Nqaba Finance 1 (RF) Ltd (Registration number 2005/040050/07) Annual financial statements for the year ended 31 March 2018 Nqaba Finance 1 (RF) Ltd Index The reports and statements set out below comprise the annual financial statements presented to the shareholder: Index Page Statement of responsibilities and approval 3 Report of the audit committee 4-8 Statement by the company secretary 9 Directors' report 10 - 11 Independent auditor's report 12 - 15 Statement of financial position 16 Statement of comprehensive income 17 Statement of changes in equity 18 Statement of cash flows 19 Notes to the financial statements 20 - 44 The annual financial statements for the year ended 31 March 2018 of Nqaba Finance 1 (RF) Ltd have been prepared under the supervision of the financial manager, Ettienne Bester and were approved by the board of directors and signed on its behalf on 31 July 2018. The financial statements have been audited in compliance with section 30 of the Companies Act. Published 31 July 2018 2 Nqaba Finance 1 (RF) Ltd Report of the audit committee Mandate and terms of reference The audit and risk committee (the committee) presents its report in terms of the requirements of the Companies Act (section 94(7)(f)) and in accordance with the King Code of Governance Principles for South Africa for the financial year ended 31 March 2018. The role of the committee is defined in its mandate. It covers, amongst others, its statutory duties and the assistance to the board with the oversight of financial and non-financial reporting and disclosure, internal control system, risk management, internal and external audit functions. The committee fulfilled all its statutory duties as required by section 94(7)(f) of the Companies Act. The committee reports that it has adopted appropriate formal terms of reference as its audit and risk committee charter, has regulated its affairs in compliance with this charter and has discharged all of its responsibilities contained therein. Execution of functions In the conduct of its duties the committee has, inter alia, reviewed the following areas: Going concern assumption The committee considered the following: ● robustness of budgets and business results ● cash flow projections ● funding plan ● going concern as the basis of preparation of the annual financial statements Oversight of financial and non-financial reporting and disclosure The committee considered the following: ● annual financial statements for fair presentation with the relevant requirements of the Companies Act and IFRS ● adequacy, reliability and accuracy of financial and non-financial information provided by management ● the expertise, resources and experience of the finance function Internal control, management of risks and compliance with legal and regulatory requirements The committee considered the following: ● effectiveness of internal control systems and governance processes ● reviewed legal matters that could have a material impact on the group ● effectiveness of the system and process of risk management including the following specific risks: – financial reporting – internal financial controls – fraud risks relating to financial reporting – information technology risks relating to financial reporting – the effectiveness of the entity’s compliance with legal and regulatory requirements Internal and external audit The committee considered the following: ● charter, annual audit plan, independence, effectiveness, coordination with external auditors and performance of the assurance and forensic department ● appointment of the external auditors in terms of the Companies Act and other applicable requirements ● external audit plan, audit budget, actual fee and terms of engagement of the external auditors ● the independence and objectivity of the external auditors ● accounting, sustainability and auditing concerns identified as a result of the internal and external audits, including reportable irregularities Opinion The committee is of the opinion, based on the information and explanations provided by management and the Eskom's assurance and forensic department during the year and at year end as well as discussions with the independent external auditors, that: ● the expertise, resources and experience of the finance function are adequate ● the system and process of risk management and compliance processes are adequate ● the internal accounting controls are adequate to ensure that the financial records may be relied upon for preparing the financial statements and accountability for assets and liabilities is maintained ● the internal audit charter approved by the committee was adhered to ● the expertise, resources and experience of the assurance and forensic department are adequate ● the assurance and forensic department operated effectively ● Nqaba Finance 1 (RF) Ltd has access to adequate resources and facilities to be able to continue their operations for the foreseeable future, supporting the going concern assumption that was examined and found to be effective ● it is satisfied with the independence and objectivity of the external auditors having considered the matters set out in section 94(8) of the Companies Act 4 Nqaba Finance 1 (RF) Ltd Report of the audit committee King IV compliance The directors of the company support the Code of Governance Principles set out in the King IV report (the "Code") and recognise the need to conduct the affairs of the company with integrity and accountability. The company is a solvent entity operating in accordance with the provisions of the Programme Memorandum, (PM), with no employees and no administrative infrastructure of its own. Accordingly, the principles contained in the King IV Code are applied to the extent that they are relevant to the company. In terms of the JSE Debt Listing Requirements, the company has complied with the King IV Report on Corporate Governance™ (hereafter referred to as King IV) to the extent applicable, and is required to provide an explanation of which principles are not applied along with reasons for non-application. The table below sets out the application of the 17 corporate governance principles by the company as recommended by King IV. Principle Application of Principle 1. Leadership: The governing body The company is a ring-fenced special purpose vehicle, and as such, its business affairs are should lead ethically and effectively. to be strictly conducted and managed within the ambit of its restrictions as set out in its Memorandum of Incorporation ("MOI") and in compliance with its PM. The Board of Directors ("the Board") is the Governing Body ("GB") and committed to the good corporate governance principles as set forth in King IV. The Board subscribes to those generally accepted norms of conduct to the extent applicable to the companies' status as described above. The Board meets at least 2 times a year to consider the companies' strategy, financial performance, etc. Directors' interests are disclosed before every board meeting. The GB ensures that they have sufficient working knowledge of the company and its industry as well as the key laws, rules, codes and standards applicable to the company. All directors may, as per the MOI, seek independent advice, at the company's expense, if required. The directors also have unrestricted access to the Chairman of the GB, the Debt Sponsor and the appointed Servicer of the company, and has the ability to consult with, and receive the full co-operation from the Debt Sponsor of the company where necessary to fulfil its responsibilities. 2. Organisational ethics: The governing The company is a ring-fenced special purpose vehicle. The company does not have any body should govern the ethics of the employees and all its functions have been outsourced to the Servicer. The Servicer is organisation in a way that supports the required to strictly perform their functions as set out in the PM. establishment of an ethical culture. 3. Responsible Corporate Citizenship: The company is a ring-fenced special purpose vehicle, with no employees and all functions The governing body should ensure that are outsourced to the Servicer. The Servicer is required to strictly perform its function as set the organisation is and is seen to be a out in the PM. The GB has an obligation to ensure that the company is governed as per the responsible citizen. objectives of the mandate of the company set out in the PM. 4. Strategy and Performance: The The company is a ring-fenced special purpose vehicle with the strategy, direction and governing body should appreciate that functions of the company driven by legal agreements. Any changes to the strategy or the organisation's core purpose, its functions presented by the Debt Sponsor to the company, would require prior discussion risks and opportunities, strategy, and approval of the directors as well as investors. business model, performance and sustainable development are all inseparable elements of the value creation process. 5 Nqaba Finance 1 (RF) Ltd Report of the audit committee King IV compliance Principle Application of Principle 5. Reporting: The governing body should The GB has, through the Servicer of the company, regular interaction on the performance of ensure that reports issued by the the company. AFS, performance updates and announcements are published in accordance organisation enable stakeholders to with the JSE Listings Requirements and met the reasonable information needs of material make informed assessments of the stakeholders. organisation's performance, and its The Board ensures that the Annual Financial Statements (AFS), which include the short, medium and long term independent auditors' report, are available to stakeholders to make informed assessments prospects. of the company's performance. Investor reports are made available to stakeholders on a quarterly basis through SENS announcements on the JSE website. The Servicer of the company confirmed to the GB via the audit committee meeting where annual financial statements are presented that the company is a going concern. 6. Primary role and responsibilities of the The role, responsibilities and procedural conduct of the Board are documented in the governing body: The governing body company's MOI and the Companies Act. The GB holds at least two meetings per year. The should serve as the focal point and governing body is satisfied that it has fulfilled its responsibilities in accordance with the MOI custodian of corporate governance in and the Companies Act. the organisation. 7. Composition of the governing body: The Board membership and composition is aligned to the King IV principles. All directors are The governing body should comprise non-executive and three are independent of the Eskom group of companies. The directors the appropriate balance of knowledge, have extensive experience and serve on a number of Boards. Strong engagement takes skills, experience, diversity and place at Board meetings. Changes in legal risk and compliance matters that could independence for it to discharge its potentially have an impact on the entity are monitored and tabled at each Board meeting. governance role and responsibilities The company does not have any employees and all its functions as contemplated in the PM, objectively and effectively. are outsourced accordingly. 8. Committees of the governing body: Whilst retaining accountability, certain responsibilities have been delegated by the GB, to The governing body should ensure that the Audit Committee, as set out in its formal approved terms of reference ("the Audit its arrangements for delegation within Charter''), and third parties. The Audit Charter is reviewed by the Board annually and its own structures promote approved by the GB. The Servicer and Arranger are invited to attend meetings by standing independent judgement, and assist invitation to provide pertinent information and insights in their areas of responsibility. The with balance of power and the effective Audit Committee comprises of three independent non-executive members of the Board. The discharge of its duties. Audit Committee holds at least two meetings per year. Due to the nature of the business, the company does not have a Social and Ethics Committee, nor a committee responsible for the nomination of directors or a remuneration committee, as directors are appointed through a formal process in terms of its MOI. 9. Evaluations of the performance of the There was no formal Board evaluation conducted during the year, a formal evaluation will be governing body: The governing body conducted in November 2018. should ensure that the evaluation of its own performance and that of its committees, its chair and its individual members, support continued improvement in its performance and effectiveness. 10. Appointment and delegation to The company does not have any employees, and due to the nature of its business, all its management: The governing body functions have been outsourced. Consequently the company is not required to appoint a should ensure that the appointment of, CEO. The company does pay an administrative fee to Maitland Group South Africa Limited, and delegation to, management (Maitland) for the provision of a company secretary and corporate company secretarial contribute to role clarity and the services. effective exercise of authority and responsibilities. 6 Nqaba Finance 1 (RF) Ltd Report of the audit committee King IV compliance Principle Application of Principle 11. Risk Governance: The governing body Responsibility for governance of risk is assigned to the GB in terms of the MOI of the should govern risk in a way that company, with the Audit Committee assisting the GB with this responsibility. In turn, the supports the organisation in setting responsibility to implement and execute effective risk management has been assigned to the and achieving its strategic objectives. Servicer, with the GB exercising ongoing oversight of risk management as contemplated in the PM. The Servicer of the company reports at GB and committee meetings. 12. Technology and information The company does not have any employees, and due to the nature of its business, all its governance: The governing body functions have been outsourced. Outsourced functions are contractual and performance is should govern technology and monitored strictly. The Servicer of the company reports at GB and committee meetings, and information in a way that supports the currently no non-performance events have been noted. organisation setting and achieving its strategic objectives. 13. Compliance Governance: The The company's MOI confirms that the GB is responsible for ensuring that the company governing body should govern complies with all relevant laws, regulations and codes of business practise. The GB has compliance with applicable laws and delegated the responsibility for ensuring that the relevant compliance processes are in place adopted, non-binding rules, codes and to the Audit Committee. The GB is regularly informed and updated on the relevant laws, standards in a way that supports the rules, codes and standards through reports presented to the Audit committee. The Company organisation being ethical and a good Secretary monitors regulatory compliance with the Companies Act and advises the GB. corporate citizen. 14. Remuneration Governance: The The company has no employees and does not remunerate its directors individually. Maitland governing body should ensure that the has been mandated by the company for the provision of all independent non-executive organisation remunerates fairly, directors. The fees paid for the provision of directors are agreed in the PM and are market responsibly and transparently so as to related. These fees are disclosed in the company's AFS. Maitland remunerates the promote the achievement of strategic executive director it appointed to the board of the company as its employee and not for the objectives and positive outcomes in the role as director of the company. short, medium and long term. 15. Assurance: The governing body should The GB is responsible for assurance by setting the direction concerning the arrangements ensure that assurance services and for assurance services and functions. The Audit Committee assists the GB with this functions enable an effective control responsibility. environment, and that these support the integrity of information for internal decision-making and of the organisation's external reports. 16. Stakeholders: In the execution of its The company publishes quarterly investor reports through a SENS announcement on the governance role and responsibilities, JSE's website. The GB has the ability to consult with the Debt Sponsor and the Servicer of the governing body should adopt a the company where necessary to fulfil its responsibilities. The Servicer is invited to attend stakeholder-inclusive approach that meetings by standing invitation to provide a performance update on each transaction. balances the needs, interests and Through these channels, the GB is informed of material issues and disputes and provides expectations of material stakeholders input to enable resolution as effectively, efficiently and expeditiously as possible. in the best interests of the organisation over time. 17. Responsibilities of institutional The principle is not applicable to the company as the company is not an Institutional investors: The governing body of an Investor. institutional investor organisation should ensure that responsible investment is practiced by the organisation to promote the good governance and the creation of value by the companies in which it invests. 7 Nqaba Finance 1 (RF) Ltd Directors' report The directors are pleased to present their report for the year ended 31 March 2018. 1. Principal activities, state of affairs and business review Nqaba Finance 1 (RF) Ltd (Nqaba), is a controlled entity by Eskom Finance Company SOC Ltd (EFC), incorporated and domiciled in South Africa. Nqaba manages a pool of mortgage backed securities which are listed on the Interest Rate Market of the Johannesburg Stock Exchange (JSE), using a securitisation structure. Nqaba Finance 1 (RF) Limited - The Issuer The notes issued by the Issuer are solely the obligations of Nqaba and are neither the obligations of, nor the responsibility of EFC and are not guaranteed by EFC. Nqaba has issued a cession in favour of the Nqaba Finance 1 Security Special Purpose Vehicle (SPV) Owner Trust and Nqaba Finance 1 Security SPV (RF) (Pty) Ltd by way of cession of all company's rights, title and interest in and to the mortgage advances, the mortgage agreements and the related security in respect of portfolio of mortgages owned by the company from time to time, the business proceeds and the bank accounts. Nqaba has issued an indemnity to the Nqaba Finance 1 Security SPV Owner Trust and Nqaba Finance 1 Security SPV (RF) (Pty) Ltd indemnifying the Nqaba Finance 1 Security SPV Owner Trust and Nqaba Finance 1 Security SPV (RF) (Pty) Ltd against any claims by secured creditors in terms of a guarantee by the Nqaba Finance 1 Security SPV Owner Trust and Nqaba Finance 1 Security SPV (RF) (Pty) Ltd. The obligations of Nqaba in terms of this indemnity are secured by: ● A suretyship granted by the Nqaba Finance 1 Security SPV Owner Trust in favour of Nqaba Finance 1 Security SPV (RF) (Pty) Ltd in respect of obligations of the company, limited to the shares in the company; ● A cession and pledge of all of Nqaba Finance 1 Security SPV Owner Trust's shares in the company as security for the suretyship granted by the Nqaba Finance 1 Security SPV Owner Trust and Nqaba Finance 1 Security SPV (RF) (Pty) Ltd; and ● A security cession in favour of Nqaba Finance 1 Security SPV Owner Trust and Nqaba Finance 1 Security SPV (RF) (Pty) Ltd mentioned in the first paragraph above. Nqaba Finance 1 Security SPV (RF) (Pty) Ltd Nqaba Finance 1 Security SPV (RF) (Pty) Ltd ("the Security SPV") has issued a guarantee to secured creditors of Nqaba whereby the Security SPV guarantees their claims on the occurrence of any event of default. The Security SPV shall not be liable to secured creditors for any amount which exceeds the amount which the Security SPV recovers from the Issuer pursuant to the indemnity provided by the Issuer to the Security SPV. The Security SPV holds an indemnity from the Issuer indemnifying the Security SPV against any claims by secured creditors in connection with the above guarantee. Nqaba Guarantee SPV (RF) (Pty) Ltd ("Guarantee SPV") Nqaba Guarantee SPV (RF) (Pty) Ltd is established as a special purpose entity, which issues limited recourse guarantees to the Home Loan Lender (EFC and Nqaba), against the security of an Indemnity and an Indemnity Bond. Guarantee SPV gives a guarantee in respect of guaranteed home loans in favour of EFC, guaranteeing a borrower's obligations to EFC in terms of the home loan agreement concluded in relation to the home loan granted to such borrower and which shall be ceded to the Issuer upon purchase of such home loan in terms of the home loan sale agreement. There have been no material changes to the nature of the company's business from the prior year. 2. Results of operations Revenue for the year was R189 million (2017: R193 million). Management attributes this movement to the decrease in the prime lending rate in August 2017. Profit before tax amounted to R3 million (2017: R9 million), profit after taxation amounted to R2 million (2017: R5 million). The increase in operating expenditure due to notes issued contributed to the reduction in profits. These operating expenses are linked to the size of the notes in issue. The detailed financial results of the company are set out on page 16 to 44 of the accompanying annual financial statements. 3. Share capital and dividends No shares were issued during the year under review. Shares issued to date amount to 100 ordinary shares of R1 each and 100 preference shares of 1 cent each. No dividends were paid during the current or prior financial year. 4. Going concern The directors are of the opinion that the company will have access to adequate financial resources to continue in operational existence for the foreseeable future and for this reason they continue to adopt the going concern basis in preparing the annual financial statements. 10 Nqaba Finance 1 (RF) Ltd Directors' report 5. Directors The directors in office at the date of this report are as follows: Directors Date of appointment Date of resignation Designation EM Southey 31-Jan-09 31-May-17 Non-executive director BW Smith (Chairman) * 29-Jan-16 Non-executive director TL Myburgh 09-Feb-06 Non-executive director D Lorimer 30-Sep-14 Non-executive director PBE Coombe 31-May-17 Non-executive director * Mr BW Smith was appointed a Chairman of the Board on 31 May 2017, upon the resignation of EM Southey. Directors' interest The directors have no interests in contracts with the company. Attendance at board and audit committee meetings: Board committee Audit committee Members 26-May-17 24-Nov-17 26-May-17 EM Southey  n/a  BW Smith    TL Myburgh   n/a D Lorimer    PBE Coombe n/a  n/a The members of the audit committee are all independent, non-executive directors of the company. The committee is satisfied that the members have the required knowledge and experience as set out in Section 94(5) of the Companies Act of South Africa, 71 of 2008 and Regulation 42 of the Companies Regulation, 2011. Legend Present  Not applicable, not a committee member. n/a 6. Events subsequent to the reporting date Nqaba refinanced all its maturing notes on 22 May 2018 totalling R817 million via a private placement. These comprised of R658 million Class A, R72 million Class B, R57 million Class C notes and R30 million Class D notes. 7. Auditors SizweNtsalubaGobodo Inc. were the auditors during the current and prior financial periods. 8. Company secretary Maitland Group South Africa Limited: Business address Postal 18 Fricker Road PO Box 781396 Illovo, Johannesburg Sandton 2196 2146 9. Consolidated annual financial statements In terms of IFRS 12 Appendix A, a structured entity is an entity that has been designed so that voting or similar rights are not the dominant factor in deciding who controls the entity, such as when any voting rights relate to administrative tasks only and the relevant activities are directed by means of contractual arrangements. Nqaba is a structured entity of Eskom Finance Company SOC Ltd and is consolidated in the annual financial statements of Eskom Finance Company SOC Ltd and consolidated further into Eskom Holdings SOC Ltd. 10. Holding entity Nqaba is a structured entity owned by Nqaba Finance 1 Owner Trust, a trust incorporated in the Republic of South Africa. 11. Debt listing requirements Nqaba has complied with all the Debt Listing Requirements in accordance with the King IV Code of Corporate Governance and the provisions of paragraph 5.5 (c) of the Debt Listings Requirements. 11 SNG Grant Thornton 20 Morris Street East Woodmead, 2191 P.O. Box 2939 Saxonwold, 2132 T +27 (0) 11 231 0600 Independent auditor’s report to the shareholder of Nqaba Finance 1 (RF) Limited Report on the audit of the financial statements Opinion We have audited the financial statements of Nqaba Finance 1 (RF) Limited set out on pages 16 to 44 which comprise the statement of financial position at 31 March 2018, and the statement of comprehensive income, statement of changes in equity and statement of cash flows for the year then ended, as well as the notes to the financial statements, including a summary of significant accounting policies. In our opinion, the financial statements present fairly, in all material respects, the financial position of Nqaba Finance 1 (RF) Limited at 31 March 2018, and its financial performance and cash flows for the year then ended in accordance with International Financial Reporting Standards and the requirements of the Public Finance Management Act of South Africa (PFMA) and the Companies Act of South Africa. Basis for opinion We conducted our audit in accordance with International Standards on Auditing (ISAs). Our responsibilities under those standards are further described in the Auditor’s responsibilities for the audit of the financial statements section of this auditor’s report. We are independent of Nqaba Finance 1 (RF) Limited in accordance with the Independent Regulatory Board for Auditors Code of Professional Conduct for Registered Auditors (IRBA code) and other independence requirements applicable to performing audits of financial statements in South Africa. We have fulfilled our other ethical responsibilities in accordance with the IRBA code and in accordance with other ethical requirements applicable to performing audits in South Africa. The IRBA code is consistent with the International Ethics Standards Board for Accountants Code of Ethics for Professional Accountants (Parts A and B). We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Key audit matters Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the financial statements of the current period. These matters were addressed in the context of our audit of the financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. We have determined that there are no key audit matters to communicate in our report. Victor Sekese [Chief Executive] SNG Grant Thornton is a member firm of Grant Thornton International Ltd (GTIL). GTIL and the member firms are not a A comprehensive list of all worldwide partnership. Services are delivered independently by the member firms. GTIL and its member firms are not Directors is available at the agents of, and do not obligate, one another and are not liable for one another’s acts or omissions. company offices or registered office SizweNtsalubaGobodo Grant Thornton Incorporated Registration Number: 2005/034639/21 sng-grantthornton.co.za Emphasis of matter We draw attention to the matter below. Our opinion is not modified in respect of this matter. Restatement of corresponding figures As disclosed in note 29 to the financial statements, the corresponding figures for 31 March 2017 have been restated. Responsibilities of the board of directors for the financial statements The board of directors, which constitutes the accounting authority, is responsible for the preparation and fair presentation of the financial statements in accordance with International Financial Reporting Standards and the requirements of the PFMA and the Companies Act of South Africa, and for such internal control as the accounting authority determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. In preparing the financial statements, the accounting authority is responsible for assessing the company’s ability to continue as a going concern, disclosing, as applicable, matters relating to going concern and using the going concern basis of accounting unless the accounting authority either intends to liquidate the company or to cease operations, or has no realistic alternative but to do so. Auditor’s responsibilities for the audit of the financial statements Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements. A further description of our responsibilities for the audit of the financial statements is included in the annexure to the auditor’s report. Report on the audit of the annual performance report We did not audit performance against pre-determined objectives, as the entity is not required to prepare a report on its performance against predetermined objectives. Report on the audit of compliance with legislation Introduction and scope In accordance with the Public Audit Act of South Africa (Act No. 25 of 2004) (PAA) and the general notice issued in terms thereof, we have a responsibility to report material findings on compliance of the company with specific matters in key legislation. We performed procedures to identify findings but not to gather evidence to express any assurance. We did not raise material findings on compliance with the specific matters in key legislation set out in the general notice issued in terms of the PAA. Other information The accounting authority is responsible for the other information. The other information comprises the information included in the annual report, which includes the Directors’ report, Report of the audit committee and the Statement by the company secretary as required by the Companies Act of South Africa. The other information does not include the financial statements and the auditor’s report thereon. 13 Our opinion on the financial statements, does not cover the other information and we do not express an audit opinion or any form of assurance conclusion thereon. In connection with our audit of the financial statements, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the financial statements or our knowledge obtained in the audit, or otherwise appears to be materially misstated. If, based on the work we have performed, we conclude that there is a material misstatement in this other information, we are required to report that fact. We have nothing to report in this regard. Internal control deficiencies We considered internal control relevant to our audit of the financial statements and compliance with applicable legislation, however, our objective was not to express any form of assurance conclusion on it. We did not identify any significant deficiencies in internal control. Report on other legal and regulatory requirements In terms of the IRBA rule published in Government Gazette Number 39475 dated 4 December 2015, we report that SizweNtsalubaGobodo Grant Thornton Inc. has been the auditor of Nqaba Finance 1 (RF) Limited for 13 years. Pravesh Hiralall SizweNtsalubaGobodo Grant Thornton Director Registered Auditor 1 August 2018 20 Morris Street East Woodmead 14 Annexure - Auditor’s responsibilities for the audit of the financial statements As part of an audit in accordance with ISAs, we exercise professional judgement and maintain professional scepticism throughout our audit of the financial statements. Financial statements In addition to our responsibility for the audit of the financial statements as described in the auditor’s report, we also:  Identify and assess the risks of material misstatement of the financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control.  Obtain an understanding of internal control relevant to the audit to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the company’s internal control.  Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by the accounting authority.  Conclude on the appropriateness of the accounting authority’s use of the going concern basis of accounting in the preparation of the financial statements. We also conclude, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the company’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s report to the related disclosures in the financial statements about the material uncertainty or, if such disclosures are inadequate, to modify our opinion on the financial statements. Our conclusions are based on the audit evidence obtained up to the date of our auditor’s report. However, future events or conditions may cause the company to cease to continue as a going concern.  Evaluate the overall presentation, structure and content of the financial statements, including the disclosures, and whether the financial statements represent the underlying transactions and events in a manner that achieves fair presentation. Communication with those charged with governance We communicate with the accounting authority regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit. We also provide the accounting authority with a statement that we have complied with relevant ethical requirements regarding independence, and communicate all relationships and other matters that may reasonably be thought to have a bearing on our independence, and where applicable, related safeguards. 15 Nqaba Finance 1 (RF) Ltd Statement of financial position at 31 March 2018 Note Restated Restated 2018 2017 2016 R '000 R '000 R '000 Assets Non-Current Assets Properties in possession 4 110 110 488 Loans receivable 5 1,830,957 1,835,854 1,835,238 Deferred tax 6 834 1,364 982 Derivatives held for risk management 7 2,216 2,179 - 1,834,117 1,839,507 1,836,708 Current Assets Loans receivable 5 76,767 71,934 71,159 Derivatives held for risk management 7 1,831 1,247 1,173 Trade and other receivables 8 16,421 34,590 18,477 Taxation 9 7,409 10,676 10,253 Cash and cash equivalents 10 86,297 62,774 78,246 188,725 181,221 179,308 Total Assets 2,022,842 2,020,728 2,016,016 Equity and Liabilities Equity Share capital 11 - - - Retained income 52,734 51,011 45,682 52,734 51,011 45,682 Liabilities Non-Current Liabilities Derivatives held for risk management 7 - - 288 Debt securities issued 12 843,000 1,083,000 1,231,000 843,000 1,083,000 1,231,288 Current Liabilities Debt securities issued 12 831,701 591,680 443,815 First loss credit enhancement loan 13 293,564 293,623 293,720 Trade and other payables 14 1,843 1,414 1,511 1,127,108 886,717 739,046 Total Liabilities 1,970,108 1,969,717 1,970,334 Total Equity and Liabilities 2,022,842 2,020,728 2,016,016 16 Nqaba Finance 1 (RF) Ltd Statement of comprehensive income for the year ended 31 March 2018 Note 2018 2017 R '000 R '000 Interest income 15 189,376 193,392 Finance expense 16 (180,768) (179,148) Net interest income 8,608 14,244 Other income 17 6,248 6,573 Operating profit 14,856 20,817 Net impairment loss 18 (577) (4,953) Net fair value gain on financial instruments 19 621 2,541 Operating expenses 20 (12,163) (9,459) Profit before tax 2,737 8,946 Taxation 21 (1,014) (3,617) Profit for the year 1,723 5,329 Other comprehensive income - - Total comprehensive income for the year 1,723 5,329 17 Nqaba Finance 1 (RF) Ltd Statement of changes in equity for the year ended 31 March 2018 Share capital Retained Total equity Note income R '000 R '000 R '000 Balance at 1 April 2016 - 45,682 45,682 Total comprehensive income for the year - 5,329 5,329 Balance at 31 March 2017 - 51,011 51,011 Total comprehensive income for the year - 1,723 1,723 Balance at 31 March 2018 - 52,734 52,734 18 Nqaba Finance 1 (RF) Ltd Statement of cash flows for the year ended 31 March 2018 Note 2018 2017 R '000 R '000 Cash flows from operating activities Cash generated from operations 22 195,811 167,723 Other income 17 6,248 6,573 Finance costs 16 (180,768) (179,148) Taxation paid / (received) 9 2,783 (4,422) Net cash from operating activities 24,074 (9,274) Cash flows from investing activities Decrease in properties in possession - 461 (Increase) in loans receivable (513) (6,427) Net cash applied to investing activities (513) (5,966) Cash flows from financing activities (Decrease) in borrowings (38) (232) Net cash applied to financing activities (38) (232) Net increase / (decrease) in cash and cash equivalents 23,523 (15,472) Cash and cash equivalents at the beginning of the year 62,774 78,246 Cash and cash equivalents at the end of the year 10 86,297 62,774 19 Nqaba Finance 1 (RF) Ltd Notes to the financial statements for the year ended 31 March 2018 1. Summary of significant accounting policies The principal accounting policies applied in the preparation of these statements are set out below. These policies have been consistently applied to all the years presented. 1.1 Basis of preparation and measurement Statement of compliance The financial statements of Nqaba Finance 1 (RF) Ltd at and for the year ended 31 March 2018 have been prepared in accordance with International Financial Reporting Standards (IFRS) and the Companies Act of South Africa, 71 of 2008. The financial statements have been prepared on the going concern basis. Basis of measurement The financial statements are prepared on the historical cost basis except for derivatives held for risk management and properties in possession which are measured at fair value. Historical cost is generally based on the fair value of the consideration given in exchange for assets. The preparation of financial statements in conformity with IFRS requires management to make judgements, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income and expenses. Actual results may differ from these estimates. The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimates are revised. The areas involving a higher degree of judgement or complexity, or areas where assumptions and estimates are significant to the financial statements are disclosed where relevant. Functional and presentation currency Items included in the financial statements are measured using the currency of the primary economic environment in which the entity operates (functional currency). The financial statements are presented in South African rand (rounded to the nearest thousand), which is the company's functional and presentation currency. 1.2 Financial instruments (a) Non-derivative financial instruments Recognition, measurement and derecognition of financial assets Non-derivative financial assets comprises of loans receivable, trade and other receivables and cash and cash equivalents. All non-derivative financial assets are recognised on the date of commitment to purchase (trade date). Non-derivative financial assets are recognised initially at fair value plus any directly attributable transaction costs. Directly attributable transaction costs related to financial assets at fair value through profit or loss are recognised in profit or loss on initial recognition when incurred. Subsequent to initial recognition, non-derivative financial assets are measured per asset category (as stated below). The appropriate classification of the financial asset is determined at the time of commitment to acquire the financial asset. Cash and cash equivalents Cash and cash equivalents comprise balances with local and international banks, monies in call accounts, short-term assets and money market assets with an original maturity of less than 90 days. Bank overdrafts are shown within borrowings in current liabilities in the statement of financial position. Loans and receivables Loans and advances are measured at initial recognition at fair value, and are subsequently measured at amortised cost using the effective interest method. Appropriate allowances for estimated irrecoverable amounts are recognised in profit or loss when there is objective evidence that the asset is impaired. Loans and advances are assessed for indicators of impairment at the reporting date to determine whether there is any objective evidence of impairment. Those financial assets are assessed collectively in groups that share similar credit risk characteristics. 20 Nqaba Finance 1 (RF) Ltd Notes to the financial statements for the year ended 31 March 2018 1.2 Financial instruments (continued) Trade and other receivables are measured at initial recognition at fair value, and are subsequently measured at amortised cost using the effective interest method. Appropriate allowances for estimated irrecoverable amounts are recognised in profit or loss when there is objective evidence that the asset is impaired. Significant financial difficulties of the debtor, probability that the debtor will enter bankruptcy or financial reorganisation, and default or delinquency in payments (more than 120 days overdue) are considered indicators that the trade receivable is impaired. The allowance recognised is measured as the difference between the asset's carrying amount and the present value of estimated future cash flows discounted at the effective interest rate computed at initial recognition. The carrying amount of the asset is reduced through the use of an allowance account, and the amount of the loss is recognised in profit or loss within operating expenses. When a trade receivable is uncollectable, it is written off against the allowance account for trade receivables. Subsequent recoveries of amounts previously written off are credited against operating expenses in profit or loss. Financial assets are derecognised when the rights to receive cash flows from the investments have expired or the company has transferred substantially all the risks and rewards of ownership. Impairment (loans and receivables) At each reporting date the company assesses all financial assets, other than those at fair value through profit or loss, to determine whether there is objective evidence that a financial asset or group of financial assets has been impaired; ● A review for impairment indicators is carried out at each financial year end to determine whether there is any objective evidence that a financial asset not carried at fair value through profit or loss is impaired. A financial asset is considered to be impaired if objective evidence indicates that one or more events have had a negative effect on the estimated future cash flows of that asset. ● An impairment loss in respect of a financial asset measured at amortised cost is calculated as the difference between its carrying amount and the present value of the estimated future cash flows discounted at the original effective interest rate. Individually significant financial assets are tested for impairment on an individual basis. The remaining financial assets are assessed collectively in groups that share similar credit risk characteristics. ● All impairment losses are recognised in profit or loss within net impairment (loss)/reversal. For amounts due to the company, significant financial difficulties of the debtor, probability that the debtor will enter bankruptcy and default of payments are all considered indicators of impairment. Impairment losses are reversed when an increase in the financial asset's recoverable amount can be related objectively to an event occurring after the impairment was recognised, subject to the restriction that the carrying amount of the financial asset at the date that the impairment is reversed shall not exceed what the carrying amount would have been had the impairment not been recognised. (b) Recognition, measurement and derecognition of financial liabilities Non-derivative financial liabilities comprise debt securities issued, first loss credit enhancement loans and trade and other payables. Non-derivative financial liabilities are recognised initially at fair value plus any directly attributable transaction costs except for financial liabilities at fair value through profit or loss. Directly attributable transaction costs related to liabilities recognised at fair value through profit or loss are recognised in profit or loss on initial recognition when incurred. Subsequent to initial recognition, non-derivative financial liabilities are measured at amortised cost (as described below). All non-derivative financial liabilities are recognised on the date of commitment (trade date) and are derecognised when the obligation expires, is discharged or cancelled, or there is a substantial modification to the terms of the liability. Financial liabilities at amortised cost Financial liabilities comprise debt securities issued, first loss credit-loss enhancement loan and trade and other payables. Subsequent to initial recognition, these liabilities are measured at amortised cost using the effective interest method. The trade and other payables are classified as financial liabilities at amortised cost. 21 Nqaba Finance 1 (RF) Ltd Notes to the financial statements for the year ended 31 March 2018 1.2 Financial instruments (continued) (c) Derivative financial instruments Recognition A derivative is a financial instrument whose value changes in response to an underlying variable, requires little or no initial investment and is settled at a future date. All derivatives are classified as held-for-trading instruments, unless they meet the criteria for hedge accounting and have been designated for purposes of applying hedge accounting. Derivatives are initially recognised at fair value and remeasured subsequently at fair value. Fair values are obtained from adjusted market prices, discounted cash flow models which consider current market and contractual prices for the underlying instruments as well as the time value of money. All derivative instruments are included in the statement of financial position as derivatives held for risk management. Realised and unrealised gains or losses for derivatives used for economic hedging are recognised in profit or loss within net fair value gain/(loss) on financial instruments within other income or operating expenses. All financial liabilities are derecognised when the obligation expires, is discharged or cancelled, or there is a substantial modification to the terms of the liability. Fair value gains or losses continue to be recognised in profit or loss. 1.3 Share capital Ordinary Shares Share Capital consists of ordinary shares that are classified as equity net of incremental direct costs of issue. Preference Shares The company's redeemable preference shares are classified as equity, as they bear dividends of a discretionary nature, and do not contain any obligations to deliver cash or other financial assets. 1.4 Income tax Income tax expense comprises current and deferred tax. Income tax expense is recognised in profit or loss except to the extent that it relates to items recognised in other comprehensive income, in which case it is recognised in other comprehensive income. Current tax is expected tax payable on taxable income for the year, using tax rates (and laws) enacted or substantively enacted at the reporting date, and any adjustment to tax payable in respect of previous years. The tax currently payable is based on taxable profit for the year. Taxable profits may differ from profit as reported in the profit or loss because it excludes items of income and expense that are taxable or deductible in other years and it further excludes items that are never taxable or deductible. 1.5 Deferred tax Deferred tax is recognised on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the statement of financial position. Deferred tax is not accounted for if it arises from initial recognition of an asset or liability in a transaction other than a business combination that at the time of the transaction, affects neither accounting nor taxable profit or loss. Deferred tax is determined using tax rates (and laws) enacted or substantively enacted at the reporting date and that are expected to apply when the related deferred tax asset is realised or the deferred tax liability is settled. Deferred tax assets are recognised to the extent that it is probable that future taxable profit will be available against which the temporary differences can be utilised. Deferred tax assets are reviewed at each reporting date and reversed if it is no longer probable that the related tax benefits will be realised. Deferred tax assets and liabilities are only offset when there is both a legal right to set-off and an intention to settle on a net basis. 22 Nqaba Finance 1 (RF) Ltd Notes to the financial statements for the year ended 31 March 2018 1.6 Interest income and interest expense The company recognises revenue when the amount of revenue can be reliably measured, it is probable that future economic benefits will flow to the entity and specific criteria have been met for each of the company's activities as described below. The company bases its estimates on historical results, taking into consideration the type of customer, the type of transaction and the specifics of each arrangement. Interest income Interest income comprises interest receivable on loans receivable, trade and other receivables and cash and cash equivalents. Interest income is recognised as it accrues in profit or loss, using the effective interest method. Interest expense comprises of interest payable on both debt securities issued and the first loss credit enhancement loan. Other income Other income comprises income from financial market investments. Nqaba entered into a swap agreement to economically hedge against interest rate variations on the fixed rate notes. Interest income earned on swap diferrential is recognised as it accrues in profit or loss using the effective interest method. 1.7 Related-party transactions A related party is recognised as any entity or a person related to Nqaba or is a member of the key management personnel of Nqaba or its parent. 1.8 Loans receivable EFC primarily extends home loans to employees of the Eskom Holdings SOC Ltd group and the Eskom Pension and Provident Fund. EFC's loan book comprises both fixed and variable rate loans. The home assets originated by EFC are sold to the issuer, Nqaba Finance 1 (RF) Ltd as soon as they meet the eligibility criteria set out in the Programme Memorandum. The rates applicable to fixed rate loans are based on market rates at the date of disbursement and remain fixed for the full term of the loan. Variable interest rates are determined and adjusted from time to time taking into account current market conditions. 1.9 Properties in possession Unsold properties in possession are recognised once ownership has been legally transferred to the company and the underlying debtor is then derecognised. These properties are disclosed separately under non-current assets at the outstanding loan balance, which are then valued at the lower of the carrying amount and the fair value less costs to sell. The fair value is determined using a market-based valuation performed by sworn assessors annually. 1.10 Disposal of properties in possession It is the company’s policy to dispose off repossessed properties in an orderly fashion on a willing buyer and willing seller basis. The property to be sold is auctioned. Upon receipt of offers to purchase, offers are evaluated and an offer that makes the most economic sense is accepted. 23 Nqaba Finance 1 (RF) Ltd Notes to the financial statements for the year ended 31 March 2018 2. Critical accounting judgements and key sources of estimation uncertainty The preparation of financial statements in conformity with IFRS requires management to make judgements, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income and expenses. Actual results may differ from these estimates. The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimates are revised. The areas involving a higher degree of judgement or complexity, or areas where assumptions and estimates are significant to the financial statements, are disclosed in note 3. Estimates and judgements are evaluated continually and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. The company makes estimates and assumptions concerning the future. The resulting accounting estimates will, by definition, seldom equal the related actual results. The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are recognised in the period in which they are revised and future periods they affect. (a) Impairment provisions EFC assesses the impact on impairment of the loan book based on loan loss history and underlying current economic conditions. This is done periodically to assess the potential loan loss provision. Valuation The value of the impairment is determined by assessing risk categories per loan class and applying loan loss history ratio to the loan balance. The assumptions used are: Low risk loans ● Current mortgage loans Medium risk loans ● Current ex-employees High risk loans ● Debt reviews ● Legal actions ● Insolvent ● Under-administration ● Ill health retirement ● Deceased ● Pension ● Third party attachments ● Last payment date > 3 months (b) Derivatives Nqaba has entered into interest rate swap transactions to economically hedge against interest rate variability on the issued fixed rate notes. The swaps are linked to the main debt from the secured note holders. Valuation The fair value of these swaps is determined by using interest rate differentials and the forecast cash flow is determined and then discounted by the relevant interest rate curve. This will represent the value of cash flows which would have occurred if the rights and obligations arising from those instruments were closed out at a reporting date. 24 Nqaba Finance 1 (RF) Ltd Notes to the financial statements for the year ended 31 March 2018 2. Critical accounting judgements and key sources of estimation uncertainty (continued) (c) Properties in possession The fair value is determined using a market-based valuation performed by sworn assessors annually. (d) Deferred tax Judgements are required in determining the provision for income taxes due to the complexity of legislation. There are certain transactions and calculations for which the ultimate tax determination is uncertain during the ordinary course of business. Nqaba recognises liabilities for anticipated tax issues based on estimates of whether additional taxes will be due. Where the final tax outcome of these matters is different from the amounts that were initially recorded, such differences will impact the income tax and deferred tax provisions in the period in which such determination is made. Further, assessing the recoverability of deferred income tax assets requires the entity to make significant estimates related to expectations of future taxable income. Estimates of future taxable income are based on forecast cash flows from operations and the application of existing tax laws. 3. Financial risk management The company has an integrated risk management framework. The company's approach to risk management is based on risk governance structures, risk management policies, risk identification, measurement and reporting. Three types of risks are reported as part of the risk profile, namely operational, strategic and business continuity risks. Operational risks are events, hazards, variances or opportunities which could influence the achievement of Nqaba's compliance and operational objectives. For Nqaba, a strategic risk is a significant unexpected or unpredictable change or outcome beyond what was factored in to the organisation's strategy and business model which could have an impact on the company's performance. Business continuity risks are those events, hazards, variances and opportunities which could influence the continuity of Nqaba. The financial risks, as defined by IFRS 7 Financial instruments: disclosures, and the management there of, form part of this key risk area. The Board of Directors (the board) has delegated the management of enterprise wide risk to the audit committee. One of the committee's objectives is to ensure that the company is not unduly exposed to financial risks. Most of the financial risks arising from financial instruments are managed in the finance function of Eskom Finance Company SOC Limited (EFC). The company's exposure to risk, its objectives, policies and processes for managing the risk and the methods used to measure it have been consistently applied in the years presented, unless otherwise stated. The company has exposure to the following risks as a result of its financial instruments: ● credit risk (refer to note 3.1) ● market risk (refer to note 3.2) ● liquidity risk (refer to note 3.3) 3.1 Credit risk Credit risk is the risk of financial loss to the company if a customer or other counter party (including financial institutions) to a financial instrument fails to meet its contractual obligations. Credit risk arises primarily from mortgage loan advances and related services in the ordinary course of business and financial instruments managed in the finance activities. Credit risk includes counterparty risk and delivery or settlement risk. Counterparty risk is the risk that a counter party is unable to meet its financial and/ or contractual obligations during the period of a transaction. Delivery or settlement risk is the risk that a counter party does not deliver on its contractual commitment on maturity date (including the settlement of money and delivery of securities). Trade receivables comprise a widespread customer base. Management evaluates credit risk relating to customers on an ongoing basis. If customers are independently rated, these ratings are used. Otherwise, if there is no independent rating, risk control assesses the credit quality of the customer, taking into account its financial position, past experience and other factors. Individual risk limits are set based on internal or external ratings in accordance with limits set by the board. Nqaba purchases eligible home loans originated by EFC to staff employed by the Eskom Holdings SOC Ltd group. Policies that govern credit risk are in place. These policies require that various criteria around valuation, affordability and credit history are met, in compliance with the National Credit Act, prior to the approval of a loan. Credit risk is the risk that an asset, in the form of a monetary claim against a counter party, may not result in a cash receipt (or equivalent) in accordance with the terms of the contract. Credit risk in the company arises from various forms of lending. Financial assets, which potentially subject the company to concentrations of high credit risk, consist primarily of mortgage advances. Loans and advances are presented net of impairment provisions. The company registers mortgage bonds as security against advances. 25 Nqaba Finance 1 (RF) Ltd Notes to the financial statements for the year ended 31 March 2018 3. Financial risk management (continued) Advances exceeding 80% of the property market value are guaranteed by Eskom Holdings SOC Ltd and its subsidiaries. The fair value of this guarantee approximates R78 million (2017: R83 million). The amounts advanced are secured by first mortgages on the property purchased and are repayable over an average period of 27 years. The risk of default by the employee is reduced as the monthly instalments are deducted from the employee's salary. Credit risk of Eskom Holdings SOC Ltd group employees are re-assessed when they leave Eskom's service. These ex-employees may arrange for a monthly debit order or make over-the-counter deposits to settle the monthly instalment. The weighted average current loan-to-value ratio of the home loan book at 31 March 2018 was: 2018 2017 Weighted average current loan to value ratio (%) 66.61% 66.81% The average loan amount in relation to the total home loan book value at 31 March was: Average outstanding amount - Home loans 268,027 262,530 Loan amount as a percentage of the loan book (%) 0.014% 0.013% (a) Credit exposure The carrying amount of financial assets represents the maximum credit exposure at the reporting date (refer to note 5, 7, 8 and 10). The following table represents an analysis per credit rating level (as determined by rating agencies) of the credit risk of financial assets, as indicated. Cash and Derivatives Loans Trade and cash held for risk receivable other equivalents management receivables R '000 R '000 R '000 R '000 2018 AA 86,297 4,047 - - Unrated - - 1,907,724 16,421 86,297 4,047 1,907,724 16,421 2017 AA 62,774 3,426 - - Unrated - - 1,907,788 34,590 62,774 3,426 1,907,788 34,590 The maximum exposure to credit risk for mortgage advances and trade and other receivables per class was: 2018 2017 R '000 R '000 Loans and advances Home loans 1,907,724 1,907,788 1,907,724 1,907,788 Trade and other receivables 16,421 34,590 16,421 34,590 26 Nqaba Finance 1 (RF) Ltd Notes to the financial statements for the year ended 31 March 2018 3. Financial risk management (continued) Days past due Carrying Not past due 0 - 30 days 31 - 60 days >60 days amount R '000 R '000 R '000 R '000 R '000 2018 Collectively assessed for impairment Home loans 1,916,769 1,843,547 21,711 5,670 45,841 Impairment Home loans (9,045) (2,260) (286) (207) (6,292) 1,907,724 1,841,287 21,425 5,463 39,549 Days past due Carrying Not past due 0 - 30 days 31 - 60 days >60 days amount R '000 R '000 R '000 R '000 R '000 2017 Collectively assessed for impairment Home loans 1,917,351 1,832,399 14,744 13,966 56,242 Impairment Home loans (9,563) (2,987) (402) (506) (5,668) 1,907,788 1,829,412 14,342 13,460 50,574 Mortgage advances include an amount of R23 million (2017: R21 million) relating to receivables that were renegotiated. These mortgage advances would have been past due had their terms not been renegotiated. No financial assets have been held as collateral. No financial or non-financial assets have been received wherein the company is permitted to sell or repledge even in absence of default. Allowance for impairment The movement in the allowance for impairment in respect of properties in possession and home loans during the year is as follows: 2018 2017 R '000 R '000 Balance at the beginning of the year 9,885 5,857 Impairment loss recognised (518) 4,028 Balance at the end of the year 9,367 9,885 Comprising: Home loans 9,045 9,563 Properties in possession 322 322 9,367 9,885 Nqaba establishes an allowance for impairment that represents its estimate of incurred losses in respect of properties in possession and home loans. This allowance consists of a specific loss component that relates to individual exposures, and a collective loss component established for groups of similar customers in respect of losses that have been incurred but not yet identified. 3.2 Market risk Market risk is the risk that the fair value or future cash flows of financial instruments will fluctuate because of changes in foreign exchange rates, commodity prices, interest rates and equity prices. Market risk is the potential impact on earnings of unfavourable changes in interest rates, prices, market volatilities and liquidity. Eskom Treasury monitors, analyses and reports market risk to EFC's Finance Committee. The board implemented a funding strategy that aims to protect the company from major interest rate changes. Market risk exposures for funding activities are measured using sensitivity analysis. The current sensitivity analysis measures the impact on net profit for specified movements in interest rates. 27 Nqaba Finance 1 (RF) Ltd Notes to the financial statements for the year ended 31 March 2018 3. Financial risk management (continued) Loans receivable Market risks in respect of loans receivable arise from changes in interest rates and market prices. Market risk is monitored and analysed through the treasury department and reported to the EFC Finance Committee. A strategy aimed at protecting the company from changes in market risk that may have a negative impact on earnings has been implemented. The cost of funding is based on prevailing conditions in the South African money market. Rates charged on outstanding loan receivables are based on movements in the South African Reserve Bank repurchase rate. Interest rate risk Interest rate risk is the risk that the company's financial position may be adversely affected as a result of changes in interest rate levels, yield curves and spreads. The company's interest rate risk arises from debt securities issued, loans and receivables, cash and cash equivalents, credit enhancement loan and debt securities issued at variable rates expose the company to cash flow interest rate risk. Debt securities issued at fixed rates expose the company to fair value interest rate risk. During increasing and decreasing interest rate market conditions the interest rate risk management strategy followed was to re-price assets in conjunction with the repo rate increases and decreases. Derivatives Nqaba has entered into interest rate swap transactions to hedge against interest rate variability on the issued 10 year fixed rate notes. The swaps are linked to the main debt from the secured note holders. The net impact on profit or loss because of changes in the fair value of the derivatives for the company is a fair value gain of R0.6 million (2017: R2.5 million). Sensitivity analysis The company analyses its interest rate exposure on a dynamic basis by conducting a sensitivity analysis. This involves determining the impact on profit or loss for defined interest rate shifts. For each simulation, the same interest rate shift is used for all currencies. The sensitivity analysis for interest rate risk assumes that all other variables remain constant. The analysis relates to variable-rate instruments and has been performed on the same basis as the prior year. The simulation is performed on a monthly basis to verify that the maximum loss potential is within the limit set by management. The results of the simulation are included in the table below. 2018 2018 2017 2017 +100 basis -100 basis +100 basis -100 basis point point point point R' 000 R' 000 R' 000 R' 000 Effect on profit or loss Rand interest rate 3,431 (3,431) 3,201 (3,201) The entity has not applied hedge accounting. 3.3 Liquidity risk Prudent liquidity risk management implies maintaining sufficient cash and marketable securities, the availability of funding through an adequate amount of committed credit facilities and the ability to close out market positions. Borrowings are of a revolving nature and are expected to be refinanced with new loans raised in the market upon repayment date. Liquidity risk is the risk that the company will not have sufficient financial resources to meet its obligations when they fall due, or will have to do so at excessive cost. This risk can arise from mismatches in the timing of cash flows from revenue and capital and operational out flows. Nqaba is an evergreen structure where notes issued have a final legal maturity of 30 years and a scheduled maturity of up to 7 years. The Programme Memorandum defines and makes provision for a redraw facility during the Revolving Period to fund the advance of Redraws, Re-advances and Further Advances. It further also provides for a Liquidity Facility to fund Liquidity shortfalls. These liquidity shortfalls include specified expenses of the Issuer up to and including interest on the Notes, provided that immediately following a drawdown under such facilities, the Asset Quality Test as defined in the Programme Memorandum is satisfied. 28 Nqaba Finance 1 (RF) Ltd Notes to the financial statements for the year ended 31 March 2018 3. Financial risk management (continued) The Liquidity Facility Limit is an amount equal to the greater of the Principal Amount of the Initial Notes issued on the Initial Issue Date and 2% of the Outstanding Principal Amount of the Notes in issue from time to time. These facilities are provided by ABSA Capital, or such entity with the Required Credit Rating, which will be appointed in terms of the Redraw and Liquidity Facility Agreements. The company's liquidity risk is a result of the funds available to cover future commitments. The company manages liquidity risk through an ongoing review of future commitments and credit facilities. In the event that notes are not refinanced on the scheduled maturity date, the notes will start amortising from principal collections on the pool of assets plus the excess margin in the priority of payments. In this instance the note will be termed a "matured note" and will not constitute an early amortisation event or an event of default. On each payment date after the scheduled maturity date, the Issuer will partially redeem each matured note in reducing order of rank in accordance with the revolving period priority of payments. The transaction remains in the revolving period but no new loans will be purchased until the matured notes are redeemed in full. The Issuer has the option to redeem all the matured notes on any payment date after the scheduled maturity at the outstanding principal and accrued interest by giving not less than 20 days' notice to the note holders and Nqaba Finance 1 Security SPV (RF) (Pty) Ltd. The objective of the company's liquidity and funding management is to ensure that all foreseeable operational and loan commitments can be met under both normal and stressed conditions. The company has adopted an overall statement of financial position approach, which consolidates all sources and uses of liquidity, while aiming to maintain a balance between liquidity, profitability and interest rate considerations. Contractual cash flows The management of liquidity and funding risk is centralised in the EFC finance department in accordance with practices and limits set by the board. The company's liquidity and funding management process includes: ● projecting cash flows and considering the cash required by the company and optimising short-term liquidity as well as long-term funding; ● monitoring financial position liquidity ratios; ● maintaining a diverse range of funding sources through notes issued, credit enhancement loans, redraw and liquidity facilities with adequate back-up facilities; ● managing the concentration and profile of debt maturities; ● actively managing funding risk by evaluating optimal entry points into the various markets per the official funding plan; and ● maintaining liquidity and funding contingency plans. Primary sources of funding and unused facilities The primary sources to meet liquidity requirements are cash generated from operations and cash inflows from maturing financial assets purchased. The table below indicates the contractual undiscounted cash flows of the company's financial assets and liabilities on the basis of their earliest possible contractual maturity. The undiscounted cash flows in respect of the company's financial assets are presented net of impairment losses and include estimates where there are no contractual repayment terms or the receivable is past due. The cash flows of the company's financial liabilities are indicated on a gross undiscounted basis. The cash flows for derivatives are presented as gross inflows and out flows even though physically they are settled simultaneously. Contractual cash flows are a function of forward interest rates and is a point in time calculation that is impacted by market conditions at that time. Nqaba Finance 1 Structure is an evergreen structure that aims to refinance all scheduled maturing notes. Nqaba refinanced all its matured notes on 22 May 2018, details of that transaction are discussed in the Directors' report. 29 Nqaba Finance 1 (RF) Ltd Notes to the financial statements for the year ended 31 March 2018 3. Financial risk management (continued) The table contains only cash flows relating to financial instruments. It does not include future cash flows expected from the normal course of business. Carrying amount Cash flows Nominal inflow or 0-3 4 - 12 More than 5 Non-current Current Total (outflow) months months 1 - 5 years years R' 000 R' 000 R' 000 R' 000 R' 000 R' 000 R' 000 R' 000 2018 Financial assets Loans receivable 1,830,957 76,767 1,907,724 1,907,724 65,536 195,714 997,878 2,824,324 Derivatives held for risk management 2,216 1,831 4,047 4,047 383 1,448 2,216 - Trade and other receivables - 16,421 16,421 16,421 16,421 - - - Cash and cash equivalents - 86,297 86,297 86,297 86,297 - - - 1,833,173 181,316 2,014,489 2,014,489 168,637 197,162 1,000,094 2,824,324 Financial liabilities Debt securities issued 843,000 831,701 1,674,701 1,674,701 831,701 - 843,000 - First loss credit enhancement loan - 293,564 293,564 293,564 293,564 - - - Trade and other payables - 1,843 1,843 1,843 1,843 - - - 843,000 1,127,108 1,970,108 1,970,108 1,127,108 - 843,000 - Liquidity gap 990,173 (945,792) 44,381 44,381 (958,471) 197,162 157,094 2,824,324 Carrying amount Cash flows Nominal inflow or 0-3 4 - 12 More than 5 Non-current Current Total outflow months months 1 - 5 years years R' 000 R' 000 R' 000 R' 000 R' 000 R' 000 R' 000 R' 000 2017 Financial assets Loans receivable 1,835,854 71,934 1,907,788 1,907,788 66,017 197,273 1,014,193 2,963,865 Derivatives held for risk management 2,179 1,247 3,426 3,426 319 928 2,179 - Trade and other receivables - 34,590 34,590 34,590 34,590 - - - Cash and cash equivalents - 62,774 62,774 62,774 62,774 - - - 1,838,033 170,545 2,008,578 2,008,578 163,700 198,201 1,016,372 2,963,865 Financial liabilities Debt securities issued 1,083,000 591,680 1,674,680 1,674,680 591,680 - 1,083,000 - First loss credit enhancement loan - 293,623 293,623 293,623 293,623 - - - payables - 1,414 1,414 1,414 1,414 - - - 1,083,000 886,717 1,969,717 1,969,717 886,717 - 1,083,000 - Liquidity gap 755,033 (716,172) 38,861 38,861 (723,017) 198,201 (66,628) 2,963,865 30 Nqaba Finance 1 (RF) Ltd Notes to the financial statements for the year ended 31 March 2018 3. Financial risk management (continued) Accounting classification and fair value The company has applied IFRS 13 Fair value measurement in considering the measurement of fair value where applicable. A number of the company's accounting policies and disclosures require the measurement of fair values for both financial assets and financial liabilities. The classification of each class of financial assets and liabilities, and their fair values are: Held for Loans and Liabilities at Total carrying Fair value trading receivables amortised cost amount R '000 R '000 R '000 R '000 R '000 2018 Financial assets Non-current Loans receivable - 1,830,957 - 1,830,957 1,714,407 Derivatives held for risk management 2,216 - - 2,216 2,216 2,216 1,830,957 - 1,833,173 1,716,623 Current Loans receivable - 76,767 - 76,767 71,880 Derivatives held for risk management 1,831 - - 1,831 1,831 Trade and other receivables - 16,421 - 16,421 16,421 Cash and cash equivalents - 86,297 - 86,297 86,297 1,831 179,485 - 181,316 176,429 Total financial assets 4,047 2,010,442 - 2,014,489 1,893,052 Financial liabilities Non-current Debt securities issued - - 843,000 843,000 843,000 - - 843,000 843,000 843,000 Current Debt securities issued - - 831,701 831,701 831,701 First loss credit enhancement loan - - 293,564 293,564 293,564 Trade and other payables - - 1,843 1,843 1,843 - - 1,127,108 1,127,108 1,127,108 Total financial liabilities - - 1,970,108 1,970,108 1,970,108 31 Nqaba Finance 1 (RF) Ltd Notes to the financial statements for the year ended 31 March 2018 3. Financial risk management (continued) Held for Loans and Liabilities at Total carrying Fair value trading receivables amortised cost amount R '000 R '000 R '000 R '000 R '000 2017 Financial assets Non-current Loans receivable - 1,835,854 - 1,835,854 1,696,946 Derivatives held for risk management 2,179 - - 2,179 2,179 2,179 1,835,854 - 1,838,033 1,699,125 Current Loans receivable - 71,934 - 71,934 66,491 Derivatives held for risk management 1,247 - - 1,247 1,247 Trade and other receivables - 34,590 - 34,590 34,590 Cash and cash equivalents - 62,774 - 62,774 62,774 1,247 169,298 - 170,545 165,102 Total financial assets 3,426 2,005,152 - 2,008,578 1,864,227 Financial liabilities Non-current Debt securities issued - - 1,083,000 1,083,000 1,260,068 - - 1,083,000 1,083,000 1,260,068 Current Debt securities issued - - 591,680 591,680 586,320 First loss credit enhancement loan - - 293,623 293,623 293,623 Trade and other payables - - 1,414 1,414 1,414 - - 886,717 886,717 881,357 Total financial liabilities - - 1,969,717 1,969,717 2,141,425 Collateral obtained There were no debtors that defaulted on their accounts and as a result, no mortgage bonds were called upon (2017: nil). Fair value hierarchy The table below analyses fair value measurements for financial assets and financial liabilities. These fair value measurements are categorised into the different levels in the fair value hierarchy based on the inputs to the valuation techniques used. There has been no change in the valuation technique applied. The hierarchy levels are defined as follows: Level 1: Quoted prices (unadjusted) in active markets for identical assets or liabilities. Level 2: Inputs other than quoted prices included within level 1 that are observable for the asset or liability, either directly (i.e as prices) or indirectly (i.e derived from prices). These are tested for reasonableness by discounting expected future cash flows using a market interest rate for a similar instrument at the measurement date. Fair values reflect the credit risk of the instruments and include adjustments for the credit risk of the group entity and counterparty when appropriate. Level 3: Inputs for the financial asset or financial liability that are not based on observable market data (unobservable inputs). 32 Nqaba Finance 1 (RF) Ltd Notes to the financial statements for the year ended 31 March 2018 3. Financial risk management (continued) The company recognises transfers between levels of the fair value hierarchy at the end of the reporting period during which the transfer has occurred. The valuation techniques used are as follows: Level 1: Quoted prices (unadjusted) in active markets for identical assets or liabilities. Nqaba has no items fair valued using quoted prices (unadjusted) in active markets. Level 2: Inputs other than quoted prices included within level 1 that are observable for the asset or liability, either directly (i.e as prices) or indirectly (i.e derived from prices). These are tested for reasonableness by discounting expected future cash flows using a market interest rate for a similar instrument at the measurement date. Fair values reflect the credit risk of the instruments and include adjustments for the credit risk of the group entity and counterparty when appropriate. Nqaba has items which are fair valued using inputs other than quoted prices included within level 1 that are observable for the asset or liability. Level 3: Inputs for the financial asset or financial liability that are not based on observable market data (unobservable inputs). Nqaba has no items fair valued using inputs not based on observable market data. Fair value Level 1 Level 2 Level 3 2018 R '000 R '000 R '000 Assets measured at fair value Derivatives held for risk management Interest rate swaps - 4,047 - - 4,047 - Assets not measured at fair value Loans receivables Residential mortgage backed securities - 1,786,287 - Properties in possession 1 - - 110 - 1,786,287 110 Liabilities measured at fair value Derivatives held for risk management Interest rate swaps - - - - - - Liabilities not measured at fair value Debt securities issued Commercial paper - 1,674,701 - First loss credit enhancement loan Subordinated loan - 293,564 - - 1,968,265 - 1 Properties in possession are valued at the lower of the carrying amount and the fair value less costs to sell. The fair value is determined using a market-based valuation performed by sworn assessors semi-annually taking into account factors such as market comparatives, condition of the repossessed property and recent sales of similar properties in the area. Gains or losses arising from fair value adjustments are recognised in profit or loss within net fair value gain/(loss) on financial instruments within other income or operating expenses. The fair value gain or loss on PIP's for the period is nil (2017: nil). Sensitivity analysis on PIP's would have yielded immaterial results as the PIP portfolio is immaterial in relation to the total loan book. Management considers carrying amounts on PIP's as their fair value. 33 Nqaba Finance 1 (RF) Ltd Notes to the financial statements for the year ended 31 March 2018 3. Financial risk management (continued) Fair value Level 1 Level 2 Level 3 2017 R '000 R '000 R '000 Assets measured at fair value Derivatives held for risk management Interest rate swaps - 3,426 - - 3,426 - Assets not measured at fair value Loans receivables Residential mortgage backed securities - 1,763,437 - Properties in possession - - 110 - 1,763,437 110 Liabilities measured at fair value Derivatives held for risk management Interest rate swaps - - - - - - Liabilities not measured at fair value Debt securities issued Commercial paper - 1,846,388 - First loss credit enhancement loan Subordinated loan - 293,623 - - 2,140,011 - Valuation techniques Interest rate swaps The fair value of swaps is determined by using interest rate differentials and the forecast cash flow is determined and then discounted by the relevant interest rate curve. This will represent the value of cash flows which would have occurred if the rights and obligations arising from those instruments were closed out at the reporting date. Residential mortgage backed securities The fair value of these instruments is determined by using risk profiles of those asset classes categorised into: ● Current mortgage loans ● Current ex-employee mortgage loans ● Vacant land ● High risk mortgage loans Debt securities issued Fair values for debt securities are determined using a discounted cash flow technique, which uses expected cash flows and a market-related discount rate. 34 Nqaba Finance 1 (RF) Ltd Notes to the financial statements for the year ended 31 March 2018 2018 2017 R '000 R '000 4. Properties in possession Opening balance 432 892 Additions - - Disposals - (460) Repayments - - Closing balance 432 432 Impairments (322) (322) 110 110 5. Loans receivable Secured by mortgage 1,907,724 1,907,788 1,907,724 1,907,788 Maturity analysis Non-current 1,830,957 1,835,854 Current 76,767 71,934 1,907,724 1,907,788 The loans receivable are split into non-current and current based on the maturity dates of the loans. 2018 2017 6. Deferred tax R '000 R '000 Deferred tax assets Balance at the beginning of the year 1,364 982 Recognised in profit or loss (530) 382 834 1,364 Reconciliation of deferred tax asset Balance at beginning of year 1,364 982 Prior year under or over adjustment (248) 248 Doubtful debts allowances S11(j) 37 (282) Originating differences on provisions (145) 1,128 Reversing differences on fair value swaps (174) (712) 834 1,364 Recognition of deferred tax asset/(liability) The deferred tax asset arises from: ● Prior year adjustments ● Doubtful debts allowances ● Originating differences on loan losses provisions ● Differences on fair value swaps 35 Nqaba Finance 1 (RF) Ltd Notes to the financial statements for the year ended 31 March 2018 7. Derivatives held for risk management 2018 2017 Assets Liabilities Carrying Assets Liabilities Carrying value value R '000 R '000 R '000 R '000 R '000 R '000 Interest rate derivatives Interest rate swaps 4,047 - 4,047 3,426 - 3,426 4,047 - 4,047 3,426 - 3,426 Reconciliation Derivatives held for risk management Balance at the beginning of the year 3,426 - 3,426 1,173 (288) 885 Charged to profit or loss 621 - 621 2,253 288 2,541 4,047 - 4,047 3,426 - 3,426 Maturity analysis Non-current 2,216 - 2,216 2,179 - 2,179 Current 1,831 - 1,831 1,247 - 1,247 4,047 - 4,047 3,426 - 3,426 Interest rate swaps are used to economically hedge the interest expense variability of the issued fixed rate notes issued on 22 May 2010. The interest rate swaps are linked to the main debt to the secured note holders. Quarterly payments or receipts are based on the difference between the Johannesburg Interbank Agreed Rate plus an agreed fixed interest spread and the fixed rate of the swap agreement. The fair value of a derivative represents the value of cashflows (either positive or negative) which would have occurred if the rights and obligation arising from those instruments were closed out at year end. The interest differential earned during the year on this swap agreement was R1.42 million (2017: R1.48 million). 2018 2017 8. Trade and other receivables R '000 R '000 Gross 16,421 34,590 Impairment - - 16,421 34,590 Maturity analysis Current 16,421 34,590 9. Taxation Balance at the beginning of the year 10,676 10,253 Current tax for the year recognised in profit or loss (484) (3,999) Balance at the end of the year (7,409) (10,676) 2,783 (4,422) 10. Cash and cash equivalents Bank balances 86,297 62,774 11. Share capital Authorised 1000 Ordinary shares of R1 each 1 1 100 Cumulative redeemable preference shares of R0.01 each * - - Issued 100 Ordinary shares of R1 each * - - 100 Cumulative redeemable preference shares of R0.01 each * - - The un-issued ordinary shares are under the control of the directors of the company until the next annual general meeting. * Due to roundings to the nearest R'000, the amounts reflect a nil balance. 36 Nqaba Finance 1 (RF) Ltd Notes to the financial statements for the year ended 31 March 2018 2018 2017 12. Debt securities issued R '000 R '000 Commercial paper 1,674,701 1,674,680 Maturity analysis Non-current 843,000 1,083,000 Current 831,701 591,680 1,674,701 1,674,680 Notes Currency Interest rate Maturity date Nominal Carrying value 2018 2017 2018 2017 2018 2017 % % R' 000 R' 000 R' 000 R' 000 Floating rate notes Class A18 ZAR - 8.28 May-17 - 318,000 - 320,667 Class A20 ZAR - 8.37 May-17 - 195,000 - 196,654 Class B16 ZAR - 8.48 May-17 - 32,000 - 32,275 Class C16 ZAR - 8.73 May-17 - 32,000 - 32,283 Class A17 ZAR 8.23 8.43 May-18 302,000 302,000 304,518 304,579 Class A19 ZAR 8.52 8.72 May-18 303,000 303,000 305,615 305,677 Class A23 ZAR 8.18 - May-18 5,000 - 5,041 - Class A26 ZAR 8.18 - May-18 48,000 - 48,398 - Class B15 ZAR 8.38 8.58 May-18 40,000 40,000 40,340 40,347 Class B19 ZAR 8.38 - May-18 32,000 - 32,272 - Class C15 ZAR 8.48 8.68 May-18 25,000 25,000 25,215 25,220 Class C19 ZAR 8.53 - May-18 32,000 - 32,276 - Class D7 ZAR 8.68 8.88 May-18 30,000 30,000 30,264 30,270 Class A21 ZAR 8.70 8.90 May-19 210,000 210,000 211,851 211,894 Class D8 ZAR 9.98 10.18 May-19 24,000 24,000 24,243 24,248 Class A24 ZAR 8.73 - May-20 310,000 - 312,741 - Class A25 ZAR 8.97 - May-20 150,000 - 151,363 - Class B17 ZAR 8.95 9.15 May-20 8,000 8,000 8,073 8,074 Class C17 ZAR 9.38 9.58 May-20 5,000 5,000 5,048 5,049 Class D5 ZAR 10.38 10.58 May-20 5,000 5,000 5,053 5,054 Fixed rate notes Class A10 ZAR 10.44 10.44 May-20 115,000 115,000 116,216 116,216 Class B10 ZAR 10.64 10.64 May-20 11,000 11,000 11,119 11,119 Class C10 ZAR 10.84 10.84 May-20 5,000 5,000 5,055 5,055 1,660,000 1,660,000 1,674,701 1,674,680 Class A17, A18, A19, A20, A21, A23, A24, A25, A26, B15, B16, B17, B19, C15, C16, C17, C19, D5, D7 and D8 are secured floating rate notes. Interest on the notes is payable at an annual rate equal to the sum of the Johannesburg Interbank Average Rate ("JIBAR") for 3 Months Rand deposits plus a margin of: ● 1.10% per annum in relation to Class A17 Notes; ● 1.39% per annum in relation to Class A19 Notes; ● 1.57% per annum in relation to Class A21 Notes; ● 1.05% per annum in relation to Class A23 Notes; ● 1.60% per annum in relation to Class A24 Notes; ● 1.84% per annum in relation to Class A25 Notes; ● 1.05% per annum in relation to Class A26 Notes; ● 1.25% per annum in relation to Class B15 Notes; ● 1.82% per annum in relation to Class B17 Notes; ● 1.25% per annum in relation to Class B19 Notes; ● 1.35% per annum in relation to Class C15 Notes; ● 2.25% per annum in relation to Class C17 Notes; ● 1.40% per annum in relation to Class C19 Notes; ● 3.25% per annum in relation to Class D5 Notes; 37 Nqaba Finance 1 (RF) Ltd Notes to the financial statements for the year ended 31 March 2018 12. Debt securities issued (continued) ● 1.55% per annum in relation to Class D7 Notes; ● 2.85% per annum in relation to Class D8 Notes; Class A10, B10 and C10 are secured fixed rate notes. The fixed interest rate of these notes were: ● 10.44% per annum in relation to Class A10 Notes; ● 10.64% per annum in relation to Class B10 Notes; and ● 10.84% per annum in relation to Class C10 Notes; The interest rate swap agreement rates applicable to these notes are: ● 2.100% per annum in relation to Class A10 Notes; ● 2.300% per annum in relation to Class B10 Notes; and ● 2.500% per annum in relation to Class C10 Notes. Interest is payable quarterly on the 22nd day of February, May, August and November or if the 22nd is not a business day, the next business day. Interest payable on each class of notes will occur in descending order of rank and with notes of equal rank being paid parri passu, until the interest due and payable in respect of each such class of notes has been paid in full. Loan covenants and triggers Loan covenants and triggers are standardised and are monitored on an on-going basis with formal testing reported to the board. The company continues to comply with all borrowing obligations and financial covenants. All financial covenants have been tested and complied with as at 31 March 2018. 2018 2017 13. First loss credit enhancement loan R '000 R '000 Subordinated loan - Eskom Finance Company SOC Limited 290,000 290,000 Accrued interest 3,564 3,623 293,564 293,623 The aggregate principal amount of the subordinated loan is R290 million and shall be used by the Issuer solely to: ● fund a portion of the purchase price of home loans; and ● to repay, on any scheduled maturity date, the refinanced notes and any subordinated loan associated with the refinanced notes. The First Loss Credit Enhancement Loan or such balance as shall remain outstanding from time to time, bears interest at 3 month JIBAR plus 5.0%. Although interest accrues on a daily basis, it only becomes owing in respect of each Interest Period to the extent that the notional amount of net income accrued to Nqaba, after taking account of all other income and expenses, exceeds the interest to be accrued. Nqaba shall not incur any obligation, then or at any later date, to pay such excess. Any interest which is owing is payable by Nqaba in arrears on each interest payment date, provided that the payment is made in accordance with the Priority of Payments. 14. Trade and other payables Accruals 1,843 1,414 Maturity analysis Current 1,843 1,414 15. Interest income Interest revenue 189,376 193,392 189,376 193,392 16. Finance expense Interest paid on debt securities issued 145,437 143,626 Interest paid on subordinated loan 35,331 35,522 180,768 179,148 38 Nqaba Finance 1 (RF) Ltd Notes to the financial statements for the year ended 31 March 2018 2018 2017 17. Other income R '000 R '000 Swaps interest 1,482 1,427 Interest on Call account 4,766 5,146 6,248 6,573 18. Net impairment loss Impairment (reversal) charge (518) 4,028 Loan losses 1,095 925 577 4,953 19. Net fair value gain on financial instruments Net fair value gain on financial instruments 621 2,541 20. Operating expenses Auditors fees 546 490 Management fees 637 505 Bank charges 4 - Servicer fees 3,284 3,280 Liquidity facility fee 170 205 Redraw facility fees 2,414 3,148 Back up servicer fees 192 192 JSE fixed fee 223 457 JSE variable fee - - Owner trustee fee 246 212 Rating fee 443 835 Rating fee expense 844 - National Credit Regulator fee 114 69 Credit ombudsman 71 - Strate fixed fee 111 66 Bond issue fees 2,430 - Legal fees 434 - 12,163 9,459 21. Taxation Major components of tax expense Income tax 484 3,999 Deferred tax 530 (382) Total income tax in profit or loss 1,014 3,617 Reconciliation of tax expense Taxation as a percentage of profit before tax 37.06% 40.44% Taxation effect of: Expenses not deductible for tax purposes 0.00% 2.76% Prior year adjustments (9.06%) (15.20%) Standard tax rate 28.00% 28.00% 22. Cash generated from operations Profit before taxation 2,737 8,946 Adjustments for: Loan losses 1,095 925 Other income (6,248) (6,573) Finance costs 180,768 179,148 Net impairment loss (518) 4,028 Net fair value gain on financial instruments (621) (2,541) Changes in working capital: Trade and other receivables 18,169 (16,112) Trade and other payables 429 (97) 195,811 167,723 39 Nqaba Finance 1 (RF) Ltd Notes to the financial statements for the year ended 31 March 2018 23. Commitments 2018 2017 R '000 R '000 Nqaba further loans approved but not yet disbursed Loans and advances 8,372 2,201 These commitments will be financed by operations or a redraw facility. 24. Guarantees and contingent liabilities Legal claims There were no legal claims nor guarantees against the company for the period under review (2017: nil). 25. Related parties Related party transactions with Eskom Finance Company SOC Limited Eskom Finance Company SOC Ltd (EFC) is a related party as Nqaba is a structured entity, established to securitise residential mortgage backed advances originated by EFC and EFC is the appointed service provider to Nqaba. The following transactions took place between EFC and Nqaba. Financing A first loss credit enhancement loan has been provided by EFC, details of which are set out in note 13 above. Total interest on this loan during the period amounted to R35 million (2017: R36 million). Servicing fees EFC is the appointed servicing agent to Nqaba. EFC has been appointed under the servicing agreement as agent for Nqaba, to administer the pool of mortgage advances, including the collection of payments, arrears and foreclosure procedures. EFC is entitled to charge fees for its services under the servicing agreement which are payable on each interest payment date. Such fees are limited to an amount equal to 0.15% per annum of the average principal balance of the home loan pool during the immediately preceding collection period. Management fees ABSA Corporate and Investment bank has been appointed under a Management Agreement as agent for Nqaba to advise Nqaba in relation to the management of the Programme. A management fee is charged and accordingly becomes due in respect of each interest period only to the extent that, on any interest payment date, cash is available for the payment of such fee in accordance with the Priority of Payments. Related party balances 2018 2017 R '000 R '000 Payables and amounts owed to related parties First loss credit enhancement loan 290,000 290,000 Interest payable on first loss credit enhancement loan 3,564 3,623 293,564 293,623 Servicing fees 334 334 Transactions Purchases of goods and services Servicing fees 3,284 3,280 Finance cost Eskom Finance Company SOC Limited 35,331 35,522 40 Nqaba Finance 1 (RF) Ltd Notes to the financial statements for the year ended 31 March 2018 25. Related parties (continued) Other related party transactions These transactions comprise those entered into with Maitland Group SA Limited, the trustee of the Issuer and of Nqaba Finance 1 Security SPV (RF) Pty Ltd and relates to trustee fees paid during the period and owed to the Trustees at the end of the period. 2018 2017 R '000 R '000 Transactions Owner trustee and Directors' fees 246 212 Outstanding balances (due to related parties) Owner trustee and Directors' fees 38 18 38 18 26. Significant events Matured notes re-financing The Residential Mortgaged Backed Securities in note 12 of these financial statements, scheduled for maturity on 22 May 2018 were re- financed on that day. None of these notes became a "matured note" as defined in note 2 of these financial statements. EFC disposal The Eskom board of directors is currently in the process of developing a project plan and strategy for the disposal of EFC in terms of a directive from the Department of Public Enterprises. An estimation of the financial effect of this event cannot be determined at the date of these annual financial statements. The going concern assumption has been tested against this fact and it will have no bearing on Nqaba as the structure is ring fenced. 27. Directors' emoluments The directors do not receive individual remuneration from the company. Due to the nature of the securitisation structure, Maitland Group SA Limited (Maitland) acts as Trustees of the Nqaba Finance 1 Owner Trust and of Nqaba Finance 1 Security SPV Owner Trust and provides three independent non-executive directors to the Issuer. These directors are contracted to Maitland and are remunerated by Maitland for services rendered as Directors of the company. The fourth non-executive director is an employee of Eskom Holdings SOC Ltd and is also not remunerated by this company. The fee paid to Maitland for their services to the securitisation structure is disclosed in note 25. 41 Nqaba Finance 1 (RF) Ltd Notes to the financial statements for the year ended 31 March 2018 28. Net debt reconciliation Debt First loss credit Total securities enhancement issued loan R'000 R'000 R'000 Balance 1 April 2016 1,674,815 293,720 1,968,535 Net cash increase / (decrease) (135) (97) (232) Non-cash movements - - - Balance 31 March 2017 1,674,680 293,623 1,968,303 Net cash increase / (decrease) 21 (59) (38) Non-cash movements - - - Balance 31 March 2018 1,674,701 293,564 1,968,265 29. Restatement of comparatives Nqaba did not correctly disclose the split between the current and non-current portions of its loans and advances, due to an incorrect interpretation of what constitutes the current portion of its loans and advances. The current portion was incorrectly interpreted as being only those loans that matured within twelve months from balance sheet date instead of all loans and advances capital repayments to be received within twelve months from the balance sheet date. This interpretation was consistent with the treatment of the loans and advances followed by EFC (refer to par 9 in the director’s report), which is governed by the PFMA. Accordingly the disclosure of the current and non-current portion of Nqaba’s loans and advances was corrected in the 2018 annual financial statements in terms of IAS 8 as a prior period error by disclosing the split between the current and non-current portion of its loans and advances, based on capital repayments to be received within twelve months from the balance sheet date. The restatement had no impact on the claims of the senior secured creditors as defined in the Programme Memorandum. The impact of the restatement is as follows: 2017 2016 Previously Adjustment Restated Previously Adjustment Restated reported reported R'000 R'000 R'000 R'000 R'000 R'000 Statement of financial position Non-Current Assets Loans receivable 1,906,108 (70,254) 1,835,854 1,904,978 (69,740) 1,835,238 Current Assets Loans receivable 1,680 70,254 71,934 1,419 69,740 71,159 42 Nqaba Finance 1 (RF) Ltd Notes to the financial statements for the year ended 31 March 2018 30. New standards and interpretations 30.1 Standards, interpretations and amendments to published standards that are not yet effective The following new standards, interpretations and amendments to existing standards have been published that are applicable for future accounting periods and have not been adopted early. The company is currently in the process of evaluating the detailed requirements of the following amendments to assess the possible impact on the financial statements: Topic Summary of requirements Effective date Impact IFRS 9 Financial IFRS 9 Financial instruments sets out 1 January 2018 The company is well positioned to implement IFRS instruments the requirements for recognising and 9 for the financial year ending 31 March 2019. The measuring financials assets, financial preparation for implementation is allocated to an liabilities and some contracts to buy established committee which is supported by a and sell non-financial items. This number of working groups. The working groups standard replaces IAS 39 Financial have made sound progress in setting, inter alia, the instruments: Recognition and accounting policies, determining the classification Measurement. of instruments under IFRS 9, developing pilot models for credit modelling, and designing reporting templates. While the company has developed a working credit model suitable for the IFRS9 implementation, it is still subject to independent internal and external validation, and it is therefore not possible to provide an accurate indication of what the impact on the financial results will be. Annual The annual improvements deals with 1 January 2019 The company is currently in the process of improvements additional guidance for applying the evaluating the detailed requirements of the 2017 acquisition method to particular types improvements to assess the impact on the financial (1 January 2019) of business combinations (IFRS 3 statements. Business Combinations), accounting for acquisitions of interests in joint operations (IFRS 11 Joint Arrangements), income tax consequences of payments on financial instruments classified as equity (IAS 12 Income Taxes), and borrowing costs eligible for capitalisation (IAS 23 Borrowing Costs) IFRS 15 Revenue IFRS 15 establishes a comprehensive 1 January 2019 The company is evaluating the impact of the from contracts framework for determining whether, requirements of IFRS 15. with customers when and how much of revenue is (1 January 2018) recognised. It replaces existing revenue recognition guidance, including IAS 18 Revenue and IAS 11 Construction contracts and their related interpretations. 43 Nqaba Finance 1 (RF) Ltd Notes to the financial statements for the year ended 31 March 2018 30.2 Standards, interpretations and amendments to published standards that are effective and applicable to the company The company has adopted the following new standards, interpretations and amendments to existing standards for the first time for the financial year ended 31 March 2018. The nature and effect of the changes are as follows: Topic Summary of requirements Effective date Impact Amendments to IAS The amendments introduce new 1 January 2017 Impact immaterial. 7 Disclosure disclosure for changes in liabilities initiative arising from financing activities, by providing a reconciliation between the opening and closing balances. Amendments to IAS The amendments clarify the 1 January 2017 Impact immaterial. Deferred tax assets have 12 Recognition of requirements for recognition of already been accounted for in line with the deferred tax assets deferred tax assets arising from amendment. for unrealised unrealised losses on debt instruments losses measured at fair value. 44