecognised; the equity-settled share-based payment is recognised at the modification date fair value of the equity instrument granted to the extent that services have been rendered up to the modification date; and iii) any difference between the carrying amount of the liability at the modification date and the amount recognised in equity should be recognised in profit or loss immediately. The amendments are effective for annual reporting periods beginning on or after 1 January 2018 with earlier application permitted. Specific transition provisions apply. The Directors of the Group do not anticipate that the application of the amendments in the future will have a significant impact on the company and consolidated financial statements as the Group does not have any cash-settled share-based payment arrangements or any withholding tax arrangements with tax authorities in relation to share-based payments. The Directors do not intend to early apply the standard and intend to use the full retrospective method upon adoption. 30 Kakuzi Plc Consolidated and Company Financial Statements For the year ended 31 December 2017 Notes to the Consolidated and Company Financial Statements (continued) 2 Accounting policies (continued) (a) Statement of compliance (continued) Adoption of new and revised IFRSs (continued) (iii) Impact of new and amended standards and interpretations on the financial statements for future annual periods (continued) Amendments to IFRS 10 and IAS 28 Sale or Contribution of Assets between an Investor and its Associate or Joint Venture The amendments to IFRS 10 and IAS 28 deal with situations where there is a sale or contribution of assets between an investor and its associate or joint venture. Specifically, the amendments state that gains or losses resulting from the loss of control of a subsidiary that does not contain a business in a transaction with an associate or a joint venture that is accounted for using the equity method, are recognised in the parent’s profit or loss only to the extent of the unrelated investors’ interests in that associate or joint venture. Similarly, gains and losses resulting from the remeasurement of investments retained in any former subsidiary (that has become an associate or a joint venture that is accounted for using the equity method) to fair value are recognised in the former parent’s profit or loss only to the extent of the unrelated investors’ interests in the new associate or joint venture. The effective date of the amendments has yet to be set by the IASB; however, earlier application of the amendments is permitted. The Directors of the Group do not anticipate that the application of the amendments in the future will have a significant impact on the consolidated and company financial statements. The Directors do not intend to early apply the standard and intend to use the full retrospective method upon adoption. Amendments to IAS 40 Transfers of Investment Property The amendments clarify that a transfer to, or from, investment property necessitates an assessment of whether a property meets, or has ceased to meet, the definition of investment property, supported by observable evidence that a change in use has occurred. The amendments further clarify that the situations listed in IAS 40 are not exhaustive and that a change in use is possible for properties under construction (i.e. a change in use is not limited to completed properties). The amendments are effective for annual periods beginning on or after 1 January 2018 with earlier application permitted. The Directors of the Group do not anticipate that the application of the amendments in the future will have a significant impact on the consolidated and company financial statements. The Directors do not intend to early apply the standard and intend to use the full retrospective method upon adoption. 31 Kakuzi Plc Consolidated and Company Financial Statements For the year ended 31 December 2017 Notes to the Consolidated and Company Financial Statements (continued) 2 Accounting policies (continued) (a) Statement of compliance (continued) Adoption of new and revised IFRSs (continued) (iii) Impact of new and amended standards and interpretations on the financial statements for future annual periods (continued) IFRIC 22 Foreign Currency Transactions and Advance Consideration IFRIC 22 addresses how to determine the ‘date of transaction’ for the purpose of determining the exchange rate to use on initial recognition of an asset, expense or income, when consideration for that item has been paid or received in advance in a foreign currency which resulted in the recognition of a non-monetary asset or non-monetary liability (for example, a non-refundable deposit or deferred revenue). The Interpretation specifies that the date of transaction is the date on which the entity initially recognises the non-monetary asset or non- monetary liability arising from the payment or receipt of advance consideration. If there are multiple payments or receipts in advance, the Interpretation requires an entity to determine the date of transaction for each payment or receipt of advance consideration. The Interpretation is effective for annual periods beginning on or after 1 January 2018 with earlier application permitted. The Directors of the Group do not anticipate that the application of these amendments will have a material impact on the consolidated and company financial statements. The Directors do not intend to early apply the standard and intend to use the full retrospective method upon adoption. Annual Improvements to IFRSs 2014 – 2016 Cycle The Annual Improvements to IFRSs 2014 – 2016 Cycle include a number of amendments to various IFRSs, which are summarised below: The amendments to IFRS 1 deletes certain short-term exemptions because the reporting period to which the exemptions applied have already passed. As such, these exemptions are no longer applicable. The Directors of the Group do not anticipate that the application of these amendments will have any impact on the consolidated and company financial statements. The amendments to IAS 28 clarify that the option for a venture capital organisation and other similar entities to measure investments in associates and joint ventures at FVTPL is available separately for each associate or joint venture, and that election should be made at initial recognition of the associate or joint venture. Kakuzi Plc 32 Consolidated and Company Financial Statements For the year ended 31 December 2017 Notes to the Consolidated and Company Financial Statements (continued) 2 Accounting policies (continued) (a) Statement of compliance (continued) Adoption of new and revised IFRSs (continued) (iii) Impact of new and amended standards and interpretations on the financial statements for future annual periods (continued) Annual Improvements to IFRSs 2014 – 2016 Cycle (continued) In respect of the option for an entity that is not an investment entity (IE) to retain the fair value measurement applied by its associates and joint ventures that are IEs when applying the equity method, the amendments make a similar clarification that this choice is available for each IE associate or IE joint venture. The amendments apply retrospectively with earlier application permitted. The Directors of the Group do not anticipate that the application of these amendments will have a material impact on the consolidated and company financial statements. The Directors do not intend to early apply the standard and intend to use the full retrospective method upon adoption. iv) Early adoption of standards The Group did not early-adopt any new or amended standards not yet effective in 2017. (b) Consolidation of 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. (c) Segment reporting Operating segments are reported in a manner consistent with the internal reporting provided to the Executive Directors, who are responsible for allocating resources and assessing performance of the operating segments and making strategic decisions. (d) Revenue recognition Revenue comprises the fair value of the consideration received and receivable for the sale of goods and services in the ordinary course of the Group’s activities. Revenue is shown net of value-added tax (VAT), returns, rebates and discounts and after eliminating sales within the Group. The Group recognises revenue when the amount of revenue can be reliably measured, it is probable that future economic benefits will flow to the Group and when specific criteria have been met for each of the Group’s activities as described below. The amount of revenue is not considered to be reliably measurable until all contingencies relating to the sale have been resolved. The Group bases its estimates on historical results, taking into consideration the type of customer, the type of transaction and the specifics of each arrangement. i. Sales are recognised upon delivery of products to the customer, the customer has accepted the products and collectability of the related receivables is reasonably assured. Interest income is recognised using the effective interest method. ii. iii. Dividends are recognised as income in the period in which the right to receive payment is established. 33 Kakuzi Plc Consolidated and Company Financial Statements For the year ended 31 December 2017 Notes to the Consolidated and Company Financial Statements (continued) 2 Accounting policies (continued) (e) Functional currency and translation of foreign currencies (i) Functional and presentation currency Items included in the consolidated and company financial statements are measured using the currency of the primary economic environment in which the entity operates (‘the functional currency’). The financial statements are presented in Kenyan Shillings which is the consolidated and company functional currency. (ii) Transactions and balances Foreign currency transactions are translated into the functional currency of the respective entity using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in the statement of comprehensive income. Foreign exchange gains and losses that relate to borrowings and cash and cash equivalents are presented in the income statement of comprehensive income within ‘finance income or cost’. All other foreign exchange gains and losses are presented in the statement of income statement of comprehensive income within ‘other income’ or ‘other expenses’. (f) Property, plant and equipment All categories of property, plant and equipment are initially recorded at historical cost and subsequently stated at cost less depreciation. Historical cost includes expenditure that is directly attributable to the acquisition of the items. Subsequent costs are included in the asset’s carrying amount or recognised as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the Group or Company and the cost of the item can be measured reliably. All other repairs and maintenance are charged to the income statement within ‘cost of production’ during the financial period in which they are incurred. Bearer plants are classified as immature until the produce can be commercially harvested and are classified as capital work in progress. At that point they are reclassified to bearer plants and depreciation commences. Immature plantations are measured at accumulated cost. Freehold land is not depreciated. Depreciation on other assets is calculated using the straight line method to write cost to their residual values over their estimated useful life as follows: Buildings, dams and improvements Plant and machinery Motor vehicles, tractors, trailers & implements Furniture, fittings and equipment Bearer plants: - Avocado trees - Macadamia trees - Pineapple crop - Tea bushes Capital work in progress is not depreciated Immature period Estimated useful life 20 – 50 years 10 – 13 years 4 – 10 years 3 – 8 years 4 years 6 years 1 year 4 years 25 years 30 years 2 years 50 years The assets’ residual values and useful lives are reviewed, and adjusted if appropriate, at each reporting date. 34 Kakuzi Plc Consolidated and Company Financial Statements For the year ended 31 December 2017 Notes to the Consolidated and Company Financial Statements (continued) 2 Accounting policies (continued) (f) Property, plant and equipment (continued) Property, plant and equipment are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognised in the statement of profit or loss for the amount by which the asset’s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset’s fair value less costs to sell and value in use. For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows (cash-generating units). Gains and losses on disposal of property, plant and equipment are determined by reference to their carrying amounts and are taken into account in determining operating profit. (g) Biological assets Biological assets comprise forestry, livestock and growing agricultural produce on tea, avocado, pineapple, and macadamia plantations. Biological assets are measured on initial recognition and at each reporting date at fair value less costs to sell. Any gains or losses arising on initial recognition of biological assets and from subsequent changes in fair value less costs to sell are recognised in the statement of comprehensive income in the year in which they arise. The fair value of livestock is determined based on market prices of livestock of similar age, breed and genetic merit. The tea bushes, avocado and macadamia trees, and pineapple crops are bearer plants and are therefore presented and accounted for as property, plant and equipment (see note 2(f)). However, the produce growing on these trees is accounted for as biological assets until the point of harvest. Harvested produce is transferred to inventory at fair value less costs to sell when harvested. Management has assessed the fair value of growing agricultural produce on avocado, macadamia, pineapple and tea plantations using estimated market prices less costs to sell based on the biological transformation of the produce at the reporting date. The fair value of timber plantations and livestock is based on market prices as valued by external independent valuers. Purchases and development of biological assets include cost of planting, breeding and upkeep until they mature. Subsequently all costs of upkeep and maintenance of mature biological assets are recognised in the statement of comprehensive income within ‘cost of production’ under cost of production in the period in which they are incurred. (h) Operating leases Leases in which a significant portion of the risks and rewards of ownership are retained by the lessor are classified as operating leases. Payments made under operating leases are charged to the statement of comprehensive income within ‘cost of production’ on a straight-line basis over the period of the lease. 35 Kakuzi Plc Consolidated and Company Financial Statements For the year ended 31 December 2017 Notes to the Consolidated and Company Financial Statements (continued) 2 Accounting policies (continued) (i) Inventories Inventories are stated at the lower of cost and net realisable value. Agricultural produce at the point of harvest is measured at fair value less costs to sell. Any changes arising on initial recognition of agricultural produce at fair value less costs to sell are recognised in the statement of comprehensive income in the year in which they arise. The cost of other inventory is determined by the weighted average method. Net realisable value is the estimate of the selling price in the ordinary course of business, less the costs of completion and selling expenses. (j) Receivables Receivables are amounts due from customers for produce sold or services performed in the ordinary course of business. If collection is expected in one year or less (or in the normal operating cycle of the business if longer), they are classified as current assets. If not, they are presented as non-current assets. Receivables are financial assets recognised initially at fair value and subsequently measured at amortised cost using the effective interest method. A provision for impairment of receivables is established when there is objective evidence that the Group will not be able to collect all the amounts due according to the original terms of receivables. The amount of the provision is the difference between the carrying amount and the present value of expected cash flows, discounted at the effective interest rate. The amount of the provision is recognised in the statement of comprehensive income within ‘cost of production’. (k) Payables Payables are obligations to pay for goods and services that have been acquired in the ordinary course of business from suppliers. Accounts payable are classified as current liabilities if payment is due within one year or less (or in the normal operating cycle of the business if longer). If not, they are presented as non- current liabilities. Payables are recognised initially at fair value and subsequently measured at amortised cost using the effective interest method. (l) Share capital Ordinary shares are classified as equity. (m) Cash and cash equivalents Cash and cash equivalents include cash in hand, deposits held at call with banks, other short term highly liquid investments with original maturities of three months or less. 36 Kakuzi Plc Consolidated and Company Financial Statements For the year ended 31 December 2017 Notes to the Consolidated and Company Financial Statements (continued) 2 Accounting policies (continued) (n) Financial assets The Group classifies its financial assets in the following categories: receivables and held-to-maturity financial assets. The classification depends on the purpose for which the financial assets were acquired. Management determines the classification of its financial assets at initial recognition and re-evaluates such designation at every reporting date: (i) Receivables Receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They are included in current assets, except for maturities greater than 12 months after the end of reporting date. These are classified as non-current assets. (ii) Financial assets held-to-maturity Financial assets held-to-maturity are non-derivative financial assets with fixed or determinable payments and fixed maturities that the Group’s management has the positive intention and ability to hold to maturity. 37 Kakuzi Plc Consolidated and Company Financial Statements For the year ended 31 December 2017 Notes to the Consolidated and Company Financial Statements (continued) 2 Accounting policies (continued) (o) Employee benefits (i) Post employment benefits obligations For unionised employees, the Group has an unfunded obligation to pay terminal gratuities under its Collective Bargaining Agreement with the union. Employees who resign after completing at least ten years (Nandi Hills employees) or employees who retire and have completed at least five years (Makuyu employees) of service are entitled to twenty one days pay (Nandi Hills employees) or eighteen days (Makuyu employees) for each completed year of service respectively. The liability recognised in the statement of financial position in respect of this defined benefit scheme is the present value of the defined benefit obligation at the reporting date. The obligation is estimated annually using the projected unit credit method by independent actuaries. The present value is determined by discounting the estimated future cash outflows using interest rates of government bonds. The currency and estimated term of these bonds is consistent with the currency and estimated term of the post-employment benefit obligation. The obligation relating to employees who have reached the minimum retirement age and completed the required years of service and are still in employment are classified as payable within the next twelve months. Remeasurement of post employment benefit obligations arising from experience adjustments and changes in actuarial assumptions are charged or credited to equity in other comprehensive income in the period in which they arise. The Group operates a defined contribution post-employment benefit scheme for management employees. A defined contribution plan is a pension plan under which the Group pays fixed contributions into a separate entity. The Group has no legal or constructive obligations to pay further contributions if the fund does not hold sufficient assets to pay all employees the benefits relating to employee service in the current and prior periods. The assets of the defined contribution post-employment benefit scheme are held in a separate trustee administered fund, which is funded by contributions from both the Group and the employees. The Group and all its employees also contribute to the statutory National Social Security Fund, which is a defined contribution scheme. 38 Kakuzi Plc Consolidated and Company Financial Statements For the year ended 31 December 2017 Notes to the Consolidated and Company Financial Statements (continued) 2 Accounting policies (continued) (o) Employee benefits (continued) (i) Post employment benefits obligations (continued) The Group’s contributions to both these defined contribution schemes are charged to the statement of comprehensive income within ‘cost of production’ in the year in which they fall due. (ii) Other entitlements The estimated monetary liability for employees’ accrued annual leave entitlement at the reporting date is recognised as an expense accrual. (p) Current and deferred income tax The tax expense for the period comprises current and deferred income tax. Tax is recognised in the statement of profit or loss except to the extent that it relates to items recognised in other comprehensive income or directly in equity. In this case, the tax is also recognised in other comprehensive income or directly in equity respectively. (i) Current income tax The current income tax charge is calculated on the basis of the tax enacted or substantively enacted at the reporting date. Directors periodically evaluate positions taken in tax returns with respect to situations in which applicable tax regulation is subject to interpretation. It establishes provisions where appropriate on the basis of amounts expected to be paid to the tax authorities. (ii) Deferred income tax Deferred income tax is recognised, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying values in the financial statements. Deferred income tax is determined using tax rates and laws that have been enacted or substantively enacted at the reporting date and are expected to apply when the related deferred income tax liability is settled. Deferred income tax assets are recognised only to the extent that it is probable that future taxable profits will be available against which the temporary differences can be utilised. Deferred income tax is provided on temporary differences arising on investments in subsidiaries and associates, except where the timing of the reversal of the temporary difference is controlled by the Group and it is probable that the temporary difference will not reverse in the foreseeable future. Deferred income tax assets and liabilities are offset when there is a legally enforceable right to offset current tax assets against current tax liabilities and when the deferred income taxes assets and liabilities relate to income taxes levied by the same taxation authority on either the same taxable entity or different taxable entities where there is an intention to settle the balances on a net basis. 39 Kakuzi Plc Consolidated and Company Financial Statements For the year ended 31 December 2017 Notes to the Consolidated and Company Financial Statements (continued) 2 Accounting policies (continued) (q) Dividends Dividends on ordinary shares are charged to equity in the period in which they are declared. Proposed dividends are shown as a separate component of equity until declared (i.e. proposed dividend). 3 Critical accounting estimates, judgements and assumptions The estimates and assumptions that have significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are addressed below: Estimates and judgements are continually evaluated and are based on historical experience and other factors, including experience of future events that are believed to be reasonable under the circumstances. (a) Critical accounting estimates and assumptions (i) Bearer plants Critical judgement has been made in determining the useful life and maturity period of the bearer plants. The useful life of the bearer plant is based on experience and expected productivity of the plant and the expected replanting schedules. (ii) Biological assets Critical assumptions are made by the Directors and the independent valuer in determining the fair values of biological assets. The key assumptions relate to estimate of future market prices as adjusted for age and condition of the assets. (iii) Growing agricultural produce Critical judgement has been made in determining the fair value of growing agricultural produce on bearer plant. The key assumptions include the market prices and stage of growth at reporting date based on past experience. (iv) Post-employment benefits obligations Critical assumptions are made by the actuary in determining the present value of the service gratuities to non-management employees. The carrying amount of the provision and the key assumptions made in estimating the provision are set out in Note 16. (b) Critical judgements in applying the entity’s accounting policies In the process of applying the Group’s accounting policies, the Directors have made judgements in determining: the classification of financial assets and leases whether financial and non-financial assets are impaired the recoverability of tax assets. 4 Financial risk management objectives and policies The Group’s activities expose it to a variety of financial risks, including credit risk, liquidity risk, prices for its agricultural produce, foreign currency exchange rates and interest rates. The Group’s overall risk management programme focuses on the unpredictability of financial and agricultural markets and seeks to minimise potential adverse effects on its financial performance, but the Group does not hedge any risks. 40 Kakuzi Plc Consolidated and Company Financial Statements For the year ended 31 December 2017 Notes to the Consolidated and Company Financial Statements (continued) 4 Financial risk management objectives and policies (continued) Financial risk management is carried out by the finance department under policies approved by the Board of Directors. These policies provide principles for overall risk management, as well as policies covering specific areas such as foreign exchange risk, interest rate risk and credit risk. The Group monitors closely the returns it achieves from its crops and considers replacing its biological assets when yields decline with age or markets change. Further financial risk arises from changes in market prices of key cost components. Such costs are closely monitored. Market risk (i) Foreign exchange risk The Group and Company operates internationally and is exposed to foreign exchange risk arising from various currency exposures, primarily with respect to the US dollar and Euro. Foreign exchange risk arises from future commercial transactions, and recognised assets and liabilities. At 31 December 2017, if the Shilling was weaker/stronger by 5% (2016: 5%) against the US dollar with all other variables held constant, the Group and Company post tax profit would have been Shs 20,593,665 (2016: Shs 17,931,550) higher/lower mainly as a result of US dollar deposits and trade receivables. At 31 December 2017 if the Shilling was weaker/stronger by 5% (2016: 5%) against the Euro with all other variables held constant, the consolidated post tax profit would have been Shs 5,140 higher/lower (2016: Shs 366). (ii) Price risk The Group and Company does not hold any financial instruments subject to price risk. (iii) Interest rate risk The Group and Company has interest earning deposits, whose income would be subject to interest rate risk. An increase/decrease in interest rates of 5% (2016: 5%) would have resulted in an increase/decrease in Group and Company post tax profit of Shs 7,308,493 (2016: Shs 7,030,917). Credit risk Credit risk arises from deposits with banks, as well as trade and other receivables. The Group does not have any significant concentrations of credit risk. The Group and Company has policies in place to ensure that sales are made to customers with an appropriate credit history. The amount that best represents the Group and Company’s maximum exposure to credit risk at 31 December 2017 is the carrying value of the financial assets in the statement of financial position. Collateral is held only for staff loans amounting to Shs 30,219,705 (2016: Shs 28,421,823) included in other receivables. The Group and Company does not grade the credit quality of receivables. All receivables that are neither past due or impaired are within their approved credit limits, and no receivables have had their terms renegotiated. 41 Kakuzi Plc Financial Statements For the year ended 31 December 2017 Notes (continued) 4 Financial risk management objectives and policies (continued) Credit risk (continued) None of the assets are past due or impaired except for the following amounts (which are due within 30 days of the end of the month in which they are invoiced): Past due but not impaired: by up to 30 days by 31 to 60 days by 61 to 90 days over 90 days 2017 Shs’000 - 1,539 5,837 6,172 2016 Shs’000 - 4,892 2,129 4,375 Total past due but not impaired 13,548 11,396 Individually impaired Liquidity risk - - Prudent liquidity risk management includes maintaining sufficient cash balances, and the availability of funding from an adequate amount of committed credit facilities. Due to the dynamic nature of the underlying businesses, the finance department maintains flexibility in funding by maintaining availability under committed credit lines. Directors monitor rolling forecasts of the Group’s liquidity reserve on the basis of expected cash flow. The table below analyses the Group and Company’s financial liabilities that will be settled on a net basis into relevant maturity groupings based on the remaining period at the reporting date to the contractual maturity date. The amounts disclosed in the table below are the contractual undiscounted cash flows. Balances due within 12 months equal their carrying balances, as the impact of discounting is not significant. Group Less than 1 year Shs’000 Between 1 and 2 years Shs’000 Between 2 and 5 years Shs’000 Over 5 years Shs’000 At 31 December 2017: - Trade and other payables At 31 December 2016: - Trade and other payables 462,339 398,762 - - - - - - 42 Kakuzi Plc Financial Statements For the year ended 31 December 2017 Notes (continued) 4 Financial risk management objectives and policies (continued) Liquidity risk (continued) Company At 31 December 2017: - Trade and other payables At 31 December 2016: - Trade and other payables Capital management Less than 1 year Shs’000 Between 1 and 2 years Shs’000 Between 2 and 5 years Shs’000 Over 5 years Shs’000 470,722 407,145 - - - - - - The Group’s objectives when managing capital are to safeguard the Group’s ability to continue as a going concern in order to provide returns for shareholders and to maintain an optimal capital structure to reduce the cost of capital. In order to maintain or adjust the capital structure, the Group may limit the amount of dividends paid to shareholders. The Group ensures that funds are available for capital developments by capping the dividends payable. The dividends paid and proposed are shown in Note 12. Fair value estimation IFRS 13 requires disclosure of fair value measurements by level of the following fair value measurement hierarchy: Quoted prices (unadjusted) in active markets for identical assets or liabilities (level 1). Inputs other than quoted prices included within level 1 that are observable for the asset or liability, either directly (that is, as prices) or indirectly (that is, derived from prices) (level 2). Inputs for the asset or liability that are not based on observable market data (that is, unobservable inputs) (level 3). The fair value of financial instruments that are not traded in an active market (for example, over-the- counter derivatives) is determined by using valuation techniques. These valuation techniques maximise the use of observable market data where it is available and rely as little as possible on entity specific estimates. If all significant inputs required to fair value an instrument are observable, the instrument is included in level 2. 43 Kakuzi Plc Financial Statements For the year ended 31 December 2017 Notes (continued) 5 Segmental reporting - Company Directors have determined the operating segments based on the reports reviewed by the Executive Directors to make strategic decisions. The Group operates in two geographical areas in Kenya, Makuyu and Nandi Hills, under several operating segments. The principal operating segments currently consist of Avocados, Macadamia, Tea and Forestry. The business activities of livestock, fresh pineapples and joint projects are included under “all other segments” as they individually fall below the threshold of 10% of Group sales. Segment assets consist primarily of property, plant and equipment, biological assets, inventories, receivables and prepayments. Unallocated assets are property, plant and equipment, and inventories relating to Main Office and Engineering Stores. Segmental liabilities consist primarily of payables and accrued expenses. Unallocated liabilities are taxes, borrowings and non-current liabilities. The segment information for the reportable segments for the year ended 31 December 2017 and 31 December 2016 is as follows: 2017 2016 2017 2016 2017 2016 2017 2016 2017 2016 2017 2016 Tea Avocados Shs’000 Shs’000 Shs’000 Shs’000 Madacamia Shs’000 Shs’000 Forestry All other segments Shs’000 Shs’000 Shs’000 Shs’000 Consolidated Shs’000 Shs’000 Sales to external customers Sales Comprising Major external customers sales All other external customers sales Geographical analysis UK & Continental Europe Kenya Others 293,373 290,632 1,816,675 1,869,507 371,562 153,072 219,645 211,062 122,671 126,926 2,823,926 2,651,199 293,373 - 290,632 - 1,779,835 1,835,513 33,994 36,840 365,736 5,826 149,898 3,174 - 219,645 - 211,062 - 122,671 3,141 123,785 2,438,944 384,982 2,279,184 372,015 293,373 290,632 1,816,675 1,869,507 371,562 153,072 219,645 211,062 122,671 126,926 2,823,926 2,651,199 - 293,373 - - 290,632 - 1,779,835 1,835,513 33,994 - 36,840 - - 5,826 365,736 - 3,174 149,898 - 219,645 - - 211,062 - - 122,671 - - 123,785 3,141 1,779,835 678,355 365,736 1,835,513 662,647 153,039 293,373 290,632 1,816,675 1,869,507 371,562 153,072 219,645 211,062 122,671 126,926 2,823,926 2,651,199 44 Kakuzi Plc Financial Statements For the year ended 31 December 2017 Notes (continued) 5 Segmental reporting - Company (continued) 2017 2016 2017 2016 2017 2016 Tea Avocados Madacamia 2017 Forestry 2016 Shs’000 Shs’000 Shs’000 Shs’000 Shs’000 Shs’000 Shs’000 Shs’000 Shs’000 Shs’000 2017 2016 2017 2016 All other segments Consolidated Shs’000 Shs’000 Profit/(loss) Gross profit /(loss) before depreciation and fair value changes in non-current biological assets Depreciation charge Changes in fair value of non-current biological assets Gross profit/(loss) Distribution costs Segment profit Other income Interest income Admin expenditure (under COS) Profit/(loss) before income tax Income tax expense Profit/(loss) for the year Assets (all located in Kenya) Segment assets Unallocated assets Liabilities Segment liabilities Unallocated liabilities Additions Property, plant and equipment Biological assets 19,013 (14,583 ) 2,911 1,409,412 1,465,961 (60,187 ) (62,875 ) (14,030 ) 176,463 (51,896 ) 63,822 (39,598 ) 61,369 (5,634 ) 64,838 (5,601 ) (23,557 ) (32,592 ) (21,138 ) (41,605 ) 1,642,700 (167,580 ) 1,576,394 (161,021 ) - 4,430 - 4,430 2,485 - - 6,915 (2,097 ) 4,818 - - - (11,119 ) 1,346,537 1,405,774 (609,977 ) (574,162 ) 795,797 772,375 - - - - - - 795,797 772,375 (205,155 ) (234,208 ) 590,642 538,167 - (11,119 ) 2,651 - - (8,468 ) 2,183 (6,285 ) - 124,567 (23,786 ) 100,781 - - 24,224 (10,658 ) 13,566 - 100,781 (30,560 ) 70,221 13,566 (3,497 ) 10,069 36,741 92,476 - 92,476 - - - 92,476 (28,042 ) 64,434 34,442 93,679 - 93,679 - - - 93,679 (24,150 ) 69,529 46,058 (10,091 ) - (10,091 ) 3,936 94,440 (211,709 ) (123,424 ) 37,427 (85,997 ) 32,794 (29,949 ) - (29,949 ) 4,055 75,187 (186,088 ) (136,795 ) 35,265 (101,530 ) 82,799 1,557,919 (597,948 ) 959,971 6,421 94,440 (211,709 ) 849,123 (257,480 ) 591,643 67,236 1,482,609 (620,635 ) 861,974 6,706 75,187 (186,088 ) 757,779 (195,354 ) 562,425 628,291 806,910 1,012,459 1,011,763 983,220 881,975 695,109 655,801 291,033 305,738 149,230 97,647 38,750 34,535 - - - - 305,805 298,891 3,610,112 2,136,014 5,746,126 3,662,187 1,402,227 5,064,414 493,785 930,305 1,424,090 431,073 787,083 1,218,156 10,009 - 10,009 3,065 - 3,065 90,991 - 90,991 64,211 - 64,211 143,678 - 143,678 224,100 - 224,100 3,915 12,795 16,710 16,273 20,141 36,414 29,231 404 29,635 34,449 2,141 36,590 277,824 13,199 291,023 342,098 22,282 364,380 45 Kakuzi Plc Financial Statements For the year ended 31 December 2017 Notes (continued) 6 Biological assets – Group and Company (i) Non current assets Changes in carrying amounts of non-current biological assets comprise: Year ended 31 December 2017 Livestock Shs’000 Plantation Shs’000 Total Shs’000 At start of year Increase due to purchases and development Gains arising from changes in fair value less costs to sell Decrease due to harvest and sales 123,135 404 46,058 (42,664 ) 517,000 12,795 36,741 (29,636 ) 640,135 13,199 82,799 (72,300 ) At end of year 126,933 536,900 663,833 Year ended 31 December 2016 At start of year Increase due to purchases and development Gains arising from changes in fair value less costs to sell Decrease due to harvest and sales 128,218 2,141 32,794 (40,018 ) 486,400 20,141 34,442 (23,983 ) 614,618 22,282 67,236 (64,001 ) At end of year 123,135 517,000 640,135 (ii) Current assets Growing agricultural produce on bearer plants as at the reporting date Avocado Macadamia Pineapples Tea 2017 Shs’000 151,294 29,797 11,779 2,881 2016 Shs’000 111,823 28,448 22,434 1,598 195,751 164,303 46 Kakuzi Plc Financial Statements For the year ended 31 December 2017 Notes (continued) 6 Biological assets – Group and Company (continued) Biological assets are carried at fair value at the end of each reporting period. Plantations comprise forestry. The fair value of forestry is determined by external independent valuation based on recent market transaction prices. The fair value of livestock is determined based on market prices of livestock of similar age, breed and genetic merit. The fair value of growing agricultural produce is estimated using the market approach. The key assumptions made in the determination of the fair value are: climatic conditions will remain the same and hence productivity will be similar to prior years the biological transformation process of the growing agricultural produce will remain consistent to prior produce the market price will remain constant based on estimated future market prices the actual costs to sell will not change significantly from estimated costs The following table presents Group’s biological assets that are measured at fair value: Level 1 Level 2 Level 3 Total Valuation technique Shs’000 Shs’000 Shs’000 Shs’000 Year ended 31 December 2017 Livestock Avocado Tea Forestry Macadamia Pineapple Market approach Market approach Market approach Market approach Market approach Market approach Year ended 31 December 2016 Livestock Avocado Tea Forestry Macadamia Pineapple Market approach Market approach Market approach Market approach Market approach Market approach - - - - - - - 126,933 - 2,881 536,900 - 11,779 - 151,294 - - 29,797 - 126,933 151,294 2,881 536,900 29,797 11,779 678,493 181,091 859,584 - - - - - - 123,135 - 1,598 517,000 - 22,434 - 111,823 - - 28,448 - 123,135 111,823 1,598 517,000 28,448 22,434 - 664,167 140,271 804,438 There were no transfers between any levels during the year. 47 Kakuzi Plc Financial Statements For the year ended 31 December 2017 Notes (continued) 6 Biological assets – Group and Company (continued) The following unobservable inputs at the respective year ends were used to measure the Group’s avocado growing agricultural produce classified as level 3 of fair value hierarchy. Year ended 31 December 2017 Description Fair value at 31 December Valuation techniques Unobservable inputs Range of unobservable inputs Relationship of unobservable inputs to fair value Shs’000 Avocado Produce 151,294 Market approach Yield - Kgs per Hectare 17,800 The higher the yield, the higher the value Net price per carton €4.70 – €6.21 The higher the market price, the higher the fair value Stage of growth 12% – 15% The higher the stage of growth, the higher the fair value Year ended 31 December 2016 Description Fair value at 31 December Valuation techniques Unobservable inputs Range of unobservable inputs Relationship of unobservable inputs to fair value Shs’000 Avocado Produce 111,823 Market approach Yield - Kgs per Hectare 17,000 The higher the yield, the higher the value Net price per carton €4.45 – €5.26 The higher the market price, the higher the fair value Stage of growth 12% – 15% The higher the stage of growth, the higher the fair value 48 Kakuzi Plc Financial Statements For the year ended 31 December 2017 Notes (continued) 6 Biological assets – Group and Company (continued) The following unobservable inputs at the year end were used to measure the Group’s macadamia growing agricultural produce Year ended 31 December 2017 Description Fair value at 31 December Valuation techniques Unobservable inputs Range of unobservable inputs Relationship of unobservable inputs to fair value Shs’000 Macadamia Produce 29,797 Market approach Yield Kgs/Ha 1,878 The higher the yield, the higher the value Net price per kg of NIS Stage of growth Ksh.93.00 The higher the market price, the higher the fair value 40% - 45% The higher the stage of growth, the higher the fair value Year ended 31 December 2016 Description Fair value at 31 December Valuation techniques Unobservable inputs Range of unobservable inputs Relationship of unobservable inputs to fair value Shs’000 Macadamia Produce 28,448 Market approach Yield Kgs/Ha 1,805 The higher the yield, the higher the value Net price per kg of NIS Stage of growth Ksh.93.00 The higher the market price, the higher the fair value 40% - 45% The higher the stage of growth, the higher the fair value 49 Kakuzi Plc Financial Statements For the year ended 31 December 2017 Notes (continued) 6 Biological assets – Group and Company (continued) Areas planted with the various crops at the year end: Forestry plantations Cattle numbers at the year end 2017 Hectares 2016 Hectares 1,792 1,798 Head 4,409 Head 4,552 Output of agricultural produce during the year: Tea (green leaf) Avocado Pineapple Macadamia 2017 Hectares 2016 Hectares Metric tonnes Metric tonnes 510 606 24 1,026 510 515 52 953 6,789 7,282 1,414 568 7,437 7,102 1,656 476 Timber harvested during the year was: 5,838 5,353 Cubic metres Cubic metres Agricultural produce of tea bushes is the harvested green leaf which is processed soon after harvest in a factory to made tea. Timber is included under inventory. 50 Kakuzi Plc Financial Statements For the year ended 31 December 2017 Notes (continued) 6 Biological assets – Group and Company (continued) Fair value of the agricultural output after deducting costs to sell: Tea (green leaf) Avocado Pineapple Macadamia Others 7 Other income – Group and Company Net foreign exchange gain other than cash and cash equivalents (Loss)/gain on disposal of property, plant and equipment Rental Income Sundry 8 Interest income and finance costs -– Group and Company Interest income Interest income on short term bank deposits 2017 Shs’000 2016 Shs’000 293,374 1,158,723 45,729 349,287 230,291 290,624 1,130,107 53,160 142,523 213,722 2,077,404 1,830,136 2017 Shs’000 2016 Shs’000 1,714 (186 ) 3,987 906 590 402 3,956 1,758 6,421 6,706 2017 Shs’000 2016 Shs’000 95,820 76,551 95,820 76,551 Finance costs Interest expense on bank borrowings, overdrafts and exchange losses (1,380 ) (1,364 ) 51 Kakuzi Plc Financial Statements For the year ended 31 December 2017 Notes (continued) 9 Expenses by nature – Group and Company The following items have been charged/(credited) in arriving at profit before income tax:- Depreciation on property, plant and equipment (Note 17) Repairs and maintenance expenditure on property, plant and equipment Amortisation of prepaid operating lease rentals (Note 18) Gain arising from changes in fair value less costs to sell of non-current biological assets (Note 6) Cost of inventories sold Employee benefits expense (Note 10) Auditor’s remuneration Loss/(profit) on disposal of property plant and equipment Directors remuneration 10 Employee benefits expense – Group and Company The following items are included within employee benefits expense: Salaries and wages Post employment benefits costs: - Post employment benefit obligations (Note 16) - Defined contribution scheme - National Social Security Fund 2017 Shs’000 167,580 66,319 5 (82,799 ) 1,289,324 528,460 5,800 186 4,077 2016 Shs’000 161,021 65,008 5 (67,236 ) 1,160,105 493,930 6,474 (402) 3,328 2017 Shs’000 2016 Shs’000 496,008 463,823 16,065 5,592 10,795 15,116 3,687 11,304 528,460 493,930 The average number of employees during the year ended 31 December 2017 was 2,852 (2016 – 2,866). Kakuzi Plc 52 Financial Statements For the year ended 31 December 2017 Notes (continued) 11 Income tax – Group and Company (a) Taxation charge Current income tax Deferred income tax charge (Note 15) 2017 Shs’000 257,351 129 2016 Shs’000 110,079 85,275 257,480 195,354 (b) Reconciliation of tax based on accounting profit to tax charge The tax on the Group’s profit before income tax differs from the theoretical amount that would arise using the statutory income tax rate as follows: Profit before income tax Tax calculated at the statutory income tax rate of 30% (2016: 30%) Tax effect of: Tax credit arising from investment deduction in the year Income not subject to tax Expenses not deductible for income tax purposes 2017 Shs’000 2016 Shs’000 849,123 757,779 254,737 227,334 - (1,586 ) 4,329 (43,915 ) - 11,935 Taxation charge 257,480 195,354 (c) Group tax charge relating to components of other comprehensive income Remeasurement of post-employment benefit obligations: Actuarial gain (Note 16) Deferred tax charge to other comprehensive income (Note 15) 2,479 (744 ) 8,480 (2,544 ) 2017 Shs’000 2016 Shs’000 Net credit to other comprehensive income 1,735 5,936 53 Kakuzi Plc Financial Statements For the year ended 31 December 2017 Notes (continued) 11 Income tax – Group and Company (Continued) (d) Current tax payable/(recoverable) Group Company 2017 Shs’000 2016 Shs’000 2017 Shs’000 2016 Shs’000 At start of year Taxation charge (Note 11 (a)) Paid during the year (1,821 ) 257,351 (122,720 ) 128,071 110,079 (239,971 ) (1,768 ) 257,351 (122,720 ) 128,124 110,079 (239,971 ) At end of year 132,810 (1,821) 132,863 (1,768 ) 12 Earnings and dividends – Group i) Basic and diluted earnings per ordinary share Basic earnings per ordinary share is calculated on the profit attributable to the members of Kakuzi Plc and on the 19,599,999 ordinary shares in issue at 31 December 2017 and 31 December 2016 as follows:- 2017 2016 Profit attributable to equity holders of the Group (Shs ‘000) 591,643 562,425 Number of ordinary shares in issue (thousands) 19,600 19,600 Basic and diluted earnings per ordinary share (Shs) 30.19 28.70 The Group had no potentially dilutive ordinary shares outstanding at 31 December 2017 and 31 December 2016. ii) Dividends per ordinary share At the annual general meeting to be held on 15 May 2018, the Directors will recommend the payment of a first and final dividend of 140% of par value equivalent to Shs 7.00 per ordinary share (Shs 137,200,000) ((2016: Shs 6.00 per ordinary share) (Shs 117,600,000)) in respect of the year ended 31 December 2017. 13 Share capital Number of ordinary shares (Thousands) Ordinary share capital Shs ‘000 Authorised At 1 January 2016, 31 December 2016 and 31 December 2017 20,000 100,000 Issued At 1 January 2016, 31 December 2016 and 31 December 2017 19,600 98,000 The par value of the shares is Shs 5 54 Kakuzi Plc Financial Statements For the year ended 31 December 2017 Notes (continued) 14 Borrowing facilities – Group and Company 2017 Shs’000 2016 Shs’000 The Group has the following undrawn committed borrowing facilities: Floating rate (expiring within one year) 626,300 626,300 The facilities are subject to annual review at various dates during the year 2018. The undrawn bank facilities of Shs 626,300,000 are secured by an undertaking, at any time if and when required by the banks, to execute legal or other mortgages and charges including fixed or floating charges or assigned in favour of the banks. 15 Deferred income tax – Group and Company Deferred income tax is calculated using the enacted tax rate of 30% (2016: 30%). The net deferred taxation liability is attributable to the following items: Property, plant and equipment Biological assets Other temporary differences 2017 Shs’000 654,291 215,409 (125,925 ) 2016 Shs’000 638,158 206,203 (101,459 ) Net deferred income tax liability 743,775 742,902 The movement on the deferred income tax account is as follows: At start of year Charge to profit or loss (Note 11(a)) Charge to other comprehensive income (Note 11(c)) 2017 Shs’000 742,902 129 744 2016 Shs’000 655,083 85,275 2,544 At end of year 743,775 742,902 The following amounts, determined after appropriate offsetting, are shown in the statement of financial position. Deferred income tax assets Deferred income tax liabilities 55 2017 Shs’000 2016 Shs’000 (125,925 ) 869,700 (101,459 ) 844,361 743,775 742,902 Kakuzi Plc Financial Statements For the year ended 31 December 2017 Notes (continued) 16 Post employment benefit obligations – Group and Company The amounts recognised in the statement of financial position are determined as follows: 2017 Shs’000 2016 Shs’000 Present value of post employment benefit obligations 85,166 76,492 Split as follows: Non-current portion Current portion 63,415 21,751 58,516 17,976 The movement in present value of the post employment benefit obligations is as follows: At start of year Net expense recognised in statement of comprehensive income Benefits paid At end of year 2017 Shs’000 2016 Shs’000 76,492 13,586 (4,912 ) 72,000 6,636 (2,144 ) 85,166 76,492 The amounts recognised in the statement of profit or loss within ‘cost of sales’ for the year are as follows: Current service cost Interest on obligation 2017 Shs’000 4,970 11,095 2016 Shs’000 4,847 10,269 Total included in employee benefits expenses (Note 10) 16,065 15,116 Actuarial gain recognised in other comprehensive income (Note 11(c)) 2,479 8,480 56 Kakuzi Plc Financial Statements For the year ended 31 December 2017 Notes (continued) 16 Post employment benefit obligations Group and Company (continued) 31 December 2017 31 December 2016 Gratuity (Makuyu) Shs’000 Gratuity (Nandi Hills) Shs’000 Total Shs’000 Gratuity (Makuyu) Shs’000 Gratuity (Nandi Hills) Shs’000 Total Shs’000 At start of year 51,358 25,134 76,492 48,021 23,979 72,000 Current service cost Interest expense 3,481 7,594 1,489 3,501 4,970 11,095 3,345 6,929 1,502 3,340 4,847 10,269 11,075 4,990 16,065 10,274 4,842 15,116 Remeasurements: (Gain)/loss from change in assumptions Experience (gains)/losses (5,257 ) 2,372 (1,219 ) 1,625 (6,476 ) 3,997 (1,153 ) (5,384 ) (1,226 ) (717 ) (2,379 ) (6,101 ) Benefits paid At end of year (2,885 ) 406 (2,479 ) (6,537 ) (1,943 ) (8,480 ) (1,451 ) (3,461 ) (4,912 ) (400 ) (1,744 ) (2,144 ) 58,097 27,069 85,166 51,358 25,134 76,492 57 Kakuzi Plc Financial Statements For the year ended 31 December 2017 Notes (continued) 16 Post employment benefit obligations Group and Company (continued) The principal actuarial assumptions used are as follows: Gratuity (Makuyu) Gratuity (Nandi Hills) Discount rate (% p.a.) Future salary increases (% p.a.) first year second year Thereafter 2017 13.5% 10% 10% 10% 2016 14.5% 10% 10% 10% 2017 13.5% 10% 10% 10% 2016 14.5% 10% 10% 10% Mortality (pre-retirement) A 1949 - 1952 A 1949 - 1952 A 1949 - 1952 A 1949 - 1952 Withdrawals Ill-Health At rates consistent with similar arrangements At rates consistent with similar arrangements At rates consistent with similar arrangements At rates consistent with similar arrangements At rates consistent with similar arrangements At rates consistent with similar arrangements At rates consistent with similar arrangements At rates consistent with similar arrangements Retirement age 55 years 55 years 55 years 55 years The sensitivity of the defined obligation to changes in the weighted principal assumptions is: Impact on post employment benefit obligation Changes in assumption Increase/Decrease in assumption Discount rate Salary growth rate by 1% by 1% Shs 4,409,000 Not material 58 Kakuzi Plc Financial Statements For the year ended 31 December 2017 Notes (continued) 16 Post employment benefit obligations Group and Company (continued) The above sensitivity analyses are based on a change in an assumption while holding all other assumptions constant. In practice, this is unlikely to occur, and changes in some of the assumptions may be correlated. When calculating the sensitivity of the post employment benefit obligation to significant actuarial assumptions the same method (present value of the post employment benefit obligation calculated with the projected unit credit method at the end of the reporting period) has been applied as when calculating the liability recognised within the statement of financial position. The methods and types of assumptions used in preparing the sensitivity analysis did not change compared to the previous period. Five year summary: 2017 Shs’000 2016 Shs’000 2015 Shs’000 2014 Shs’000 2013 Shs’000 Present value of post employment benefit obligations – Group and Company 85,166 76,492 72,000 68,840 52,896 Net expense recognised in the statement of comprehensive income – Group and Company - within ‘cost of sales’ - within ‘other comprehensive income (gain)/loss 16,065 (2,479 ) 15,116 (8,480 ) 14,359 (7,079 ) 11,411 8,579 12,216 (16,107 ) 59 Kakuzi Plc Financial Statements For the year ended 31 December 2017 Notes (continued) 17 Property, plant and equipment Group and Company Year ended 31 December 2017 Cost At start of year Transfers Additions Disposals At end of year Depreciation and impairment At start of year Charge for the year Disposals At end of year Net book amount Depreciation and impairment at year end comprises: Depreciation Impairment Buildings, freehold land, dams and improvements Shs’000 Plant & machinery Shs’000 Bearer plants Shs’000 Motor vehicles, tractors, trailers and implements Shs’000 Furniture, fittings and equipment Shs’000 Capital work in progress Shs’000 Total Shs’000 1,182,306 47,923 - - 1,174,162 4,771 87,910 (683 ) 1,230,229 1,266,160 160,759 72,560 - 233,319 996,910 233,319 - 233,319 492,861 31,649 (109 ) 524,401 741,759 518,730 5,671 524,401 262,630 8,633 8,627 - 279,890 115,529 22,724 - 138,253 141,637 137,695 558 138,253 214,945 - 60,290 (1,409 ) 273,826 152,800 27,269 (1,409 ) 178,660 95,166 178,660 - 178,660 89,390 - 6,965 - 96,355 52,475 13,378 - 65,853 30,502 65,767 86 65,853 360,705 (61,327 ) 114,032 - 3,284,138 - 277,824 (2,092 ) 413,410 3,559,870 - - - - 974,424 167,580 (1,518 ) 1,140,486 413,410 2,419,384 - - - 1,134,171 6,315 1,140,486 Fixed assets stated at cost of Shs 488,510,676 have been fully depreciated. The notional annual depreciation charge in respect of these values would have been Shs 64,939,563. 60 Kakuzi Plc Financial Statements For the year ended 31 December 2017 Notes (continued) 17 Property, plant and equipment (continued) Group and Company Year ended 31 December 2016 Cost At start of year Transfers Additions Disposals At end of year Depreciation and impairment At start of year Charge for the year Disposals At end of year Net book amount Depreciation and impairment at year end comprises: Depreciation Impairment Buildings, freehold land, dams and improvements Shs’000 Plant & machinery Shs’000 Bearer plants Shs’000 Motor vehicles, tractors, trailers and implements Shs’000 Furniture, fittings and equipment Shs’000 Capital work in progress Shs’000 Total Shs’000 1,089,841 92,465 - - 953,983 97,979 125,966 (3,766 ) 1,182,306 1,174,162 82,793 77,966 - 160,759 466,206 30,338 (3,683 ) 492,861 1,021,547 681,301 161,791 63,317 37,526 (4 ) 262,630 95,059 20,474 (4 ) 115,529 147,101 176,095 - 40,618 (1,768 ) 214,945 134,033 20,535 (1,768 ) 152,800 51,887 - 39,032 (1,529 ) 89,390 42,281 11,708 (1,514 ) 52,475 515,510 (253,761 ) 98,956 - 2,949,107 - 342,098 (7,067 ) 360,705 3,284,138 - - - - 820,372 161,021 (6,969 ) 974,424 62,145 36,915 360,705 2,309,714 160,759 - 160,759 487,190 5,671 492,861 114,971 558 115,529 152,800 - 152,800 52,389 86 52,475 - - - 968,109 6,315 974,424 Fixed assets stated at cost of Shs 400,691,650 have been fully depreciated. The notional annual depreciation charge in respect of these values would have been Shs 48,505,771. 61 Kakuzi Plc Financial Statements For the year ended 31 December 2017 Notes (continued) 18 Prepaid operating lease rentals – Group and Company At start of year Amortisation charge for the year 2017 Shs’000 2016 Shs’000 4,389 (5 ) 4,394 (5 ) At end of year 4,384 4,389 19 Investment in subsidiaries The subsidiary companies are all incorporated in Kenya and have the same year end. Estates Services Limited and Kaguru EPZ Limited are wholly owned and are dormant. Year ended 31 December 2017 At start of year At end of year Year ended 31 December 2016 At start of year At end of year Kaguru EPZ Limited Shs’000 Estates Services Limited Shs’000 Total Shs’000 1,670 2,625 4,295 1,670 2,625 4,295 Kaguru EPZ Limited Shs’000 Estates Services Limited Shs’000 Total Shs’000 1,670 2,625 4,295 1,670 2,625 4,295 62 Kakuzi Plc Financial Statements For the year ended 31 December 2017 Notes (continued) 20 Financial assets held to maturity – Group and Company Financial assets held to maturity comprise corporate bonds carried at amortised cost. Maturity rate Average Interest Rate Maturity date 2017 Shs’000 2016 Shs’000 Kengen Limited 12.50% 31-Oct-19 30,768 46,153 Treasury Infrastructure Bonds 12.50% 18-Nov-24 312,551 - The movement in financial assets held to maturity is as follows: At start of year Redeemed in the year Additions in the year 343,319 46,153 2017 Shs’000 46,153 (15,385 ) 312,551 2016 Shs’000 61,538 (15,385 ) - At end of year 343,319 46,153 Non current portion Current portion 218,444 124,875 30,768 15,385 343,319 46,153 The Directors consider that the carrying amounts of the financial assets held to maturity in the consolidated financial statements approximate their fair values. 21 Inventories – Group and Company Spare parts and consumable materials Macadamia nuts Poles & timber 103,922 - 42,402 108,984 29,551 32,577 Total inventories 146,324 171,112 The cost of inventories recognised as an expense and included in cost of sales amounted to Shs 1,289,324,000 (Shs 1,160,105,000). Kakuzi Plc 63 Financial Statements For the year ended 31 December 2017 Notes (continued) 22 Receivables and prepayments – Group and Company Trade receivables Due from related companies (Note 26(v)) Other receivables and prepayments Less non current portion Current receivables & prepayments 2017 Shs’000 62,641 133,170 128,571 2016 Shs’000 38,427 142,159 115,625 324,382 (32,877 ) 296,211 (30,061 ) 291,505 266,150 Non current receivables 32,877 30,061 Non current receivables are due within five years from reporting date and are secured and interest free. None of the amounts were impaired (2016: Nil). The carrying amounts of the current receivables approximate to their fair value. 23 Payables and accrued expenses Group 2017 Shs’000 2016 Shs’000 Company 2017 Shs’000 2016 Shs’000 Trade payables Due to related companies (Note 26(v)) Accrued expenses Other payables 42,605 - 27,030 392,704 83,268 - 31,261 284,233 42,605 8,383 27,030 392,704 83,268 8,383 31,261 284,233 462,339 398,762 470,722 407,145 The carrying amounts of the payables and accrued expenses approximate to their fair values. 24 Cash and bank balances – Group and Company For the purposes of the statement of cash flows, cash and cash equivalents comprise the following:- Cash at bank and in hand Short term deposits 2017 Shs’000 2016 Shs’000 18,884 1,629,865 60,945 1,369,631 1,648,749 1,430,576 The Directors consider that the carrying amounts of cash and bank balances in the consolidated financial statements approximate their fair values. 64 Kakuzi Plc Financial Statements For the year ended 31 December 2017 Notes (continued) 25 Cash generated from operations Reconciliation of profit before income tax to cash generated from operations: Profit before income tax Adjustments for: Interest income (Note 8) Interest expense Depreciation (Note 17) Amortisation of prepaid operating lease rentals (Note 18) Loss/(gain) on sale of property, plant and equipment Gains arising from changes in fair value less estimated point-sale costs of biological assets (Note 6) Decrease in the fair value of biological assets due to sales and harvest and disposal (Note 6) Fair value movement in biological asset – growing agricultural produce Changes in working capital: - Decrease/(increase) in inventories - (Increase) in receivables and prepayments - Increase in payables and accrued expenses - Increase in post-employment benefit obligations 2017 Shs’000 2016 Shs’000 849,123 757,779 (95,820 ) 1,380 167,580 5 186 (76,551 ) 1,364 161,021 5 (402 ) ) (82,799 ) (67,236 72,300 (31,448 ) 24,788 (28,171 ) 63,577 11,153 64,001 (53,670 ) (87,550 ) (17,050 ) 171,738 12,972 Cash generated from operations 951,854 866,421 65 Kakuzi Plc Financial Statements For the year ended 31 December 2017 Notes (continued) 26 Related party transactions – Group and Company The group is controlled by Camellia Plc, incorporated in England. Camellia Plc is the ultimate parent of the Group. There are other companies that are related to Kakuzi Plc through common shareholdings or common Directorships. Fellow Subsidiaries within the Camellia Plc Group act as brokers and managing agents for certain products and operations of the Group. The following transactions were carried out with related parties: 2017 2016 Shs’000 Shs’000 257,102 264,966 36,572 38,489 66,414 23,851 30,368 69,974 141,475 124,193 47,885 567 44,728 329 48,452 45,057 3,600 477 3,000 328 4,077 3,328 i) Sale of goods to: Eastern Produce Kenya Limited ii) Purchase of goods and services from: Linton Park Plc Robertson Bois Dickson Anderson Limited Eastern Produce Kenya Limited iii) Key management compensation Salaries and other short-term employment benefits Post employment benefits iv) Directors’ remuneration Fees for services as a Director Other emoluments 66 Kakuzi Plc Financial Statements For the year ended 31 December 2017 Notes (continued) 26 Related party transactions – Group and Company (continued) v) Outstanding balances arising from sale and purchase of goods and service Group 2017 2016 Company 2017 2016 Shs’000 Shs’000 Shs’000 Shs’000 133,170 - 118,940 23,219 133,170 - 118,940 23,219 133,170 142,159 133,170 142,159 - - - - - - 2,570 5,813 2,570 5,813 8,383 8,383 Due from related Companies Eastern Produce Kenya Limited Robertson Bois Dickson Anderson Limited Due to related Companies Estates Services Limited Kaguru EPZ Limited 27 Commitments – Group and Company Capital commitments Capital expenditure contracted for at the reporting date but not recognised in the financial statements is as follows: Property, plant and equipment 2017 Shs’000 2016 Shs’000 2,414 2,826 ------------- 000 ------------- 67 Kakuzi Plc Five year record Turnover 2,823,926 2,651,199 2,481,844 1,689,917 1,384,375 2017 Shs'000 2016 Shs'000 2015 Shs'000 2014 Shs'000 2013 Shs'000 Profit before income tax Income tax 849,123 (257,480 ) 757,779 (195,354 ) 667,341 (207,627 ) 232,799 (72,594 ) 239,306 (74,248 ) Profit after income tax Non controlling interest 591,643 - 562,425 - 459,714 - 160,205 - 165,058 - Profit attributable to the members of Kakuzi Plc 591,643 562,425 459,714 160,205 165,058 Dividends: - Proposed final dividend - for the year 137,200 117,600 98,000 73,500 73,500 Capital and reserves: - Called up share capital Reserves and non controlling interest 98,000 4,207,429 98,000 3,733,386 98,000 3,268,961 98,000 2,882,747 98,000 2,806,028 Total equity 4,305,429 3,831,386 3,366,961 2,980,747 2,904,028 Basic earnings per ordinary share (Shs) 30.19 28.70 23.45 8.17 8.42 Dividends per ordinary share (Shs) 7.00 6.00 5.00 3.75 3.75 Dividend cover 4.31 4.78 4.69 2.18 2.25 Total equity per ordinary share (Shs) 219.66 195.48 171.78 152.08 148.16 All amounts are stated in Kenya shillings thousands (shs’000) except where otherwise indicated. 68 Kakuzi Plc Major shareholders and distribution schedule MAJOR SHAREHOLDERS The 10 major shareholders and their holdings at 31 December 2017 were: Shareholder name John Kibunga Kimani Lintak Investments Limited* 1 2 Bordure Limited* 3 4 Standard Chartered Nominees – A/C 9532 5 G H Kluge & Sons Limited 6 HBSC Global Custody Nominee (UK) Ltd 7 Kenyalogy.com Limited 8 CFC Stanbic Nominees Ltd – A/C NR1031143 9 Joe Barrage Wanjui 10 John Okuna Ogango Number of ordinary shares 5,816,708 5,107,920 4,828,714 388,334 239,118 200,000 192,400 172,383 122,004 104,400 17,171,981 % 29.68% 26.06% 24.64% 1.98% 1.22% 1.02% 0.98% 0.88% 0.62% 0.53% 87.61% * Camellia Plc incorporated in England, by virtue of its interests in Bordure Limited incorporated in England and Lintak Investments Limited incorporated in Kenya, is deemed to be interested in these ordinary shares. DISTRIBUTION SCHEDULE The distribution of ordinary shares as at 31 December 2017 was: Ordinary shares range Less than 500 501 to 5,000 5,001 to 10,000 10,001 to 100,000 100,001 to 1,000,000 Over 1,000,000 Number of shareholders 744 461 49 45 8 3 1,310 Number of ordinary shares 126,512 837,385 375,000 988,288 1,519,472 15,753,342 19,599,999 % 0.65% 4.27% 1.91% 5.04% 7.75% 80.37% 100.00% 69 Kakuzi Plc Form of Proxy (Annual General Meeting) I/We .…………………………………………….………..…………………..…………...………...………….…...…….…….., of ………………………………..………………………………… being a member of the above-named Group, hereby appoint: ……………………………………………………………………………………………………..……, of ……..………………………………………………....,or failing him …………………………………………………, of …………………………………………………………………..., or failing him the duly appointed Chairman of the meeting, as my/our proxy to vote for me/us on my/our behalf at the Annual General Meeting of the Group to be held on the 15th day of May 2018, and at any adjournment thereof. As witness my hand this …………………………….. day of …………………………………………………..2018 Signed ……………………………………………………………………………………………………………………… Signed ……………………………………………………………………………………………………………………… Note: 1. 2. 3. A member entitled to attend and vote is entitled to appoint a proxy to attend and vote in his stead and a proxy need not be a member of the Group. In the case of a member being a limited Group, this form must be completed under its common seal or under the hand of an officer or attorney duly authorized in writing. Proxies must be in the hands of the Group Secretary not less than 48 hours before the time of holding the meeting. 70 FOLD 2 STAMP 1 D L O F Kakuzi Plc P O Box 24 Thika 01000 Kenya FOLD 3 INSERT FLAP INSIDE
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