2019

Integrated Annual Report

Notes to the summarised consolidated annual financial statements

For the year ended 30 September

FAIR VALUE DISCLOSURE

    Carrying
value
2019
Rm
Fair
value
2019
Rm
  Carrying
value
2018
Restated
Rm
Fair
value
2018
Restated
Rm
 
ASSETS              
Loans and advances*   10 759 10 744   9 251 9 246  
Purchased book debts   2 382 2 382   1 374 1 374  
Other loans receivable   45 45   39 39  
Trade and other receivables**   849 849   860 860  
Cash and cash equivalents   919 919   900 900  
TOTAL   14 954 14 939   12 424 12 419  
LIABILITIES              
Interest-bearing liabilities   10 806 11 195   9 817 9 870  
    Fixed rate liabilities   266 279   240 247  
    Floating rate liabilities   10 540 10 916   9 577
9 623  
Trade and other payables***   473 473   510 510  
Other short-term borrowings   76 76    
Bank overdrafts   381 381   116 116  
TOTAL   11 736 12 125   10 443 10 496  
NET EXPOSURE   3 218 2 814   1 981 1 923  
* Loans and advances net of expected credit losses (ECL) and benefits ceded on insurance contracts to the credit provider. Loans and advances relating to repossessed stock of R58 million (2018: R137 million) are not financial assets and therefore have been excluded from loans and advances.
** Prepayments and VAT receivables are not financial assets and therefore have been excluded from trade and other receivables.
*** Revenue received in advance, deferred lease liabilities, VAT payables and bonus accruals are not financial liabilities and therefore have been excluded from trade and other payables.

VALUATION METHODS AND ASSUMPTIONS:

Loans and advances for premium vehicles entered into at variable interest rates approximate fair value as the estimated future cash flows are already considered in the expected loss model. The fair value of loans and advances for premium vehicles at fixed interest rates, which is a small component of the loan book, is determined by adjusting the discount rate from the effective interest rate of the contract to a current effective lending rate. Loans and advances for entry-level vehicles are carried at fair value, refer "level disclosure" below for additional information in this regard.

Purchased book debt is held at amortised cost. The balance at year end is calculated based on the expected future cash flows which are adjusted for risk as it takes historical cash flows into account to predict forecasted cash flows. The fair value of purchased book debt would be determined by adjusting the discount rate from the credit-adjusted effective interest rate to a current market related discount rate and adjusting the expected cash flows for risk, therefore the carrying value approximates the fair value. The fair value of interest-bearing liabilities is calculated based on future cash flows, discounted using a forward rate curve plus a valuation margin. The valuation margin is a consensus margin at which deals with similar remaining cash profiles could be secured in the market at the valuation date.

The carrying value of trade and other receivables, cash and cash equivalents, trade and other payables and bank overdrafts approximates fair value as they are short-term in nature and not subject to material changes in credit risk and fair value.

LEVEL DISCLOSURE

2019   Level 1
Rm
Level 2
Rm
Level 3
Rm
Total
Rm
 
FINANCIAL ASSETS AT FAIR VALUE THROUGH PROFIT AND LOSS            
   Loans and advances: entry-level vehicles   19 19  
   Other financial assets   99 99  
   Derivatives   4 4  
FINANCIAL ASSETS AT FAIR VALUE THROUGH OTHER COMPREHENSIVE INCOME            
   Derivatives   190 190  
TOTAL FINANCIAL ASSETS   194 118 312  
FINANCIAL LIABILITIES AT FAIR VALUE THROUGH PROFIT AND LOSS            
   Derivatives   1 1  
TOTAL FINANCIAL LIABILITIES   1 1  

2018   Level 1
Rm
Level 2
Rm
Level 3
Rm
Total
Rm
 
FINANCIAL ASSETS AT FAIR VALUE THROUGH PROFIT AND LOSS            
   Loans and advances: entry-level vehicles   23 23  
   Other financial assets   49 49  
FINANCIAL ASSETS AT FAIR VALUE THROUGH OTHER COMPREHENSIVE INCOME            
   Derivatives   124 124  
TOTAL FINANCIAL ASSETS   124 72 196  
FINANCIAL LIABILITIES AT FAIR VALUE THROUGH PROFIT AND LOSS            
   Derivatives   4 4  
FINANCIAL LIABILITIES AT FAIR VALUE THROUGH OTHER COMPREHENSIVE INCOME            
   Derivatives   1 1  
TOTAL FINANCIAL LIABILITIES   5 5  

VALUATION METHODS AND ASSUMPTIONS:

Loans and advances for entry-level vehicles: The fair value was calculated using an income approach (estimating and discounting future cashflow) as well as the average collateral value. These represent the significant unobservable parameters applied in the fair value model. The expected cash flows were estimated using a lifetime expected loss model which is consistent with the IFRS 9 provision methodology. The expected cashflows were then discounted at the market related discount rate of 25% to yield a fair value of the total loans and advances for entry level-vehicles.

Other financial assets: The valuation of other financial assets 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. These represent the significant unobservable parameters applied in the fair value model. The group estimates the expected cash flows by considering all the contractual terms of the financial instrument. The discount rate applied to the expected future cash flows reflects specific risk premiums relating to the asset. This includes government risk, single project customer, no previous experience with client and small stock premium for valuations less than R250 million. The discount rate applied to the additional purchase price is based on the current South African prime interest rate.

Derivatives: The group enters into derivative financial instruments with respective counterparties. Interest rate swaps and cross-currency swaps are valued using valuation techniques, which employ the use of market observable inputs. The most frequently applied valuation techniques include forward pricing and swap models using present value calculations. The models incorporate various inputs including the foreign exchange spot and forward rates, yield curves of the respective currencies, currency basis spreads between the respective currencies and interest rate curves.

RECONCILIATION OF LEVEL 3 FAIR VALUE MEASUREMENTS OF FINANCIAL ASSETS

2019   Fair value 
through 
profit or loss 
Rm 
Fair value
through other
comprehensive
income
Rm
Total 
Rm 
 
Opening balance   72  72   
Total gains or losses        
   In profit or loss   (39) (39)  
   Other movements*   85  85   
CLOSING BALANCE OF FAIR VALUE MEASUREMENT   118  118   

2018   Fair value 
through 
profit or loss 
Rm 
Fair value
through other
comprehensive
income
Rm
Total 
Rm 
 
Opening balance   88  88   
Total gains or losses        
   In profit or loss   (3) (3)  
   Other movements*   (13) (13)  
CLOSING BALANCE OF FAIR VALUE MEASUREMENT   72  72   

*  Other movements include charges on accounts less collections received and write-offs on loans for entry-level vehicles, as well as movements in other financial assets.

SENSITIVITY ANALYSIS OF VALUATIONS USING UNOBSERVABLE INPUTS

As part of the group's risk management processes, stress tests are applied on the significant unobservable parameters to generate a range of potentially possible alternative valuations. The financial instruments that are most impacted by this sensitivity analysis are those with the more illiquid and/or structured portfolios. The stresses are applied independently and do not take account of any cross correlation between separate asset classes that would reduce the overall effect on the valuations. A significant parameter has been deemed to be one which may result in a change in the fair value of the asset or liability of more than 10%. This is demonstrated by the sensitivity analysis below, which includes a reasonable range of possible outcomes.

MOVEMENT IN FAIR VALUE GIVEN THE 10% CHANGE IN SIGNIFICANT ASSUMPTIONS

    2019   2018  
Loans and advances: entry-level vehicles   10%
Favourable
Rm
10%
Unfavourable
Rm
  10%
Favourable
Rm
10%
Unfavourable
Rm
 
SIGNIFICANT UNOBSERVABLE INPUT AND DESCRIPTION OF ASSUMPTION              
Average collateral value   1 (1)   1 (1)  
Discount rate: the rate used to discount projected future cash flows to present value   1 (1)   1 (1)  
TOTAL   2 (2)   2 (2)  

    2019   2018  
Other financial assets   10%
Favourable
Rm
10% 
Unfavourable 
Rm 
  10%
Favourable
Rm
10% 
Unfavourable 
Rm 
 
SIGNIFICANT UNOBSERVABLE INPUT AND DESCRIPTION OF ASSUMPTION              
Cash flows: change in the expected revenue   4 (4)   1 (1)  
Cash flows: change in expected costs   <1 (<1)   <1 (<1)  
Discount rate: the rate used to discount projected future cash flows to present value   2 (2)   1 (1)  
TOTAL   6 (6)   2 (2)  

Amounts less than R500 000 are reflected as “<1”.

NON-INTEREST REVENUE

Revenue earned from the group’s vehicle insurance offering (‘Net insurance result’) mainly includes insurance premiums and commission income earned from insurance contracts, all of which are accounted for in accordance with IFRS 17 – Insurance Contracts, and therefore fall outside the scope of IFRS 15 – Revenue from Contracts with Customers (IFRS 15).

The recognition of revenue earned from collecting on purchased credit-impaired loan portfolios as principal (‘Revenue from purchased book debts’) is in accordance with the amortised cost model under IFRS 9 – Financial Instruments, and therefore fall outside the scope of IFRS 15.

Other non-interest revenue streams are disaggregated into the following major revenue streams in accordance with IFRS 15:

Non-interest revenue   2019
Rm
  2018  
Restated*
Rm  
 
NON-INTEREST REVENUE COMPRISES:          
Net insurance result   364   301    
Revenue from purchased book debts   902   562    
Other non-interest revenue   1 422   1 472    
   Fee-for-service revenue   912   939    
   Commission income   75   69    
   Fee income   300   298    
   Revenue from sale of goods   74   73    
   Other income   61   93    
TOTAL NON-INTEREST REVENUE   2 688   2 335    

* Restated for the early adoption of IFRS 17 – Insurance Contracts.