sasol limited group  accounting policies

Sasol Limited is a company domiciled in the Republic of South Africa. The consolidated annual financial statements of the Group for the year ended 25 June 2001 comprise the company, its subsidiaries and the Group’s interest in associates and jointly controlled entities.

Statement of compliance  The consolidated annual financial statements have been prepared in accordance with the accounting standards issued by the International Accounting Standards Committee (IASC), interpretations issued by the Standing Interpretations Committee of the IASC and the requirements of South African law.

Basis of preparation  The consolidated annual financial statements are prepared on the historical cost basis except for commodity derivative financial instruments and open foreign exchange contracts, which are presented at fair value.

The consolidated annual financial statements have been prepared for the first time in accordance with the accounting standards and interpretations issued by the IASC. The consolidated annual financial statements have been prepared as if they had always been prepared in accordance with these standards and interpretations, effective for the period of first time application. Comparative figures have been restated where appropriate.

The consolidated annual financial statements are prepared using uniform accounting policies. Where applicable, adjustments are made where the accounting policies of subsidiaries, jointly controlled entities and associates are different to those of the holding company.

Basis of consolidation  The consolidated annual financial statements incorporate the assets, liabilities, revenue, expenses and cash flows of the holding company and its subsidiaries and the proportionate interest in the assets, liabilities, revenue, expenses and cash flows of jointly controlled entities and the Group’s interest in associates.

All significant inter company transactions, balances and unrealised gains and losses within the Group are eliminated on consolidation.

Subsidiaries  Entities in which the Group can exercise effective voting control, at either equity or board level, are regarded as subsidiaries. Control exists where the Group has the power to govern the financial and operating policies of an entity so as to obtain benefit from its activities. The results of subsidiaries acquired or disposed of during the period are included in the consolidated income statement from the date control commences until the date that control ceases.

Jointly controlled entities  Jointly controlled entities are those entities over which the Group exercises joint control under a contractual arrangement. The Group’s share of the assets, liabilities, revenue, expenses and cash flows of jointly controlled entities are proportionately consolidated on a line by line basis from the date that joint control commences until the date that joint control ceases.

Associates  An associate is an entity other than a subsidiary or jointly controlled entity in which the Group holds a long-term investment and exercises significant influence on the financial and operating policies. The results of associates are accounted for according to the equity method. The investment in an associate is written down when there is considered to be a diminution in value. Associates that have years ending other than 25 June are included in the consolidated annual financial statements using their most recently audited annual financial statements. Adjustments are made to the associate’s results for material transactions and events between the Group and the associate in the intervening period.

Translation of foreign entities and operations  Foreign entities  A foreign entity is a foreign operation whose activities are not an integral part of the Group. The assets and liabilities of foreign entities are converted to South African rand at rates of exchange ruling at the balance sheet date. Fair value adjustments are effected in the foreign entity and are translated at rates of exchange ruling at the balance sheet date. Income and expenditure are converted at the average rates of exchange for the period. Differences arising from the conversion of a foreign entity are classified as a translation reserve.

Integrated foreign operations  An integrated foreign operation’s activities are integral to that of the Group. Transactions are translated at rates of exchange ruling at the transaction date. Differences arising from the conversion of a foreign operation are recognised as income or expenses in the period in which they arise.

Property, plant and equipment  Property, plant and equipment is stated at cost to the company which first acquired the asset, less accumulated depreciation and impairment losses. Land is not depreciated.

The cost of self-constructed assets includes the cost of materials, direct labour and an appropriate proportion of overheads. Cost also includes site rehabilitation costs that are recognised as a liability on the date the asset is brought into use. The cost of plant includes interest capitalised during the construction period where financed by external borrowings. Major expenditure on plant renewal is capitalised when additional future economic benefits are created. The book value of assets replaced during plant renewal is written off.

Property, plant and equipment is depreciated on the straight-line method over the expected useful life of the asset.

Expenditure on geographic expansion at the existing mines and on certain minor assets is written off.

Assets acquired under finance lease agreements are capitalised, at the lower of fair value and the present value of the minimum lease payments at the inception of the lease, with the equivalent amount being shown as a liability. Lease payments are allocated between a reduction in the liability to the lessor and interest charged to income on the effective interest rate method.

Intangible assets  Intangible assets are carried at cost to the company which first acquired or developed the asset, less accumulated amortisation and impairment losses.

Software  Package software and the direct costs associated with the development and installation thereof are capitalised. Software is amortised on the straight-line basis over three years from the date of commission.

Patents and trademarks  Where patents and trademarks are acquired from third parties, the costs are capitalised and amortised on the straight-line basis over their expected useful lives. Expenditure incurred to extend the life of the patents or trademarks is capitalised if it increases the future economic benefits to be derived from the assets. This capitalised expenditure is amortised over the remaining useful life of the assets.

Research and development expenditure  Research and development expenditure is written off in the period in which it is incurred. Where development expenditure relates to a new or substantially improved product or process it is capitalised if the product or process is technically and commercially feasible.

Capitalised development expenditure not related to a specific item of property, plant and equipment is stated at cost less accumulated amortisation and impairment losses. This capitalised expenditure is written off over a period not exceeding five years.

Exploration expenditure  The successful efforts method is applied in accounting for exploration expenditure. Unsuccessful exploration expenditure is written off in the period in which it is incurred. The success or failure of each exploration effort is judged regularly on a site-by-site basis. Once proven reserves have been identified, any additional expenditure is capitalised and written off over the expected useful life of the reserves, not exceeding twenty-five years.

Impairment of assets  The book value of the assets, other than inventories and deferred taxation, is reviewed at each balance sheet date to determine if there is any indication of impairment. An impairment loss is recognised in the income statement when the book value exceeds the recoverable amount. The recoverable amount is the greater of net realisable value and value in use. In determining the value in use, expected future cash flows are discounted to their estimated present values.

A previously recognised impairment loss will be reversed in so far as estimates change, but not to an amount higher than the carrying amount that would have been determined had no impairment loss been recognised. A reversal of an impairment loss is recognised as income.

Township land and residential buildings  Land is stated at cost less accumulated impairment losses. Buildings are stated at cost less accumulated depreciation and impairment losses. Buildings are depreciated on the straight-line method over their expected useful lives.

Business combinations  The excess of the cost of acquisition over the fair value of the Group’s interest in the net assets of subsidiaries and jointly controlled entities at the date of acquisition is treated as goodwill. Goodwill is amortised on the straight-line method over the expected useful life of the asset, not exceeding twenty years.

Negative goodwill is recognised where the fair value of the Group’s interest in the net assets of the entity exceeds the cost of acquisition. It is taken to income immediately in the case of an expectation of future losses or in respect of monetary assets. To the extent that negative goodwill relates to depreciable assets, it is recognised as income over the useful life of those assets.

Goodwill is stated at cost less accumulated amortisation and impairment losses.

Long-term investments  Long-term investments are shown at cost less provisions and amounts written off. The directors review investments on an annual basis for any possible diminution in value.

Inventories  Inventories are valued at the lower of cost and net realisable value. Crude oil and raw materials are valued at purchase price according to the first in first out (FIFO) method. Process, maintenance and other materials are valued at weighted average purchase price. Manufactured products are valued at production cost (excluding administrative costs), according to the FIFO method. Redundant items are written off and adequate provision is made in respect of slow-moving items.

Trade and other receivables  Bad debts are written off and provision is made for doubtful debts.

Provisions  A provision is recognised in the balance sheet when the Group has a legal or constructive obligation as a result of a past event and it is probable that it will be required to settle the obligation.

Long-term provisions are determined by discounting the expected future cash flows and taking the risks specific to the liability into account.

In accordance with the Group’s published environmental policy and applicable legislation, a provision for rehabilitation is recognised.

Taxation  The current taxation charge is based on the results for the year after adjusting for disallowed expenditure. The charge is calculated using rates applicable at balance sheet date.

Deferred taxation is provided for using the balance sheet liability method, at tax rates applicable at balance sheet date, providing for temporary differences between the book value of assets and liabilities for accounting purposes and the amounts used for taxation purposes with the exception of goodwill.

Deferred taxation assets are not raised unless it is probable that future taxable profits will be available against which the deferred taxation asset can be realised in the foreseeable future. Deferred taxation assets are reduced to the extent that it is no longer probable that the related tax benefit will be realised.

Revenue  Revenue comprises the sale of products, services rendered, licence fees, royalties, dividends and interest, excluding value-added tax, excise duty and levies and including tariff protection where applicable.

Transactions in foreign currencies  Transactions in foreign currencies are translated at the rates of exchange ruling at the transaction date. Transactions in foreign currencies are recognised initially at cost.

Realised and unrealised gains and losses on forward exchange contracts entered into as hedges are recognised as income and expenses on the same basis and over the same period as the hedged assets or liabilities, when the contracts are entered into with the intention to hedge another transaction which has a high degree of correlation with the hedging instrument.

Open foreign exchange contracts are marked to market at year end, and resulting gains or losses are recognised in the income statement. Monetary assets and liabilities in foreign currency are translated at the rate of exchange ruling at the balance sheet date.

Any foreign exchange differences are dealt with in the income statement in the period in which the difference occurs.

Dividends payable  Dividends payable are recognised as a liability in the period in which they are declared.

Derivative instruments  Derivative instruments are entered into for the primary purpose of reducing exposure to fluctuations in foreign exchange rates and to manage the Group’s exposure to changes in crude oil prices. Derivative instruments are recognised initially at cost.

All derivatives held for managing commodity risk are marked to market and all gains and losses are recognised in the income statement in the period in which they are incurred.

Fair value represents the approximation of current market values but these may differ from the values that will finally be realised.

Employee benefits  Defined contribution plans  Contributions to defined contribution pension plans are recognised as expenditure in the period in which they are incurred.

Defined benefit plans  The Group’s net obligation in respect of defined benefit pension plans is calculated separately for each defined benefit plan by estimating the amount of future benefit that employees have earned in return for their service in the current and prior periods.

This future benefit is discounted to determine its present value from which the fair value of any assets of each plan is deducted. The discount rate is the yield at balance sheet date on AAA credit rated bonds that have maturity dates approximating the terms of the Group’s net obligations. Actuaries perform this calculation every two years using the projected unit credit method. In the intervening periods the calculation is updated based on information received from the actuaries.

When the benefits of a plan increase, the portion relating to past service is written off on the straight-line method over the employees’ average remaining working period until the benefits become vested. Once the benefits vest, the expense is written off.

To the extent that any actuarial gain or loss exceeds ten percent of the greater of the present value of the defined benefit obligation and the fair value of the assets of each plan, the Group’s obligation is recognised in the income statement over the expected average remaining working period of the participating employees.

Where the calculation results in a benefit to the Group, the asset recognised is limited to the net total of actuarial losses and past service costs and the present value of any future refunds or reductions in future contributions.

Long-term service benefits  The Group’s net obligation in respect of long-term service benefits, other than pension plans, is the amount of future benefit that employees have earned in return for their service in the current and prior periods. The net obligation is calculated using the projected unit credit method and is discounted to its present value at the rate applicable to high quality corporate bonds that have maturity dates approximating the terms of the Group’s obligations.

Equity and equity-related compensation benefits  The Sasol Share Incentive Scheme allows Group employees the option to acquire shares in Sasol Limited over a prescribed period. The exercise price of these options equals the market price of the underlying shares on the trading day immediately preceding the granting of the option. Consequently no compensation cost or obligation is recognised. When the options are exercised, stated capital is increased by the proceeds received.

Share buyback programme  When Sasol Limited’s shares are repurchased by a subsidiary, the amount paid, including directly attributable costs, is disclosed as a deduction from Group equity. Shares repurchased are classified as treasury shares.

Comparative figures  Comparative figures have been reclassified or restated where necessary to afford a proper comparison.

Segmental reporting  Segment information is reported using the accounting policies adopted by the Group. Business segments based on product lines form the basis of the primary segmental analysis. In terms of the secondary, geographical segmental analysis, income statement items and trade receivables are reported by location of customer, other assets by the location of the operating activities and liabilities by source.