STATEMENTS OF FINANCIAL POSITION

STATEMENTS OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME

STATEMENTS OF CHANGES IN EQUITY

STATEMENTS OF CASH FLOWS

* Other – includes all countries outside the African continent.

Management has determined the operating segments based on the reports reviewed by the Executive Committee that are used to make strategic decisions. The Executive Committee considers the business primarily from a product perspective. The products are segmented into financing activities and non-financing activities. Segment assets consist primarily of loans, advances, investments, property, plant and equipment and cash and cash equivalents. Segment liabilities comprise non-current and current liabilities. Capital expenditure comprises additions to property, plant and equipment

REPORTABLE SEGMENTS

* All revenue is from external customers. ** Other financing activities – includes Findevco, Impofin, Konoil and the Small Enterprise Finance Agency Limited.

NOTES TO THE FINANCIAL STATEMENTS

1. ACCOUNTING POLICIES

The Industrial Development Corporation of South Africa Limited (IDC, Company or Corporation) is domiciled in South Africa. The consolidated financial statements for the year ended 31 March 2017 comprise the IDC, its subsidiaries and the Group’s interest in associates and jointly controlled entities (referred to as the Group).

The financial statements were authorised for issue by the directors on 28 June 2017.

1.1 STATEMENT OF COMPLIANCE

The separate and consolidated financial statements have been prepared in accordance with and comply with International Financial Reporting Standards (IFRS) and its interpretations adopted by the International Accounting Standards Board (IASB) as well as the requirements of the Public Finance Management Act (PMFA).

1.2 BASIS OF PREPARATION

The separate and consolidated financial statements are presented in South African Rand, which is the Company’s functional currency, rounded to the nearest million.

These consolidated financial statements are prepared on the historical cost basis, except for the following:

  • Derivative financial instruments are measured at fair value
  • Financial instruments held-for-trading are measured at fair value
  • Financial instruments classified as available-for-sale are measured at fair value
  • Financial instruments designated at fair value through profit or loss are measured at fair value
  • Investments in subsidiaries, associates and jointly controlled entities are carried at fair value in the separate financial statements of the Company
  • Biological assets are measured at fair value less costs to sell
  • Investment property is measured at fair value
  • Land and buildings are measured at revalued amount
  • Aircraft are measured at fair value
  • Non-current assets held-for-sale are measured at fair value

Standards, amendments and interpretations to existing standards not yet effective and also not early adopted:

  • a) IFRS 9 Financial Instruments (Effective 1 January 2018)

    IFRS 9 Financial Instruments will replace certain key elements of IAS 39. The two key elements that would impact the Group’s accounting policies include:

    • Classification and measurement of financial assets and financial liabilities: the standard requires that all financial assets be classified as either held at fair value or amortised cost.
      1. The amortised cost classification is only permitted where it is held within a business model where the underlying cash flows are held in order to collect contractual cash flows and that the cash flows arise solely from payment of principal and interest.
      2. The standard further provides that gains and losses on assets held at fair value are measured through the income statement unless the entity has elected to present gains and losses on non-trading equity investments (individually elected) directly through comprehensive income. With reference to financial liabilities held at fair value, the standard proposes that changes to fair value attributable to credit risk are taken directly to other comprehensive income without recycling.
    • Impairment methodology: Impairments in terms of IFRS 9 will be determined based on an expected credit loss model rather than the current incurred loss model required by IAS 39. Entities are required to recognise an allowance for either 12-month or lifetime expected credit losses (ECLs), depending on whether there has been a significant increase in credit risk since initial recognition. The measurement of ECLs reflects a probability-weighted outcome, the time value of money and the entity’s best available forward-looking information. The aforementioned probability-weighted outcome must consider the possibility that a credit loss occurs and the possibility that no credit loss occurs, even if the possibility of a credit loss occurring is low.

    The ECL model applies to debt instruments recorded at amortised cost or at FVTOCI, such as loans, debt securities and trade receivables, lease receivables and most loan commitments and financial guarantee contracts.

    The implementation of IFRS 9 is anticipated to have a significant impact on the preparation of the Group’s financial statements. The Group has initiated a process to determine the quantitative impact of the standard on the Group’s statement of financial position and ongoing performance metrics. Until the process has been completed, the Group is unable to quantify the expected impact.

  • b) IFRS 15 Revenue from Contracts with Customers (Effective 1 January 2018)

    This standard replaces IAS 11 Construction Contracts, IAS 18 Revenue, IFRIC 13 Customer Loyalty Programmes, and IFRIC 15 Agreements for the Construction of Real Estate, IFRIC 18 Transfer of Assets from Customers and SIC-31 Revenue – Barter of Transactions Involving Advertising Services.

    The standard contains a single model that applies to contracts with customers and two approaches to recognising revenue: at a point in time or over time. The model features a contract-based five-step analysis of transactions to determine whether, how much and when revenue is recognised.

    The Group is in the process of evaluating the impact of IFRS 15 on its financial statements.

    All other standards and interpretations issued but not yet effective are not expected to have a material impact on the Group.

1.3 INVESTMENTS IN SUBSIDIARIES

Subsidiaries are entities controlled by the IDC. The Group ‘controls’ an investee if it is exposed to, or has rights to, variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee. The financial statements of subsidiaries are included in the consolidated financial statements from the date on which control commences until the date when control ceases. Investments in subsidiaries in the Company’s separate financial statements are carried at fair value as available-for-sale financial assets.

  1. Business combinations

    The acquisition method is used to account for the acquisition of subsidiaries by the Group. The cost of an acquisition is measured as the fair value of the assets given, equity instruments issued and liabilities incurred or assumed at the date of exchange. The assets, liabilities and contingent liabilities acquired are assessed and included in the statement of financial position at their estimated fair value to the Group. If the cost of acquisition is higher than the net assets acquired, any difference between the net asset value and the cost of acquisition of a subsidiary is treated in accordance with the Group’s accounting policy for goodwill. If the cost of acquisition is less than the fair value of the net assets of the subsidiary acquired, the difference is recognised directly in profit or loss. The consideration transferred does not include amounts related to the settlement of pre-existing relationships. Such amounts are generally recognised in profit or loss.

    Transaction costs, other than those associated with the issue of debt or equity securities, that the Group incurs in connection with a business combination are expensed as incurred.

    Any contingent consideration payable is measured at fair value at the acquisition. If the contingent consideration is classified as equity, then it is not remeasured and the settlement is accounted for within equity. Otherwise, subsequent changes in the fair value of the contingent consideration are recognised in profit or loss.

    If share-based payment awards (replacement awards) are required to be exchanged for awards held by the acquiree’s employees (acquirees’ awards) and relate to past services, then all or a portion of the amount of the acquirer’s replacement awards is included in measuring the consideration transferred in the business combination. This determination is based on the market-based value of the replacement awards compared to the market-based value of the acquiree’s awards and the extent to which the replacement awards relate to past and/or future service.

  2. Transactions eliminated on consolidation

    Inter-company transactions, balances and unrealised gains on transactions between Group companies are eliminated on consolidation. Unrealised losses are eliminated in the same way as unrealised gains, but only to the extent that there is no evidence of impairment.

  3. Non-controlling interests

    Non-controlling interests (NCI) are measured at their proportionate share of the acquiree’s identifiable net assets at the acquisition date. Changes in the Group’s interest in a subsidiary that do not result in a loss of control are accounted for as equity transactions.

  4. Loss of control

    When the Group loses control over a subsidiary, it derecognises the assets and liabilities of the subsidiary, and any related NCI and other components of equity. Any resulting gain or loss is recognised in profit or loss. Any interest retained in the former subsidiary is measured at fair value when control is lost.

1.4 CONSOLIDATED STRUCTURED ENTITIES

The Group has established a number of consolidated structured entities (CSEs) for trading and investment purposes. CSEs are entities that are created to accomplish narrow and well-defined objectives. A CSE is consolidated if, based on an evaluation of the substance of the relationship with the Group and the Group has control over the CSE. CSEs are the Group entities which are designed so that voting rights are not relevant to the determination of power, but instead other rights are relevant. CSEs controlled by the Group are generally those established under terms that impose strict limitations on the decision-making powers of the CSEs’ management and that result in the Group receiving the majority of the benefits related to the CSEs’ operations and net assets.

Investments in CSEs in the Company’s separate financial statements are classified as available for sale and carried at fair value through other comprehensive income.

1.5 INVESTMENTS IN ASSOCIATES

Investments in associates are all entities over which the Group has significant influence but not control, generally accompanying a shareholding of between 20% and 50% of the voting rights. Investments in associates are accounted for using the equity method of accounting and are initially recognised at cost. The Group’s investment in associates includes goodwill identified on acquisition, net of any accumulated impairment loss.

The Group’s share of its associates’ post-acquisition profits and losses is recognised in profit or loss, and its share of post-acquisition movements in reserves is recognised in other comprehensive income. The cumulative post-acquisition movements are adjusted for against the carrying amount of the investment. When the Group’s share of losses in an associate equals or exceeds its interest in the associate, including any other unsecured receivables, the Group does not recognise further losses, unless it has incurred obligations or made payments on behalf of the associate.

Unrealised gains and losses arising from transactions with equity-accounted investments are eliminated against the investment to the extent of the Group’s interest in the investment. Unrealised losses are eliminated only to the extent that there is no evidence of impairment.

Investments in associates in the Company’s separate financial statements are classified as available for sale and carried at fair value through other comprehensive income.

1.6 JOINT VENTURES AND PARTNERSHIPS

Joint ventures are those entities over whose activities the Group has joint control, whereby the Group has rights to the net assets of the arrangement, rather than rights to its assets and obligations for its liabilities. Partnerships are those entities wherein the IDC has rights to the assets and obligations for the liabilities of the partnership. The assets and liabilities of the partnerships are included in the Company and Group financial statements.

The consolidated financial statements include the Group’s share of the total recognised gains and losses of joint ventures on an equity-accounted basis, from the date that joint control is established by contractual agreement commences until the date that it ceases. When the Group’s share of losses exceeds its interest in a joint venture, the Group’s carrying amount is reduced to nil and recognition of further losses is discontinued except to the extent that the Group has incurred legal or constructive obligations or made payments on behalf of a joint venture.

Unrealised gains and losses arising from transactions with equity-accounted joint ventures and partnerships are eliminated against the investment to the extent of the Group’s interest in the investment.

Investments in joint ventures in the Company’s separate financial statements are classified as available for sale and carried at fair value through other comprehensive income.

1.7 FINANCIAL INSTRUMENTS

a) Financial assets

The Group classifies its financial assets into the following categories: financial assets at fair value through profit or loss; loans and receivables; held-to-maturity investments; and available-for-sale financial assets. Management determines the classification of its financial assets at initial recognition.

  1. i. Financial assets at fair value through profit or loss

    This category has two subcategories: financial assets held for-trading and those designated at fair value through profit or loss at inception. A financial asset is classified in this category if acquired principally for the purpose of selling in the short term or if so designated by management. Derivatives are also categorised as held-for-trading unless they are designated as hedging instruments.

    Directly attributable transaction costs on initial recognition of financial assets are recognised at fair value through profit or loss.

    The Group designates financial assets at fair value through profit or loss when either:

    • The assets are managed, evaluated and reported internally on a fair value basis;
    • The designation eliminates or significantly reduces an accounting mismatch which would otherwise arise; and
    • The asset contains an embedded derivative that significantly modifies the cash flows that would otherwise be required under the contract.
  2. ii. Loans and receivables

    Loans and receivables are non-derivative assets with fixed or determinable payments that are not quoted in an active market other than those that the Group intends to sell in the near future. They arise when the Group provides money, goods or services directly to a debtor with no intention of trading the receivable.

    Trade receivables are measured at initial recognition at fair value, and are subsequently measured at amortised cost using the effective interest method.

  3. iii. Available-for-sale

    Available-for-sale investments are non-derivative investments that are not designated as another category of financial assets. Available-for-sale investments are those intended to be held for an indefinite period of time, which may be sold in response to needs for liquidity or changes in interest rates, exchange rates or equity prices. Available for sale investments includes investments in subsidiaries investments in associates, joint ventures and partnerships.

  4. iv. Recognition and measurement

    Purchases and sales of financial assets at fair value through profit or loss, held-to-maturity and available-for-sale are recognised on trade date – the date on which the Group commits to purchase or sell the asset. Loans are recognised when the cash is advanced to the borrowers. Financial assets are initially recognised at fair value plus transaction costs for all financial assets not carried at fair value through profit or loss.

    Where the transaction price in a non-active market is different to the fair value from other observable current-market transactions in the same instrument or based on a valuation technique, the variables of which include only data from observable markets, the group defer such differences (day 1 gains or losses). Day 1 gains or losses are amortised on a straight line basis over the life of the financial instrument. To the extent that the inputs determining the fair value of the instrument become observable, or on derecognition of the instrument, day 1 gains or losses are recognised immediately in profit or loss.

    Available-for-sale financial assets and financial assets at fair value through profit or loss are subsequently measured at fair value. Loans and receivables and held-to-maturity investments are subsequently measured at amortised cost using the effective interest method less impairment loss. Gains and losses arising from changes in the fair value of the financial instruments through profit or loss category are included in profit or loss in the period in which they arise. Gains and losses arising from changes in the fair value of available-for-sale financial assets are recognised directly in other comprehensive income, until the financial asset is disposed of, derecognised or impaired, at which time the cumulative gain or loss previously recognised in other comprehensive income is recognised in profit or loss. However, interest calculated using the effective interest method is recognised in profit or loss for available-for-sale debt investments. Dividends on available-for-sale equity instruments are recognised in profit or loss when the entity’s right to receive payment is established.

    Financial assets (or, where applicable, a part of a financial asset or part of a group of similar financial assets) are derecognised when the contractual rights to receive cash flows from the financial assets have expired or where the Group has transferred substantially all the risks and rewards of ownership, without retaining control. Any interest in the transferred financial assets that is created or retained by the Group is recognised as a separate asset or liability.

  5. v. Cash and cash equivalents

    For the purpose of the cash flow statement, cash and cash equivalents comprise cash on hand, deposits held on call with banks, and investments in money market instruments and bank overdrafts, all of which are available for use by the Group unless otherwise stated.

    Cash and cash equivalents are subsequently measured at amortised cost in the statement of financial position.

b) Financial liabilities

Financial liabilities are recognised initially at fair value, generally being their issue proceeds net of transaction costs incurred except for financial liabilities measure at fair value trough profit or loss. Financial liabilities, other than those at fair value through profit or loss are subsequently measured at amortised cost and interest is recognised over the period of the borrowing using the effective interest method.

Where the Group classifies certain liabilities at fair value through profit or loss, changes in fair value are recognised in profit or loss.

This designation by the Group takes place when either:

  • The liabilities are managed, evaluated and reported internally on a fair value basis; or
  • The designation eliminates or significantly reduces an accounting mismatch which would otherwise arise; and
  • The liability contains an embedded derivative that significantly modifies the cash flows that would otherwise be required under the contract.

A financial liability is derecognised when the obligation under the liability is discharged, cancelled or expires.

Where an existing financial liability is replaced by another from the same lender on substantially different terms, or the terms of an existing liability are substantially modified, such an exchange or modification is treated as a derecognition of the original liability and the recognition of a new liability, and the difference in the respective carrying amounts is recognised in profit or loss.

Trade payables are initially measured at fair value, and are subsequently measured at amortised cost, using the effective interest method.

c) Financial guarantees

Financial guarantees are contracts that require the Group to make specified payments to reimburse the holder for a loss it incurs because a specified debtor fails to make payment when due in accordance with the terms of a debt instrument. Financial guarantee liabilities are initially recognised at their fair value and the initial fair value is amortised over the life of the financial guarantee. The guarantee liability is subsequently measured at the higher of this amortised amount and the present value of any expected payment (when payment under the guarantee has become probable). Financial guarantees are included with other liabilities.

d) Offsetting of financial instruments

Financial assets and liabilities are offset and the net amount reported in the statement of financial position when there is a legally enforceable right to offset the recognised amounts and there is an intention to settle on a net basis, or realise the asset and settle the liability simultaneously. Income and expenses are presented on a net basis only when permitted by the accounting standards, or for gains and losses arising from a group of similar transactions such as in the Group’s trading activity.

e) Derivative financial instruments

Certain Group companies use derivative financial instruments to hedge their exposure to foreign exchange rate risks and other market risks arising from operational, financing and investment activities.

The Group does not hold or issue derivative financial instruments for trading purposes.

Derivatives may be embedded in another contractual arrangement (a “host contract”). The Group accounts for an embedded derivative separately from the host contract when the host contract is not itself carried at fair value through profit or loss, the terms of the embedded derivative would meet the definition of a derivative if they were contained in a separate contract, and the economic characteristics and risks of the embedded derivative are not closely related to the economic characteristics and risk of the host contract. Separated embedded derivatives are accounted for depending on their classification, and are presented in the statement of financial position together with the host contract.

1.8 IMPAIRMENT OF ASSETS

a) Impairment of financial assets carried at amortised cost (held-to-maturity financial assets, and loans and receivables)

Allowances for impairment on financial assets carried at amortised cost represent management’s estimate of losses incurred in the portfolio at reporting date.

The Group assesses whether there is objective evidence that a financial asset or group of financial assets in this category are impaired at each reporting date.

A financial asset or group of financial assets is impaired and impairment losses are incurred if, and only if, there is objective evidence of a decrease in the estimated future cash flows of the financial asset or group of financial assets that can be reliably estimated, as a result of one or more events that have occurred after the initial recognition of the asset (a loss event or events).

The Group first assesses whether objective evidence of impairment exists individually for financial assets that are individually significant, referred to as specific impairments, and individually or collectively for financial assets that are not individually significant.

Objective evidence that a financial asset or group of assets is impaired includes observable data that comes to the attention of the Group about the following loss events:

  • Significant financial difficulty of the issuer or obligor;
  • A breach of contract, such as default or delinquency in interest or principal payments;
  • The Group granting to the borrower, for economic or legal reasons relating to the borrower’s financial difficulty, a concession that the lender would not otherwise consider;
  • It becoming probable that the borrower will enter bankruptcy or other financial reorganisation;
  • Changes in macroeconomic conditions;
  • The disappearance of an active market for that financial asset resulting in financial difficulties; or
  • Observable data indicating that there is a measurable decrease in the estimated future cash flows from a group of financial assets since the initial recognition of those assets, although the decreases cannot yet be identified with the individual financial assets in the group.

Valuations of financial assets are performed by the Post Investment Monitoring and Workout and Restructuring departments and approved by the Investment Monitoring Committee (IMC), which meets three times a year.

Impairment losses are recognised in profit or loss and reflected in an allowance account against loans and advances.

If the Group determines that no objective evidence of impairment exists for an individually assessed financial asset, whether significant or not, it includes the asset in a group (portfolio) of financial assets with similar credit risk characteristics and collectively assesses them for impairment. Assets that are individually assessed for impairment and for which an impairment loss is, or continues to be recognised are not included in a collective assessment of impairment.

The recoverable amount of the assets is calculated as the present value of estimated future cash flows, discounted at the original effective interest rate (i.e. the effective interest rate computed at initial recognition of the asset).

For the purpose of a collective evaluation of impairment, financial assets are grouped on the basis of similar credit risk characteristics (i.e. on the basis of the Group’s grading process that considers asset type, industry, geographical location, collateral type, past-due status and other relevant factors). Those characteristics are relevant to the estimation of future cash flows for groups of such assets by being indicative of the debtors’ ability to pay all amounts due according to the contractual terms of the assets being evaluated.

Future cash flows in a group of financial assets that are collectively evaluated for impairment are estimated on the basis of the contractual cash flows of the assets in the group, and as well as historical loss experience for assets with credit risk characteristics similar to those in the Group. Historical loss experience is adjusted on the basis of current observable data to reflect the effects of current conditions which did not affect the period on which the historical loss experience is based. This also serves to remove the effects of conditions in the historical period that do not exist currently.

The Group ensures that estimates of changes in future cash flows for groups of assets are reflective and directionally consistent with changes in related observable data from period to period (for example, changes in interest rates, foreign currency exchange rates, payment status, or other factors indicative of changes in the probability of losses in the Group and their magnitude). The methodology and assumptions used for estimating future cash flows are reviewed regularly by the Group to reduce any differences between loss estimates and actual loss experience.

If an impairment loss decreases due to an event occurring subsequently and the decrease can be related objectively to an event occurring after the impairment was recognised (such as an improvement in the debtor’s credit rating), then the previously recognised impairment loss is reversed through profit or loss with a corresponding increase in the carrying amount of the underlying asset. The reversal is limited to an amount that does not state the asset at more than what its amortised cost would have been in the absence of impairment.

b) Impairment of available-for-sale financial assets

The Group assesses at each reporting date whether there is objective evidence that a financial asset or a group of financial assets is impaired. In the case of equity investments classified as available-for-sale, a significant and prolonged decrease in the fair value of the instrument below its cost is considered in determining whether the assets are impaired. The IDC applies the most conservative approach and immediately impairs the financial instrument upon the fair value going below cost. Management assesses all relevant information and applies its professional judgement in determining whether the impairment of a financial asset is significant and prolonged.

If any such evidence exists for available-for-sale financial assets, the cumulative loss – measured as the difference between the acquisition cost and the current fair value, less any impairment loss on that financial asset previously recognised in profit or loss – is removed from other comprehensive income and recognised in profit or loss. Impairment losses recognised in profit or loss on equity instruments are not reversed through profit or loss but rather through reserves.

Any increase in the fair value after an impairment loss has been recognised is treated as a revaluation and is recognised directly in other comprehensive income. If, in a subsequent period, the fair value of a debt instrument classified as available-for-sale increases and the increase can be objectively related to an event occurring after the impairment loss was recognised in profit or loss, the impairment loss is reversed through profit or loss.

c) Impairment of non-financial assets

At each reporting date, the Group reviews the carrying amounts of its non-financial assets (other than biological assets, land and buildings, deferred tax assets and investment property) to determine whether there is any indication of impairment. If any such indication exists, then the asset’s recoverable amount is estimated. Goodwill is tested annually for impairment.

For impairment testing, assets are grouped together into the smallest group of assets that generates cash inflows from continuing use that is largely independent of the cash inflows of other assets or cash-generating units (CGUs). Goodwill arising from a business combination is allocated to CGUs or groups of CGUs that are expected to benefit from the synergies of the combination.

The ‘recoverable amount’ of an asset or CGU is the greater of its value in use and its fair value less costs to sell. ‘Value in use’ is based on the estimated future cash flows, discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset or CGU.

An impairment loss is recognised if the carrying amount of an asset or CGU exceeds its recoverable amount.

Impairment losses are recognised in profit or loss. They are allocated first to reduce the carrying amount of any goodwill allocated to the CGU, and then to reduce the carrying amounts of the other assets in the CGU on a pro rata basis.

An impairment loss in respect of goodwill is not reversed. For other assets, an impairment loss is reversed only to the extent that the asset’s carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortisation if no impairment loss had been recognised.

Any impairment loss of a revalued asset is treated as a revaluation decrease.

1.9 INTANGIBLE ASSETS

a) Goodwill

Business combinations are accounted for using the acquisition method as at the acquisition date.

The Group measures goodwill at the acquisition date as:

  • The fair value of the consideration transferred; plus
  • The recognised amount of any non-controlling interests in the acquiree; plus
  • If the business combination is achieved in stages, the fair value of the pre-existing equity interest in the acquiree; less
  • The net recognised amount (generally fair value) of the identifiable assets required and the liabilities assumed.

When the excess is negative, a bargain purchase gain is recognised immediately in profit and loss.

Subsequent to initial recognition, goodwill is measured at cost less accumulated impairment losses. Impairment losses on goodwill are recognised in profit or loss and determined in accordance with the impairment of non-financial assets.

b) Intangible assets acquired separately

Intangible assets acquired separately are measured on initial recognition at cost. Following initial recognition, intangible assets are carried at cost less any accumulated amortisation and accumulated impairment losses, if any.

Amortisation is charged on a straight-line basis over the estimated useful lives of the intangible assets which do not exceed four years. The estimated useful life and amortisation method are reviewed at the end of each annual reporting period, with the effect of any changes being accounted for on a prospective basis.

c) Intangible assets acquired in a business combination

Intangible assets acquired in a business combination are identified and recognised separately from goodwill where they satisfy the definition of an intangible asset and their fair values can be measured reliably. The cost of such intangible assets is their fair value at the acquisition date.

Subsequent to initial recognition, intangible assets acquired in a business combination are measured at cost less accumulated amortisation and accumulated impairment losses, on the same basis as intangible assets acquired separately.

1.10 FOREIGN CURRENCY TRANSLATION

a) Transactions and balances

Transactions in foreign currencies are translated into South African Rand at the foreign exchange rate prevailing at the date of the transaction. The foreign currency gain or loss on monetary items is the difference between amortised cost in the functional currency at the beginning of the period, adjusted for effective interest and payments during the period, and amortised cost in foreign currency translated at the exchange rate at the end of the reporting period, if applicable.

Monetary assets and liabilities denominated in foreign currencies at the reporting date have been translated into South African Rand at the rates ruling at that date. Non-monetary assets and liabilities that are measured in terms of historical cost in a foreign currency are translated using the exchange rate at the date of the transaction. Non-monetary assets and liabilities denominated in foreign currencies that are stated at fair value are translated to Rand at foreign exchange rates ruling at the dates the fair value was determined.

Foreign currency differences are recognised in profit and loss, except for available-for-sale investments and effective cash flow hedges which are recognised in other comprehensive income.

b) Financial statements of foreign operations

All foreign operations have been accounted for as foreign operations. Assets and liabilities of foreign operations, including goodwill and fair value adjustments arising on consolidation, are translated into South African Rand at foreign exchange rates ruling at the reporting date. Income and expenses are translated at the average foreign exchange rates, provided these rates approximate the actual rates, for the year. Exchange differences arising from the translation of foreign operations are recognised in other comprehensive income. When a foreign operation is disposed of, in part or in full, the relevant amount in the foreign currency translation reserve is transferred to profit or loss.

1.11 INVESTMENT PROPERTY

Investment property is property held either to earn rental income or for capital appreciation, or both.

a) Measurement

Investment property is measured initially at cost, including transaction costs and directly attributable expenditure in preparing the asset for its intended use. Subsequently, all investment properties are measured at fair value. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.

Valuation takes place annually, based on the aggregate of the net annual rental receivable from the properties, considering and analysing rentals received on similar properties in the neighbourhood, less associated costs (insurance, maintenance, repairs and management fees). A capitalisation rate which reflects the specific risks inherent in the net cash flows is applied to the net annual rentals to arrive at the property valuations.

Gains or losses arising from a change in fair value are recognised in profit or loss.

External, independent valuers having appropriate, recognised professional qualifications and recent experience in the location and category of the property being valued are used to value the portfolio.

When the use of a property changes such that it is reclassified as property and equipment, its fair value at the date of reclassification becomes its cost for subsequent accounting.

1.12 PROPERTY, PLANT AND EQUIPMENT

a) Measurement

All items of property, plant and equipment recognised as assets are measured initially at cost. Cost includes expenditures that are directly attributable to the acquisition of the asset. The cost of self-constructed assets includes the cost of material and direct labour and any other cost directly attributable to bringing the asset to a working condition for its intended use, and the cost of dismantling and removing the items and restoring the site on which they are located. Except for land, buildings and aircraft all other items of property, plant and equipment are subsequently measured at cost less accumulated depreciation and any accumulated impairment losses.

Land, buildings and aircraft are subsequently measured at fair value less accumulated depreciation and accumulated impairment losses. Land, buildings and aircraft are revalued by external, independent valuers. Valuers having appropriate recognised professional qualifications and recent experience in the location and category of the property being valued are used to value the portfolio.

Any surplus in excess of the carrying amount is transferred to a revaluation reserve net of deferred tax. Surpluses on revaluation are recognised in profit or loss to the extent that they reverse revaluation decreases of the same assets recognised as expenses in the previous periods.

Decreases in revaluation are charged directly against the revaluation reserves only to the extent that the decrease does not exceed the amount held in the revaluation reserves in respect of that same asset, otherwise they are recognised in profit or loss.

Where parts of an item of property, plant and equipment have significantly different useful lives, they are accounted for as separate items of property, plant and equipment. Although individual components are accounted for separately, the financial statements continue to disclose a single asset.

b) Subsequent cost

The Group recognises the cost of replacing part of such an item of property, plant and equipment in the carrying amount when that cost is incurred if it is probable that the future economic benefits embodied with the item will flow to the Group and the cost of the item can be measured reliably. All other costs are recognised in profit or loss as an expense as they are incurred.

c) Depreciation

Depreciation is recognised in profit or loss on a straight-line basis, based on the estimated useful lives of the underlying assets. Depreciation is calculated on the cost less any impairment and expected residual value of the asset. Land is not depreciated. The estimated useful lives for the current and comparative periods are as follows:

The residual values, useful lives and depreciation method are re-assessed at each financial year-end and adjusted if appropriate.

d) Derecognition

The carrying amount of items of property, plant and equipment are derecognised on disposal or when no future economic benefits are expected from their use or disposal.

Gains or losses arising from derecognition are determined as the difference between the net disposal proceeds and the carrying amount of the item of property, plant and equipment and included in profit or loss when the items are derecognised. When revalued assets are sold, the amounts included in the revaluation reserve are transferred to retained income.

1.13 BIOLOGICAL ASSETS

A biological asset is a living animal or plant.

a) Measurement

A biological asset is measured initially and at reporting date at its fair value less costs to sell. If the fair value of a biological asset cannot be determined reliably at the date of initial recognition, it is stated at cost less any accumulated depreciation and impairment losses.

Gains or losses arising on the initial recognition of a biological asset at fair value less costs to sell, and from a change in fair value less costs to sell of biological assets, are included in profit or loss in the period in which they arise.

1.14 LEASES

a) Finance leases

Leases of assets under which the lessee assumes all the risks and benefits of ownership are classified as finance leases.

  1. i. Finance leases – Group as lessee

    Finance leases are recognised as assets and liabilities in the statement of financial position at amounts equal to the fair value of the leased property or, if lower, the present value of the minimum lease payments. The corresponding liability to the lessor is included in the statement of financial position as a finance lease obligation.

    The discount rate used in calculating the present value of the minimum lease payments is the interest rate implicit in the lease. The lease payments are apportioned between the finance charge and reduction of the outstanding liability. The finance charge is allocated to each period during the lease term so as to produce a constant periodic rate on the remaining balance of the liability.

  2. ii. Finance leases – Group as lessor

    The Group recognises finance lease receivables in the statement of financial position. Finance income is recognised based on a pattern reflecting a constant periodic rate of return on the Group’s net investment in the finance lease.

b) Operating leases

Leases of assets under which the lessor effectively retains all the risks and benefits of ownership are classified as operating leases.

  1. i. Operating leases – Group as lessee

    Lease payments arising from operating leases are recognised in profit or loss on a straight-line basis over the lease term. Lease incentives received are recognised in profit or loss as an integral part of the total lease expense.

  2. ii. Operating leases – Group as lessor

    Receipts in respect of operating leases are accounted for as income on the straight-line basis over the period of the lease.

    The assets subject to operating leases are presented in the statement of financial position according to the nature of the assets.

c) Determining whether an arrangement contains a lease

At inception of an arrangement, the Group determines whether such an arrangement is or contains a lease. A specific asset is the subject of a lease if fulfilment of the arrangement is dependent on the use of that specified asset. An arrangement conveys the right to use the asset if the arrangement conveys to the Group the right to control the use of the underlying asset.

At inception or upon re-assessment of the arrangement, the Group separates payments and other consideration required by such an arrangement into those for the lease and those for other elements on the basis of their relative fair values. If the Group concludes for a finance lease that it is impracticable to separate the payments reliably, an asset and a liability are recognised at an amount equal to the fair value of the underlying asset. Subsequently the liability is reduced as payments are made and an imputed finance charge on the liability is recognised using the Group’s incremental borrowing rate.

1.15 SHARE CAPITAL

Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of the ordinary shares are recognised as a deduction from equity, net of any tax effects.

1.16 INVENTORIES

a) Spares and consumables

Spares and consumables are valued at the lower of cost and net realisable value, on a weighted average method.

The cost of inventories comprises all costs of purchase, conversion and other costs incurred in bringing the inventories to the present location and condition.

Obsolete, redundant and slow-moving items of spares and consumable stores are identified on a regular basis and written down to their net realisable value.

Net realisable value is the estimated selling price in the ordinary course of business, less the costs of completion and selling expenses.

b) Raw materials, finished goods and phosphate rock

Raw materials, finished goods and phosphate rock are valued at the lower of cost of production and net realisable value.

Cost of production is calculated on a standard cost basis, which approximates the actual cost and includes the production overheads. Production overheads are allocated on the basis of normal capacity to finished goods.

The valuation of inventory held by agents or in transit includes forwarding costs, where applicable.

1.17 PROVISIONS

Provisions are recognised when:

  • The Group has a present obligation as a result of a past event;
  • It is probable that an outflow of resources embodying economic benefits will be required to settle the obligation; and
  • A reliable estimate can be made of the obligation.

Provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the liability. The unwinding of the discount is recognised as finance cost. Where some or all of the expenditure required to settle a provision is expected to be reimbursed by another party, the reimbursement shall be recognised when, and only when, it is virtually certain that reimbursement will be received if the entity settles the obligation. The reimbursement shall be treated as a separate asset. The amount recognised for the reimbursement shall not exceed the amount of the provision. Provisions are not recognised for future operating losses.

A constructive obligation to restructure is recognised when an entity:

  • Has a detailed formal plan for the restructuring, identifying at least:
    • –  The business or part of a business concerned
    • –  The principal locations affected
    • –  The location, function, and approximate number of employees who will be compensated for terminating their services
    • –  The expenditures that will be undertaken
    • –  When the plan will be implemented
    • –  Has raised a valid expectation in those affected that it will carry out the restructuring by starting to implement that plan or announcing its main features to those affected by it.

a) Decommissioning provision

The obligation to make good environmental or other damage incurred in installing an asset is provided in full immediately, as the damage arises from a past event.

If an obligation to restore the environment or dismantle an asset arises on the initial recognition of the asset, the cost is capitalised to the asset and amortised over the useful life of the asset. The cost of an item of property, plant and equipment includes not only the ‘initial estimate’ of the costs relating to dismantlement, removal or restoration of property, plant and equipment at the time of installing the item but also amounts recognised during the period of use, for purposes other than producing inventory.

If an obligation to restore the environment or dismantle an asset arises after the initial recognition of the asset, then a provision is recognised at the time that the obligation arises.

b) Onerous contracts

A provision for onerous contracts is recognised when the expected benefits to be derived by the Group from a contract are lower than the unavoidable cost of meeting its obligations under the contract. The provision is measured at the present value of the lower of the expected cost of terminating the contract and the expected net cost of continuing with the contract.

Before a provision is established, the Group recognises any impairment loss on the assets associated with the contract.

1.18 CONTINGENT LIABILITIES AND COMMITMENTS

a) Contingent liabilities

A contingent liability is a possible obligation that arises from past events and whose existence will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the Group.

Contingent liabilities are not recognised in the statement of financial position of the Group but disclosed in the notes.

After their initial recognition contingent liabilities recognised in business combinations that are recognised separately are subsequently measured at the higher of:

  • The amount that would be recognised as a provision
  • The amount initially recognised less cumulative amortisation

Contingent liabilities are not recognised. Contingencies are disclosed in the notes.

b) Commitments

Items are classified as commitments where the Group has committed itself to future transactions. Commitments are not recognised in the statement of financial position of the Group but disclosed in the notes.

1.19 TAXATION

a) Current tax assets and liabilities

Current tax for current and prior periods is, to the extent unpaid, recognised as a liability. If the amount already paid in respect of current and prior periods exceeds the amount due for those periods, the excess is recognised as an asset.

Current tax liabilities (assets) for the current and prior periods are measured at the amount expected to be paid to (recovered from) the tax authorities, using the tax rates (and tax laws) that have been enacted or substantively enacted by the end of the reporting period.

b) Income tax

Current and deferred taxes are recognised as income or an expense and included in profit or loss for the period, except to the extent that the tax arises from:

  • A transaction or event which is recognised, in the same or a different period, to other comprehensive income
  • A business combination

Current tax is charged or credited in profit or loss, except when it relates to items credited or charged directly to equity or other comprehensive income, in which case the current tax is also recognised in equity or other comprehensive income.

Current tax also includes any adjustment to tax payable in respect of previous years.

c) Deferred tax

Deferred tax is recognised in respect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. Deferred tax is recognised for all taxable temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. Deferred tax assets are recognised to the extent that it is probable that future taxable profit will be available against which unused tax deductions can be utilised. Deferred tax assets are reviewed at each reporting date and are reduced to the extent that it is no longer probable that the related tax will be realised.

Deferred tax is not recognised if the temporary differences arise on the initial recognition of goodwill or from the initial recognition (other than in a business combination) of other assets and liabilities in a transaction that affects neither taxable income nor accounting income. Deferred tax is also not recognised in respect of temporary differences relating to investments in associates, subsidiaries and joint ventures to the extent that it is probable that they will not reverse in the foreseeable future and the timing of the reversal of the temporary difference is controlled.

Deferred tax is measured at the tax rates that are expected to be applied to temporary differences when they reverse, based on the laws that have been enacted or substantively enacted by the reporting date.

Deferred tax is charged or credited in profit or loss, except when it relates to items credited or charged directly to equity or other comprehensive income, in which case the deferred tax is also recognised in equity or other comprehensive income.

Deferred tax assets and liabilities are offset if there is a legally enforceable right to offset current tax liabilities and assets, and they relate to taxes levied by the same tax authority on the same taxable entity, or on different tax entities, but they intend to settle current tax liabilities and assets on a net basis or their tax assets and liabilities will be realised simultaneously.

1.20 REVENUE

Revenue comprises sales to customers, dividends, interest and fee income, but excludes value added tax, and is measured at the fair value of the consideration received or receivable, net of returns and allowances, trade discounts and volume rebates.

a) Sales to customers

Revenue from sale of goods is recognised in profit or loss when the significant risks and rewards of ownership have been transferred to the customer, recovery of the consideration is probable, associated costs and possible return of goods can be estimated reliably and there is no continuing managerial involvement with the goods. This occurs when the Group entity has delivered products to the customer and the customer has accepted the products. The delivery of products and the transfer of risks are determined by the terms of sale.

b) Dividends

Dividend income is recognised when the right to receive payment is established on the ex-dividend date for equity instruments and is included in dividend income.

c) Interest

Interest income and expense are recognised in profit or loss using the effective-interest method taking into account the contractual expected timing and amount of cash flows. The effective-interest method is a method of calculating the amortised cost of a financial asset or financial liability (or group of financial assets or financial liabilities) and of allocating the interest income or interest expense over the relevant period. Interest income and expense include the amortisation of any discount or premium or other differences between the initial carrying amount of an interest-bearing financial instrument and its amount at maturity calculated on an effective-interest-rate basis.

d) Fees

The Group earns fees and commissions from a range of services it provides to clients and these are accounted for as follows:

  • Income earned on the execution of a significant act is recognised when the significant act has been performed. For instance, the syndication or structuring fee is recognised when the syndication as a lead arranger or structuring as a structure of the deal has been completed. On the other hand, loan commitment fees are recognised on a straight-line basis over the commitment period
  • Income earned from the provision of services is recognised as the service is rendered by reference to the stage of completion of the service
    The stage of completion is assessed by reference to the service performed to date as a percentage of total service to be performed. In most instances, this is straight-lined
  • Income that forms an integral part of the effective interest rate of a financial instrument is recognised as an adjustment to the effective interest rate and recognised in interest income
  • Fees charged for servicing a loan are recognised in revenue as the service is provided.

1.21 BORROWING COSTS

Borrowing costs are expensed in the period in which they are incurred, except to the extent that they are capitalised when directly attributable to the acquisition, construction or production of a qualifying asset.

1.22 EMPLOYEE BENEFITS

a) Post-retirement medical benefits

Some Group companies provide post-employment healthcare benefits to their retirees. The entitlement to post-employment healthcare benefits is based on the employee remaining in service up to retirement age. The expected costs of these benefits are accrued over the period of employment, using the projected unit of credit method. Valuations of these obligations are carried out annually by independent qualified actuaries.

b) Defined contribution plans

The majority of the Group’s employees are members of defined contribution plans and contributions to these plans are recognised in profit or loss in the year to which they relate.

A defined contribution plan is a pension plan under which the Group pays fixed contributions into a separate entity (a fund) and under which the Group will have no legal or constructive obligations to pay further contributions if the fund does not hold sufficient assets to pay all employees benefits relating to employee service in the current and previous periods.

c) Defined benefit plans

The Group operates a defined benefit and a defined contribution plan, the assets of which are held in separate trustee-administered funds. The schemes are generally funded through payments to insurance companies or trustee-administered funds as determined by periodic actuarial valuations. A defined benefit plan is a pension plan that defines an amount of pension benefit to be provided, usually as a function of one or more factors such as age, years of service and compensation.

The liability in respect of defined benefit pension plans is the present value of the defined benefit obligation at the reporting date less the fair value of plan assets. The defined benefit obligation is calculated annually by independent actuaries using the projected unit credit method. The present value of the defined benefit obligation is determined by discounting the estimated future cash outflows using interest rates of government securities that have terms to maturity approximating the terms of the related liability.

Actuarial gains and losses arising from experience adjustments and the effects of changes in actuarial assumptions to the defined benefit plans are recognised fully in other comprehensive income.

Past-service costs are recognised immediately in profit or loss when they occur.

d) Short-term employee benefits

Short-term employee benefit obligations are measured on an undiscounted basis and are expensed as the related services are provided. A liability is recognised for the amount expected to be paid under short-term cash bonus or profit-sharing plans if the Group has a present obligation to pay this amount as a result of past service provided by the employee, and the obligation can be estimated reliably.

1.23 SEGMENT REPORTING

An operating segment is a component of the Group that engages in business activities from which it may earn revenues and incur expenses, including revenue and expenses that relate to transactions with any of the Group’s other components, whose operating results are reviewed regularly by the Executive Committee to make decisions about resources allocated to each segment and assess its performance, and for which discrete financial information is available.

The group accounts for inter-segment revenue and transfers as if the transactions were with third parties. Transactions between reportable segments are eliminated in the other segment.

1.24 DISCONTINUED OPERATIONS AND NON-CURRENT ASSETS HELD-FOR-SALE

a) Discontinued operations

A discontinued operation is a component of the Group’s business that represents a separate major line of business or geographical area of operations or is a subsidiary acquired exclusively with a view to resale and is part of a single co-ordinated plan to dispose of a separate major line of business or geographical area of operations.

Classification as a discontinued operation occurs upon disposal or when the operation meets the criteria to be classified as held-for-sale, if earlier. A disposal group that is to be abandoned may also qualify.

b) Non-current assets held-for-sale

Non-current assets and disposal groups are classified as held-for-sale if their carrying amount will be recovered through a sale transaction rather than continuing use. This classification is only met if the sale is highly probable and the assets are available for immediate sale in its present condition.

c) Measurement

Immediately before classification as held-for-sale, the measurement of the assets (and all assets and liabilities in a disposal group) is brought up-to-date in accordance with the applicable IFRS. Then, on initial classification as held-for-sale, the non-current assets and disposal groups are recognised at the lower of carrying amount and fair value less costs to sell. Any impairment loss on a disposal group is first allocated to goodwill and then to remaining assets and liabilities on a pro rata basis, except that no loss is allocated to inventories, financial assets, deferred tax assets, employee benefit assets, investment property and biological assets, which continue to be measured in accordance with the Group’s accounting policies.

Impairment losses on initial classification as held-for-sale are included in profit or loss, even when there is a revaluation. The same applies to gains and losses on subsequent measurement. Once classified as held-for-sale, intangible assets and property, plant and equipment are no longer amortised or depreciated, and any equity-accounted investee is no longer equity accounted.

d) Reclassification

The non-current assets held-for-sale will be reclassified immediately when there is a change in intention to sell. At that date, it will be measured at the lower of its carrying value before the asset was classified as held-for-sale, adjusted for any depreciation, amortisation or revaluations that would have been recognised had the asset not been classified as held-for-sale and its recoverable amount at the date of the subsequent decision not to sell.

1.25 RELATED PARTIES

The IDC operates in an economic environment together with other entities directly or indirectly owned by the South African government. Only parties within the national sphere of government will be considered to be related parties.

Key management is defined as individuals with the authority and responsibility for planning, directing and controlling the activities of the entity. All individuals from the level of Executive Management up to the Board of Directors are regarded as key management per the definition of the standard. Close family members of key management personnel are considered to be those family members who may be expected to influence, or be influenced by key management individuals in their dealings with the entity.

Other related party transactions are also disclosed in terms of the requirements of IAS 24.

1.26 SHARE-BASED PAYMENTS

A Group company operates an equity-settled share-based plan and a cash-settled share-based plan.

The equity-settled share-based payments vest immediately, the reserve was recognised in equity at grant date.

The cash-settled plan was entered into with one of the Group company’s employees, under which the company receives services from employees by incurring the liability to transfer cash to the employees for amounts that are based on the value of the company’s shares. The fair value of the transaction is measured using an option pricing model, taking into account all terms and conditions. The fair value of the services received in exchange for the grant of the options is recognised as an expense. The total amount to be expensed is determined by reference to the fair value of the options granted:

  • Including any market performance conditions
  • Excluding the impact of any service and non-market performance vesting conditions
  • Including the impact of any non-vesting conditions

The services received by the company are recognised as they are received and the liability is measured at fair value. The fair value of the liability is re-measured at each reporting date and at the date of settlement. Any changes in the fair value are recognised in profit or loss for the period.

1.27 DETERMINATION OF FAIR VALUES

A number of the Group’s accounting policies and disclosures require the determination of fair value, for both financial and non-financial assets and liabilities.

Fair values have been determined for measurement and/or disclosure purposes based on the following methods. When applicable, further information about the assumptions made in determining fair values is disclosed in the notes specific to that asset or liability.

a) Financial assets and liabilities

‘Fair value’ is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date in the principal or, in its absence, the most advantageous market to which the Group has access at that date. The fair value of a liability reflects its non-performance risk.

When available, the Group measures the fair value of an instrument using the quoted price in an active market for that instrument. A market is regarded as active if transactions for the asset or liability take place with sufficient frequency and volume to provide pricing information on an ongoing basis.

If there is no quoted price in an active market, then the Group uses valuation techniques that maximise the use of relevant observable inputs and minimise the use of unobservable inputs. The chosen valuation technique incorporates all of the factors that market participants would take into account in pricing a transaction.

The best evidence of the fair value of a financial instrument at initial recognition is normally the transaction price, i.e. the fair value of the consideration given or received. If the Group determines that the fair value at initial recognition differs from the transaction price and the fair value is evidenced neither by a quoted price in an active market for an identical asset or liability nor based on a valuation technique that uses only data from observable markets, then the financial instrument is initially measured at fair value, adjusted to defer the difference between the fair value at initial recognition and the transaction price. Subsequently, that difference is recognised in profit or loss on an appropriate basis over the life of the Instrument but no later than when the valuation is wholly supported by observable market data or the transaction is closed out.

The Group recognises transfers between levels of the fair value hierarchy as of the end of the reporting period during which the change has occurred.

b) Property, plant and equipment

The market value of land and buildings is the estimated amount that would be received to sell an asset in an orderly transaction between market participants at the measurement date.

c) Investment property

Valuation methods and assumptions used in determining the fair value of investment property

  1. i. Capitalisation method

    The value of the property reflects the present value of the sum of the future benefits which an owner may expect to derive from the property. These benefits are expressed in monetary terms and are based upon the estimated rentals for the property in an orderly transaction between market participants. The usual property outgoings are deducted to achieve a net rental, which is then capitalised at a rate an investor, would require receiving the income.
  2. ii. Comparative method

    The method involves the identification of comparable properties sold in the area or in a comparable location within a reasonable time. The selected comparable properties are analysed and compared with the subject property. Adjustments are then made to their values to reflect any differences that may exist. This method is based on the assumption that a purchaser will pay an amount equal to what others have paid or are willing to pay.
  3. iii. Residual land valuation method

    This method determines the residual value which is the result of the present value of expected inflows less all outflows (including income tax) less the developer’s required profits. This is the maximum that the developer can afford to pay for the real estate. This residual value is in theory also the market value of the land.

d) Non-derivative financial liabilities

Fair value, which is determined for disclosure purposes, is calculated based on the present value of future principal and interest cash flows, discounted at the market rate of interest at the reporting date. In respect of the liability component of convertible notes, the market rate of interest is determined by reference to similar liabilities that do not have a conversion option. For finance leases the market rate of interest is determined by reference to similar lease agreements.

e) Share-based payment transactions

A Group company entered into a Business Assistance Agreement, which is considered to be an equity-settled, share-based payment transaction. The fair value of the technical and business services received in exchange for the grant of equity instruments is recognised as an expense. The total amount to be expensed over the vesting period is determined by reference to the fair value of the equity instruments granted, excluding the impact of any non-market vesting conditions. Non-market vesting conditions are included in assumptions about the number of equity instruments that are expected to vest.

1.28 USE OF ESTIMATES AND JUDGEMENTS

Estimates and judgements are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances.

The Group makes estimates and assumptions concerning the future. The resulting accounting estimates will, by definition, rarely equal the related actual results. The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are outlined below.

a) Income taxes

Significant judgement is required in determining the worldwide provision for income taxes. There are many transactions and calculations for which the ultimate tax determination is uncertain during the ordinary course of business. The Group recognises liabilities for anticipated tax audit issues based on estimates of whether additional taxes will be due. Where the final tax outcome of these matters is different from the amounts that were initially recorded, such differences will impact the income tax and deferred tax provisions in the period in which such determination is made.

b) Fair value of financial instruments

The fair value of financial instruments that are not traded in an active market is determined by using valuation techniques. The Group uses its judgement to make assumptions that are mainly based on market conditions existing at each reporting date. Listed equities are valued based on their listed value (fair value) on 31 March 2017.

Unlisted equities are valued based on various valuation methods, including free cash flow, price earnings (PE) and net asset value basis (NAV) bases.

Judgements and assumptions in the valuations and impairments include determining the:

  • Free cash flows of investees
  • Replacement values
  • Discount or premium applied to the IDC’s stake in investees
  • Sector/subsector betas
  • Debt weighting – this is the target interest-bearing debt level
  • Realisable value of assets
  • Probabilities of failure in using the NAV-model

c) Post-employment obligations

Significant judgement and actuarial assumptions are required to determine the fair value of the post-employment obligations. More detail on these actuarial assumptions is provided in the notes to the financial statements.

d) Environmental rehabilitation liability

In determining the environmental rehabilitation liability, an inflation rate of 5.78% (FY2016: 6.0%) was assumed to increase the rehabilitation liability for the next 20 years, and a rate of 8.39% (FY2016: 8.37%) to discount that amount to present value. The discount rate assumed of 8.39% is a risk-free rate, specifically the rate at which the R186 South African government bond was quoted at year-end.

e) Fair value of share-based payments

The fair value of equity instruments on grant date is determined based on a simulated company value, using the Geometric Brownian Motion model. The valuation technique applied to determine the simulated company value is part of the Monte Carlo simulation methodology.

f) Impairment of assets

The Group follows the guidance of IAS 36, Impairment of Assets to determine when an asset is impaired. This determination requires significant judgement. In making this judgement, the Group evaluates the impairment indicators that could exist at year-end, such as significant decreases in the selling prices of finished goods, significant decreases in sales volumes and changes in the international export regulatory environment.

Risks specific to future cash flows and weighted average cost of capital are key indicators considered in making this judgement.

1.29 TRANSFER OF FUNCTIONS

a) Between entities under common control

  • i. Recognition

    The receiving entity recognises the assets and liabilities acquired through a transfer of functions on the effective date of the transfer. All income and expenses that relate to the functions transferred are also recognised from the effective date of the transfer. The recognition of these income and expenses are governed by the accounting policies related to those specific income and expenses and accordingly this policy does not provide further guidance thereon.

  • ii. Measurement

    Assets and liabilities acquired, by the receiving entity, through a transfer of functions are measured at initial recognition at the carrying value at which they were transferred. The difference between the carrying value of the assets and liabilities transferred and any consideration paid for the assets and liabilities transferred is recognised in equity. The carrying value at which the assets and liabilities are initially recognised is therefore the deemed cost thereof. Therefore for the subsequent measurement of these assets and liabilities the accounting policies relevant to those assets and liabilities are followed. Accordingly, this accounting policy does not provide additional guidance on the subsequent measurement of the transferred assets and liabilities.

  • iii. Derecognition

    The transferring entity derecognises the assets and liabilities on the effective date of the transfer of functions. These transferred assets and liabilities are measured at their carrying values upon derecognition. The resulting difference between the carrying value of the assets and liabilities transferred and any consideration received for the assets and liabilities transferred is recognised in equity.

b) Between entities that are not under common control

  • i. Recognition

    The receiving entity recognises the assets and liabilities acquired through a transfer of functions on the effective date of the transfer. All income and expenses that relate to the functions transferred are also recognised from the effective date of the transfer. The recognition of these income and expenses are governed by the accounting policies related to those specific income and expenses and accordingly this policy does not provide further guidance thereon.

  • ii. Measurement

    Assets and liabilities acquired, by the receiving entity, through a transfer of functions are measured at initial recognition at the fair value at which they were transferred. The difference between the fair value of the assets and liabilities transferred and any consideration paid for the assets and liabilities transferred is recognised in profit or loss. The fair value of these assets and liabilities is therefore deemed cost thereof. Therefore for the subsequent measurement of these assets and liabilities the accounting policies relevant to those assets and liabilities are followed. Accordingly, this accounting policy does not provide additional guidance on the subsequent measurement of the transferred assets and liabilities.

  • iii. Derecognition

    The transferring entity derecognises the assets and liabilities on the effective date of the transfer of functions. These transferred assets and liabilities are measured at their fair values upon derecognition. The resulting difference between the fair value of the assets and liabilities transferred and any consideration received for the assets and liabilities transferred is recognised in profit or loss.

2. FINANCIAL ASSETS AND LIABILITIES

The table below sets out the Group’s classification of each class of financial assets and liabilities, and their fair values.

3. FINANCIAL RISK MANAGEMENT

FINANCIAL RISK

This risk category encompasses losses that may occur as a result of the way the IDC is financed and its own financing or investment activities. Financial risk includes credit and settlement risk related to the potential for counterparty default, market risk related to volatility in interest rates, exchange rates, commodity and equity prices, liquidity/funding risk related to the cost of maintaining various financial positions as well as financial compliance risk. Other financial risks faced by the Corporation include the risk of concentration of investments in certain economic sectors, regions and/or counterparties as well as the risk of over-dependency in relation to income on a limited number of counterparties and/or financial products and the risk of margin erosion due to inappropriate pricing relative to the cost of funding. The management of these risk areas is therefore critical for the IDC.

Financial credit risk

This refers to the risk that a counterparty to a financial transaction will fail to meet its obligations in accordance with the agreed terms and conditions of the contract, either because of bankruptcy or for any other reason, thereby causing the asset holder to suffer a financial loss. Credit risk, as defined by the IDC, comprises the potential loss on loans, advances, guarantees, quasi-equity and equity investments due to counterparty default.

Credit risk arises as a result of the Corporation’s lending activities as well as the placement of deposits with financial institutions.

Approach to managing credit risk

The IDC endeavours to maintain credit risk exposure within acceptable parameters, managing the credit risk inherent in the entire portfolio as well as the risk associated with individual clients or transactions. The effective management of credit risk is a critical component of a comprehensive approach to risk management and is essential to the long-term success of the Corporation. This is the dominant risk within the IDC as the providing of loans, advances, quasi-equity, equity investments and guarantees represent the Corporation’s core business.

Managing credit risk concentration

Risk concentrations can arise in a financial organisation’s assets, liabilities or off-balance sheet items, through the execution or processing of transactions (either product or service), or through a combination of exposures across these broad categories.

The potential for loss reflects the size of the position and the extent of loss given a particular adverse circumstance. The IDC can be exposed to various forms of credit risk concentration which, if not properly managed, may cause significant losses that could threaten its financial health. Accordingly the IDC considers the management (including measurement and control) of its credit concentrations to be of vital importance. There is recognition in Basel II that portfolios of financial institutions can exhibit credit concentrations and that prudently managing such concentrations is one of the important aspects in effective credit risk management. However, despite the recognition of credit concentrations as important sources of risk for portfolios, there is no generally accepted approach or methodology for dealing with the issue (including measurement) of concentration particularly with respect to sector or industry concentration.

Concentrations within a lending and/or investment portfolio can be viewed in a variety of ways: by borrower, product type, collateral type, geography, economic sector and any other variable that may be associated with a group of credits. Investment or credit concentrations are considered to be a large group of exposures that respond similarly to the same stresses. These stresses can be:

  • Sensitivity to a certain industry or economic factors;
  • Sensitivity to geographical factors, either a single country or region of interlinked ones;
  • Sensitivity to the performance of a single company or counterparty; and/or
  • Sensitivity to a particular risk mitigation technique, e.g. a particular collateral type.

The IDC has various established methodologies for the management of the credit concentrations it is exposed to and has established risk concentration limits and policies for:

  • Value of transactions with a single counterparty within a 12-month period;
  • Individual and groups of counterparties and/or related parties
  • Geographical locations; and
  • Economic sectors.

The concentration limits are reviewed on an annual basis or sooner should the need arise. The status of the IDC investment book is reported to IDC Executive Management, the Board Risk and Sustainability Committee and the IDC Board on a regular basis.

Counterparty and related party limits

The need for counterparty and related party limits are to identify and protect the IDC’s Statement of Financial Position and Statement of Comprehensive Income from significant losses/volatility which threaten financial sustainability, should a counterparty default or experience material loss in value. A counterparty is defined as IDC’s client whereas a related party is any legal entity to whom the IDC has a credit exposure, which has one or more of the following similarities with another client to which IDC has or had a credit exposure to

  • Shareholding of more than 50%,;
  • Management control;
  • Revenue or expenses reliance of 51% or more, and/or;
  • Provision of security for 51% or more of IDC’s exposure.

The Basel principles for the management of credit risk indicate in particular, that an important element of credit risk management is the establishment of exposure limits on single counterparties and groups of connected counterparties. In determining the recommended counterparty limit for the IDC, its strategic objectives are taken into account.

Africa portfolio limit, regional limits, country thresholds and outside Africa portfolio limit

Country risk refers to risk(s) associated with investing or lending in a country, arising from possible changes in the business environment that may adversely affect operating profits or the value of assets in the host country. These risks include political risk, exchange rate risk, economic risk, sovereign risk and transfer risk; and investment’s returns could suffer as a result of political changes or instability in a country.

The focus of the IDC’s activities in the African continent is determined by its mandate and managed through our investment criteria and regional investment limits, including country thresholds. Country thresholds enable effective risk management of country concentration risk. The IDC’s objectives are to contribute to the economic integration and industrial development in SADC and the Rest of Africa. The IDC views Africa in terms of South Africa, the southern African region and the rest of Africa. This distinction is evident from the importance that the South African Government places on Southern Africa relative to the rest of the continent. As such the Corporation’s activities are weighted in favour of southern Africa in terms of budget allocation and resultant exposure. In order for IDC to achieve its mandate in the southern African region and rest of Africa, the Corporation focuses on being a catalyst for sustainable economic change.

Given the importance of the IDC’s mandate and its objectives, in conjunction with the consistent improvement of the African economic landscape, both in performance and risk profile, Portfolio and Regional Limits and Country Thresholds are reviewed at least on an annual basis in order to support and enhance the developmental objectives of the IDC’s strategy as well as its vision and mission statement.

The IDC continues to diversify its regional funding profile from being historically concentrated in the developed regions to other less developed provinces.

Should approval of a transaction result in breach of this limit explicit approval is required from the Board Investment Committee.

GEOGRAPHICAL ANALYSIS

Carrying value of available-for-sale investments, excluding investments in subsidiaries, associates and joint ventures.

ECONOMIC SECTOR LIMITS

Managing sector concentration remains one of the key strategic priorities of the Corporation. Concentration risk in the context of sectors generally results from an uneven distribution of an institution’s exposure to industry sectors which can generate losses large enough to jeopardise its solvency or profitability. In particular, sector concentration arises because business conditions and hence default risk may be linked across and within industry sectors within the economy. Concentrations of credit exposures in sectors can pose risks to the earnings and capital of any financial institution in the form of unexpected losses. One of the risk management techniques of managing sector risk concentration entails the establishment of concentration limits, the monitoring and analysis thereof. The monitoring and limiting of the concentration of exposures in certain sectors is necessary to reduce the risk of an exposure to a significant downturn in a particular industry in time, and thus to be able to avoid losses, as far as possible, by implementing counter measures (e.g. withdrawing from, reducing or hedging certain exposures). Experience has shown that the earlier risks are identified, the more effectively it can be countered.

Although the IDC’s business cuts across a number of sectors, it could be exposed to concentration risk by virtue of disproportionately large exposures in any of these sectors. Managing and monitoring such concentrations to limit downside potential is therefore an integral part of an effective risk management programme. To avoid undue losses due to associated exposures, the IDC strives to identify potential common risk factors and minimise its aggregate exposure to these risk factors. By spreading its risk over many sectors instead of a few, the IDC can minimise the collective impact of economic events or trends on its earnings and capital. Sector diversification should, by reducing dependence on specific sectors, assist in obtaining assets whose performance is not affected by the same external factors.

The goal of sector limits is for the IDC to attempt to diversify or at least identify its portfolio concentrations based on exposures to sectors and to identify concentrations of exposures that could become closely related, especially during a crisis; this provides an important mechanism to protect the long-term financial sustainability of the IDC. The key challenge to establish a Sector limit methodology is to ensure that it is effective in protecting the institution from credit events and is practical in its enforcement without restricting investment activities. The establishment of Sector limits is aligned with the overall strategy of the IDC (including its risk appetite).

During the year under review, the IDC revised the methodology for the management and measuring of Credit concentration risk.

The revised methodology will become effective on 1 April 2017.

SECTORAL ANALYSIS

INTERNAL RATING MODEL AND PRICING

The changing banking regulatory requirements and increased focus by international and local DFIs to incorporate Basel II best practice risk management makes it increasingly important for IDC to regularly measure credit risk and ensure that risk costs are transparent and appropriately accounted for. IDC therefore updated and redesigned its Project Finance and SME/Middle market rating and pricing methodologies and models with the assistance of consultants. These models were fully implemented during the 2017 financial year.

The rating and pricing methodology follows a two-step approach namely; rating which is incorporated into the pricing solution for debt, equity, guarantee and mezzanine finance transactions

The models offer amongst others, the following key value added features:

  • Calculation of an Expected Loss ( EL), where EL = (PD*EAD*LGD), which is included as a risk margin in the price of a facility based on the client’s riskiness
  • Customised qualitative factors based on consultation with industry specialists in the business units to reflect specific IDC industry focus when rating a client.
  • Quantification of the development score impact into a ZAR amount;

The key objectives of internal rating methodologies and related rating models are:

  • To assess the overall credit or investment risk on a quantitative and objective basis;
  • To objectively determine the credit quality of individual clients as well as the portfolio;
  • To aid in portfolio analysis;
  • To allow migration analysis of individual clients as well as the portfolio; and
  • To assist in identifying which clients are due for review.

Maximum credit risk exposure

The IDC loan book is reviewed on a regular basis, by IMC Loans, which monitors and manages the quality and arrears on a proactive basis. Clients are classified according to their risk profiles based on the most recent available financial information and repayment profile. A low risk client is a client that is not in arrears and for which no impairment triggers have been identified. A medium risk client is one which is in arrears by more than 60 days and/or for which impairment triggers have been identified. A high risk client is one who is in arrears and/or for whom impairment triggers have been identified and who fails to respond to initial legal action (e.g. letter of demand). High risk clients include those for which legal action is in progress or where the client has ceased manufacturing or has been placed in liquidation.

IMPAIRED LOANS AND INVESTMENTS

Impaired loans and investments are loans and investments for which the Group determines that it is probable that it will be unable to collect all principal and interest due according to the contractual terms of the loan/investment agreements.

PAST DUE BUT NOT IMPAIRED LOANS

These are loans and securities where contractual interest or principal payments are past due but the Group believes that impairment is not appropriate on the basis of level of security/collateral available and/or the stage of collection of amounts owed to the Group.

ALLOWANCES FOR IMPAIRMENT

The Group establishes an allowance for impairment losses that represents its estimate of incurred losses in its loan portfolio. The main components of this allowance are a specific loss component that relates to individually significant exposures, and a collective loan loss allowance on the entire portfolio.

RENEGOTIATED LOANS

Loans with renegotiated terms are loans that have been restructured due to deterioration in the borrower’s financial position and where the Group has made concessions that it would not otherwise consider. Once the loan is restructured it remains in this category independent of satisfactory performance after restructuring.

COLLATERAL

The Group holds collateral against loans and advances to clients in the form of mortgage bonds over property, other registered securities over assets and guarantees. Estimates of fair values are based on the value of collateral assessed at the time of borrowing and are generally not updated except when a loan is individually assessed as impaired.

An estimate of the fair value of collateral held against financial assets is shown below:

The carrying amount of financial assets represents the maximum credit exposure.

LIQUIDITY RISK

Liquidity risk refers to the risk that the Group will not be able to meet its obligations promptly for all maturing liabilities, increase in financing assets, including commitments and any other financial obligations (funding liquidity risk), or will only able to do so at materially disadvantageous terms (market liquidity risk)

Sources of liquidity risk include:

  • Unpredicted accelerated drawdowns on approved financing or call-ups of guarantee obligations;
  • Inability to roll and/or access new funding;
  • Unforeseen inability to collect what is contractually due to the Group;
  • Liquidity stress at subsidiaries and/or other SOEs;
  • A recall without due notice of on-balance sheet funds managed by the Group on behalf of third parties;
  • A breach of covenant(s), resulting in the forced maturity of borrowing(s); and
  • Inability to liquidate assets in a timely manner with minimal risk of capital losses.

Day-to-day liquidity management is performed by Corporate Treasury within Board-approved treasury limits, such that:

  • At all times, there is sufficient readily-available liquidity to meet probable operational cash flow requirements for a rolling threemonth period; and
  • Excess liquidity is minimised in order to limit the consequential drag on profitability.

Liquidity coverage ratios are used to ensure that suitable levels of unencumbered high-quality liquid assets are held to protect against unexpected yet plausible liquidity stress events. Two separate liquidity stresses are considered: firstly an acute three-month liquidity stress (Scenario 1) impacting strongly on both funding and market liquidity and secondly, a protracted 12-month liquidity stress (Scenario 2) impacting moderately on both funding and market liquidity. Approved high-quality liquid assets include cash, near-cash, committed facilities, as well as a portion of the Group’s listed equity investments.

Structural liquidity mismatch ratios are used to ensure adequate medium- to long-term liquidity mismatch capacity. This is done by restricting, within reasonable levels, potential future borrowing requirements related to existing business. The structural liquidity mismatch is based on conservative cash flow profiling with the added assumption that liquidity in the form of high-quality liquid assets are treated as readily-available (i.e. recognised in the first time bucket).

MARKET RISK

Market risk is the risk that the value of a financial position or portfolio will decline due to adverse movements in market rates. In respect of market risk, the Group is exposed to interest rate risk, exchange rate risk and equity price risk. Market risk is governed by the Asset and Liability Management policy and the Asset and Liability Committee (ALCO) provides the objective oversight and makes delegated decisions related to market risk exposures.

INTEREST RATE RISK

Interest rate risk is the risk that adverse movements in market interest rates may cause a reduction in the IDC’s future net interest income and/or economic value of its shareholder’s equity.

Sources of interest rate risk include:

  • Repricing risk, as a result of interest-bearing assets and liabilities which reprice within different periods. This also includes the endowment effect caused by an overall quantum difference between interest-bearing assets and liabilities;
  • Basis risk, as a result of the imperfect correlation between interest rate changes on interest-bearing assets and liabilities which reprice within the same period (spread volatility);
  • Yield curve risk, as a result of unanticipated yield curve shifts (twists and pivots); and
  • Optionality, as a result of embedded options in the Group’s assets and liabilities. This risk is mitigated by imposing contract breakage penalties on prepayments and early settlements.

The sensitivity to interest rate shocks and/or changes in interest-bearing balances is measured by means of earnings and economic value approaches. The former focuses on quantifying the impact on net interest income over the next 12 months whereas the latter is used to gauge the impact on the fair market values of assets, liabilities and equity.

INTEREST RATE SENSITIVITY MISMATCH – FINANCE ACTIVITIES

RSA and RSL (rate sensitive assets and rate sensitive liabilities)

Furthermore, interest rate risk management is monitored through the sensitivity analysis done to the financial assets and liabilities.
A 100 basis points (bps) increase/(decrease) in market interest rates resulted in the following sensitivities:

NEXT 12 MONTHS NET INTEREST INCOME SENSITIVITY

Effect of a 100 basis point increase/(decrease) in market rates:

EXCHANGE RATE RISK

Exchange risk is the risk that adverse changes in exchange rates may cause a reduction in the Group’s future earnings and/or its shareholder’s equity.

In the normal business, the Group is exposed to exchange rate risk, through its trade finance book and exposure to investments in and outside Africa. The risk is further divided into:

  • Transaction risk arising from transactions undertaken by the Group in a foreign currency that will ultimately require an actual conversion in the foreign exchange markets from one currency to another, thus having a direct cash effect;
  • Translation risk arising from the periodic translation consolidation of the financial statements of the Group and its subsidiaries and affiliates for the purpose of uniform reporting to shareholders; and
  • Any open (unhedged) position in a particular currency giving rise to exchange rate risk. Open positions can be either short (i.e. the Group will need to buy foreign currency to close the position) or long (i.e. the Group will need to sell foreign currency to close the position) with the net open foreign currency position referring to the sum of all open positions (spot and forward) in a particular currency.

For purposes of hedging, net open foreign currency positions are segmented into the following components:

  • All exposures related to foreign currency denominated lending and borrowing; and
  • All foreign currency denominated payables in the form of operating and capital expenditure, as well as foreign currency denominated receivables in the form of dividends and fees.

The Group does not hedge its exchange rate risk on foreign currency denominated shareholder loans, equity and quasi-equity investments.

EQUITY PRICE RISK

Equity price risk is the risk that adverse movements in equity prices may cause a reduction in the value of the Group’s investments in listed and/or unlisted equity investments, and therefore also its future earnings and/or value of its shareholder’s equity.

Sources of equity price risk include:

  • Systematic risk or volatility in relation to the market as a whole; and
  • Unsystematic risk or company-specific risk factors.

The investment portfolio’s beta is used as an indication of systematic risk which is not diversifiable. In light of the long-term nature of the Group’s investments, unsystematic risk is managed by means of diversification.

Sensitivity analyses were performed on the Group’s equity portfolio, to determine the possible effect on the fair value should a range of variables change, e.g. cash flows, earnings, net asset values etc. These assumptions were built into the applicable valuation models.

In calculating the sensitivities for investments the key input variables were changed in a range from -10% to +10%. The effect of each change on the value of the investment was then recorded. The key variables that were changed for each valuation technique were as follows:

  • Discounted cash flow: Net income before interest and tax
  • Price earnings: Net income
  • Listed companies: Share price
  • Forced sale net asset value: Net asset value.

From the table below it is evident that a 10% increase in the relevant variables will have a R9 521 million increase in the equity values as at 31 March 2017 (2016: R7 889 million) and a 10% decrease will lead to an R8 993 million decrease in the equity values (2016: R7 148 million).

CAPITAL MANAGEMENT

The IDC is accountable to its sole shareholder, the Economic Development Department. The performance as well as management of IDC capital is supported by the agreement between the Corporation and the shareholder in the form of the Shareholder’s Compact which outlines the agreements between the two parties.

REGULATORY CAPITAL

IDC is not required by law to keep any level of capital but has to utilise its capital to achieve the shareholder’s mandate. The IDC Act of 1940, as amended, dictates that IDC can be geared up to 100% of its capital.

RISK APPETITE

The Board-approved risk appetite limit serves as a monitoring tool to ensure that the impact of investment activities in the Corporation do not have a negative impact on the Corporation’s financial position.

There were no changes to the Group’s approach to capital management during the year.

4. FAIR VALUE INFORMATION

The table below analyses assets carried at fair value:

VALUATION PROCESSES APPLIED BY THE GROUP

The Group’s main instruments of monitoring the performance of its investee companies are through quarterly IMC meetings, including but not limited to the PACS (payment and collection system) regular client review visits, as well as by way of analysis of management accounts and audited financial statements.

The Post Investment Monitoring Department (PIMD) creates a focused approach to the monitoring of IDC investments. One of the key monitoring activities is the IMC Equity meetings, wherein the calculations of fair values and impairments are assessed and approved by the Committee. The IMC Equity Meetings are normally held three times per financial year, in April, August and December for reporting periods of February, June and September respectively.

VALUATION TECHNIQUES USING OBSERVABLE INPUTS

The Group measures fair values using the following fair value hierarchy, which reflects the significance of the inputs used in making the measurements:

Level 1

Instruments valued with reference to unadjusted quoted prices for identical assets or liabilities in active markets where the quoted price is readily available and the price represents actual and regularly occurring market transactions on an arm’s length basis. An active market is one in which transactions occur with sufficient volume and frequency to provide pricing information on an ongoing basis. These include listed shares.

Level 2

Instruments valued using inputs other than quoted prices as described above for Level 1 but which are observable for the instrument, either directly or indirectly, such as:

  • Quoted price for similar assets or liabilities in an active market;
  • Quoted price for identical or similar assets or liabilities in inactive markets;
  • Valuation model using observable inputs; and
  • Valuation model using inputs derived from/corroborated by observable market data.

These include derivative financial instruments, investment properties and option pricing models.

VALUATION TECHNIQUES USING UNOBSERVABLE INPUTS

Level 3

Instruments valued using inputs not based on observable data and the unobservable inputs have a significant effect on the instruments’ valuation. This category includes instruments that valued based on quoted prices for similar instruments for which significant unobservable adjustments or assumptions are required to reflect differences between the instruments.

Valuation techniques include price earnings, net present value and discounted cash flow models, comparison with similar instruments for which market observable prices exist and other valuation models. Assumptions and inputs used in valuation techniques include risk-free and benchmark interest rates and discount rates.

The objective of valuation techniques is to arrive at a fair value measurement that reflects the price that would be received to sell the asset or paid to transfer the liability in an orderly transaction between market participants at the measurement date.

PRICE EARNINGS (PE) VALUATION

The PE valuation method is the first valuation option, but has only been used in respect of companies with:

  • At least two years’ profit history;
  • Forecast I budgeted steady growth in profits;
  • Is low risk;
  • A good year-on-year performance; and
  • A long history of consistent return – operating in an industry that is not prone to fluctuations.

FREE CASH FLOW VALUATION (FCF)

FCF is the most widely used valuation method by the Group on its Level 3 financial instruments. The below approach is followed:

  • All inputs are substantiated, especially in instances where there are prior year losses;
  • This method is used without exception for valuing all projects and start-ups unless the going concern principle is in doubt.

In the case where a project has a limited remaining life (e.g. Mining operations or single contract with a determined end), a separate “Limited Life” FCF model is used.

NET ASSET VALUE VALUATION (NAV)

Forced-Sale basis

The Group uses the Forced-Sale NAV method in the following circumstances:

  • Where the going concern assumption is not applicable; or
  • Where it has been motivated that no other model is appropriate.

NAV – Going concern

The Group uses NAV (without applying Forced-Sale) where it can be motivated that no other model is appropriate based on the following conditions:

  • An entity is consistently making losses and not meeting budgets (excluding start-up operations);
  • An entity has material variances between actual and budgeted figures;
  • An entity operates in highly volatile sector making it almost impossible to budget;
  • An entity has completed all studies necessary to implement a project but has however not yet secured the necessary capital to fully fund the implementation of the project;
  • An entity is not fully funded and there is no clear indication that it will obtain the necessary funding to complete the project/ expansion/continue operations.

Quantitative information about fair value measurements using significant unobservable inputs (Level 3)

DISCOUNTED CASH FLOW

Significant increases in any of the inputs in isolation would result in lower fair values. Significant decreases in any of the inputs in isolation would result in higher fair values.

PRICE-EARNING VALUATION

The fair value would increase (decrease) if:

  • The risk-adjusted PE ratio were higher (lower); or
  • The expected long-term growth were higher (lower).

5. CASH AND CASH EQUIVALENTS

6. TRADE AND OTHER RECEIVABLES

HERDMANS SOUTH AFRICA (PTY) LTD

Trade and other receivables pledged as security

A subsidiary, made a decision during 2015 to close Herdmans Europe. For this reason the Herdmans Europe debt was impaired to a value equal to Herdmans Europe stock valued at Net Realisable Value.

SWAC SOUTH AFRICA (PTY) LTD

A subsidiary, recognised a provision for impairment of R17 million (2016: R28 million) for amounts past due date by more than 150 days.

PRILLA 2000 (PTY) LTD

A subsidiary, entered into an invoice discounting agreement with Nedbank Limited whereby it has discounted all of its debtors and has given first cession of all receivables as security for a R115 million finance facility advanced to it.

7. INVENTORIES

Group inventory to the value of R21.4 million was written down as a net realisable value adjustment at 31 March 2017 (2016: R79 million).

8. LOANS AND ADVANCES

9. INVESTMENTS

10. DISCONTINUED OPERATIONS OR DISPOSAL GROUPS OR NON-CURRENT ASSETS HELD-FOR-SALE

SEFA

On 20 November 2013, sefa’s Board of Directors approved the sale of certain properties in the property portfolio. Investment properties held-for-sale are current assets.

Additionally in a Board meeting on 25 May 2015 it was resolved that all property should be transferred to Khula Business Premises, and thus all the properties at sefa company level will need to be reclassified from investment property to investment property held-for-sale. The resolution has no impact on sefa group level due to Khula Business Premises being a wholly owned subsidiary of sefa.

IDC

On 20 April 2016 a decision was made by management to sell the Company’s aircraft. The sales agreement has been signed by the buyer and partners. The sales price agreed upon is US$5.1 million and the sale is expected to be finalised in the first half of the 2018 financial year.

DISPOSAL GROUPS

Scaw South Africa

The IDC holds 74% of the issued share capital in Scaw South Africa (Pty) Ltd (Scaw). Scaw has six distinct divisions: Cast Products, Grinding Media, Wire Rod Products, Rolled products, Scrap Processing and Distribution Network. On 30 November 2016, management committed to a plan to dispose of the Grinding Media and Cast Products divisions. At year-end, management is in negotiations with potential buyers and the sale is expected to be finalised within the next financial year.

The planned disposal of the two divisions is part of a single plan to dispose of Scaw and is in line with the IDC’s intention to introduce strategic equity partners into Scaw who possess the technical and commercial expertise necessary to grow the business and provide access to growth markets.

The disposal of the two divisions meets the criteria set out in IFRS 5 Non-current Assets Held for Sale and Disposal groups and therefore warrants the accounting treatment and disclosure required in terms of that standard. There are no immediate plans to dispose of the rest of Scaw and hence, that part of the business has been accounted for and disclosed as a continuing operation.

At year end, the results of the discontinued operations were as follows:

11. INVESTMENTS IN SUBSIDIARIES

Legally the IDC owns 59% of Foskor, but for accounting purposes an effective 85% of Foskor is consolidated.

SUBSIDIARIES WITH 50% STAKE

Although the Company holds 50% of the voting powers in Thelo Rolling Stock Leasing (Pty) Ltd, the investment is considered a subsidiary because of additional voting powers granted to the IDC through its right to appoint three out of the five directors to the Board of Directors of Thelo Rolling Stock Leasing (Proprietary) Limited.

The aggregate net profits and losses after taxation of subsidiaries attributable to the IDC were as follows:

A register of investments is available and is open for inspection at the IDC’s registered office.

SUBSIDIARIES WITH MATERIAL NON-CONTROLLING INTERESTS

The following information is provided for subsidiaries with non-controlling interests which are material to the reporting company. The summarised financial information is provided prior to inter-company eliminations.

The percentage ownership interest and the percentage voting rights of the non-controlling interests were the same in all cases except for Foskor Limited where the voting rights were 41% (2016: 41%).

SUMMARISED STATEMENT OF FINANCIAL POSITION

SUMMARISED STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME

SUMMARISED STATEMENT OF CASH FLOWS

Companies in which IDC took more than 50% shareholding with exposures less than R250 million.

12. INVESTMENTS IN ASSOCIATES, JOINT VENTURES AND PARTNERSHIPS

MATERIAL ASSOCIATES

* The financial year-ends for which the financial statements of the associated entities have been prepared, where they are different from that of the investor, are disclosed above.
** The IDC does not have a joint arrangement in which it contractually agreed to share control with another party. The IDC does not have a substantial representation on the Board of Directors precluding it from having control.

SUMMARISED FINANCIAL INFORMATION OF MATERIAL ASSOCIATES

2016

* Financial information is for the underlying investment being Aquarius Platinum Limited.

13. DEFERRED TAX

14. INVESTMENT PROPERTY

15. PROPERTY, PLANT AND EQUIPMENT

Reconciliation of property, plant and equipment – Group – 2016

Reconciliation of property, plant and equipment – Company – 2017

Reconciliation of property, plant and equipment – Company – 2016

16. BIOLOGICAL ASSETS

Reconciliation of biological assets – Group – 2017

Reconciliation of biological assets – Group – 2016

* Current biological assets comprise maize which would be sold within the next 12 months. Due to the fact that there is an active market at year-end and the fair value of the maize could be determined by using an external independent valuer the biological asset would be measured at fair value less estimated point-of-sale cost of agricultural produce, which is determined at the point-of-sale harvest.
** The fair value of the pecan nut trees has been determined by management who is of the opinion that the fair value is similar to the historical cost due to the reasons that the trees are under two years old, still need to be fully established and will reach maturity within the next six to eight years. There is still a high risk of diseases, death or damage due to forces of nature or other circumstances up to that point. Sufficient
measures are in place to minimise this risk. The fair value of the pecan nuts, although based on the historical cost, compares to a cash flow based valuation at 16% discounted rate. This is deemed fair by management based on the risk factors indicated above.
*** There are 119.05 hectares (2016: 99.77 hectares) of plants. The current density for the majority of the plants is 4 000 and 5 000 plants per hectare, but new plant densities at Klyne Fontein are 4 167 and 3 333 plants per hectare respectively. Fair value cannot be determined for blueberry plants as trustworthy information about the projected yields for blueberry plants is not available and any predictions about yields cannot be verified in terms of historical yields.
**** A register containing the information required by Regulation 25(3) of the Companies Regulations, 2011 is available for inspection at the registered office of the company. Registers containing details of land and building, including any details of any revaluations and encumbrances, are kept at the registered offices of the companies concerned.

17. INTANGIBLE ASSETS

Reconciliation of intangible assets – Group – 2017

18. SHARE CAPITAL

A shares are not transferable otherwise than by an Act of Parliament, however the B shares may be sold with the authorisation of the President of the Republic of South Africa.

The A shares held by the State shall entitle it to a majority vote.

19. DERIVATIVE FINANCIAL INSTRUMENTS

These derivative assets and liabilities are subject to master netting agreements, which allow the company to off-set the assets and liabilities, arriving at a net asset position of R54 million (2016: net asset position of R18 million).

All contractual maturities for the derivative assets and liabilities are within 12 months.

20. TRADE AND OTHER PAYABLES

*Accrued bonus relates to the Long Term Incentive bonus, the Short Term Incentive bonus and the Non-Pensionable Allowance.

The contractual matuarities of all trade and other payables are current

21. RETIREMENT BENEFITS

PENSION AND PROVIDENT SCHEMES

The Group has pension and provident schemes covering substantially all employees. All eligible employees are members of either defined contribution or defined benefit schemes. These schemes are governed by the Pension Funds Act, 1956, as amended. The assets of the schemes under the control of trustees are held separately from those of the Group.

The costs charged to profit or loss represent contributions payable to the scheme by the Group at rates specified in the rules of the scheme.

DEFINED CONTRIBUTION SCHEMES

Employees and Group companies contribute to the provident funds on a fixed-contribution basis. No actuarial valuation of these funds are required. Contributions, including past-service costs, are charged to profit or loss when incurred.

DEFINED BENEFIT SCHEME

A Group company and its employees contribute to a defined benefit pension fund. The pension fund is final salary fully funded. The assets of the fund are held in an independent trustee-administered fund, administered in terms of the Pension Funds Act, 1956, as amended.

The fund is valued every three years using the projected unit credit method. The actuarial valuation for purposes of IAS 19 was performed on 31 December 2015.

The deficit in the current year does not require a cash contribution to be made to increase the plan assets as the fund is not in deficit for the statutory valuation. The IAS 19 actuarial valuation makes use of difference basis than the statutory valuation.

The sensitivity of the overall pension liability to changes in the weighted principal assumptions is:

Impact on overall liability

The expected contributions to the post-employment pension scheme for the year ending 31 March 2017 are R0.8 million.

POST-RETIREMENT MEDICAL BENEFITS

Some Group companies have obligations to provide post-retirement medical benefits to their pensioners.

The accumulated post-retirement medical aid obligation and the annual cost of those benefits were determined by independent actuaries. Any surplus or shortfall between the actuarially determined liability and the aggregate amounts provided is charged to profit or loss.

The amounts recognised in the statement of financial position are as follows:

The expected contributions to post-employment medical plans for the year ending 31 March 2018 are R0.2 million.

22. OTHER FINANCIAL LIABILITIES

* Secured by assets of subsidiary companies.

23. PROVISIONS

Reconciliation of provisions – Group – 2017

Reconciliation of provisions – Group – 2016

Reconciliation of provisions – Company – 2017

Reconciliation of provisions – Company – 2016

ENVIRONMENTAL REHABILITATION LIABILITY

African Chrome

As a result of the processes used in the manufacture of the chemical products of the company, the groundwater has become contaminated with a by-product Chrome 6. In terms of minimum requirements of the National Water Act, 37 of 1998, Part 5, section 20 and the Environment Conservation Act, 73 of 1989, Part V, Sub-sections 21 and 22, the company is required to remove the contaminated water and dispose of the waste material.

The Industrial Development Corporation, as primary shareholder, stands security for the entire environmental provision until the land is fully rehabilitated.

The rehabilitation process initially comprised two phases namely Phase 1 and Phase 2. The entire process was expected to take a period of three years; with Phase 1 having commenced on 1 March 2012 and was completed during the 2013/14 financial year. Phase 2 activities commenced during 2013/14 financial year after Phase 1 was completed. An amount of R18.5 million was expected to be incurred for Phase 2 activities, this provisional amount was based on previous historical costs and it was adjusted for inflation. It was assumed that the amount incurred each year for Phase 2 activities will be settled at each respective year-end. Phase 2 activities commenced during 2013/14 financial after Phase 1 was completed.

During the year tests were conducted to ascertain the success of Phase 1 in rehabilitating the surface of the soil. It was found that remediation works completed to date had effectively removed soil contamination from the surface of the site to concentration levels well below the recently gazetted South African Soil Screening Values (SSV2) for industrial land use. The site is therefore considered suitable for industrial re-development. However, the groundwater contamination has not been resolved, giving rise to an environmental liability for the IDC.

All cash flows used in the calculation of the provision were adjusted for inflation forecasted by IDC Research and Information department.

ENVIRONMENTAL REHABILITATION LIABILITY

Foskor

The company continually contributes to the Environmental Rehabilitation Trust to ensure that adequate funds are available to pay for mine closure and reclamation costs. The Environmental Rehabilitation Trust is an irrevocable trust under the control of the company.

The financial assets held by the Trust are intended to fund the environmental rehabilitation liability of Foskor (Pty) Ltd and are not available for general purposes of the group. The objective of the Trust is to act as the financial provider for expenditure that its member, Foskor (Pty) Ltd, is likely to incur in order to comply with the statutory obligation for the environmental rehabilitation. The Trust is exempt from tax in accordance with section 10(1)cP of the Income Tax Act, No 58 of 1962.

A contingent liability has been recognised for the issuing of guarantees to the Department of Mineral Resources.

Columbus

Columbus Joint Venture was a partnership between IDC, Samancor Limited and Highveld Steel. The provision is for the rehabilitation of dumps of different waste streams estimated at 4.3 million tonnes, which were not included in the sale of Middelburg Stainless Steel in January 2002, and accordingly each partner was liable for its share of the rehabilitation. The rehabilitation is expected to be completed in 2018.

Scaw South Africa

Scaw South Africa has an obligation to incur restoration rehabilitation and environmental costs when environmental disturbance is caused by the development of ongoing production at a property. A provision is recognised for the present value of such costs. It is anticipated that the costs will be incurred over a period in excess of 20 years.

The estimation of the environmental rehabilitation provision is a key area where management’s judgement is required.

24. SHARE-BASED PAYMENTS

On 7 July 2009 Foskor and the IDC, as the controlling shareholder of Foskor, entered into a BEE Transaction. In terms of the transaction the IDC has legally sold a 15% interest in Foskor to Strategic Business Partners and Special Black Groups (collectively, the BEE Partners), a 6% interest in Foskor to the Foskor Employee Share Option Plan (ESOP), and a 9% interest in Foskor to communities (the Community Trust) as part of Foskor’s efforts to achieve the objectives set out in the DTI’s Broad-based Black Economic Empowerment Codes of Good Practice (the DTI Codes) and also to attain broad-based employee participation. The BEE Partners, employee beneficiaries of the ESOP and beneficiaries of the Community Trust are collectively referred to as the “BEE Participants”.

The transaction was recognised as a share-based payment in terms of the requirements of IFRS 2 Share-based Payment and consequently the 26% interest in Foskor sold to the BEE Participants has not been derecognised for accounting purposes in the Company or Group. Whilst certain rewards have been transferred to the BEE Participants, the IDC remains substantially exposed to the risks of the Foskor shares through its funding of the transaction. The transaction will continue to be accounted for in this manner until such time as the preference shares have been redeemed by the BEE Participants. The value of the share-based payment is determined using an appropriate valuation technique.

Equity-settled reserve: Weighted average fair value assumptions

The fair value of services received in return for equity instruments granted is measured by reference to the fair value of the equity instruments granted. The estimate of the fair value of the equity instruments granted is measured based on the Monte Carlo Option Pricing model.

The following weighted average assumptions were used in the share pricing models at grant date:

31 December

Cash-settled share-based payment liability: Weighted average fair value assumptions

The following weighted average assumptions were used in the share pricing models during the year:

25. REVENUE

26. INVESTMENT REVENUE

27. FINANCE COSTS

28. FEE INCOME

29. NET CAPITAL (LOSSES)/GAINS

30. NON-ADMINISTRATIVE EXPENSES

Capital gains tax provision for the exit from Main Street 333 (MS333)

In 2006 the IDC acquired 15.3% of the ordinary shares of MS333, which in turn invested in the ordinary shares of Exxaro, giving the latter its majority BEE shareholding status. The investment was done in terms of the Pangolin agreement, which was in effect for the 10-year period up to 26 November 2016.

The expiry of the Pangolin agreement on 26 November 2016 (expiry date) removed standing restrictions on MS333 and its shareholders. Effectively, as on this date, Exxaro shares held by Main Street became free for trade. The MS333 shareholders’ agreement provides that after expiry date, MS333 will distribute its shareholding in Exxaro to its shareholders in exchange for each such shareholder’s shares in and claims against the unwinding of MS333.

The shareholders’ agreement further provides that:

  1. Exxaro will repurchase sufficient shares from MS333 to enable the latter to settle its obligations.
  2. Any remaining Exxaro shares in MS333 will be distributed to the shareholders in proportion to their shareholdings.

On 26 November 2016, the IDC derecognised its investment in MS333 in line with the requirements of International Financial Reporting Standards (IFRS) as, on that date, the risks and rewards of ownership of Exxaro shares transferred from MS333 to the shareholders. Upon derecognition, a profit of R1.7 billion was recognised in profit and loss.

For tax purposes, a CGT trigger has not been achieved at year-end, as the shares have not been transferred from MS333 to the proposed replacement structure. A provision for tax of R378 million has been made in the financial statements in accordance with the requirements of IAS 37, as it is highly probable that the IDC would pay capital gains tax on the disposal of its MS333 shares upon implementation of the replacement structure.

31. OPERATING PROFIT/(LOSS)

32. TAXATION

33. OTHER COMPREHENSIVE INCOME

34. DIRECTORS’ EMOLUMENTS

  1. Ms L Bethlehem does not derive any financial benefit for services rendered to the IDC. Her fees are paid directly to HCI Limited
  2. Mr Molefe’s fee was paid to the Transnet Foundation
  3. Mr NE Zalk is employed by the DTI and does not earn director’s fees for services rendered to the IDC

Executive
2017

* Non-guaranteed performance-based allowance
1 Contract ended on 30 April 2016
2 Appointed on 1 May 2016
3 Appointed on 1 May 2016

 

35. NATURE AND PURPOSE OF RESERVES

FOREIGN CURRENCY TRANSLATION RESERVE

The translation reserve comprises all foreign currency differences arising from the translation of the financial statements of foreign operations, as well as the effective portion of any foreign currency differences arising from hedges of a net investment in a foreign operation.

REVALUATION RESERVE

The revaluation reserve comprises the cumulative net change in the fair value of available-for-sale financial assets until the assets are derecognised or impaired. The revaluation reserve also relates to the revaluation of property, plant and equipment.

ASSOCIATED ENTITIES RESERVE

The associated entities reserve comprises the cumulative net changes of equity-accounted investment, directly to other comprehensive income.

COMMON CONTROL RESERVE

The common control reserve relates to the transfer of Small Enterprise Finance Agency from the Economic Development Department to the IDC.

SHARE-BASED PAYMENT RESERVE

The share-based payment reserve relates to the equity-settled portion share-based portion of the Foskor BEE transaction, entered into on 7 July 2009. Please refer to note 24 for further detail.

OTHER RESERVES

Other reserves comprises remeasurements on net defined benefit liability or asset.

36. FINANCIAL AND OPERATING LEASES

FINANCE LEASES – GROUP AS LESSEE

The Group has leases classified as financial leases principally for property. Future minimum lease payments payable under finance leases, together with the present value of minimum lease payments, are as follows:

FOSKOR

The finance lease is between Foskor (Pty) Ltd and uMhlathuze Water Board for an effluent pipeline.

The lease liability is effectively secured, as the rights to the leased asset revert to the lessor in the event of default. The lease is over a 20-year period with nine years remaining as at 31 March 2017. Foskor has sole use of the effluent pipeline and pays for the maintenance.

The lease is at a fixed rate of 14.4% per annum.

BLUE MOUNTAIN BERRIES

These loans are repayable in monthly instalments of R227 351 which includes interest at rates between. 9.05% and 9.55% per year.

OPERATING LEASES – GROUP AS LESSEE

Certain items of computer and office equipment are leased by the Group.

Commitments for future minimum rentals payable under non-cancellable leases are as follows:

37. CASH GENERATED FROM/(USED IN) OPERATIONS

38. TAX PAID

39. COMMITMENTS

40. GUARENTEES

41. CONTINGENCIES

CONTINGENT LIABILITIES OF SUBSIDIARIES

Foskor (Pty) Ltd

The company had mine rehabilitation guarantees amounting to R495 million (2016: R495 million) at year-end. In line with the requirements set out by the Department of Mineral Resources (DMR), this guarantee amount was in place at 31 March 2017.

These guarantees and the agreement reached with the DMR were based on the environmental rehabilitation and closure costs assessment that was performed during the 2016 financial year. The assessments are performed on a three-year rolling basis, with the next assessment due in 2018. Estimated scheduled closure costs for the mine are R478 million.

For unscheduled or premature closure, the DMR, in accordance with Minerals and Petroleum Resources Development Act, requires Foskor (Pty) Ltd to provide for the liability of R616 million in the form of guarantees and cash. The R616 million is covered by guarantees totalling R495 million and investment assets totalling R169 million, resulting in an overprovision of R49 million.

CONTINGENT LIABILITIES OF EQUITY ACCOUNTED INVESTMENTS

The York Timber Organisation Limited (York)

Suretyship: York participates in pool banking facilities granted by FirstRand Bank Limited. As such, York has provided unlimited suretyship in favour of FirstRand Bank Limited in respect of its obligations to the bank. Obligations are R142 million (2016: R142 million), R24 million being the Group’s exposure thereto.

42. RELATED PARTIES

Shareholder: The Government of South Africa through the Economic Development Department