31. FINANCIAL INSTRUMENTS
  The groupís financial instruments consist mainly of deposits with banks, short-term investments, accounts receivable and payable, bank borrowings, money and capital market borrowings, leases, hire-purchase agreements discounted with recourse and derivatives. Details of the amounts discounted with recourse are included in note 30. Derivative instruments are used by the group for hedging purposes. Such instruments include forward exchange, currency option contracts and interest rate swap agreements. The group does not speculate in the trading of derivative instruments.
31.1

Summary of the carrying and fair value of financial instruments

      2018  
      Fair value
through
profit
and loss:
Designated
at initial
recognition
Fair value
through
profit
and loss:
Held for
trading
items
Held to
maturity
Available-
for-sale
financial
assets
Loans and
receivables
Derivatives
designated
as hedging
instruments
Finance
lease
receivables
Total
financial
assets
Non-
financial
instruments
Assets 
held for 
sale 
Total
amount
 
  Notes   Rm Rm Rm Rm Rm Rm Rm Rm Rm Rm  Rm  
ASSETS                            
Finance lease receivables 14               211 211     211  
Long-term financial assets 15   55   755 5 61   20 896 10   909  
Trade and other receivables 18       155   8 005 1 248 8 408 643 (168) 8 883  
Cash and cash equivalents 19           7 912     7 912   (19) 7 893  
Total assets     55   910 5 15 977 1 479 17 427 653 (187) 17 897  
      2017  
      Fair value
through
profit
and loss:
Designated
at initial
recognition
Fair value
through
profit
and loss:
Held for
trading
items
Held to
maturity
Available-
for-sale
financial
assets
Loans and
receivables
Derivatives
designated
as hedging
instruments
Finance
lease
receivables
Total
financial
assets
Non-
financial
instruments
Assets 
held for 
sale 
Total
amount
 
  Notes   Rm Rm Rm Rm Rm Rm Rm Rm Rm Rm  Rm  
ASSETS                            
Finance lease receivables 14               240 249     240  
Long-term financial assets 15   49   228   72     349 64 (9) 404  
Trade and other receivables 18       662   7 013 42 259 7 976 1 673 (973) 8 676  
Cash and cash equivalents 19           4 027     4 027   (102) 3 925  
Total assets     49   890   11 112 42 499 12 592 1 737 (1 084) 13 245  
      2018  
      Fair value
through
profit
and loss:
Designated
at initial
recognition
Fair value
through
profit
and loss:
Held for
trading
items
Measured
at
amortised
cost
Derivatives
designated
as hedging
instruments
Total
financial
liabilities
Non-
financial
instruments
Assets 
held for 
sale 
Total
amount
 
  Notes   Rm Rm Rm Rm Rm Rm Rm  Rm  
LIABILITIES                      
Interest-bearing non-current liabilities 22       5 995   5 995     5 995  
Other non-current liabilities 24       490   490 1 753   2 243  
Trade and other payables 25   9   9 444   9 453 1 794 (125) 11 122  
Amounts due to bankers and short-term loans 26       5 140 35 5 175   (1) 5 174  
Total liabilities     9   21 069 35 21 113 3 537 (126) 24 534  
      2017  
      Fair value
through
profit
and loss:
Designated
at initial
recognition
Fair value
through
profit
and loss:
Held for
trading
items
Measured
at
amortised
cost
Derivatives
designated
as hedging
instruments
Total
financial
liabilities
Non-
financial
instruments
Assets 
held for 
sale 
Total
amount
 
  Notes   Rm Rm Rm Rm Rm Rm Rm  Rm  
LIABILITIES                      
Interest-bearing non-current liabilities 22       7 079   7 079 577 (33) 7 623  
Other non-current liabilities 24       435   435 2 237   2 672  
Trade and other payables 25   5 1 8 569   8 575 2 759 (637) 10 697  
Amounts due to bankers and short-term loans 26       2 055   2 055     2 055  
Total liabilities     5 1 18 138   18 144 5 573 (670) 23 047  
    2018
Rm
  2017
Rm
 
Carrying value of financial instruments by class:          
Financial assets:          
Trade receivables          
– Industry   6 124   5 429  
– Government   902   438  
– Consumers   543   403  
Other loans and receivables and cash balances   9 120   5 732  
Finance lease receivables   459   499  
Derivatives (including items designated as effective hedging instruments)          
– Forward exchange contracts   1   42  
Other financial assets at fair value   278   49  
Total carrying value of financial assets   17 427   12 592  
Financial liabilities:          
Trade payables          
– Principals   2 925   3 336  
– Other suppliers   3 734   5 234  
Other non-interest-bearing payables   490   435  
Derivatives (including items designated as effective hedging instruments)          
– Forward exchange contracts   35      
– Other derivatives   9   5  
Interest-bearing debt measured at amortised cost   13 920   9 134  
Total carrying value of financial liabilities   21 113   18 144  
Fair value of financial instruments by class:          
Financial assets:          
Trade receivables          
– Industry   6 124   5 429  
– Government   902   438  
– Consumers   543   403  
Other loans and receivables and cash balances   9 120   5 726  
Finance lease receivables   459   499  
Derivatives (including items designated as effective hedging instruments)          
– Forward exchange contracts   1   42  
Other financial assets at fair value   278   55  
Total fair value of financial assets   17 427   12 592  
Financial liabilities:          
Trade payables          
– Principals   2 925   3 336  
– Other suppliers   3 734   5 234  
Other non-interest-bearing payables   490   435  
Derivatives (including items designated as effective hedging instruments)          
– Forward exchange contracts   35      
– Other derivatives   9   5  
Interest-bearing debt measured at amortised cost   13 991   9 659  
Total fair value of financial liabilities   21 184   18 669  

All financial instruments are carried at fair value or amounts that approximate fair value, except for the non-current portion of fixed rate receivables, payables and interest-bearing borrowings, which are carried at amortised cost. The carrying amounts for investments, cash, cash equivalents as well as the current portion of receivables, payables and interest-bearing borrowings approximate fair value due to the short-term nature of these instruments. The fair values have been determined using available market information and discounted cash flows.

31.2

Fair value measurements recognised in the statement of financial position

The following table provides an analysis of financial instruments that are measured subsequent to initial recognition at fair value, grouped into levels 1 to 3 based on the degree to which the fair value is observable.

  • Level 1 fair value measurements are those derived from quoted prices (unadjusted) in active markets for identical assets. The markets from which these quoted prices are obtained are the bonds market, the stock exchange as well as other similar markets.
  • Level 2 fair value measurements are those derived from inputs other than quoted prices included within level 1 that are observable for the asset or liability, either directly (ie as prices) or indirectly (ie derived from prices). The valuation techniques used in deriving level 2 fair values are discounted cash flows. The discounted cash flows are derived using rates that appropriately reflects the different risks of the various counterparties in relation to the financial instrument. Significant unobservable inputs are long-term revenue and profit projections as well as managementís experience and knowledge of the market conditions. Inputs used and assumptions made in relation to the discounted cash flow model is based on macro-economic indicators consistent with external sources of information.
  • Level 3 fair value measurements are those derived from valuation techniques that include inputs for the asset or liability that are not based on observable market data (unobservable inputs). The valuation techniques used in deriving level 3 fair values are discounted cash flows as well as the net asset value approach of the investment that is being valued. This information is based on unobservable market data, and adjusted for based on managementís experience and knowledge of the investment.
  2018
  Level 1 Level 2 Level 3 Level 4  
  Rm Rm Rm Rm  
Financial assets at fair value through profit or loss          
Financial assets designated at fair value through profit or loss     55 55  
Available for sale financial assets          
Shares     5 5  
Derivative assets designated as effective hedging instruments   1   1  
Total   1 60 62  
Financial liabilities at fair value through profit or loss          
Financial liabilities designated at fair value through profit or loss   9   9  
Derivatives   35   35  
Total   44   44  
  2017
  Level 1 Level 2 Level 3 Level 4  
  Rm Rm Rm Rm  
Financial assets at fair value through profit or loss          
Financial assets designated at fair value through profit or loss     49 49  
Available for sale financial assets          
Shares     5 5  
Derivative assets designated as effective hedging instruments   42   42  
Total   42 54 96  
Financial liabilities at fair value through profit or loss          
Derivatives 5     5  
Total 5     5  

FECs are classified under level 2 as they are not quoted and the value needs to be calculated.

Reconciliation of level 3 fair value measurements

  Available-for-
sale
unlisted
shares
  Fair
value of
investment
in cell
captives
 
  Rm   Rm  
Balance 30 September 2016 5   28  
Total gains recognised in profit and loss     21  
Balance 30 September 2017 5   49  
Total gains recognised in profit and loss     6  
Balance 30 September 2018 5   55  

Total gains/(losses) recognised in profit and loss relate to unrealised gains relating to financial assets that are measured at fair value at the end of the period.

31.3

Financial risk management

a. Capital risk management

The group manages its capital to ensure that all entities in the group will be able to continue as a going concern while maximising the return to stakeholders through the optimisation of debt and equity. The overall strategy remains unchanged from the previous year.

The capital structure of the group consists of debt (refer notes 22 and 26), cash and cash equivalents (note 19) and equity attributable to equity holders of Barloworld Limited, comprising issued capital (note 21), reserves and retained earnings (statement of changes in equity).

A finance committee consisting of senior executives of the group meets on a regular basis to review the capital structure based on the cost of capital and the risks associated with each class of capital, analyse currency and interest rate exposure and to re-evaluate treasury management strategies in the context of most recent economic conditions and forecasts. The group has targeted gearing ratios for each major business segment. The group’s various treasury operations provide the group with access to local money markets and provide group subsidiaries with the benefit of bulk financing and depositing.

b. Market risk

(i) Currency risk

Trade commitments

The group’s currency exposure management policy for the southern African operations is to hedge substantially all material foreign currency trade commitments which customers have or will not be accepting the currency risk. In respect of offshore operations, where there is a traditionally stable relationship between the functional and transacting currencies, the need to take foreign exchange cover is at the discretion of the divisional board. Each division manages its own trade exposure within the overall framework of the group policy. In this regard the group has entered into certain forward exchange contracts which do not relate to specific items appearing in the statement of financial position, but were entered into to cover foreign commitments not yet due or proceeds not yet received. The risk of having to close out these contracts is considered to be low.

Net currency exposure and sensitivity analysis

The following table represents the extent to which the group has monetary assets and liabilities in currencies other than the group companies’ functional currency. The information is shown inclusive of the impact of forward contracts and options in place to hedge the foreign currency exposures. Based on the net exposure below it is estimated that a simultaneous 10% change in all foreign currency exchange rates against divisional functional currency will impact the fair value of the net monetary assets/liabilities of the group to the extent of R373 million (2017: R181 million), of which R17 million (2017: R67 million) will impact other comprehensive income and R356 million (2017: R115 million) will impact profit or loss.

  Currency of assets/(liabilities)
  SA Rand  Euro British 
Sterling 
US Dollar Total  
Net foreign currency monetary assets/(liabilities) Millions  Millions Millions  Millions Millions  
Functional currency of group operation:                   
South African Rand  n/a   (4) 268  265    
British Sterling  (58)     n/a  3 287  3 228    
US Dollar  (103) (16) n/a  (116)   
Other currencies  (59) (1)    412  352    
As at 30 September 2018  (220) (20) 3 966  3 730    
South African Rand  n/a   23   1 734  1 757    
British Sterling         n/a           
US Dollar           n/a       
Other currencies  54            54    
As at 30 September 2017  54   23   1 734  1 811    
  Fair value  
  2018 
Rm 
  2017
Rm
 
Hedge accounting applied in respect of foreign currency risk        
Cash flow hedges        
– Fair value of (asset)/liability – foreign currency forward exchange contracts (34)   42  

The foreign currency contracts have been acquired to hedge the underlying currency risk arising from a firm commitment to acquire equipment machines as well as the forecast purchases of spare parts. All cash flows are expected to occur and affect profit or loss within the next 12 months.

(ii) Interest rate risk

The group manages the exposure to interest rate risk by maintaining a balance between fixed and floating rate borrowings. The interest rate characteristics of new borrowings and the refinancing of existing borrowings are
structured according to expected movements in interest rates. There has been no change in the current year to this approach.

The interest rate profile of total borrowings is as follows:

  Currency   Year of redemption/
repayment
  Interest
rate (%)
    2018
Rm
  2017
Rm
 
Liabilities in foreign currencies                                            
Bank overdrafts and short-term loans   USD               LIBOR* + 3.5%           806       460    
    ZMK               (12%) +8.3%           12       18    
    MZM               Prime (MT) – 2% and 3% p.a.**           83       12    
    RUR               1-month MOSPRIME + 2.85%           100       34    
    EUR               UK base rate + 2% and 3%           2       14    
    BWP               Prime – 1.5%           155       20    
Total short-term foreign currency liabilities                               1 158       557    
Amounts classified as held for sale                                       (22)  
Total short-term foreign currency liabilities (note 26)                             1 158       535    
Unsecured loans   BWP       2019       Prime – 1.5%           255       439    
Liabilities under capitalised finance leases   EUR       2019       EURIBOR*** 12-month + 5.68%           96       19    
Total long-term foreign currency liabilities (notes 22)                             351       458    
Liabilities in South African Rand                                            
Bank borrowings and bank overdrafts                               4 016       1 520    
Total South African Rand liabilities (note 26)                             4 016       1 520    
Secured loans           2018 – 2023 onwards       9 – 12.6           102       106    
Unsecured loans           2018 – 2023       8.52 – 9.95           7 137       7 157    
Liabilities under capitalised finance leases           2018 – 2023 onwards       8.3 – 15.1           528       768    
Total South African Rand liabilities (notes 22)                             7 767       8 031    
Total South African Rand and foreign currency liabilities (notes 22 and 26)                             13 292       10 544    
Interest rates                                            
Loans at fixed rates of interest                               3 605       4 483    
Loans linked to South African money market rates                               4 258       3 819    
Loans linked to offshore money markets                               255       187    
Long-term interest rate exposure (note 22)                             8 118       8 489    
Loans at fixed rates of interest                               460       91    
Loans linked to floating rates of interest                               3 556       1 429    
Loans linked to offshore money markets                               1 158       535    
Short-term interest rate exposure (note 26)                             5 174       2 055    
Interest rate exposure (notes 22 and 26)                             13 292       10 544    
* LIBOR – London inter-bank offered rate.
** Mozambique short-term bank instrument.
*** EURIBOR – European inter-bank offered rate.
    2018
Rm
  2017
Rm
 
Interest rate sensitivity analysis                    
Impact of a 1% increase in South African interest rates                    
– Charge to profit or loss       118       80    
Impact of a 1% increase in offshore interest rates                    
– Charge to profit or loss       15       7    
(iii) Other price risk                    
The group is exposed to price risk arising out of the following: Barloworld share price                    
The group has a liability to option holders in terms of the long-term share-based payments (refer note 32.2 and 32.3)                  
Barloworld share price sensitivity analysis                    
Impact of a 10% increase in the Barloworld share price as at 30 September – Charge to profit or loss in respect of the liability       3       1    

There has been no change during the current year in the group approach to managing other price risk.

c. Credit risk

Potential areas of credit risk consist of trade receivables and short-term cash investments. Trade receivables consist mainly of a large and widespread customer base. Group companies monitor the financial position of their customers on an ongoing basis. Where considered appropriate, use is made of credit guarantee insurance. The granting of credit is controlled by application and account limits. Provision is made for bad debts and at the year end management did not consider there to be any material credit risk exposure that was not already covered by credit guarantee insurance or a bad debt provision. It is group policy to deposit short-term cash investments with major banks and financial institutions with strong credit ratings.

Maximum exposure to credit risk represented by the carrying value of all financial assets on statement of financial position

    2018
Rm
  2017
Rm
 
Maximum exposure to credit risk (excluding collateral held), exceeding the carrying amount          
Other items, including financial guarantees   944   785  
    944   785  

d. Liquidity risk

The group manages liquidity risk by monitoring forecast cash flows, maintaining a balance between long-term and short-term debt and ensuring that adequate unutilised borrowing facilities are maintained. Unutilised bank facilities amounted to R10.5 billion (2017: R9.6 billion). There has been no change to this approach during the current year.

Maturity profile of financial liabilities

The maturity profile of the financial instruments is summarised as follows (based on contractual undiscounted cash flows):

  Repayable during the year ending
30 September
 
  Total
owing
2019 2020 to
2022
 
  Rm Rm Rm  
Interest-bearing liabilities 9 722 3 270 6 451  
Trade payables and other non-interest-bearing liabilities 11 172 11 122 50