Nqaba Finance 1 (RF) Ltd (Registration number 2005/040050/07) Annual financial statements for the year ended 31 March 2017 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 4-5 Statement by the company secretary 6 Directors' report 7-8 Independent auditor's report 9 - 12 Statement of financial position 13 Statement of comprehensive income 14 Statement of changes in equity 15 Statement of cash flows 16 Notes to the financial statements 17 - 40 The annual financial statements for the year ended 31 March 2017 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 26 May 2017. The financial statements have been audited in compliance with section 30 of the Companies Act. Published 29 September 2017 2 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 13 to 40 which comprise the statement of financial position at 31 March 2017, and the statement of comprehensive income, statement of changes in equity and statement of cash flows for the year then ended, and 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 2017, 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 our report. We are independent of the company 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. 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. Head Office 20 Morris Street East, Woodmead, 2191 P.O. Box 2939, Saxonwold, 2132 Tel: +27 (0) 11 231 0600 Fax: +27 (0) 11 234 0933 Victor Sekese (Chief Executive) A comprehensive list of all Directors is available at the company offices or registered office. SizweNtsalubaGobodo Incorporated. Registration Number: 2005/034639/21own 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 predetermined 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 identify any material findings of non-compliance with legislation Other information Nqaba Finance 1 (RF) Limited’s accounting authority is responsible for the other information. The other information comprises 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 our auditor’s report thereon. Our opinion on the financial statements, and findings on the reported performance information and compliance with legislation, 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, on the other information obtained prior to the date of this auditor’s report, we conclude that there is a material misstatement of 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 legislation, however, the objective is not to express any form of assurance conclusion thereon. We did not identify any significant deficiencies in internal control. 10 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 Inc. has been the auditor of Nqaba Finance 1 (RF) Limited for 12 years. SizweNtsalubaGobodo Inc. Pravesh Hiralall Chartered Accountant (SA) Director Registered Auditor 29 September 2017 20 Morris Street East Woodmead Johannesburg 11 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, and the procedures performed on reported performance information for selected objectives and on the company’s compliance with respect to the selected subject matters. 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. 12 Nqaba Finance 1 (RF) Ltd Statement of financial position at 31 March 2017 Note 2017 2016 R '000 R '000 Assets Non-Current Assets Properties in possession 4 110 488 Loans receivable 5 1,906,108 1,904,978 Deferred tax 6 1,364 982 Derivatives held for risk management 7 2,179 - 1,909,761 1,906,448 Current Assets Loans receivable 5 1,680 1,419 Derivatives held for risk management 7 1,247 1,173 Trade and other receivables 8 34,590 18,477 Taxation 9 10,676 10,253 Cash and cash equivalents 10 62,774 78,246 110,967 109,568 Total Assets 2,020,728 2,016,016 Equity and Liabilities Equity Share capital 11 - - Retained income 51,011 45,682 51,011 45,682 Liabilities Non-Current Liabilities Derivatives held for risk management 7 - 288 Debt securities issued 12 1,083,000 1,231,000 1,083,000 1,231,288 Current Liabilities Debt securities issued 12 591,680 443,815 First loss credit enhancement loan 13 293,623 293,720 Trade and other payables 14 1,414 1,511 886,717 739,046 Total Liabilities 1,969,717 1,970,334 Total Equity and Liabilities 2,020,728 2,016,016 13 Nqaba Finance 1 (RF) Ltd Statement of comprehensive income for the year ended 31 March 2017 Note 2017 2016 R '000 R '000 Interest income 15 193,392 175,816 Finance expense 16 (179,148) (160,864) Net interest income 14,244 14,952 Other income 17 6,573 6,759 Operating profit 20,817 21,711 Net impairment loss 18 (4,953) (1,920) Net fair value gain/(loss) on financial instruments 19 2,541 (5,160) Operating expenses 20 (9,459) (8,318) Profit before tax 8,946 6,313 Taxation 21 (3,617) (2,461) Profit for the year 5,329 3,852 Other comprehensive income - - Total comprehensive income for the year 5,329 3,852 14 Nqaba Finance 1 (RF) Ltd Statement of changes in equity for the year ended 31 March 2017 Share capital Retained Total equity Note income R '000 R '000 R '000 Balance at 1 April 2015 - 41,830 41,830 Total comprehensive income for the year - 3,852 3,852 Balance at 31 March 2016 - 45,682 45,682 Total comprehensive income for the year - 5,329 5,329 Balance at 31 March 2017 11 - 51,011 51,011 15 Nqaba Finance 1 (RF) Ltd Statement of cash flows for the year ended 31 March 2017 Note 2017 2016 R '000 R '000 Cash flows from operating activities Cash generated from operations 22 167,723 164,977 Finance income 6,573 6,759 Finance costs 16 (179,148) (160,864) Income tax paid 9 (4,422) (7,150) Net cash from operating activites (9,274) 3,722 Cash flows from investing activities Decrease / (Increase) in properties in possession 461 (1) Increase in loans receivable (6,427) (2,060) Net cash from investing activities (5,966) (2,061) Cash flows from financing activities (Decrease) / Increase in borrowings (232) 1,707 Net cash from financing activities (232) 1,707 Net (decrease) / increase in cash and cash equivalents (15,472) 3,368 Cash and cash equivalents at the beginning of the year 78,246 74,878 Cash and cash equivalents at the end of the year 10 62,774 78,246 16 Nqaba Finance 1 (RF) Ltd Notes to the financial statements for the year ended 31 March 2017 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 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 2017 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 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 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 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. Loans and receivables 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. 17 Nqaba Finance 1 (RF) Ltd Notes to the financial statements for the year ended 31 March 2017 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. Subsequent to initial recognition, trade and other receivables are measured at amortised cost using the effective interest method, less any accumulated impairment losses. 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. Fair value through profit or loss Included in the financial trading assets are derivatives held for risk management. The fair values of trading assets are based on adjusted bid prices if available. 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. Where an asset has been impaired, the carrying amount of the asset is reduced through an allowance account. (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 or fair value as per the relevant liability category (as described below). 18 Nqaba Finance 1 (RF) Ltd Notes to the financial statements for the year ended 31 March 2017 1.2 Financial instruments (continued) 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, 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. 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. Fair value through profit or loss (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 recognized in profit or loss. 1.3 Share capital Ordinary shares are classified as equity net of incremental direct costs of issue. 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 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. However, deferred tax is provided in respect of the temporary differences arising on the assets. 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 net basis. 19 Nqaba Finance 1 (RF) Ltd Notes to the financial statements for the year ended 31 March 2017 1.6 Interest income and interest expense 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 credit enhancement loan. 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. 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 IAS 24 Related party disclosures provide government related entities an exemption which eliminates the requirements to disclose the related party transactions and outstanding balances, including commitments. 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 adhere to 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. The unsecured loans comprise of micro loans and are only secured by compulsory credit life insurance policies. The personal home loans are fully guaranteed by the individual's employer. 1.9 Offsetting financial assets and financial liabilities The company offsets certain financial assets and liabilities, when it has a legal right to offset such financial instruments and there is an intention to settle these financial instruments on a net basis. When determining whether it is appropriate to offset financial assets and liabilities, the following judgement is applied: ● In the absence of a contractual agreement that provides for offsetting, common law principles in South Africa are applied when determining whether there is a legally enforceable right to offset. The application of these common law principles is sometimes subject to a significant degree of interpretation. In these instances, legal advice is obtained to ensure that the application of the common law principles is correctly applied within the ambit of the law. Using the legal advice obtained, management assesses whether there is a legal right to offset accounts. ● When determining whether there is an intention to settle a financial asset and a financial liability, management evaluates the underlying terms of the contract to identify whether there is a legal right to offset which could also indicate the company’s intention to settle on a net basis. 1.10 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 a sworn assessors semi-annually. 1.11 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. 20 Nqaba Finance 1 (RF) Ltd Notes to the financial statements for the year ended 31 March 2017 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 personal 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. 21 Nqaba Finance 1 (RF) Ltd Notes to the financial statements for the year ended 31 March 2017 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 a sworn assessors semi-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 which operates through various sub committees. 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 rate 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. 22 Nqaba Finance 1 (RF) Ltd Notes to the financial statements for the year ended 31 March 2017 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 R83 million (2016: R87 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 2017 was: 2017 2016 Weighted average current loan to value ratio (%) 66.81% 66.24% The average loan amount in relation to the total home loan book value at 31 March was: Average loan amount - Home loans 262,530 247,489 Loan amount as a percentage of the loan book (%) 0.013% 0.015% (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 2017 AA 62,774 3,426 - - Unrated - - 1,907,788 34,590 62,774 3,426 1,907,788 34,590 2016 AAA 78,246 1,173 - - Unrated - - 1,906,397 18,477 78,246 1,173 1,906,397 18,477 No credit limits were exceeded during the reporting period, nor does management expect any losses from non-performance by these counterparties. The maximum exposure to credit risk for mortgage advances and trade and other receivables per class was: 2017 2016 R '000 R '000 Loans and advances Home loans 1,907,788 1,906,397 1,907,788 1,906,397 Other receivables Sundry receivables 34,590 18,477 34,590 18,477 23 Nqaba Finance 1 (RF) Ltd Notes to the financial statements for the year ended 31 March 2017 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 2017 Collectively assesssed 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 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 2016 Collectively assesssed for impairment Home loans 1,911,850 1,864,270 21,325 4,946 21,309 Impairment Home loans (5,453) (3,109) (404) (180) (1,760) 1,906,397 1,861,161 20,921 4,766 19,549 Mortgage advances include an amount of R21 million (2016: 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: 2017 2016 R '000 R '000 Balance at the beginning of the year 5,857 4,400 Impairment loss recognised 4,028 1,457 Balance at the end of the year 9,885 5,857 Comprising: Home loans 9,563 5,453 Properties in possession 322 404 9,885 5,857 Nqaba establishes an allowance for impairment that represents its estimate of incurred losses in respect of properties in possession and home loans. This allowance consisits 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 and liquidity challenges. 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. 24 Nqaba Finance 1 (RF) Ltd Notes to the financial statements for the year ended 31 March 2017 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 and credit enhancement loan. 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 R2.5 million (2016: R5.2 million loss). 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. 2017 2017 2016 2016 +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 3,201 (3,201) 3,301 (3,301) 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 is satisfied”. 25 Nqaba Finance 1 (RF) Ltd Notes to the financial statements for the year ended 31 March 2017 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 issue, credit enhancement loan, 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 exchange rates and 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 has refinanced all its matured notes on 22 May 2017, details of that transaction are discussed in the Directors' report. 26 Nqaba Finance 1 (RF) Ltd Notes to the financial statements for the year ended 31 March 2017 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 2017 Financial assets Loans receivable 1,906,108 1,680 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 - - - 1,908,287 100,291 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 - - - Trade and other 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 825,287 (786,426) 38,861 38,861 (723,017) 198,201 (66,628) 2,963,865 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 2016 Financial assets Loans receivable 1,904,978 1,419 1,906,397 1,906,397 63,957 191,182 984,100 2,940,208 Derivatives held for risk management - 1,173 1,173 1,173 435 738 - - Trade and other receivables - 18,477 18,477 18,477 18,477 - - - Cash and cash equivalents - 78,246 78,246 78,246 78,246 - - - 1,904,978 99,315 2,004,293 2,004,293 161,115 191,920 984,100 2,940,208 Financial liabilities Debt securities issued 1,231,000 443,815 1,674,815 1,674,815 443,815 - 1,231,000 - First loss credit enhancement loan - 293,720 293,720 293,720 293,720 - - - Derivatives held for risk management 288 - 288 288 - - 288 - Trade and other payables - 1,511 1,511 1,511 1,511 - - - 1,231,288 739,046 1,970,334 1,970,334 739,046 - 1,231,288 - Liquidity gap 673,690 (639,731) 33,959 33,959 (577,931) 191,920 (247,188) 2,940,208 The company has already refinanced all its matured notes in May 2017. 27 Nqaba Finance 1 (RF) Ltd Notes to the financial statements for the year ended 31 March 2017 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 2017 Financial assets Non-current Loans receivable - 1,906,108 - 1,906,108 1,762,550 Derivatives held for risk management 2,179 - - 2,179 2,179 2,179 1,906,108 - 1,908,287 1,764,729 Current Loans receivable - 1,680 - 1,680 887 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 99,044 - 100,291 99,498 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 Derivatives held for risk management - - - - - - - 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 The fair values of these financial instruments approximate their carrying amounts. The effect of discounting is not expected to be material. The company has set its materiality limit of these at 10% of differential. 28 Nqaba Finance 1 (RF) Ltd Notes to the financial statements for the year ended 31 March 2017 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 2016 Financial assets Non-current Loans receivable - 1,904,978 - 1,904,978 1,774,305 Derivatives held for risk management - - - - - - 1,904,978 - 1,904,978 1,774,305 Current Loans receivable - 1,419 - 1,419 1,260 Derivatives held for risk management 1,173 - - 1,173 1,173 Trade and other receivables - 18,477 - 18,477 18,477 Cash and cash equivalents - 78,246 - 78,246 78,246 1,173 98,142 - 99,315 99,156 Total financial assets 1,173 2,003,120 - 2,004,293 1,873,461 Financial liabilities Non-current Debt securities issued - - 1,231,000 1,231,000 1,477,574 Derivatives held for risk management 288 - - 288 288 288 - 1,231,000 1,231,288 1,477,862 Current Debt securities issued - - 443,815 443,815 435,761 First loss credit enhancement loan - - 293,720 293,720 293,720 Trade and other payables - - 1,511 1,511 1,511 - - 739,046 739,046 730,992 Total financial liabilities 288 - 1,970,046 1,970,334 2,208,854 Collateral obtained There were no debtors that defaulted on their accounts and as a result, no mortgage bonds were called upon (2016: 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 quotes 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). 29 Nqaba Finance 1 (RF) Ltd Notes to the financial statements for the year ended 31 March 2017 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 quotes 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 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 1 - - 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 - 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 a sworn assessors semi-annually taking into account factors such as market comparitives, condition of the reposessed 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 (2016, nil). Sensitivity analysis on PIP's would have yielded immaterial results as the PIP portfolio is immaterial in relation to the total loan book. 30 Nqaba Finance 1 (RF) Ltd Notes to the financial statements for the year ended 31 March 2017 3. Financial risk management (continued) Fair value Level 1 Level 2 Level 3 2016 R '000 R '000 R '000 Assets measured at fair value Derivatives held for risk management Interest rate swaps - 1,173 - - 1,173 - Assets not measured at fair value Loans receivables Residential mortgage backed securities - 1,775,565 - Properties in possession - - 488 Cash and cash equivalents - - - - 1,775,565 488 Liabilities measured at fair value Derivatives held for risk management Interest rate swaps - 288 - - 288 - Liabilities not measured at fair value Debt securities issued Commercial paper - 1,674,815 - First loss credit enhancement loan Subordinated loan - 293,720 - - 1,968,535 - 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 ● Personal housing loans ● Current personal and micro loans ● High risk current personal and micro 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. 31 Nqaba Finance 1 (RF) Ltd Notes to the financial statements for the year ended 31 March 2017 2017 2016 R '000 R '000 4. Properties in possession Opening balance 892 892 Additions - - Disposals (460) - Repayments - - Closing balance 432 892 Impairments (322) (404) 110 488 5. Loans receivable Secured by mortgage 1,907,788 1,906,397 1,907,788 1,906,397 Maturity analysis Non-current 1,906,108 1,904,978 Current 1,680 1,419 1,907,788 1,906,397 The loans receivable are split into non-current and current based on the maturity dates of the loans. 2017 2016 6. Deferred tax R '000 R '000 Deferred tax assets/(liability) Balance at the beginning of the year 982 (76) Recognised in profit or loss 382 1,058 1,364 982 Reconciliation of deferred tax asset/(liability) Balance at beginning of year 982 (76) Prior year under or over adjustment 248 (693) Doubtful debts allowances S11(j) (282) (103) Originating differences on provisions 1,128 408 Reversing differences on fair value swaps (712) 1,446 1,364 982 Recognition of deferred tax asset/(liability) The deferred tax asset arises from: ● Prior year adjustments ● Doubtful debts allowances ● Originating differences from provisions on loan losses ● Differences on fair value swaps 32 Nqaba Finance 1 (RF) Ltd Notes to the financial statements for the year ended 31 March 2017 7. Derivatives held for risk management 2017 2016 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 3,426 - 3,426 1,173 (288) 885 3,426 - 3,426 1,173 (288) 885 Reconciliation Derivatives held for risk management Balance at the beginning of the year 1,173 (288) 885 6,278 (233) 6,045 Charged to profit or loss 2,253 288 2,541 (5,105) (55) (5,160) 3,426 - 3,426 1,173 (288) 885 Maturity analysis Non-current 2,179 - 2,179 - (288) (288) Current 1,247 - 1,247 1,173 - 1,173 3,426 - 3,426 1,173 (288) 885 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 R1.4 million (2016: R2.7 million). 2017 2016 8. Trade and other receivables R '000 R '000 Gross 34,590 18,477 Impairment - - 34,590 18,477 Maturity analysis Current 34,590 18,477 9. Income tax paid Balance at the beginning of the year 10,253 6,622 Current tax for the year recognised in profit or loss (3,999) (3,519) Balance at the end of the year (10,676) (10,253) (4,422) (7,150) 10. Cash and cash equivalents Bank balances 62,774 78,246 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. 33 Nqaba Finance 1 (RF) Ltd Notes to the financial statements for the year ended 31 March 2017 2017 2016 12. Debt securities issued R '000 R '000 Commercial paper 1,674,680 1,674,815 Maturity analysis Non-current 1,083,000 1,231,000 Current 591,680 443,815 1,674,680 1,674,815 Notes Currency Interest rate Maturity date Nominal Carrying value 2017 2016 2017 2016 2017 2016 % % R' 000 R' 000 R' 000 R' 000 Floating rate notes Class A11 ZAR - 8.24 May-16 - 205,000 - 206,808 Class D6 ZAR - 9.63 May-16 - 24,000 - 24,247 Class A16 ZAR - 7.84 May-16 - 200,000 - 201,679 Class A18 ZAR 8.28 7.94 May-17 318,000 318,000 320,667 320,695 Class A20 ZAR 8.37 - May-17 195,000 - 196,654 - Class B16 ZAR 8.48 8.14 May-17 32,000 32,000 32,275 32,278 Class C16 ZAR 8.73 8.39 May-17 32,000 32,000 32,283 32,287 Class A17 ZAR 8.43 8.09 May-18 302,000 302,000 304,579 304,616 Class B15 ZAR 8.58 8.24 May-18 40,000 40,000 40,347 40,353 Class C15 ZAR 8.68 8.34 May-18 25,000 25,000 25,220 25,223 Class D7 ZAR 8.88 8.54 May-18 30,000 30,000 30,270 30,274 Class A19 ZAR 8.72 8.38 May-18 303,000 303,000 305,677 305,711 Class B17 ZAR 9.15 8.54 May-18 8,000 8,000 8,074 8,075 Class C17 ZAR 9.58 9.24 May-18 5,000 5,000 5,049 5,049 Class A21 ZAR 8.90 - May-19 210,000 - 211,894 - Class D8 ZAR 10.18 - May-19 24,000 - 24,248 - Class D5 ZAR 10.58 8.81 May-20 5,000 5,000 5,054 5,055 Fixed rate notes Class A10 ZAR 10.44 10.44 May-20 115,000 115,000 116,216 116,282 Class B10 ZAR 10.64 10.64 May-20 11,000 11,000 11,119 11,125 Class C10 ZAR 10.84 10.84 May-20 5,000 5,000 5,055 5,058 1,660,000 1,660,000 1,674,680 1,674,815 During the period, there were no loans overdue. Class A11, A16, A17, A18, A19, A20, A21, B15, B16, B17, C15, C16, C17, D5, D6, 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; ● 0.95% per annum in relation to Class A18 Notes; ● 1.39% per annum in relation to Class A19 Notes; ● 1.04% per annum in relation to Class A20 Notes; ● 1.57% per annum in relation to Class A21 Notes; ● 1.25% per annum in relation to Class B15 Notes; ● 1.15% per annum in relation to Class B16 Notes; ● 1.82% per annum in relation to Class B17 Notes; ● 1.35% per annum in relation to Class C15 Notes; ● 1.40% per annum in relation to Class C16 Notes; ● 2.25% per annum in relation to Class C17 Notes; ● 3.25% per annum in relation to Class D5 Notes; ● 1.55% per annum in relation to Class D7 Notes; ● 2.85% per annum in relation to Class D8 Notes; 34 Nqaba Finance 1 (RF) Ltd Notes to the financial statements for the year ended 31 March 2017 12. Debt securities issued (continued) 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 Arrears Reserve trigger that was breached in the 2015 financial year remains in breach at its trigger level of 1.5%. The consequence is a cash provision in the priority of payments. The Issuer (Nqaba) must pay the Arrears Reserve Required Amount, being R6,6 million into the Arrears Reserve, in accordance with the Programme Memorandum. 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 2017. 2017 2016 13. First loss credit enhancement loan R '000 R '000 Subordinated loan - Eskom Finance Company SOC Limited 290,000 290,000 Accrued interest 3,623 3,720 293,623 293,720 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 1,414 1,511 Maturity analysis Current 1,414 1,511 15. Interest income Interest revenue 193,392 175,816 193,392 175,816 16. Finance expense Interest paid on debt securities issued 143,626 127,865 Interest paid on subordinated loan 35,522 32,999 179,148 160,864 35 Nqaba Finance 1 (RF) Ltd Notes to the financial statements for the year ended 31 March 2017 2017 2016 17. Other income R '000 R '000 Swaps received 1,427 2,718 Call account - ABSA Bank Limited 5,146 4,041 6,573 6,759 18. Net impairment loss Impairment charge 4,028 1,457 Loan losses 925 463 4,953 1,920 19. Net fair value loss on financial instruments Net fair value gain / (loss) on financial instruments 2,541 (5,160) 2,541 (5,160) 20. Other operating expenses Auditors fees 490 589 Management fees 505 570 Servicer fees 3,280 3,307 Liquidity facility fee 205 196 Redraw facility fees 3,148 2,477 Back up servicer fees 192 193 JSE fixed fee 457 80 Owner trustee fee 212 237 Rating fee 835 245 Rating fee expense - (19) National Credit Regulator fee 69 87 Credit ombudsman - 80 Bond issue fees - 57 Strate fixed fee 66 219 9,459 8,318 21. Taxation Major components of tax expense Income tax 3,999 3,519 Deferred tax (382) (1,058) Total income tax in profit or loss 3,617 2,461 Reconciliation of tax expense Taxation as a percentage of profit before tax 40.44% 38.98% Taxation effect of: Expenses not deductible for tax purposes 2.76% -1.48% Prior year adustments -15.20% -9.50% Other 0.00% 0.00% Standard tax rate 28.00% 28.00% 22. Cash generated from operations Profit before taxation 8,946 6,313 Adjustments for: Loan losses written off 925 463 Finance and other income (6,573) (6,759) Finance costs 179,148 160,864 Net impairment loss (excluding bad debts recovered) 4,028 1,457 Net fair value gain/(loss) on financial instruments (2,541) 5,160 Changes in working capital: Trade and other receivables (16,112) (3,320) Trade and other payables (97) 799 167,723 164,977 36 Nqaba Finance 1 (RF) Ltd Notes to the financial statements for the year ended 31 March 2017 23. Commitments 2017 2016 R '000 R '000 Nqaba further loans approved but not yet disbursed Loans and advances 2,201 5,186 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 (2016: 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 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 R36 million (2016: R33 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 2017 2016 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 3,623 3,720 Servicing fees 334 315 293,957 294,035 Transactions Purchases of goods and services Servicing fees 3,280 3,307 Finance cost Eskom Finance Company SOC Limited 35,522 32,999 37 Nqaba Finance 1 (RF) Ltd Notes to the financial statements for the year ended 31 March 2017 25. Related parties (continued) Other related party transactions These transactions comprise those entered into with Maitland Trustees Proprietary 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. 2017 2016 R '000 R '000 Transactions Owner trustee fees 212 237 Outstanding balances (due to related parties) Owner trustee fees 18 50 18 50 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 2017, are scheduled to be re-financed on 22 May 2017. None of the 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 Trustees Proprietary Limited (Maitland) acts as Trustees of the Issuer and of Nqaba Finance 1 Security SPV (RF) Pty Ltd. Employees of Maitland serve as directors of the company and are remunerated by Maitland for services rendered as Directors of the company. The fee paid to Maitland for their services to the securitisation structure is disclosed in note 25. 38 Nqaba Finance 1 (RF) Ltd Notes to the financial statements for the year ended 31 March 2017 28. New standards and interpretations 28.1 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 replaces IAS 39 Financial instruments: recognition and 01 January 2018 The company is instruments measurement. It retains but simplifies the mixed measurement model currently in the and establishes three primary measurement categories for financial process of assets: amortised cost, fair value through other comprehensive evaluating the income and fair value through profit or loss. The basis of classification detailed depends on the entity’s business model and the contractual cash flow requirements characteristics of the financial asset. Investments in equity of the standard to instruments are required to be measured at fair value through profit or assess loss with the irrevocable option at inception to present changes in fair the impact on the value in other comprehensive income. financial statements. IFRS 9 also replaces the rule-based hedge accounting requirements in IAS 39. It requires an economic relationship between the hedged item and hedging instrument and for the “hedged ratio” to be the same as the one management actually uses for risk management purposes. IFRS 9 includes an expected credit loss model for calculating impairment on financial assets. This replaces the incurred loss model used under IAS 39. The adoption of IFRS 9 is not expected to change the measurement of financial assets and liabilities significantly, but will require a review of the current classification of financial assets and liabilities. IFRS 15 Revenue IFRS 15 replaces the two main revenue recognition standards, IAS 18 1 January 2018 Nqaba currently from contracts Revenue and IAS 11 Construction contracts and their related recognises with customers interpretations interest income when the risks IFRS 15 provides a single control-based revenue recognition model and rewards of and clarifies the principles for recognising revenue from contracts with ownership have customers. The core principle is that an entity should recognise passed to the revenue to depict the transfer of promised goods or services to customer. customers at an amount that reflects the consideration which the entity expects to be entitled to in exchange for those goods or services. Revenue is recognised when a customer obtains control of a good or service. A customer obtains control when it has the ability to direct the use of and obtain the benefits from the good or service. IFRS 15 also includes a cohesive set of disclosure requirements that will result in an entity providing users of financial statements with comprehensive information about the nature, amount, timing and uncertainty of revenue and cash flows arising from the entity’s contracts with customers. IFRS 15 will be applied retrospectively subject to the application of the transitional provisions (includes modified retrospective approach). 39 Nqaba Finance 1 (RF) Ltd Notes to the financial statements for the year ended 31 March 2017 28.1 Standards, interpretations and amendments to published standards that are not yet effective (continued) Topic Summary of requirements Effective date Impact IAS 12 Income taxes 01 January 2017 Impact (amendment) immaterial. The amendments clarify that unrealised losses on debt instruments measured at fair value in the financial statements and at cost for tax purposes give rise to a deductible temporary difference regardless of whether the debt instrument's holder expects to recover the carrying amount of the debt instrument by sale or by use. It further clarifies that; (i) the carrying amount of an asset does not limit the estimation of probable future taxable profits, (ii) estimates for future taxable profits exclude tax deductions resulting from the reversal of deductible temporary differences, and (iii) an entity assesses a deferred tax asset in combination with other deferred tax assets. Where tax law restricts the utilisation of tax losses, an entity would assess a deferred tax asset in combination with other deferred tax assets of the same type. The amendments will be applied retrospectively; however an entity may recognise the change in the opening retained earnings of the earliest comparative period presented. The amendment will not have a material impact on the company’s financial statements. IAS 7 Statement of cash flows 01 January 2017 Impact (amendment) immaterial. The amendments require entities to provide disclosures that enable users of financial statements to evaluate changes in liabilities arising from financing activities; namely (i) changes from financing cash flows, (ii) changes arising from obtaining or losing control of subsidiaries or other businesses, (iii) the effect of changes in foreign exchange rates, (iv) changes in fair values, and (v) other changes. The amendments will be applied prospectively and will not have a material impact on the company’s financial statements. 40