Notes to the Company annual financial statements | Note 12

Accounting policy

Financial guarantee contracts are recognised at fair value on the date that the Company becomes a party to an irrevocable commitment. Financial guarantee contracts are subsequently stated at the higher of the amount determined by the expected credit loss (ECL) model and the amount initially recognised less, where appropriate, the cumulative amount of income recognised in accordance with the principles of IFRS 15 Revenue from Contracts with Customers. The fair value of financial guarantees is determined based on the present value of the difference in cash flows between the contractual payments required under the debt instrument and the payments that would be required without the guarantee, or the estimated amount that would be payable to a third party for assuming the obligations. Any difference between the redemption value guarantee obligation and the amount paid is recognised in the statement of profit or loss.

A guarantee to the value of R35 million was provided to Investec Bank Limited by the Company during the 2018 financial year as security for a loan provided to Glocell Proprietary Limited. The ECL relating to the financial guarantee provided to Glocell Proprietary Limited was measured at the full amount of the guarantee provided. On 29 June 2021, The Prepaid Company Proprietary Limited (TPC) acquired the remaining 52% shareholding in Glocell. As part of the purchase agreement, TPC assumed Glocell’s obligation to Investec Bank Limited. Therefore in the current year this guarantee was released, and recognised as a credit ECL adjustment in the statement of profit or loss. No further obligation remains.

CEC has a financing facility with African Bank amounting to R1.9 billion. The Company has issued a guarantee to the value of R250 million for this facility. In the prior year, the Company and TPC issued guarantees to the value of R150 million for the Investec Bank facility held by CEC. Management assessed the likelihood of the guarantees being called as remote, and therefore no liability was recognised in the current or prior year.

TPC has working capital loan facilities available from Investec Bank amounting to R1.125 billion (2021: R1.45 billion), as well as a Telkom guarantee facility of R50 million (2021: R50 million). The Company issued a guarantee for the full value of these facilities. Management assessed the likelihood of the guarantee being called as remote, and therefore no liability was recognised in the current or prior year.

The Company has issued a guarantee to the value of R31.9 million (2021: R31.9 million) for the cross surety of various facilities in favour of FNB, a division of FirstRand Bank Limited. These facilities include an overdraft, as well as credit card and settlement facilities. Management assessed the likelihood of the guarantees being called as remote, and therefore no liability was recognised in the current or prior year.

The Company has issued guarantees to the value of R20 million to the clients of Unipay, a division of Cigicell Proprietary Limited. Management assessed the likelihood of the guarantees being called as remote, and therefore no liability was recognised in the current or prior year.

In 2020, a financial guarantee to the value of USD5 million (R87.6 million) was provided to RBL Bank by the Company as security for a loan provided to Oxigen Services (India) Private Limited, an associate of Gold Label Investments Proprietary Limited, a subsidiary of the Company. The financial guarantee contract obligation of USD5 million (R87.6 million) to RBL Bank Limited was affected favourably by the strengthening of the rand to the US dollar in 2021, which resulted in a foreign exchange gain of R8.6 million. USD3.25 million (R53.8 million) of the obligation was called upon by RBL Bank and settled in the prior year. The balance of the obligation, amounting to USD1.75 million (R25.2 million), was released by RBL Bank Limited and recognised in profit or loss in the prior year. No further obligation remains.

Exposure to credit risk

The financial guarantee contracts expose the Company to credit risk, being the risk that the Company will incur financial loss if guaranteed parties fail to make payments as they fall due.

Financial guarantee contracts are measured, subsequent to initial recognition, at the higher of the credit loss allowance or the amount initially recognised less, where appropriate, cumulative amount of income recognised in accordance with the revenue recognition policies. The credit loss allowances for financial guarantee contracts are determined in accordance with the impairment provisions of IFRS 9 Financial Instruments, which requires a loss allowance to be recognised for all exposures to credit risk. The loss allowance for financial guarantee contracts is calculated based on 12-month expected losses if the credit risk has not increased significantly since initial recognition. In cases where the credit risk has increased significantly since initial recognition, the loss allowance is calculated based on lifetime ECLs. The loss allowance is updated to either 12-month or lifetime ECLs at each reporting date based on changes in the credit risk since initial recognition. If an exposure is considered to have a low credit risk at the reporting date, then it is assumed that the credit risk has not increased significantly since initial recognition. On the other hand, if the underlying loan is in arrears more than 90 days, then it is assumed that there has been a significant increase in credit risk since initial recognition.

In determining the amount of ECLs, the Company has taken into account any historic default experience, the financial positions of the counterparty as well as the future prospects in the industries in which the counterparty operates.

There has been no change in the estimation techniques or significant assumptions made during the current reporting period.

The maximum exposure to credit risk is the carrying amount of the loans subject to guarantee as presented below.

Credit rating framework

For purposes of determining the credit loss allowances, management determine the credit rating grades of
each financial guarantee at the end of the reporting period. These ratings are determined either externally
through ratings agencies or internally where external ratings are not available.

Credit loss allowances

The following table sets out the loss allowance and measurement basis of ECLs for financial guarantee contracts by credit rating grade:

Reconciliation of loss allowances

The following table shows the movement in the loss allowance for financial guarantee contracts:

Exposure to currency risk

The carrying amounts of financial guarantee contracts are denominated in South African rand.