Annexure E – Financial instruments

FAIR VALUE HIERARCHY

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		2018 R’000		2017 R’000
Investment(1)		Available for sale		Other financial assets		1 937		1 906
Black Managers Share Trust(3)		Loans and receivables		Other financial assets		32 073		39 840
Trade and sundry receivables(3)		Loans and receivables		Trade and other receivables		1 535 369		1 485 705
Foreign exchange contracts – derivative asset(2)		Cash flow hedge		Trade and other receivables		21 838		8 957
Cash and cash equivalents(3)		Loans and receivables		Cash and cash equivalents		404 629		592 070
Long-term borrowings(3)		Loans and borrowings		Long-term borrowings		–		251 492
Trade and other payables(3)		Loans and borrowings		Trade and other payables		1 830 652		1 622 899
Foreign exchange contracts – derivative liability(2)		Cash flow hedge		Trade and other payables		–		752
Short-term borrowings(3)		Loans and borrowings		Short-term borrowings		–		416
Bank overdraft(3)		Loans and borrowings		Bank overdraft		248 877		5 619

(1)	Level 3. The value of the investment in Group Risk Holdings Proprietary Limited 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.
(3)	The carrying value approximates fair value.

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 2018, 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 operations in the specific country.

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.

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:

	Change in rate %		(Decrease)/Increase in profit before tax
			2018  R’000		2017  R’000
Liabilities
South African loans at variable rates	+1		–		(2 500)
Cash balances
Cash and cash equivalents	+1		4 046		5 921
Bank overdraft	+1		(2 489)		(56)

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 creditworthy.

The Group trades only with recognised, creditworthy 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, 89% (2017: 91%) 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 14.1% (2017: 14.2%) or R207.4 million (2017: R201.9 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

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. The facilities in place in South Africa are R850 million for working capital purposes and a R250 million loan facility.

The Group does not have any loan facility outstanding as at 30 June 2018 but the maturity profile of the Group’s long-term financial liabilities as at 30 June 2017, based on contractual discounted payments, is shown in note 21. The maturity profile of the trade and other payables is shown in note 23.

The Group has provided guarantees to various regulatory authorities to the amount of R3.3 million at 30 June 2018 (2017: R2.8 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:

	2018 Income/ Expenses Average Rand		2018 Assets/ Liabilities SpotRand		2017 Income/ Expenses Average Rand		2017 Assets/ Liabilities Spot Rand
Ghanaian Cedi	2.8410		2.8662		3.2055		2.9718
Indian Rupee	0.1977		0.2005		0.2049		0.2024
Kenyan Shilling	0.1250		0.1360		0.1323		0.1261
United States Dollar	12.8635		13.7275		13.6114		13.0551

Foreign assets/liabilities

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

	Assets Rand		Liabilities Rand
2018
Euro	15.99		16.00
US Dollar	13.72		13.73
2017
Euro	14.90		14.93
US Dollar	13.05		13.06

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 any order 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. The fair value is determined using the applicable foreign exchange spot rates at reporting dates.

At 30 June 2018, 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 2018 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.

The effective portion of the gains and losses on the hedging instruments that is included in the initial cost of inventory is R27.7 million (2017: R87.0 million).

A summary of the material contracts, comprising at least 99% of the total contracts outstanding at:

	Foreign currency ‘000	Average forward rate	R’000
2018
Euro	17 131	15.67	268 483
US Dollar	19 444	13.15	255 637
2017
Euro	21 524	14.78	318 208
US Dollar	12 751	13.22	168 592

The maturity analysis for the material outstanding contracts at:

	Euro ‘000	Rands ‘000	US Dollar ‘000	Rands ‘000
2018
Within 30 days	6 666	103 160	10 268	133 442
31 to 60 days	4 014	62 172	2 856	38 235
61 to 90 days	3 490	56 466	4 061	53 957
> 90 days	2 961	46 685	2 259	30 003
	17 131	268 483	19 444	255 637
2017
Within 30 days	3 416	50 503	7 621	100 026
31 to 60 days	2 729	39 190	2 775	36 772
61 to 90 days	4 326	63 344	879	11 773
> 90 days	11 053	165 171	1 476	20 021
	21 524	318 208	12 751	168 592

A summary of the material contracts settled during the year:

	Foreign currency ‘000	Average forward rate	R’000
2018
Euro	35 321	15.30	540 533
US Dollar	51 345	13.30	682 957
2017
Euro	32 864	16.08	528 514
Swedish Krona	4 379	1.73	7 586
US Dollar	55 548	14.32	795 240

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 forward exchange contracts and net investment hedges):

	Change in foreign currency exchange rate %		(Decrease)/ Increase in profit before tax R’000		Increase/ (Decrease) in other comprehensive income R’000
2018
Euro
	+10		(8 108)		19 965
	-10		8 108		(19 965)
US dollar
	+10		(9 476)		(19 308)
	-10		9 476		(19 308)
2017
Euro
	+10		(10 703)		23 579
	-10		10 703		(23 579)
US dollar
	+10		(8 986)		12 068
	-10		8 986		(12 068)

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 or issue new 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	2018  R’000		2017  R’000
Interest-bearing loans and borrowings	248 877		257 527
Less: Cash and short-term deposits	(404 629)		(592 070)
Net cash	(155 752)		(334 543)
Equity	3 914 919		3 495 004
Gearing ratio (%)	N/A		N/A