NOTES TO THE FINANCIAL STATEMENTS | Note 7

7. INTANGIBLE ASSETS
 
   Group 
   Brands 
and 
intellectual 
property 
R'000 		    Pharma-  
ceutical  
dossiers*
R'000  		    Internally 
generated 
software 
R'000 		    Computer 
software 
R'000 		    Goodwill 
R'000 		    Customer 
relationships 
R'000 		    Total 
R'000 		   
Reconciliation for the year ended 30 June 2020                             
At 30 June 2019                             
At cost  47 873     286 365      754 336     477 803     1 399 808     303 452     3 269 637    
Accumulated amortisation and impairment  (39 934)    –      (213 416)    (224 457)    (48 674)    (187 144)    (713 625)   
Closing carrying amount 30 June 2019  7 939     286 365      540 920     253 346     1 351 134     116 308     2 556 012    
Movements for the year ended 30 June 2020                             
Additions**  –     –      203 318     80 713     22 216     –     306 247    
Amortisation  (841)    (14 454)    (68 854)    (41 927)    –     (38 077)    (164 153)   
Impairment loss recognised in profit or loss  –     –      –     (2 919)    –     –     (2 919)   
Carrying value at 30 June 2020  7 098     271 911      675 384     289 213     1 373 350     78 231     2 695 187    
At 30 June 2020                             
At cost  47 873     286 365      957 654     535 312     1 422 024     303 452     3 552 680    
Accumulated amortisation and impairment  (40 775)    (14 454)    (282 270)    (246 099)    (48 674)    (225 221)    (857 493)   
Closing carrying amount  7 098     271 911      675 384     289 213     1 373 350     78 231     2 695 187    
* Pharmaceutical dossiers relate to a set of documents that contains all the technical data (administrative, quality, non-clinical and clinical) of a pharmaceutical product in order to promote, market, sell, import and distribute the product in a specific territory.
** In relation to the acquisition of Activo Health (Pty) Ltd in March 2019, in terms of the sale of shares agreement, a preacquisition dividend was declared and payment effected in December 2019. In terms of IFRS 3 Business Combination, the provisional accounting applied to the acquisition of Activo Health (Pty) Ltd was finalised in December 2019 (which is within the measurement period), resulting in an increase in Goodwill.
   Group 
   Brands 
and 
intellectual 
property 
R'000 		    Pharma-   
ceutical   
dossiers**
R'000   		    Internally 
generated 
software 
R'000 		    Computer 
software 
R'000 		    Goodwill 
R'000 		    Customer 
relationships 
R'000 		    Total 
R'000 		   
Reconciliation for the year ended 30 June 2019                             
At 30 June 2018                             
At cost  47 873     –       607 499     431 425     926 900     269 558     2 283 255    
Accumulated amortisation and impairment  (37 703)    –       (131 164)    (167 317)    (43 412)    (164 573)    (544 169)   
Closing carrying amount 30 June 2018  10 170     –       476 335     264 108     883 488     104 985     1 739 086    
Movements for the year ended 30 June 2019                             
Take on balance  –     –       –     29 177     –     –     29 177    
Business acquisitions*  –     –       –     –     472 908     282 600     755 508    
Additions  –     –       186 837     54 860     –     –     241 697    
Amortisation  (2 231)    –       (35 252)    (50 887)    –     (22 571)    (110 941)   
Scrapping of intangible assets  –     –       (47 000)    (6 253)    (5 262)    –     (58 515)   
Reclassification***  –     286 365       –     (37 659)    –     (248 706)    –    
Derecognition  –     –       (40 000)    –     –     –     (40 000)   
Carrying value at 30 June 2019  7 939     286 365       540 920     253 346     1 351 134     116 308     2 556 012    
At 30 June 2019                             
At cost  47 873     286 365       754 336     477 803     1 399 808     303 452     3 269 637    
Accumulated amortisation and impairment  (39 934)    –       (213 416)    (224 457)    (48 674)    (187 144)    (713 625)   
Closing carrying amount 30 June 2019  7 939     286 365       540 920     253 346     1 351 134     116 308     2 556 012    
* The recognition of goodwill (R472 million) and customer relationships (R283 million) is as a result of the business combinations in the prior financial year.
** Pharmaceutical dossiers relate to a set of documents that contains all the technical data (administrative, quality, non-clinical and clinical) of a pharmaceutical product in order to promote, market, sell, import and distribute the product in a specific territory.
*** Pharmaceutical dossiers that were previously recognised in computer software and customer relationships were reclassified to a separate category, Pharmaceutical dossiers.

The reclassification has no impact on the depreciation as the Pharmaceutical dossiers continued to be amortised at the same useful life as when they were classified in computer software and customer relationships.
  Group Company
  2020
R'000		   2019
R'000		   2020
R'000		   2019
R'000		  
Healthcare administration SA CGU
Medscheme – healthcare administration 274 972   274 972   –   –  
Medscheme – health risk management 89 298   89 298   –   –  
Aid for AIDS Management Proprietary Limited – healthcare administration 23 490   23 490   –   –  
Allegra Proprietary Limited – healthcare IT support 1 268   1 268   –   –  
AfroCentric Distribution Services Proprietary Limited – healthcare marketing support 835   835   –   –  
Klinikka Proprietary Limited – medical equipment supplier 2 435   2 435   –   –  
Wellness Odyssey – healthcare wellness days 14 857   14 857   –   –  
Tendahealth – healthcare insurance broker 1 162   1 162   –   –  
Scriptpharm – chronic scripts claim 2 699   2 699   –   –  
Essential Group – healthcare insurance 9 333   9 333   –   –  
AfroCentric Integrated Corporate Solutions Group – healthcare administration 38 096   38 096   –   –  
Workcare – healthcare administration 771   771   –   –  
Healthcare Africa CGU
Medscheme Mauritius Limited – local administration 4 969   4 969   –   –  
Medscheme Mauritius Limited – international administration 10 566   10 566   –   –  
Healthcare Retail SA CGU
Pharmacy Direct, Curasana and Glen Eden (PD, CS and GE) 473 954   473 954   –   –  
Activo* 424 645   402 429   –   –  
Total 1 373 350   1 351 134   –   –  
* In relation to the acquisition of Activo Health (Pty) Ltd in March 2019, in terms of the sale of shares agreement, a preacquisition dividend to was declared and payment effected in December 2019. In terms of IFRS 3 Business Combination, the provisional accounting applied to the acquisition of Activo Health (Pty) Ltd was finalised in December 2019 (which is within the measurement period), resulting in an increase in Goodwill.

Management determines the recoverable amount of Cash Generating Units (CGUs) as being the higher of fair value less costs to sell or value in use. In the absence of an active market, value in use is used to determine the recoverable amount. A traditional method of discounting management's best estimate of future cash flows attributable to the CGU has been applied to determine the value in use. A growth rate has been applied to cash flow streams to take into account the effect of inflation as well as business-specific expectations.

Assumptions used in the determination of the discount rate are as follows:

The inputs above were adjusted for geographical and entity

  • The estimated revenues to be earned from the use of the assets;
  • The forecast period over which those revenues are projected;
  • An average growth rate;
  • The weighted average cost of capital (WACC) which is the discount rate that takes into account the yield on government bonds, Beta and a market risk premium;
  • Risk adjustment factors used in deriving an appropriate discount rate applied to future estimated cash flows;
  • The rate on government bonds (risk-free rate) of 7.32% as at 30 June 2020 (30 June 2019: 8.12%);
  • A market risk premium of 7.7% (2019: 6.5%) is justified as the overall risk is to the downside; and
  • The Beta (ß) is 0.92 as at 30 June 2020 (30 June 2019: 0.9).

The inputs above were adjusted for geographical and entity specific risk.

The following table sets out the key assumptions for those CGUs that management considers the most significant to the Group.

Recoverable
amount
R'000		   WACC   Forecast
period		   Average
growth rate		  
2020
Medscheme – admin and managed care 4 746 798   13.16   5 years   6%  
Activo 941 072   13.16   5 years   7%  
Pharmacy Direct, Curasana and Glen Eden 1 243 246   13.16   5 years   7%  
2019
Medscheme – admin and managed care 4 033 937   12.59   5 years   6%  
Activo 858 574   12.59   5 years   6%  
Pharmacy Direct, Curasana and Glen Eden 433 504   12.59   5 years   6%  

Management has determined the values assigned to each of the above key assumptions as follows:

Assumption Approach used in determining values

Average growth rate (%)

Average annual growth rate over the five-year forecast period; based on past performance and management's expectations of market development specifically taking into account the impact that the COVID-19 pandemic is expected to have on future earnings noted below:

Medscheme - admin and managed care:

  • Average revenue increases in the forecast period have been muted with 4% growth expected in revenue.
  • Management has embarked on effective cost savings initiatives through early investment in systems development. This increased IT capacity has now been applied to greater scale and through improved procedural efficiencies.
  • The group will continue with system renewals and upgrades to explore better and more cost efficient ways in servicing and engaging its customers/members.
  • These programmes are expected to enable the group to achieve 6% growth.

Activo, Pharmacy Direct, Curasana and Glen Eden:

The pharmaceutical related component yielded significant growth during the year, particularly during the stressful time under COVID-19. This included the increasing volume of activity in Pharmacy Direct.

  • The more heedful attention paid by patients reliant on chronic medication during lockdown, not least an obvious desire to stay healthy in general, the convenience of group deliveries during lockdown, at work or home, proved extremely valuable to those dependent on their chronic medications and other requirements.
  • The trends experienced are expected to continue in the forecast period. This, together with the cost efficiency embarked on, resulted in a growth rate of 7% being applied.
WACC (%) Rate the Company is expected to pay on average to all its security holders to finance its assets which reflects specific risks to the relevant segment.

Sensitivity analysis: impact of possible changes in key assumptions (growth rate, terminal growth rate and WACC) on the recoverable amount

Worst case
R'000
Medscheme:
4.5%
PD, CS, GE & Activo: 6%		 Growth rate
Base case
R'000
Medscheme:
5.5%
PD, CS, GE &
Activo: 7%		 Best case
R'000
Medscheme:
6.5% PD, CS, GE &
Activo: 8%		  
Medscheme WACC Worst case 14.68% 3 569 114 3 960 039 4 446 512  
Base case 13.16% 4 196 305 4 746 798 5 462 565  
Best case 13.29% 4 667 372 4 134 079 5 357 702  
Pharmacy Direct, Curasana and Glen Eden Worst case 14.68% 666 139 754 390 869 052  
Base case 13.16% 807 955 941 072 1 125 768  
Best case 13.29% 793 489 921 544 1 097 996  
Activo Worst case 14.68% 901 073 993 833 1 113 273  
Base case 13.16% 1 095 792 1 243 246 1 446 444  
Best case 13.29% 1 075 709 1 216 888 1 410 066  
(i) Impairment assessment
 

During the period under review, management embarked on a process of assessing the internally generated intangible assets for potential impairment. Following from this process, an impairment loss was recognised for the following system:

  • R2.9 million in respect of the Solatium system – an impairment has been recognised as there are no expected cash flows from the system, resulting in the recoverable amount not being able to be substantiated.

NOTES TO THE FINANCIAL STATEMENTS | Note 7