|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.|
Summary of the carrying and fair value of financial instruments
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.
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.
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
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.
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
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.
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
The interest rate profile of total borrowings is as follows:
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
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):