Valuation techniques and assumptions applied for the purposes of measuring fair value

The carrying amount of financial instruments approximates fair value, with the exception of interest-bearing debt which is at amortised cost.

The fair value of financial assets and financial liabilities that are traded in active markets are based on quoted market prices or dealer price quotations. Listed investments, Cell Captive’s absolute portfolios and some borrowings are traded in active markets. For all other financial instruments the Group determines fair values using other valuation techniques as outlined below. The value is not necessarily indicative of the amounts that the Group could realise in the normal course of business.

Fair value hierarchy

The following table presents the Group’s assets and liabilities that are measured at fair value at reporting date. The different levels have been defined as follows:

* Level 1: Quoted prices in active markets for identical assets or liabilities.
* Level 2: Inputs other than quoted prices, that are observable for the asset or liability.
* Level 3: Inputs for the asset or liability that are not based on observable market data.

Credit risk or the risk of financial loss is the risk that a counterparty will not meet its contractual obligations as they fall due. The Group is exposed to credit risk from its operating activities and from financing activities, including deposits with banks and financial institutions. The Group is not exposed to significant concentrations of credit risk as credit limits are set on an individual basis and reviewed regularly.

The Group’s exposure to credit risk is represented by the carrying amount of the financial asset, with a maximum exposure equal to the carrying amount of the asset.

The Group is not exposed to significant concentrations of credit risk. Credit limits are set on an individual basis. The maximum exposure to the Group from counterparties in respect of derivative contracts is a net favourable position of R237 million (2012: R234 million). No collateral is required when entering into derivative contracts. Credit limits are reviewed on an annual basis or when information becomes available in the market. The Group limits the exposure to any counterparty and exposures are monitored daily. The Group expects that all counterparties will meet their obligations.

With respect to credit risk arising from other financial assets of the Group, which comprises loans and receivables, held-to-maturity investments and financial assets held at fair value through profit or loss and available-for-sale assets (other than equity accounted investments), the Group’s exposure to credit risk arises from a potential default by counterparty, with a maximum exposure equal to the carrying amount of these instruments.

The Group’s exposure to credit risk is influenced mainly by the individual characteristics of each type of customer. Management reduces the risk of irrecoverable debt by improving credit management through credit checks and limits. To reduce the risk of counterparty failure, limits are set based on the individual ratings of counterparties by well-known ratings agencies. Trade receivables comprise a large widespread customer base, covering residential, business, government, wholesale, global and corporate customer profiles.

Credit checks are performed on all customers, other than pre-paid customers, on application for new services on an ongoing basis where appropriate.

The Group establishes an allowance for impairment that represents its estimate of incurred losses in respect of trade and other receivables. The collective loss allowance is determined based on historical data of payment statistics for similar financial assets as well as expected future cash flows – refer to note 21.

Given the deterioration of credit markets, stricter objectives, polices and processes were applied for managing and measuring the risk than in the previous period.

Credit risk from balances with banks and financial institutions is managed by the Group’s treasury department in accordance with the Group’s policy. Investments of surplus funds are made only with approved counterparties and within credit limits assigned to each counterparty. Counterparty credit limits are reviewed by the Group’s board of directors annually or when the need arises. The limits are set to minimise the concentration of risks and therefore mitigate financial loss through potential counterparty failure. The Company policy is in line with the Group policy.

The maximum exposure to credit risk for financial assets at the reporting date by type of instrument and counterparty was:

The movement in the allowance for impairment in respect of trade receivables during the year is disclosed in note 21.

Included in the allowance for doubtful debts, for Company are individually impaired receivables with a balance of R214 million (2012: R211 million) which have been identified as being unable to service their debt obligation. The impairment recognised represents the difference between the carrying amount of these trade receivables and the present value of the expected liquidation proceeds. The Group does not hold any collateral over these balances.

Liquidity risk is the risk that the Group will not be able to meet its financial obligations as they fall due. The Group is exposed to liquidity risk as a result of uncertain cash flows as well as capital commitments of the Group.

Liquidity risk is managed by the Group’s treasury department in accordance with policies and guidelines formulated by the Group’s Executive Committee. In terms of its borrowing requirements the Group ensures that sufficient facilities exist to meet its immediate obligations. In terms of its long-term liquidity risk, the Group maintains a reasonable balance between the period over which assets generate funds and the period over which the respective assets are funded. Short-term liquidity gaps may be funded through repurchase agreements and/or commercial paper bills.

There were no material changes in the exposure to liquidity risk and its objectives, policies and processes for managing and measuring the risk during the 2013 financial year.

The table below summarises the maturity profile of the Group’s financial liabilities based on undiscounted contractual cash flow at the reporting date:

The table below summarises the maturity profile of the Company’s financial liabilities based on undiscounted contractual cash flow at the reporting date:

Market risk is the risk that the fair value of future cash flows of a financial instrument will fluctuate because of changes in market prices. The objective of market risk management is to manage and control market risk exposure. Market prices comprise three types of risk: interest rate risk, currency risk, commodity price risk and other price risk, such as equity risk. Financial instruments affected by market risk include loans and borrowings, deposits, available-for-sale investments, and derivative financial instruments.

Changes in the market prices have an impact on the values of the underlying derivatives and an analysis has been prepared on the basis of changes in one variable and all other variables remaining constant.

Interest rate risk management

Interest rate risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market interest rates. Interest rate risk arises from the repricing of the Group’s forward cover and floating rate debt.

The Group’s policy is to manage interest cost through the utilisation of a mix of fixed and floating rate debt. In order to manage this mix in a cost efficient manner and to hedge specific exposure in the interest rate repricing profile of the existing borrowings, the Group makes use of interest rate swaps. Fixed rate debt represents approximately 83.3% (2012: 88%) of the total debt. The debt profile of mainly fixed rate debt has been maintained to limit the Group’s exposure to interest rate increases.

The guideline is to target a fixed/floating debt ratio of 65% fixed, but adjusted to market conditions. In a scenario of low interest rates, a higher ratio may be established.

The table below summarises the interest rate swaps outstanding as at the reporting date:

Pay fixed and receive floating

The floating rate is based on the three-month JIBAR, and is settled in arrears. The interest rate swaps are used to manage interest rate risk on debt instruments.

Foreign currency exchange rate risk management

Foreign currency risk is the risk that the fair value of future cash flows of a financial instrument will fluctuate because of changes in exchange rates. The Group manages its foreign currency exchange rate risk by economically hedging all identifiable exposures via various financial instruments suitable to the Group’s risk exposure.

The Group enters into forward exchange contracts and cross-currency swaps to hedge foreign currency exposure on the Group’s operations and liabilities.

There were no changes in the objectives, policies and processes for managing and measuring the risk from the previous period.

The following table details the forward exchange contracts and cross-currency swaps outstanding at the reporting date:

The following table details the forward exchange contracts and cross-currency swaps outstanding at the reporting date:

The Group has various monetary assets and liabilities in currencies other than the Group’s functional currency. The following table represents the net currency exposure (net carrying amount of foreign denominated monetary assets and liabilities) of the Group according to the different foreign currencies:

Sensitivity analysis

Interest rate and foreign currency risk

An interest rate sensitivity analysis is based on an increase or decrease of 1% (100 basis points) in market interest rates and the prevailing information as at the reporting date.

The analysis assumes that all other variables remain constant. The analysis and changes in interest rates is performed on the same basis as was used in prior years.

If interest rates had been 100 basis points higher/lower and all other variables were held constant, the Group’s and Company’s profit for the year ended
31 March 2013 would increase/decrease by R34 million (2012: increase by R42 million and decrease by R42 million).

The following table illustrates the sensitivity to a 100 basis points change in the interest rates on profit before tax:

Foreign exchange currency risk

If exchange rates had been 10% higher/lower and all other variables were held constant, the Group’s profit for the year ended 31 March 2013 would decrease/increase by R233 million (2012: increase/decrease by R149 million) and Company by R233 million (2012: increase/decreases by R106 million).

The following table illustrates the sensitivity to a reasonably possible change in the exchange rates before tax, with all other variables held constant:

The Group’s listed and unlisted equity securities are susceptible to market price risk arising from uncertainties about future values of the investment securities. Changes in the fair value of equity securities held by the Group will fluctuate because of changes in market prices, caused by factors specific to the individual equity issuer, or factors affecting all similar equity securities traded on the market. The Group is not exposed to commodity price risk. The Group manages the equity price risk through diversification and placing limits on individual and total equity instruments. Reports on the equity portfolio are submitted to the Group’s senior management on a regular basis. The Group’s board of directors reviews and approves all equity investment decisions.

At the reporting date, the total amount for local equity investments was R3,285 million (2012: R2,716 million). A 5% increase in the local and foreign equity portfolios at the reporting date would have increased profit or loss by R110 million (2012: R95 million) before tax. An equal and opposite change would have decreased profit or loss.

There will be no other impact on equity as the equity securities are classified as at fair value through profit or loss. The analysis assumes that all other variables remain constant and is performed on the same basis as the prior year.

The Group’s policy is to manage the capital structure to ensure that it maximises shareholders’ return, growth and ability to meet its obligations. Capital comprises equity and net debt which it monitors using, inter alia, a net debt to EBITDA ratio. The Group’s guidance is to keep the ratio below 1.4 times.

Net debt is defined as interest-bearing debts, credit facilities utilised and other financial liabilities, less cash and cash equivalents and other financial assets. EBITDA is defined as earnings before depreciation, amortisation, impairment and losses, investment income, finance charges and fair value movements and taxation.

The Group’s dividend policy aims to provide shareholders with a competitive return on their investment, while assuring sufficient reinvestment of profits to achieve its strategy. The Group may revise its dividend policy from time to time. The determination to pay dividends, and the amount of dividends, will be based on a number of factors, including the consideration of the financial results, capital and operating requirements, net debt levels and growth opportunities.

The net debt to EBITDA ratio at reporting date was as follows: