Annexure E: Financial instruments

FAIR VALUE HIERARCY

The Group classifies all financial instruments and its fair value hierarchy as follows:

Financial instruments	Classification per IAS 39	Statement of financial position line item	2016 R’000	2015 R’000
Investments ⁽¹⁾	Available-for-sale	Other financial assets	2 215	2 915
Black Managers Share Trust	Loans and receivables	Other financial assets	72 095	88 191
Trade and sundry receivables	Loans and receivables	Trade and other receivables	1 365 284	1 288 807
Foreign exchange contracts – derivative asset ⁽²⁾	Fair value cash flow hedge	Trade and other receivables	576	294
Cash and cash equivalents	Loans and receivables	Cash and cash equivalents	200 555	147 379
Long-term borrowings	Loans and borrowings	Long-term borrowings	500 000	513 753
Trade and other payables	Loans and borrowings	Trade and other payables	1 532 979	1 321 585
Foreign exchange contracts – derivative liability ⁽²⁾	Fair value cash flow hedge	Trade and other payables	23 552	205
Short-term borrowings	Loans and borrowings	Short-term borrowings	–	13 273
Bank overdraft	Loans and borrowings	Bank overdraft	11 755	304 210

⁽¹⁾	Level 3. The value of the investment in Group Risk Holdings is based on Adcock Ingram’s proportionate share of the net asset value of the company.
⁽²⁾	Level 2. Fair value based on the ruling market rate at year-end. The fair value of the forward exchange contract is calculated as the difference in the forward exchange rate as per the contract and the forward exchange rate of a similar contract with similar terms and maturities concluded as at the valuation date multiplied by the foreign currency monetary units as per the FEC contract.

FINANCIAL RISK MANAGEMENT OBJECTIVES AND POLICIES

The Group’s principal financial liabilities comprise borrowings and trade payables. The main purpose of these financial liabilities is to raise finance for the Group’s operations.

The Group has various financial assets such as trade and other receivables, loans receivable and cash which arise directly from its operations.

The Group also enters into derivative transactions via forward currency contracts. The purpose is to manage the currency risks arising from the Group’s operations.

It is, and has been throughout 2016, the Group’s policy that no trading in derivatives shall be undertaken.

The main risks arising from the Group’s financial instruments are interest rate, credit, liquidity and foreign currency. The Board of directors reviews and agrees policies for managing each of these risks which are summarised below:

INTEREST RATE RISK
The Group is exposed to interest rate risk as the following assets and liabilities carry interest at rates that vary in response to the lending rates in the continuing operations in South Africa and Zimbabwe and the discontinued operations in India and Ghana:

•	Cash balances which are subject to movements in the bank deposit rates; and
•	Long-term and short-term debt obligations with floating interest rates linked to the Johannesburg Interbank Agreed Rate, the South African prime, Indian bank lending rates and the Stannic Bank Base Rate (Ghana).

The Group’s policy is to manage its interest rate risk through both fixed and variable, long-term and short-term instruments at various approved financial institutions.

No financial instruments are entered into to mitigate the risk of interest rates.

Interest rate risk
The following table demonstrates the sensitivity to a reasonably possible change in interest rates, with all other variables held constant, of the Group’s profit before tax (through the impact on balances subject to floating rates) in its continuing and discontinued operations:

		(Decrease)/Increase in profit before tax
	Change in rate %	2016 R’000	2015 R’000
Liabilities
Indian rupee loans*	+1	(55)	(50)
Ghanaian Cedis*	+1	(60)	(106)
South African loans at variable rates	+1	(5 000)	(5 114)
Cash balances
Cash and cash equivalents	+1	2 006	1 474
Bank overdraft	+1	(118)	(3 042)

* Discontinued operations

Credit risk
Financial assets of the Group which are subject to credit risk consist mainly of cash resources, loans receivables and trade receivables. The maximum exposure to credit risk is set out in the respective cash, loans receivable and accounts receivable notes. The Group’s exposure to credit risk arises from default of the counterparty, with a maximum exposure equal to the carrying amount of these instruments.

Cash resources are placed with various approved financial institutions subject to approved limits. All these institutions are credit worthy.

The Group trades only with recognised, credit worthy third parties. It is the Group’s policy that all customers who wish to trade on credit terms are subject to credit verification procedures. Individual credit limits are defined in accordance with an independent assessment. In addition, 90% (2015: 88%) of all debtors balances are covered by credit insurance, decreasing the risk of loss due to non-payment. Receivable balances are monitored on an on-going basis with the result that the Group’s historical exposure to bad debts is not significant. For transactions that do not occur in the country of the relevant operating unit, the Group does not offer credit terms without the approval of the Corporate office. Apart from the South African Government, which comprises 11.7% (2015: 11.1%) or R154.9 million (2015: R139.9 million) of trade receivables, there are no significant concentrations of credit risk within the Group arising from the financial assets of the Group.

Substantially all debtors are non-interest bearing and repayable within 30 to 90 days.

Debtors are disclosed net of a provision for impairment and credit notes.

Liquidity risk
Although the Group is in a net debt position it has limited exposure to liquidity risk as all obligations in the foreseeable future will be met.

The Group manages its risk to a shortage of funds using planning mechanisms. This considers the maturity of both its financial liabilities and financial assets and projected cash flows from operations. The Group’s objective is to maintain a balance between continuity of funding and flexibility through the use of bank overdrafts and bank loans, with facilities in place in South Africa of R1 billion each, respectively.

The maturity profile of the Group’s long-term financial liabilities at 30 June 2016, based on contractual undiscounted payments, is shown in note 21 and the maturity profile of the trade and other payables in note 23.

The Group has provided guarantees to the amount of R6.2 million at 30 June 2016 (2015: R15.7 million)

Foreign currency risk
As the Group operates in various countries and undertakes transactions denominated in foreign currencies, exposures to foreign currency fluctuations arise. Exchange rate exposures on transactions are managed within approved policy parameters utilising forward exchange contracts in conjunction with external consultants who provide financial services to Group companies as well as contributing to the management of the financial risks relating to the Group’s operations.

Foreign operations
In translating the foreign operations, the following exchange rates were used:

	2016 Income/Expenses Average (Rand)	2016 Assets/Liabilities Spot (Rand)	2015 Income/Expenses Average (Rand)	2015 Assets/Liabilities Spot (Rand)
Kenyan Shilling	0.1409	0.1456	0.1250	0.1225
Ghanaian Cedi*	3.7135	3.7230	3.2046	2.7910
United States Dollar	14.5184	14.7168	11.4565	12.1699
Indian Rupee**	0.2188	0.2179	0.1846	0.1913

* Discontinued operation
** Discontinued operation and continuing operation

Foreign assets/liabilities
In converting foreign denominated assets and liabilities, the following exchange rates were used:

	Assets Rand	Liabilities Rand
2016
US Dollar	14.71	14.72
Euro	16.35	16.37
2015
US Dollar	12.16	12.17
Euro	13.55	13.56

CASH FLOW HEDGES

The Group’s current policy for the management of foreign exchange is to cover 100% of foreign currency commitments with forward exchange contracts when a firm commitment for the order of inventory is in place. As a result, all material foreign liabilities were covered by forward exchange contracts at year-end.

The forward currency contracts must be in the same currency as the hedged item. It is the Group’s policy to fix the terms of the hedge derivatives to match the terms of the hedged item to maximise hedge effectiveness. Forward exchange contracts are entered into to cover import exposures. The fair value is determined using the applicable foreign exchange spot rates at reporting dates.

At 30 June 2016, the Group held no foreign exchange contracts designated as hedges of expected future sales to customers outside South Africa for which the Group has firm commitments. The Group had foreign exchange contracts outstanding at 30 June 2016 designated as hedges of expected future purchases from suppliers outside South Africa for which the Group has firm commitments. All foreign exchange contracts will mature within 12 months. The cash flow hedges of expected future purchases were assessed to be effective.

A summary of the material contracts, comprising at least 98% of the total contracts outstanding at:

	Foreign currency ‘000	Average forward rate	R’000
2016
US Dollar	14 845	15.62	231 904
Euro	11 302	17.70	200 100
2015
US Dollar	11 443	12.34	141 177
Euro	14 926	13.63	203 479

The maturity analysis for the material outstanding contracts at:

	US Dollar ‘000	Rands ‘000	Euro ‘000	Rands ‘000
2016
Within 30 days	5 639	87 158	4 007	70 129
31 to 60 days	3 386	51 220	2 484	44 197
61 to 90 days	1 107	17 689	1 454	25 606
> 90 days	4 713	75 837	3 357	60 168
	14 845	231 904	11 302	200 100
2015
Within 30 days	5 125	62 956	5 213	69 935
31 to 60 days	2 780	34 283	4 482	61 220
61 to 90 days	2 772	34 305	1 888	25 676
> 90 days	766	9 633	3 343	46 648
	11 443	141 177	14 926	203 479

A summary of the material contracts settled during the year:

	Foreign currency ‘000	Average forward rate	‘000
2016
US Dollar	51 420	14.17	728 681
Euro	34 190	14.91	509 805
Swedish Krona	61 229	1.68	103 025
2015
US Dollar	46 244	11.43	528 482
Euro	24 351	13.98	340 535
Swedish Krona	53 689	1.51	81 258

The following table demonstrates the sensitivity to change in foreign currencies, with all other variables held constant, of the Group’s profit before tax (due to changes in the fair value of monetary assets and liabilities) and the Group’s equity (due to changes in the fair value of open foward exchange contracts and net investment hedges):

	Change in foreign currency exchange rate %	Increase/ (Decrease) in profit before tax R'000	Increase/ (Decrease) in other comprehensive income R'000
2016
US dollar	+10	(7 300)	15 932
	–10	7 300	(15 932)
Euro	+10	(5 372)	13 488
	–10	5 372	(13 488)
Swedish Krona	+10	(497)	338
	–10	497	(338)
2015
US dollar	+10	4	9 801
	–10	(4)	(9 814)
Euro	+10	(4 369)	14 520
	–10	4 369	(14 443)
Swedish Krona	+10	(1 240)	975
	–10	1 240	(975)

CAPITAL MANAGEMENT

The primary objective of the Group’s capital management is to ensure that it maintains a strong credit rating and healthy capital ratios, in order to support its business and maximise shareholder value. The Group manages its capital structure and makes adjustments to it, in light of changes in economic conditions. To maintain or adjust the capital structure, the Group may adjust the dividend payment to shareholders, return capital to shareholders, issue new shares or repurchase shares.

The Group monitors its capital using gearing and interest cover ratios. The primary methods of measurement used are interest-bearing debt to total equity and interest cover.

Continuing operations	2016 R'000	2015 R'000
Interest-bearing loans and borrowings	511 755	831 236
Less: Cash and short-term deposits	(200 555)	(147 379)
Net debt	311 200	683 857
Equity	3 252 597	3 116 924
Gearing ratio (%)	10	22