NOTES TO THE GROUP ANNUAL FINANCIAL STATEMENTS – NOTE 9

9. FINANCIAL INSTRUMENTS
 

Financial instruments by category

    GROUP    
Financial assets Financial
assets at
amortised
cost
R’000		 Financial
assets at fair
value through
profit and
loss
R’000		 Available for
sale financial
assets
R’000		 Total
R’000		  
June 2017          
Trade and other receivables (excluding prepayments) 256 368 – – 256 368  
Financial assets at fair value – 364 015 18 444 382 459  
Cash and cash equivalent 361 738 – – 361 738  
June 2016          
Trade and other receivables (excluding prepayments) 329 237 – – 329 237  
Financial assets at fair value – 305 355 18 444 323 799  
Cash and cash equivalent 373 068 – – 373 068  

During the prior year funds were invested into collective share investment schemes (Note 9.9).

    COMPANY    
Financial assets Financial
assets at
amortised
cost
R’000		 Financial
assets at fair
value through
profit and
loss
R’000		 Available for
sale financial
assets
R’000		 Total
R’000		  
June 2017          
Trade and other receivables (excluding prepayments) 280 – – 280  
Financial assets at fair value – 364 015 – 364 015  
Cash and cash equivalent 22 699 – – 22 699  
June 2016          
Trade and other receivables (excluding prepayments) 770 – – 770  
Financial assets at fair value – 305 355 – 305 355  
Cash and cash equivalent 145 884 – – 145 884  

During the prior year funds were invested into collective share investment schemes (Note 9.9) and Jasco Electronics Holdings was reclassified as fair value through profit and loss.

  GROUP  
Financial liabilities Liabilities at
fair value
through profit
and loss
R’000		 Amortised
cost
R’000		 Total
R’000		  
June 2017        
Trade and other payables – 264 394 264 394  
Contingent consideration 194 475 – 194 475  
Conditional financial obligation – – –  
Deferred payment 5 051 – 5 051  
June 2016        
Trade and other payables – 383 029 383 029  
Contingent consideration 134 893 – 134 893  
Conditional financial obligation – 727 960 727 960  

  COMPANY  
Financial liabilities Liabilities at
fair value
through profit
and loss
R’000		 Amortised
cost
R’000		 Total
R’000		  
June 2017        
Trade and other payables – 19 174 19 174  
Loans from Group companies – 10 242 10 242  
Contingent consideration 194 475 – 194 475  
June 2016        
Trade and other payables – 7 139 7 139  
Loans from Group companies – 44 477 44 477  
Contingent consideration 134 893 – 134 893  
9.1 Trade receivables

Trade receivables that are less than 90 days are not considered for impairment. As of 30 June 2017, trade receivables of R64.5 million (2016: R58.3 million) were past due but not impaired. These relate to a number of independent customers for whom there is no recent history of default and are expected to be recoverable.

Ageing of trade and other receivables:

  GROUP  
  Current
R’000		 30 days
R’000		 60 days
R’000		 90+ days
R’000		 Total
R’000		  
June 2017            
Gross trade debtors 145 696 31 426 10 132 36 278 223 532  
Net trade debtors 145 696 31 426 10 132 22 937 210 191  
Past due but not impaired – 31 426 10 132 22 937 64 495  
Other receivables 3 821 3 259 52 4 369 11 501  
June 2016            
Gross trade debtors 200 810 7 470 7 959 46 786 263 025  
Net trade debtors 200 810 7 470 7 959 42 905 259 144  
Past due but not impaired – 7 470 7 959 42 905 58 334  
Other receivables 5 949 5 076 80 6 803 17 908  

Disclosure of trade debtors:

  June 2017
R’000		   June 2016
R’000		  
Gross trade debtors 223 532   263 025  
Provision for impairment of trade receivables as above (13 341)   (3 881)  
Net trade debtors (Note 9.2) 210 191   259 144  

Movement in the provision for impairment of trade receivables are as follows:

  June 2017
R’000		   June 2016
R’000		  
At the beginning of the period 3 881   884  
Provisions raised/(utilised) 9 460   2 997  
  13 341   3 881  

No ageing is applicable to the other categories within trade and other receivables. However, all trade and other receivables of the Company are current or due on demand.

The majority of the Group’s client base comprises large medical healthcare providers for open schemes and listed blue chip companies with regard to closed medical schemes. Amounts invoiced to these clients are banked in advance before invoice date and therefore the risk of non-recovery is very low.

Provisions for impairment are raised when there is evidence that amounts are not recoverable in full or part from the debtor. Disputed claims and long outstanding debts are usually indicators of non-recovery. The Group does not raise a general provision for all outstanding debtors due to the high quality of its debtors and an impeccable repayment history. The provision raised above relates to specific debtors.

The creation and release of provision for impaired receivables have been included in ‘other expenses’ in the statement of comprehensive income. Amounts charged to the allowance account are generally written off when there is no expectation of recovering additional cash.

The other classes within trade and other receivables detailed in Note 9.2 do not contain impaired assets.

The maximum exposure to credit risk at the reporting date is the carrying value of each class of receivable mentioned above. The Group does not hold any collateral as security.
9.2 Trade and other receivables
  GROUP   COMPANY  
  June 2017
R’000		   June 2016
R’000		   June 2017
R’000		   June 2016
R’000		  
Trade debtors 210 191   259 144   –   –  
Deposits 7 284   12 629   –   –  
Prepayments 63 868   35 767   –   45  
Sundry debtors 27 392   39 556   280   770  
Other receivables 11 501   17 908   –   –  
  320 236   365 004   280   815  

All receivables are current. The carrying amounts of all trade and other receivables approximate fair value.

Refer to Note 9.1 for ageing of trade and other receivables.
9.3 Receivables from associates
      GROUP   COMPANY  
  Effective %
holding		   June 2017
R’000		   June 2016
R’000		   June 2017
R’000		   June 2016
R’000		  
Activo Health (Pty) Ltd 26   11 337   20 437   –   –  
The Cheese Has Moved (Pty) Ltd 51   2 051   –   –   –  
      13 388   20 437   –   –  

Management has assessed the likelihood of non-recovery of outstanding amounts due from its associates and determined that no impairment is necessary due to the fact that all associates are profitable or will be profitable in the foreseeable future.
9.4 Available for sale financial instruments
  GROUP   COMPANY  
  June 2017
R’000		   June 2016
R’000		   June 2017
R’000		   June 2016
R’000		  
Non-current assets                
AAR Insurance Holdings Kenya 18 444   18 444   –   –  
  18 444   18 444   –   –  

Classification of investment as available for sale

Due to the 3% shareholding of AAR being declared as a dividend in specie to Medscheme Holdings Proprietary Limited, the investment in AAR was accounted for as an available for sale financial instrument as management intends to hold the investment for the medium to long term and is not held for trading.

  Opening
carrying
amount
R’000		 Dividend in
specie
R’000		 Transaction
costs
R’000		 Gains and
losses
recognised
in other
comprehensive
income
R’000		 Closing
carrying
amount
R’000		  
Non-current assets            
AAR Insurance Holdings Kenya 18 444 – – – 18 444  
  18 444 – – – 18 444  

Impairment indicators for the available for sale investment

The investment is considered to be impaired if there has been a significant or prolonged decline in the fair value below its cost. The Group evaluates the duration and the extent to which the fair value of the investment is less than its cost, and the financial health of and short-term business outlook for the investee (including factors such as industry and sector performance, changes in technology and operational and financing cash flows). Due to the factors listed above, the Group has determined that an impairment is not required in the 2017 financial year.

Significant estimates

The fair value of the investment in AAR Insurance Holdings Kenya is not traded in an active market and as a result is determined using valuation techniques. The Group uses its judgement to select a variety of methods and make assumptions that are mainly based on market conditions existing at the end of the reporting period. At year end, based on the latest financial information provided to us, the carrying amount approximates the fair value.
9.5 Cash and cash equivalents
  GROUP   COMPANY  
  June 2017
R’000		   June 2016
R’000		   June 2017
R’000		   June 2016
R’000		  
Cash at bank and short-term bank deposits                
zaA – Absa Bank Limited 3 091   6 174   3 091   6 174  
AA – Bank Windhoek Limited 21 576   50 528   –   –  
BB+ – Nedbank Limited* 274 411   104 882   18 575   19 792  
Baa3 – Standard Bank Limited** 303   93 070   –   57 324  
BB+ – Investec Limited* –   62 525   –   62 525  
BBB+ – Sasfin Limited* 62 357   55 889   1 033   69  
Total cash at bank and short-term bank deposits 361 738   373 068   22 699   145 884  
* The ratings from “AA” to “CCC” may be modified by the addition of a plus (+) or minus (-) sign to show relative standing within the major rating categories.
** Moody’s appends numerical modifiers 1, 2 and 3 to each generic rating classification from Aa through Caa. The modifier 3 indicates a ranking in the lower end of that generic rating category.

The ratings for Absa Bank Limited, Nedbank Limited and Investec Limited where obtained from S&P Global.

The rating for Standard Bank Limited was obtained from Moody’s.

The ratings for Sasfin Limited and Bank Windhoek Limited were obtained from Global Credit Rating Co.

The rating scores are based on the following broad investment grade definitions:
zaA An obligation rated zaA is somewhat more susceptible to adverse effects of changes in circumstances and economic conditions than higher-rated debt. Still, the obligator’s capacity to meet its financial commitments on the obligation, relative to other national obligators, is strong.
AA Very high credit quality relative to other issuers or obligations in the same country. Protection factors are very strong. Adverse changes in business, economic or financial conditions would increase investment risk although not significantly.
BB An obligation rated “BB” is less vulnerable to non-payment than other speculative issues. However, it faces major ongoing uncertainties or exposure to adverse business, financial or economic conditions which could lead to the obligator’s inadequate capacity to meet its financial commitment on the obligation.
Baa Obligations rated Baa are judged to be medium-grade and subject to moderate credit risk and as such may possess certain speculative characteristics.
BBB Adequate protection factors relative to other issuers or obligators in the same country. However, there is considerable variability in risk during economic cycles.

  GROUP   COMPANY  
  June 2017
R’000		   June 2016
R’000		   June 2017
R’000		   June 2016
R’000		  
Cash 263 346   161 584   21 666   25 966  
Short-term deposits* 98 392   211 484   1 033   119 918  
  361 738   373 068   22 699   145 884  

* Short-term deposits relate to cash at the year-end deposited into specific bank accounts.

For purposes of the statement of cash flows, the year-end cash and cash equivalents comprise the following:

  GROUP   COMPANY  
  June 2017
R’000		   June 2016
R’000		   June 2017
R’000		   June 2016
R’000		  
Cash and bank balances 361 738   373 068   22 699   145 884  
9.6 Trade and other payables
  GROUP   COMPANY  
  June 2017
R’000		   June 2016
R’000		   June 2017
R’000		   June 2016
R’000		  
Trade payables* 134 157   216 081   157   532  
Accruals 32 088   29 577   –   119  
Payroll creditors 38 142   39 764   –   –  
Shareholders for dividends 7 239   9 919   3 366   4 604  
Other payables* 52 768   87 688   15 651   1 884  
  264 394   383 029   19 174   7 139  

* All trade and other payables are current and are expected to be settled with the next 12 months. The carrying values at the year-end approximate their fair values.
9.7 Loans from Group companies
  GROUP   COMPANY  
  June 2017
R’000		   June 2016
R’000		   June 2017
R’000		   June 2016
R’000		  
AfroCentric Health (Pty) Ltd –   –   10 242   43 116  
ACT Funding (Pty) Ltd –   –   –   1 361  
  –   –   10 242   44 477  

The loan with ACT Funding Proprietary Limited is unsecured and interest free.

The loan with AfroCentric Health Proprietary Limited is unsecured and bears interest at the prime interest rate calculated monthly.

These loans have no fixed terms of repayment, but are payable on demand.
9.8

Recognised fair value measurements

Fair value hierarchy

The following hierarchy is used to classify financial and non-financial instruments for fair value measurement purposes:

Level 1 – Quoted prices (unadjusted) in active markets for identical assets or liabilities.

Level 2 – Inputs other than quoted prices included within level that are observable for the asset or liability either directly (that is, as prices) or indirectly (that is, derived from prices).

Level 3 – Inputs for the asset or liability that are not based on observable market data (unobservable inputs).

The level in the fair value hierarchy within which the fair value measurement is categorised in its entirety is determined on the basis of the lowest level input that is significant to the fair value measurement in its entirety. The significance of an input is assessed against the fair value measurement in its entirety. If a fair value measurement uses observable inputs that require significant adjustment based on unobservable inputs, that measurement is a Level 3 measurement. Assessing the significance of a particular input to the fair value measurement in its entirety requires judgement, considering factors specific to the asset or liability.

The following table presents the Group’s assets and liabilities that are measured at fair value at 30 June 2017:

      GROUP     COMPANY    
  Note   Level 1 Level 2 Level 3 Level 1 Level 2 Level 3  
2017                  
Investment in Jasco 9.9   36 296 – – 36 296 – –  
Collective share investment                  
schemes 9.9   – 327 719 – – 327 719 –  
Investment in AAR 9.4   – – 18 444 – – –  
Contingent consideration 34   – – (194 475) – – (194 475)  
Investment property 7   – – 15 418 – – –  
      36 296 327 719 (160 613) 36 296 327 719 (194 475)  
2016                  
Investment in Jasco 9.9   37 182 – – 37 182 – –  
Collective share investment                  
schemes* 9.9   – 268 173 – – 268 173 –  
Investment in AAR 9.4   – – 18 444 – – –  
Contingent consideration 34   – – (134 893) – – (134 893)  
Investment property 7   – – 15 000 – – –  
      37 182 286 173 (101 449) 37 182 268 173 (134 893)  

* The investment in collective schemes has been moved into Level 2 as it is not listed on the JSE.

Specific valuation techniques used to value financial and non-financial instruments include:

  • the use of quoted market prices or dealer quotes for similar instruments (the Jasco Electronics share price was obtained from the Johannesburg Stock Exchange (JSE));
  • the fair value of the collective schemes which is determined using the current unit price of underlying unitised asset, multiplied by the number of units held;
  • the fair value of the remaining financial instruments which is determined using discounted cash flow analysis and PE ratios; and
  • the fair value of the investment property which is determined by using the comparable sales method.

The assets disclosed above have been classified as Level 3 financial and non-financial instruments, i.e. the inputs are not based on observable market data except for the investment in Jasco Electronics, which is classified as a Level 1 financial instrument. The carrying amount of all assets in the table above approximates the fair value of the assets.

Group fair value measurements using significant unobservable inputs (Level 3):

  Contingent
consideration
R’000		 Investment
in AAR
R’000		 Investment
property
R’000		  
Opening balance 134 893 18 444 15 000  
Additions 59 582 – 418  
Closing balance 194 475 18 444 15 418  

Valuation inputs and relationships to fair value

Investment in AAR

The fair value of the investment in AAR Insurance Holdings is derived by valuation techniques (price earnings ratio) using the most recent financial information available to AfroCentric Investment Corporation Limited. Management is satisfied that valuation of the investment in the AAR represents the fair value.

Investment property

The fair value of the investment property is derived by an external property valuer using the comparable sales method. In applying this approach the valuer has selected other properties that have similar risk, growth and cash-generating profiles. Management reviews the valuation performed by the external valuer and is satisfied that the inputs used by the external property valuer are reasonable.

Contingent consideration

The fair value of the contingent consideration was determined by the ACT share price at year-end, multiplied by the number of shares to be issued. The number of shares to be issued is stipulated in the shareholders agreement which is derived from the actual profits generated from Glen Eden. Under the contingent consideration arrangement, AfroCentric Investment Corporation Limited is required to issue WAD Holdings Proprietary Limited an additional 31 366 977 shares (2016: 26 192 902 shares) based on the above. R194.5 million (2016: R134.9 million) is the estimated fair value of this obligation at year-end.

The following table summarises the quantitative information about the significant unobservable inputs used in Level 3 fair value measurements.

Description Fair value at
30 June 2017
R’000		     Unobservable
inputs		 Input value
used		   Sensitivity of unobservable inputs on profit and loss  
Investment in AAR (unlisted investment) 18 444     Price earnings ratio 8.71   If a price earnings ratio of 7.71 was used, the investment in AAR would decrease by R2.141 million in other comprehensive income.  
              If a price earnings ratio of 9.71 was used, the investment in AAR would increase by R2.141 million in other comprehensive income.  
Investment property 15 418     Price per square metre R1 542
per square metre		   The higher the price per square metre, the higher the fair value.  
Contingent consideration 194 475     Price per share R6.20   If the share price increased by 10% the contingent consideration would decrease by R19.4 million in profit and loss.  
              If the share price decreased by 10% the contingent consideration would increase by R19.4 million in profit and loss.  

Valuation process

The finance department of the Group performs the valuations of the investments for financial reporting purposes, including Level 3 fair values (excluding the investment property). The team reports directly to the Chief Financial Officer (“CFO”). Discussions of the valuation processes and results are held between the CFO and the Group Finance department at least once every six months, in line with the Group’s bi-annual reporting periods.
9.9

Financial assets at fair value through profit and loss

  GROUP   COMPANY  
  June 2017
R’000		   June 2016
R’000		   June 2017
R’000		   June 2016
R’000		  
Non-current assets                
Collective share investment scheme 59 976   268 173   59 976   268 173  
Jasco Electronic Holdings Limited 36 296   37 182   36 296   37 182  
  96 272   305 355   96 272   305 355  
Current assets                
Collective share investment scheme 267 743   –   267 743   –  
  267 743   –   267 743   –  

In the current financial year AfroCentric Investment Corporation Limited invested funds into two different investments, namely:

  • STANLIB Extra Income Fund
  • NedGroup Core Income Fund

During the prior financial year AfroCentric Investment Corporation Limited invested in the following:

  • Coronation Strategic Income fund
  • Prescient Income Proper Fund
  • Sanlam SIM Inflation Plus Fund
  • Sanlam SIM Inflation Plus Fund B4
  • Sanlam SIM Inflation Plus Fund B5

Classification financial assets through profit and loss

As a result of holding these assets for the medium term these have been designated at fair value through profit and loss. The collective share investment schemes were designated at fair value through profit and loss at initial recognition. The investment in Jasco was initially designated at fair value through profit and loss and is held for trading.

  Opening
carrying
amount
R’000		 Additions
R’000		 Fair value
gains and
losses
R’000		 Disposals/
transfer to
short term
R’000		 Closing
carrying
amount
R’000		  
Non-current assets            
Collective share investment scheme 268 173 – 23 078 (231 275) 59 976  
Jasco Electronic Holdings Limited 37 182 – (886) – 36 296  
  305 355 – 22 192 (231 275) 96 272  
Current assets            
Collective share investment scheme – 35 508 960 231 275 267 743  
  – 35 508 960 231 275 267 743  

Impairment indicators for fair value through profit and loss investment

Any impairment will be reflected in the share price which would result in a fair value loss that would be recognised in the statement of comprehensive income.
9.10

Financial assets at amortised cost

  GROUP   COMPANY  
  June 2017
R’000		   June 2016
R’000		   June 2017
R’000		   June 2016
R’000		  
Non-current assets                
AA – Standard Bank –   70 496   –   70 496  
AA – Investec Bank –   73 265   –   73 265  
  –   143 761   –   143 761  
Current assets                
AA – Investec Bank 79 892   –   79 892   –  
  79 892   –   79 892   –  

AA – The financial instrument is judged to be of high quality, is subject to very low credit risk and indicates quality issuers.

During the prior year AfroCentric Investment Corporation Limited invested funds into the following investments, namely:

  • Standard Bank Notice Deposit
  • Investec Wholesale Structured Deposit

Classification financial assets at amortised cost

Deposits are non-derivative financial assets with fixed or determinable payments that are not quoted on an active market. The deposits are included as non-current assets, except for those with maturities less than 12 months from the end of the reporting period, which would be classified as current assets. The carrying amount approximates the fair value of the investments.

NOTES TO THE GROUP ANNUAL FINANCIAL STATEMENTS – NOTE 9