for the year ended 30 September

Notes to the annual financial statements

 
28.   Financial instruments                    
        Group   Company
    Notes     2011  
Rm  
  2010  
Rm  
  2011  
Rm  
  2010  
Rm  
 

Categories of financial instruments  

                 
 

Financial assets  

                 
  Fair value through profit or loss (FVTPL)                   
  Held-for-trading (included in derivative assets)      26,0     7,3     11,9     2,6  
  Loans and receivables (included in cash and cash equivalents, accounts receivable and other investments and loans)      3 708,0     5 006,6     2 499,8     937,3  
  Available-for-sale financial asset (included in investments)      –     494,3     –     494,3  
 

Derivative assets  

    26,0     7,3     11,9     2,6  
  FECs       26,0     2,9     11,9     2,6  
  Interest rate swaps       –     4,4     –     –  
  NSN option   14     –     299,2     –     299,2  
 

Financial liabilities  

                 
  FVTPL held-for-trading (included in derivative liabilities)      (9,6)    (52,2)    (3,0)    (0,6) 
  Amortised cost (included in long-term borrowings, bank overdrafts and short-term portion of long-term borrowings and accounts payable)      (1 696,8)    (2 949,6)    (754,5)    (773,5) 
 

Derivative liabilities  

    (9,6)    (52,2)    (3,0)    (0,6) 
  FECs       (7,5)    (2,5)    (3,0)    (0,6) 
  Interest rate swaps       (1,5)    (48,2)    –     –  
  Other       (0,6)    (1,5)    –     –  
       
       Group      Company  
    Level 1  
Rm  
Level 2  
Rm  
Level 3  
Rm  
Level 1  
Rm  
Level 2  
Rm  
Level 3  
Rm  
  Levels of financial instruments
Assets measured at fair value  
           
  2011              
  FVTPL              
  FECs   –   26,0   –   –   11,9   –  
  Held-at-cost investments (included in
other investments and loans (group) 
–   –   1,6   –   –   –  
    –   26,0   1,6   –   11,9   –  
  Liabilities measured at fair value              
  FVTPL              
  FECs   –   (7,5)  –   –   (2,4)  –  
  Interest rate swaps   –   (1,5)  –   –   –   –  
  Other   –   (0,6)  –   –   (0,6)  –  
    –   (9,6)  –   –   (3,0)  –  
               
  Levels of financial instruments
Assets measured at fair value  
           
  2010              
  FVTPL              
  FECs1   –   2,9   –   –   2,6   –  
  Other   –   –   299,2   –   –   299,2  
  Interest rate swaps1   –   4,4   –   –   –   –  
  Available-for-sale financial asset (included in investments)  –   –   494,3   –   –   494,3  
    –   7,3   793,5   –   2,6   793,5  
  Liabilities measured at fair value              
  FVTPL1              
  FECs   –   (2,5)  –   –   (0,6)  –  
  Interest rate swaps   –   (49,7)  –   –   –   –  
    –   (52,2)  –   –   (0,6)  –  
  1 The prior year numbers have been restated from level 1 to level 2.  
       
       Group   Company
    Other  
Rm  
Held-at-cost  
Rm  
Available-  
for-sale  
Rm  
Other  
Rm  
Available-  
for-sale  
Rm  
  2011            
  Reconciliation of carrying value of level 3 assets at the beginning and end of the year            
  Financial assets            
  Opening balance at 1 October 2010   299,2   –   494,3   299,2   494,3  
  Disposal   (299,2)  –   (494,3)  (299,2)  (494,3) 
  Fair value adjustment through profit and loss   –   1,6   –   –   –  
  Closing balance at 30 September 2011   –   1,6   –   –   –  
  Total gains or losses for the year included in profit or loss for assets held at the end
of the year  
–   1,6   –   –   –  
             
  2010            
  Opening balance at 1 October 2009   299,2   6,8   494,3   299,2   494,3  
  Disposal   –   (6,8)  –   –   –  
  Closing balance at 30 September 2010   299,2   –   494,3   299,2   494,3  
  Total gains or losses for the year included in profit or loss for assets held at the end
of the year  
–   –   –   –   –  

 

Risk management

The group is exposed to liquidity, credit, foreign currency, interest rate and commodity price risks arising from its financial instruments.

The risk management relating to each of these risks is discussed under the headings below. The group’s objective in using derivative instruments for hedging purposes is to reduce the uncertainty over future cash flows arising from foreign currency, interest rate and commodity price risk exposures.

Liquidity risk

Liquidity risk is the risk that an entity in the group will be unable to meet its obligations in respect of financial liabilities when they become due.

The group manages liquidity risk by maintaining adequate reserves, banking facilities and reserve borrowing facilities and by continuously monitoring forecast and actual cash flows.

All of the group’s short-term borrowings or excess cash is directed through RFCL, which is managed by senior management from the head office of the group.

The overnight call market is mainly used for short-term borrowings, with three- to six-month borrowings used when deemed appropriate. Excess cash is only deposited with reputable banks and is spread over more than one bank to reduce exposure to any one institution.

The following table details the group’s remaining contractual maturity for its financial liabilities. The table reflects the undiscounted cash flows of financial liabilities based on the earliest date on which the group is required to pay. The table includes both interest and principal cash flows.  

       Group  
    <1 year  
Rm  
1–5 years  
Rm  
> 5 years  
Rm  
Total  
Rm  
  2011          
  Financial liabilities included in trade and other payables   (1 610,6)  –   –   (1 610,6) 
  Bank overdrafts and short-term portion of long-term borrowings   (85,5)  –   –   (85,5) 
  Long-term borrowings   –   (0,7)  –   (0,7) 
  Derivative instruments       –    
  FECs (gross settled)  (7,5)  –   –   (7,5) 
  Interest rate swaps   (1,5)  –   –   (1,5) 
  Other   (0,6)  –   –   (0,6) 
    (1 705,7)  (0,7)  –   (1 706,4) 
           
  2010          
  Financial liabilities included in trade and other payables   (1 545,5)  (0,9)  –   (1 546,4) 
  Bank overdrafts and short-term portion of long-term borrowings   (692,3)  –   –   (692,3) 
  Long-term borrowings   –   (710,9)  –   (710,9) 
  Derivative instruments       –    
  FECs (gross settled)  (2,5)  –   –   (2,5) 
  Interest rate swaps   (48,2)  –   –   (48,2) 
  Other derivative instruments (net settled)  (1,5)  –   –   (1,5) 
    (2 290,0)  (711,8)  –   (3 001,8) 
            
       Company  
    <1 year  
Rm  
1–5 years  
Rm  
> 5 years  
Rm  
Total  
Rm  
  2011          
  Financial liabilities included in trade and other payables   (461,5)  –   –   (461,5) 
  Bank overdrafts and short-term portion of long-term borrowings   (4,3)  –   –   (4,3) 
  Long-term borrowings   –   (23,7)  (14,9)  (38,6) 
  Amounts owing to subsidiaries   (144,2)  (58,2)  (47,7)  (250,1) 
  Derivative instruments FECs (gross settled)  (3,0)  –   –   (3,0) 
    (613,0)  (81,9)  (62,6)  (757,5) 
           
  2010          
  Financial liabilities included in trade and other payables   (447,9)  –   –   (447,9) 
  Bank overdrafts and short-term portion of long-term borrowings   (2,4)  –   –   (2,4) 
  Long-term borrowings   –   (19,0)  (22,8)  (41,8) 
  Amounts owing by subsidiaries   (233,7)  –   (47,7)  (281,4) 
  Derivative instruments FECs (gross settled)  (0,6)  –   –   (0,6) 
    (684,6)  (19,0)  (70,5)  (774,1) 
  The current portion of financial assets is sufficient to pay the financial liabilities expected to fall due within the next 12 months.  

  Borrowing capacity  
  The borrowings of the group are limited in terms of the company’s MOI.  

      Group   Company
      2011  
Rm  
  2010  
Rm  
  2011  
Rm  
  2010  
Rm  
  Total long-term borrowings     0,7     710,9     38,6     41,8  
  Bank overdrafts and short-term portion of long-term borrowings     85,5     692,3     4,3     2,4  
      86,2     1 403,2     42,9     44,2  
  The group’s maximum borrowings in terms of the MOI are R3 594,1 million (2010: R4 162,8 million).

The company’s maximum borrowings in terms of the MOI are R4 452,3 million (2010: R3 648,7 million).  

  Credit risk  
 

Credit risk refers to the risk of financial loss due to counterparties to financial instruments, including debtors, not meeting their contractual obligations. This risk is managed through ongoing credit evaluations of the financial condition of all customers. The granting of credit is controlled by application and credit vetting procedures which are updated and reviewed on an ongoing basis.

Where considered necessary, exports are covered by letters of credit and where appropriate, credit insurance is also obtained.

The credit risk on liquid funds and derivative financial instruments is limited because the counterparties are banks with high credit ratings.  

      Group   Company
      2011  
%  
  2010  
%  
  2011  
%  
  2010  
%  
  Total cash and cash equivalents, investments, accounts receivable and derivative instruments (net market value of these contracts), by geographic region exposed to:                  
  South Africa     96,3     96,7     93,0     95,8  
  Rest of Africa     0,7     0,5     0,8     0,9  
  Europe     1,1     0,7     2,3     0,7  
  Australasia     1,4     1,1     1,8     1,4  
  USA     0,3     0,5     1,9     0,8  
  Other     0,2     0,5     0,2     0,4  
      100,0     100,0     100,0     100,0  
   
  The maximum exposure to credit risk of financial assets included in trade and other receivables before any impairment losses or credit enhancements and excluding any collateral held, classified into major risk types:  

      Group   Company
      2011  
Rm  
  2010  
Rm  
  2011  
Rm  
  2010  
Rm  
 

Trade and other receivables  

  2 161,4     2 458,9     306,7     669,7  
  Insured debtors     142,5     150,6     63,7     77,7  
  Contractors     33,5     32,3     0,2     0,4  
  Individuals/small businesses     660,0     761,1     32,0     99,8  
  Mines/large businesses/government and parastatals     1 196,5     1 401,6     210,2     487,2  
  Municipalities     128,9     113,3     0,6     4,6  
 

Derivative contracts  

  26,0     7,3     11,9     2,6  
  Insured debtors     10,2     –     10,1     –  
  Individuals/small businesses     –     0,4     –     0,3  
  Mines/large businesses/government and parastatals     15,8     6,9     1,8     2,3  
      2 187,4     2 466,2     318,6     672,3  
  Foreign currency risk  
 

Foreign currency risk refers to the risk that the fair value of future cash flows of a financial instrument will fluctuate because of changes in foreign currency exchange rates.

The group has appointed a foreign currency management firm to manage its major currency exposures. A mandate is agreed with the firm from time to time which then manages the exposure within this mandate.

Forward exchange contracts at 30 September 2011 and 2010 are summarised below:  

       Group  
    Foreign  
amount  
million  
Market  
value  
Rm  
Contract  
value  
Rm  
Unrealised  
gains/(losses) 
Rm  
  2011          
  Imports – trade          
  USD   (19,4)  (159,2)  (146,3)  12,9  
  Euro   (16,7)  (182,3)  (171,2)  11,1  
  GBP   (0,2)  (3,1)  (2,9)  0,2  
  Yen   (148,1)  (15,6)  (14,0)  1,6  
  CHF   (0,9)  (8,3)  (8,1)  0,2  
  SEK   (0,1)  (0,1)  (0,1)  –  
      (368,6)  (342,6)  26,0  
  Exports – trade          
  USD   10,0   82,1   77,0   (5,1) 
  Euro   4,8   52,4   50,0   (2,4) 
      134,5   127,0   (7,5) 
  Total net forward exchange contracts     (234,1)  (215,6)  18,5  
           
          Rm  
  Accounts payable in foreign currencies         (125,4) 
  Of which covered by forward exchange contracts         122,7  
  Loans payable in foreign currencies         (26,5) 
  Of which covered by forward exchange contracts         –  
  Accounts receivable in foreign currencies         25,2  
  Of which covered by forward exchange contracts         (0,4) 
           
  2010          
  Imports – trade          
  USD   (10,9)  (78,6)  (78,0)  (0,6) 
  Euro   (17,4)  (160,0)  (160,6)  0,6  
  GBP   (0,6)  (7,5)  (7,2)  (0,3) 
  Yen   (241,0)  (20,4)  (21,0)  0,6  
  CHF   (3,3)  (8,5)  (8,6)  0,1  
  SEK   (0,3)  (0,3)  (0,3)  –  
      (275,3)  (275,7)  0,4  
  Exports – trade          
  Euro   1,0   10,0   10,0   –  
      10,0   10,0   –  
  Total net forward exchange contracts     (265,3)  (265,7)  0,4  
           
          Rm  
  Accounts payable in foreign currencies         (249,0) 
  Of which covered by forward exchange contracts         223,1  
  Accounts receivable in foreign currencies         35,9  
  Of which covered by forward exchange contracts         (10,0) 
           
       Company  
    Foreign  
amount  
million  
Market  
value  
Rm  
Contract  
value  
Rm  
Unrealised  
gains/(losses) 
Rm  
  2011          
  Imports – trade          
  USD   (1,9)  (15,6)  (14,3)  1,3  
  Euro   (14,2)  (155,1)  (145,3)  9,8  
  Yen   (105,9)  (11,3)  (10,5)  0,8  
      (182,0)  (170,1)  11,9  
  Exports – trade          
  USD   7,0   56,8   53,6   (3,2) 
  Euro   1,2   13,1   13,3   0,2  
      69,9   66,9   (3,0) 
  Total net forward exchange contracts     (112,1)  (103,2)  8,9  
           
          Rm  
  Accounts receivable in foreign currencies         8,5  
  Of which covered by forward exchange contracts         –  
           
  2010          
  Imports – trade          
  USD   (4,4)  (31,3)  (32,3)  1,0  
  Euro   (13,8)  (132,3)  (132,7)  0,4  
  GBP   (0,1)  (1,5)  (1,5)  –  
  Yen   (241,0)  (20,4)  (21,0)  0,6  
      (185,5)  (187,5)  2,0  
           
          Rm  
  Accounts payable in foreign currencies         (125,8) 
  Of which covered by forward exchange contracts         104,0  

   Foreign currency sensitivity analysis  
  The following table details the group’s sensitivity to a 20% weakening (2010: 10% weakening) in the rand against the relevant foreign currencies. A 20% (2010: 10%) decrease represents management’s assessment of the reasonable possible change in foreign exchange rates. The sensitivity analysis includes only outstanding foreign currency denominated monetary items and FECs and adjusts their translation at the year end for a 20% change in foreign currency rates.  
   
      Group   Company
  Profit/(loss) before tax impact     2011  
Rm  
  2010  
Rm  
  2011  
Rm  
  2010  
Rm  
  USD     33,6     24,4     15,5     13,9  
  Euro     49,1     12,2     39,1     10,9  
  GBP     0,3     0,6     –     0,1  
  Yen     (38,4)    (2,3)    (25,7)    (2,3) 
  CHF     4,0     2,3     –     (0,1) 
  AUD     6,0     6,3     4,4     2,9  
  Profit before taxation     54,6     43,5     33,3     25,4  
  Taxation     (15,3)    (12,2)    (9,3)    (7,1) 
  Profit after taxation impact     39,3     31,3     24,0     18,3  
  Interest rate risk  
  Interest rate risk is the risk that the fair value of future cash flows of a financial instrument will fluctuate because of changes in market interest rates. The group is exposed to interest rate risk as it operates on a net cash basis.  
  Details of the interest rate hedging instruments are:  
     
       Group  
       Contracts expiring in  
    <1 year  
Rm  
1 –5 years  
Rm  
> 5 years  
Rm  
Total  
Rm  
  2011          
  The 1 – 5 years derivative asset and liability were early settled in the current year.          
  Contract value   –   –   32,3   32,3  
  Derivative liability   –   –   (1,5)  (1,5) 
  Average fixed interest rate   –   –   8,1%    
           
  2010          
  Contract value   –   1 430,8   32,6   1 463,4  
    –   (43,8)  (1,5)  (45,3) 
  Derivative asset   –   4,4   –   4,4  
  Derivative liability   –   (48,2)  (1,5)  (49,7) 
  Average fixed interest rate   –   8,3%   8,1%    
  The interest rate hedges settle on a quarterly basis. The floating rate on the interest rate hedge is the three-month JIBAR. The group will settle the difference between the fixed and floating interest rate on a net basis. The company has not entered into any interest rate hedging instruments.  
   
  Interest rate sensitivity analysis  
  The sensitivity analyses below have been determined based on the exposure to interest rates for both derivative and non-derivative instruments at the balance sheet date.  
             
         Group    
    Weighted  
average  
effective  
interest rate  
%  
Floating  
interest  
rate  
Rm  
Fixed  
interest  
rate  
Rm  
Non-  
interest  
bearing  
Rm  
Total  
Rm  
  2011            
  Assets            
  Cash and cash equivalents   5,2   643,0   –   –   643,0  
  Financial assets included in accounts receivable   8,5   234,2   430,7   1 389,6   2 054,5  
  Other investments and loans   5,3   11,6   –   34,5   46,1  
  Accounts receivable – non-current   12,8   335,0   626,5   4,4   965,9  
      1 223,8   1 057,2   1 428,5   3 709,5  
  Liabilities            
  Financial liabilities included in trade and other payables   3,2   (187,0)  –   (1 423,6)  (1 610,6) 
  Bank overdrafts and short-term portion of long-term borrowings   6,2   (77,2)  –   (8,3)  (85,5) 
  Long-term borrowings   10,0   (0,6)  –   (0,1)  (0,7) 
      (264,8)  –   (1 432,0)  (1 696,8) 
  Net financial assets     959,0   1 057,2   (3,5)  2 012,7  
             
  2010            
  Assets            
  Cash and cash equivalents   5,2   1 876,3   –   1,8   1 878,1  
  Financial assets included in accounts receivable   10,0   593,0   989,5   1 501,6   3 084,1  
  Other investments and loans   5,3   –   –   538,7   538,7  
  NSN option     –   –   299,2   299,2  
      2 469,3   989,5   2 341,3   5 800,1  
  Liabilities            
  Financial liabilities included in trade and other payables   8,0   (190,4)  –   (1 356,0)  (1 546,4) 
  Bank overdrafts and short-term portion of long-term borrowings   6,5   (692,3)  –   –   (692,3) 
  Long-term borrowings   7,0   (699,9)  –   (11,0)  (710,9) 
      (1 582,6)  –   (1 367,0)  (2 949,6) 
  Net financial assets     886,7   989,5   974,3   2 850,5  
 

The analyses are prepared assuming the amount of net assets outstanding at the balance sheet date was outstanding for the whole year. A 2% increase is used for both the current year and prior year and represents management’s assessment of the reasonable possible change in interest rates. A 2% decrease would have the opposite effect on net profit after tax.

If the group’s interest rates had been 2% higher and all other variables remained constant, the group’s profit after tax for the year ended 30 September 2011 would increase by R13,8 million (2010: increase by R12,8 million). This is mainly attributable to the group’s exposure to interest rates on its variable rate deposits.  

  The company’s exposure to interest rate risk and the effective interest rates on financial instruments at balance sheet date are:  
     
         Company    
    Weighted  
average  
effective  
interest rate  
%  
Floating  
interest  
rate  
Rm  
Fixed  
interest  
rate  
Rm  
Non-  
interest  
bearing  
Rm  
Total  
Rm  
  2011            
  Assets            
  Cash and cash equivalents   5,2   145,2   –   –   145,2  
  Financial assets included in accounts receivable   2,0   46,8   –   299,9   346,7  
  Other investments and loans   5,3   11,6   –   32,1   43,7  
  Amounts owing by subsidiaries   4,8   1 776,3   –   189,5   1 965,8  
  Interest in subsidiaries     –   –   2 485,8   2 485,8  
      1 979,9   –   3 007,3   4 987,2  
  Liabilities            
  Financial liabilities included in trade and other payables   3,2   (187,0)  –   (274,5)  (461,5) 
  Bank overdrafts and short-term portion of long-term borrowings   6,2   –   (3,5)  (0,8)  (4,3) 
  Amounts owing to subsidaries   10,0   –   (23,7)  (226,4)  (250,1) 
  Long-term borrowings   10,5   –   (38,6)  –   (38,6) 
      (187,0)  (65,8)  (501,7)  (754,5) 
  Net financial assets/(liabilities)    1 792,9   (65,8)  2 505,6   4 232,7  
             
  2010            
  Assets            
  Cash and cash equivalents   5,2   283,0   –   –   283,0  
  Financial assets included in accounts receivable   7,9   9,1   –   318,7   327,8  
  Other investments and loans   –   –   –   3 022,1   3 022,1  
  Amounts owing by subsidiaries   5,8   108,3   –   218,1   326,4  
  NSN option   –   –   –   299,2   299,2  
      400,4   –   3 858,1   4 258,5  
  Liabilities            
  Financial liabilities included in trade and other payables   8,0   (184,1)  –   (263,8)  (447,9) 
  Bank overdrafts and short-term portion of long-term borrowings   10,5   –   (2,4)  –   (2,4) 
  Amounts owing to subsidiaries   7,3   (43,8)  (18,8)  (218,8)  (281,4) 
  Long-term borrowings   10,5   –   (41,8)  –   (41,8) 
      (227,9)  (63,0)  (482,6)  (773,5) 
  Net financial assets/(liabilities)    172,5   (63,0)  3 375,5   3 485,0  
  If the company’s interest rates had been 2% higher and all other variables remained constant, the company’s profit after tax for the year ended 30 September 2011 would increase by R25,8 million (2010: increase by R2,5 million). This is mainly attributable to the company’s exposure to interest rates on its variable rate deposits.  
   
 

Fair value of financial instruments (group and company)

Cash and cash equivalents

The carrying amounts approximate fair value because of the short-term nature of these instruments.

Current accounts receivable

The carrying amounts of rand denominated receivables approximate fair value because of the short-term nature of these instruments. The carrying amounts of foreign currency denominated receivables have been converted at the rate of exchange ruling on the last day of the financial year. These amounts approximate fair value because of the short-term nature of these instruments.

The carrying amount of the long-term accounts receivable and discounted deals approximate fair value because the rates inherent in the deals are market related and are the same rates used to discount back to their carrying values.

Non-current accounts receivable, other investments and loans

The fair value of the interest-bearing loans and accounts receivable have been determined by discounting the future cash flows of these loans back to present values using current market related interest rates. These are carried at approximately their fair values. The remainder of the investments are non-interest-bearing. The fair value of these loans cannot be determined as they have no repayment terms. These loans and minor unlisted share investments are assumed to have a carrying value that approximates fair value.

Trade and other payables

The carrying amounts of accounts payable denominated in rand approximate fair value because of the short-term nature of these liabilities. The carrying values of accounts payable denominated in foreign currencies have been converted at the rate of exchange ruling on the last day of the financial year. These amounts approximate fair value because of the short-term nature of these instruments.

The short-term borrowings approximate fair value because of their short term nature.

Forward exchange contracts

The contracts are stated at fair value which represents the foreign currency value of the exchange contracts converted at the forward rate that could have been obtained at the year end on a similar contract of the same maturity date.

Interest rate swaps

These swaps are carried at fair value which represents the net market value of equivalent instruments at balance sheet date.

Options (group and company)

Powerhouse/ATC transactions

The agreement with Powerhouse contains certain conditions which result in options for Reunert:

Upon the occurrence of certain events (for example, if Powerhouse ceases to be a BEE entity), Powerhouse will be deemed to have offered its equity for sale to Reutech Engineering Services (RES) (a wholly-owned subsidiary of Reunert). The purchase consideration payable by RES is dependant on whether the loan between Powerhouse and Reunert has been repaid in full or not. RES, therefore, has the option to acquire the shares Powerhouse holds in ATC under these circumstances.

A fair value for this option cannot be reliably determined, since the equity instrument does not have a quoted market price in an active market and other methods of reasonably estimating the fair value are at this stage inappropriate or unworkable.