Nqaba Finance 1 (RF) Ltd (Registration number 2005/040050/07) Annual financial statements for the year ended 31 March 2016 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 2 Report of the audit committee 3 Statement by the company secretary 4 Directors' report 5-6 Independent auditor's report 7-8 Statement of financial position 9 Statement of comprehensive income 10 Statement of changes in equity 11 Statement of cash flows 12 Notes to the financial statements 13 - 35 The annual financial statements for the year ended 31 March 2016 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 24 May 2016. The financial statements have been audited in compliance with section 30 of the Companies Act. Published 24 May 2016 1 Nqaba Finance 1 (RF) Ltd Directors' report The directors are pleased to present their report for the year ended 31 March 2016. 1. Principal activities, state of affairs and business review Nqaba Finance 1 (RF) Ltd (Nqaba), is 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 Security Exchange Limited (JSE), using a securitisation structure. 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 R176 million (2015: R167 million). Profit before tax amounted to R7 million (2015: R20 million), profit after taxation amounted to R5 million (2015: R14 million). The detailed financial results of the company are set out on page 9 to 35 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 and prior financial years. 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. 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 (Chairperson) 31 January 2009 n/a Non-executive director TL Myburgh 09 February 2006 n/a Non-executive director DP Towers 10 May 2013 29 February 2016 Non-executive director D Lorimer 30 September 2014 n/a Non-executive director BW Smith 29 January 2016 n/a Non-executive director Directors' interest The directors have no interests in contracts with the company. Attendance at board and audit committee meetings: Board committee Audit committee Members 25-May-15 15-Mar-16 25-May-15 EM Southey √ √ √ TL Myburgh √ √ √ DP Towers √ √ √ D Lorimer A √ A BW Smith n/a A n/a The members of the audit committee are all independent, non-executive directors of the group. 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 √ Apology A 5 Nqaba Finance 1 (RF) Ltd Directors' report 6. Events subsequent to the reporting date The directors are not aware of any matter or circumstances arising since the end of the financial year, not otherwise dealt with in the report or financial statements that would significantly affect the operations of the company, or the results of operations. 7. Liquidity and solvency The directors have performed the required liquidity and solvency tests required by the Companies Act of South Africa, 71 of 2008 and are satisfied with the liquidity and solvency of Nqaba. 8. Auditors SizweNtsalubaGobodo Inc. were the auditors during the current and prior financial periods. 9. Company secretary Maitland Group South Africa Limited: Business address Postal address 18 Fricker road PO Box 781396 Illovo Sandton Johannesburg 2146 2196 10. Company 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. 11. Holding entity Nqaba is a structured entity owned by Nqaba Finance 1 Owner Trust, a trust incorporated in the Republic of South Africa. 6 Nqaba Finance 1 (RF) Ltd Statement of financial position at 31 March 2016 Note 2016 2015 R '000 R '000 Assets Non-Current Assets Properties in possession 4 488 695 Loans receivable 5 1,904,978 1,904,763 Deferred tax 6 982 - Derivatives held for risk management 7 - 3,576 1,906,448 1,909,034 Current Assets Loans receivable 5 1,419 1,286 Derivatives held for risk management 7 1,173 2,469 Trade and other receivables 8 18,477 15,157 Taxation 9 10,253 6,622 Cash and cash equivalents 10 78,246 74,878 109,568 100,412 Total Assets 2,016,016 2,009,446 Equity and Liabilities Equity Share capital 11 - - Retained income 45,682 41,830 45,682 41,830 Liabilities Non-Current Liabilities Deferred tax 6 - 76 Derivatives held for risk management 7 288 - Debt securities issued 12 1,231,000 1,344,000 1,231,288 1,344,076 Current Liabilities Debt securities issued 12 443,815 329,559 First loss credit enhancement loan 13 293,720 293,269 Trade and other payables 14 1,511 712 739,046 623,540 Total Liabilities 1,970,334 1,967,616 Total Equity and Liabilities 2,016,016 2,009,446 9 Nqaba Finance 1 (RF) Ltd Statement of comprehensive income for the year ended 31 March 2016 Note 2016 2015 R '000 R '000 Interest income 15 175,816 167,269 Finance expense 16 (160,864) (153,203) Net interest income 14,952 14,066 Other income 17 6,759 6,591 Operating profit 21,711 20,657 Net impairment (loss)/gain 18 (1,920) 749 Net fair value (loss)/gain on financial instruments 19 (5,160) 3,570 Operating expenses 20 (8,318) (5,490) Profit before tax 6,313 19,486 Taxation 21 (2,461) (5,456) Profit for the year 3,852 14,030 Other comprehensive income - - Total comprehensive income for the year 3,852 14,030 10 Nqaba Finance 1 (RF) Ltd Statement of changes in equity for the year ended 31 March 2016 Share capital Retained Total equity Note income R '000 R '000 R '000 Balance at 01 April 2014 - 27,800 27,800 Total comprehensive income for the year - 14,030 14,030 Balance at 31 March 2015 - 41,830 41,830 Total comprehensive income for the year - 3,852 3,852 Balance 31 March 2016 11 - 45,682 45,682 11 Nqaba Finance 1 (RF) Ltd Statement of cash flows for the year ended 31 March 2016 Note 2016 2015 R '000 R '000 Cash flows from operating activities Cash generated from operations 22 164,977 163,966 Finance income 6,759 6,591 Finance costs 16 (160,864) (153,203) Income tax paid 9 (7,150) (2,891) Net cash from operating activites 3,722 14,464 Cash flows from investing activities (Increase) / Decrease in non-current trade and other receivables (1) 1,236 Increase in non-current loans receivable (2,060) (1,924) Net cash from investing activities (2,061) (688) Cash flows from financing activities Increase in borrowings 1,707 1,149 Net cash from financing activities 1,707 1,149 Net increase in cash and cash equivalents 3,368 14,925 Cash and cash equivalents at the beginning of the year 74,878 59,953 Cash and cash equivalents at the end of the year 10 78,246 74,878 12 Nqaba Finance 1 (RF) Ltd Notes to the financial statements for the year ended 31 March 2016 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, unless otherwise stated, the nature and effect of such changes are discussed in note 28. 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 2016 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 a going concern basis. Basis of measurement The financial statements are prepared on the historical cost basis except for derivatives held for risk management 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. 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. All non-derivative financial assets are recognised on the date of commitment to purchase (trade date). Financial assets are derecognised when the rights to receive cash flows from the investments have expired or when the company has transferred substantially all the risks and rewards of ownership. Non-derivative financial assets, plus any directly attributable transaction costs, are recognised initially at fair value. 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. Loans and receivables Trade and other receivables are classified as loans and receivables. Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market, other than: ● those that management intends to sell immediately or in the short term, which are classified as held-for-trading; ● those that upon initial recognition are designated as available-for-sale; ● those for which the compnay may not recover substantially all of its initial investment, other than because of credit deterioration, which shall be classified as available-for-sale. 13 Nqaba Finance 1 (RF) Ltd Notes to the financial statements for the year ended 31 March 2016 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, loans and receivables are measured at amortised cost using the effective interest method, less any accumulated impairment losses. Fair value Included in the financial trading assets are derivatives held for risk management. The fair values of trading assets are based on quoted bid prices if available. For assets that are not quoted in an active market, valuation techniques are used. Where pricing models are used, inputs are based on market-related measures at the reporting date. Where discounted cash flow techniques are used, estimated future cash flows are based on management's best estimates and the discount rate is a market-related rate for a financial asset with similar terms and conditions at the reporting date. The fair value of trade and other receivables for disclosure purposes is estimated as the present value of future cash flows, discounted at the market rate of interest at the reporting date. 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. In the case of equity securities classified as available-for-sale, a significant or prolonged decline in the fair value of the security below its cost or adverse changes in the technological, market or economic environment in which the entity operates are considered to be indicators that the securities are impaired. ● 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). 14 Nqaba Finance 1 (RF) Ltd Notes to the financial statements for the year ended 31 March 2016 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 fair value through profit or loss (held-for-trading) An instrument is classified at fair value through profit or loss if it is held-for-trading or is designated as such upon initial recognition. An instrument may only be designated at fair value through profit or loss when certain criteria are met. The company has not elected to designate financial liabilities at fair value through profit or loss. A financial liability is classified as held-for-trading if it is: ● incurred principally for the purpose of selling or repurchasing in the near term; ● part of a portfolio of identified financial instruments that is managed together and for which there is evidence of a recent pattern of short-term profit taking; or ● a derivative instrument. Subsequent to initial recognition, financial liabilities at fair value through profit or loss continue to be measured at fair value. Financial liabilities at amortised cost Financial liabilities that are not held-for-trading are classified as financial liabilities at amortised cost. Residential backed mortgage securities, that are not held-for-trading are classified as held at amortised cost. 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. Fair value The fair value of financial trading liabilities is based on quoted offer prices. For liabilities that are not quoted in an active market, valuation techniques are used. Where pricing models are used, inputs are based on market related measures at the reporting date. Where discounted cash flow techniques are used, estimated future cash flows are based on management's best estimates and the discount rate is a market-related rate for a financial liability with similar terms and conditions at the reporting date. (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 quoted market prices, discounted cash flow models and option pricing 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. 1.3 Share capital Ordinary shares are classified as equity. 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. 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. 15 Nqaba Finance 1 (RF) Ltd Notes to the financial statements for the year ended 31 March 2016 1.5 Deferred tax (continued) 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 is provided on temporary differences arising on investments in subsidiaries and associates, except where the timing of the reversal of the temporary difference is controlled by the company and it is probable that the temporary difference will not reverse in the foreseeable future. 1.6 Impairment of non-financial assets The carrying amounts of the company's non-financial assets, deferred tax assets and tax assets, are reviewed at each reporting date to determine whether there is any indication of impairment. Assets that have an indefinite useful life, for example land, are not subject to depreciation or amortisation and are tested annually for impairment. Assets that are subject to depreciation or amortisation are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognised for the amount by which the asset's carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset's fair value less costs to sell and value in use. For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows (cash-generating units). Non-financial assets that were subject to impairment are reviewed for possible reversal of the impairment at each reporting date. The impairment (loss)/reversal is recognised in profit or loss within net impairment (loss)/reversal. 1.7 Interest income and interest expense Interest income comprises interest receivable on loans receivable and trade and other receivables. Interest income is recognised as it accrues in profit or loss, using the effective interest method. Interest expense comprises of interest payable on debt securities issued. 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 is recognised when the significant risks and rewards of ownership are transferred to the buyer and the amount of revenue can be measured reliably. Other income comprises commission income, rentals on repossessed property and income from financial market investments. Interest income earned on swap diferrential is recognised as it accrues in profit or loss using the effective interest method. 1.8 Finance income Finance income comprises interest received on cash and cash equivalents. 1.9 Finance expense Finance expense comprises interest payable on debt securities issued. 1.10 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. 1.11 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 Memrandum. 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. 16 Nqaba Finance 1 (RF) Ltd Notes to the financial statements for the year ended 31 March 2016 1.12 Properties in possession Properties in possession are recognised initially at the lower of fair value of the property or outstanding balance. Properties in possession are subsequently measured at the lower of fair value of the property or the initially recognised value. Valuations are performed semi-annually by independent assessors. 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 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. 17 Nqaba Finance 1 (RF) Ltd Notes to the financial statements for the year ended 31 March 2016 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 and risk management 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. Counter party 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. 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 R87 million (2015: R92 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 2016 was: 2016 2015 Weighted average current loan to value ratio (%) 66.24% 65.69% The average loan amount in relation to the total home loan book value at 31 March was: Average loan amount - Home loans 247,489 235,775 Loan amount as a percentage of the loan book (%) 0.015% 0.012% 18 Nqaba Finance 1 (RF) Ltd Notes to the financial statements for the year ended 31 March 2016 3. Financial risk management (continued) Management of credit risk Financial instruments managed by the treasury function Credit risk arises from cash and cash equivalents and derivatives held for risk management. Processes are in place to identify, measure, monitor, control and report credit risk. The objective of Eskom's credit risk management framework is firstly to protect cash and investments and, secondly to project and maximise the rate of return of financial market investments. (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 2016 AAA 78,246 1,173 - - Unrated - - 1,906,397 18,477 78,246 1,173 1,906,397 18,477 2015 AAA 74,878 6,045 - - Unrated - - 1,906,049 15,157 74,878 6,045 1,906,049 15,157 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: 2016 2015 R '000 R '000 Loans and advances Home loans 1,906,397 1,906,049 1,906,397 1,906,049 Other receivables Sundry receivables 18,477 15,157 18,477 15,157 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 19 Nqaba Finance 1 (RF) Ltd Notes to the financial statements for the year ended 31 March 2016 3. Financial rRisk 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 2015 Collectively assesssed for impairment Home loans 1,910,252 1,873,169 12,892 5,633 18,558 Impairment Home loans (4,203) (2,035) (166) (72) (1,930) 1,906,049 1,871,134 12,726 5,561 16,628 Mortgage advances include an amount of R21 million (2015: R21 million) relating to receivables that were renegotiated. These mortgage advances would have been past due had their terms not been renegotiated. Allowance for impairment The movement in the allowance for impairment in respect of properties in possession, home loans during the year is as follows: 2016 2015 R '000 R '000 Balance at the beginning of the year 4,400 6,200 Impairment loss (reversal) recognised 1,457 (1,800) Balance at the end of the year 5,857 4,400 Comprising: Home loans 5,453 4,203 Properties in possession 404 197 5,857 4,400 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. 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. 20 Nqaba Finance 1 (RF) Ltd Notes to the financial statements for the year ended 31 March 2016 3. Financial risk management (continued) The company's interest rate risk arises mainly from debt securities issued. 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. 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. 2016 2016 2015 2015 +100 basis -100 basis +100 basis -100 basis point point point point R' 000 R' 000 R' 000 R' 000 Effect on Profit/ (Loss) Rand interest rate 3,301 (3,301) 3,251 (3,251) The company has elected not to hedge interest risk. 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. 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. 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. In the event that notes are not refinanced on the scheduled maturity date, 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 commitment 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. 21 Nqaba Finance 1 (RF) Ltd Notes to the financial statements for the year ended 31 March 2016 3. Financial risk management (continued) Contractual cash flows The management of liquidity and funding risk is centralised in the 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 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. 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 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 22 Nqaba Finance 1 (RF) Ltd Notes to the financial statements for the year ended 31 March 2016 3. Financial risk management (continued) 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 2015 Financial assets Loans receivable 1,904,763 1,286 1,906,049 1,906,049 60,227 180,223 929,013 2,767,835 Derivatives held for risk management 3,576 2,469 6,045 6,045 700 1,769 3,517 59 Trade and other receivables - 15,157 15,157 15,157 15,157 - - - Cash and cash equivalents - 74,878 74,878 74,878 74,878 - - - 1,908,339 93,790 2,002,129 2,002,129 150,962 181,992 932,530 2,767,894 Financial liabilities Debt securities issued 1,344,000 329,559 1,673,559 1,673,559 329,559 - 1,208,000 136,000 First loss credit enhancement loan - 293,269 293,269 293,269 293,269 - - - Trade and other payables - 712 712 712 712 - - - 1,344,000 623,540 1,967,540 1,967,540 623,540 - 1,208,000 136,000 Liquidity gap 564,339 (529,750) 34,589 34,589 (472,578) 181,992 (275,470) 2,631,894 23 Nqaba Finance 1 (RF) Ltd Notes to the financial statements for the year ended 31 March 2016 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 2016 Financial assets Non-current Loans receivable - 1,904,978 - 1,904,978 1,774,305 - 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 1,231,000 Derivatives held for risk management 288 - - 288 288 288 - 1,231,000 1,231,288 1,231,288 Current Debt securities issued - - 443,815 443,815 443,815 First loss credit enhancement loan - - 293,720 293,720 293,720 Trade and other payables - - 1,511 1,511 1,511 - - 739,046 739,046 739,046 Total financial liabilities 288 - 1,970,046 1,970,334 1,970,334 Loans receivable are held to maturity and there would therefore be no impact on equity arising from fair value gains or losses. 24 Nqaba Finance 1 (RF) Ltd Notes to the financial statements for the year ended 31 March 2016 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 2015 Financial assets Non-current Loans receivable - 1,904,763 - 1,904,763 1,774,915 Derivatives held for risk management 3,576 - - 3,576 3,576 3,576 1,904,763 - 1,908,339 1,778,491 Current Loans receivable - 1,286 - 1,286 718 Derivatives held for risk management 2,469 - - 2,469 2,469 Trade and other receivables - 15,157 - 15,157 15,157 Cash and cash equivalents - 74,878 - 74,878 74,878 2,469 91,321 - 93,790 93,222 Total financial assets 6,045 1,996,084 - 2,002,129 1,871,713 Financial liabilities Non-current Debt securities issued - - 1,344,000 1,344,000 1,344,000 - - 1,344,000 1,344,000 1,344,000 Current Debt securities issued - - 329,559 329,559 329,559 First loss credit enhancement loan - - 293,269 293,269 293,269 Trade and other payables - - 712 712 712 - - 623,540 623,540 623,540 Total financial liabilities - - 1,967,540 1,967,540 1,967,540 Collateral obtained There were no debtors that defaulted on their accounts and as a result, no mortgage bonds were called upon (2015: R0.2 million). 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. Other than the application of IFRS 13 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). 25 Nqaba Finance 1 (RF) Ltd Notes to the financial statements for the year ended 31 March 2016 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 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 - Trade and other receivables - 18,477 - Cash and cash equivalents - 78,246 - - 1,872,288 - 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 - Trade and other payables - 1,511 - - 1,970,046 - 26 Nqaba Finance 1 (RF) Ltd Notes to the financial statements for the year ended 31 March 2016 3. Financial risk management (continued) Fair value Level 1 Level 2 Level 3 2015 R '000 R '000 R '000 Assets measured at fair value Derivatives held for risk management Interest rate swaps - 6,045 - - 6,045 - Assets not measured at fair value Loans receivables Residential mortgage backed securities - 1,775,633 - Trade and other receivables - 15,157 - Cash and cash equivalents - 74,878 - - 1,865,668 - Liabilities measured at fair value Derivatives held for risk management Interest rate swaps - - - - - - Liabilities not measured at fair value Debt securities issued Commercial paper - 1,673,559 - First loss credit enhancement loan Subordinated loan - 293,269 - Trade and other payables - 712 - - 1,967,540 - 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. 27 Nqaba Finance 1 (RF) Ltd Notes to the financial statements for the year ended 31 March 2016 2016 2015 R '000 R '000 4. Properties in possession Gross 892 892 Impairments (404) (197) 488 695 5. Loans receivable Secured by mortgage 1,906,397 1,906,049 1,906,397 1,906,049 Maturity analysis Non-current 1,904,978 1,904,763 Current 1,419 1,286 1,906,397 1,906,049 The loans receivable are split into non-current and current based on the maturity dates of the loans. 2016 2015 6. Deferred tax R '000 R '000 Deferred tax assets/(liability) Balance at the beginning of the year (76) 4,337 Recognised in profit or loss 1,058 (4,413) 982 (76) Reconciliation of deferred tax asset/(liability) Balance at beginning of year (76) 4,337 Prior year under or over adjustment (693) - Doubtful debts allowances S11(j) (103) 126 Originating differences on provisions 408 (504) Reversing differences on fair value swaps 1,446 (4,035) 982 (76) 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 28 Nqaba Finance 1 (RF) Ltd Notes to the financial statements for the year ended 31 March 2016 7. Derivatives held for risk management 2016 2015 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 1,173 (288) 885 6,045 - 6,045 1,173 (288) 885 6,045 - 6,045 Reconciliation Derivatives held for risk management Balance at the beginning of the year 6,278 (233) 6,045 2,708 (233) 2,475 Charged to profit or loss (5,105) (55) (5,160) 3,570 - 3,570 1,173 (288) 885 6,278 (233) 6,045 Maturity analysis Non-current - (288) (288) 3,576 - 3,576 Current 1,173 - 1,173 2,469 - 2,469 1,173 (288) 885 6,045 - 6,045 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 R2.7 million (2015: R3.6 million). 8. Trade and other receivables 2016 2015 R '000 R '000 Gross 18,477 15,157 Impairment - - 18,477 15,157 9. Income tax paid Balance at the beginning of the year 6,622 4,775 Current tax for the year recognised in profit or loss (3,519) (1,044) Balance at the end of the year (10,253) (6,622) (7,150) (2,891) 10. Cash and cash equivalents Bank balances 78,246 74,878 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. 29 Nqaba Finance 1 (RF) Ltd Notes to the financial statements for the year ended 31 March 2016 2016 2015 12. Debt securities issued R '000 R '000 Commercial paper 1,674,815 1,673,559 Maturity analysis Non-current 1,231,000 1,344,000 Current 443,815 329,559 1,674,815 1,673,559 Notes Currency Interest rate Maturity date Nominal Carrying value 2016 2015 2016 2015 2016 2015 % % R' 000 R' 000 R' 000 R' 000 Floating rate notes Class A15 ZAR - 7.01 May-15 - 303,000 - 305,171 Class B14 ZAR - 7.20 May-15 - 8,000 - 8,059 Class C14 ZAR - 7.55 May-15 - 5,000 - 6,050 Class A11 ZAR 8.24 7.35 May-16 205,000 205,000 206,808 206,532 Class D6 ZAR 9.63 8.74 May-16 24,000 24,000 24,247 24,213 Class A16 ZAR 7.84 6.95 May-16 200,000 200,000 201,679 201,414 Class A18 ZAR 7.94 7.05 May-17 318,000 318,000 320,695 320,272 Class B16 ZAR 8.14 7.25 May-17 32,000 32,000 32,278 32,235 Class C16 ZAR 8.39 7.50 May-17 32,000 32,000 32,287 32,243 Class A17 ZAR 8.09 7.20 May-18 302,000 302,000 304,616 304,211 Class B15 ZAR 8.24 7.35 May-18 40,000 40,000 40,353 40,299 Class C15 ZAR 8.34 7.45 May-18 25,000 25,000 25,223 25,189 Class D7 ZAR 8.54 7.65 May-18 30,000 30,000 30,274 30,233 Class A19 ZAR 8.38 - May-18 303,000 - 305,711 - Class D5 ZAR 8.81 9.35 May-20 5,000 5,000 5,055 5,048 Class B17 ZAR 8.54 - May-20 8,000 - 8,075 - Class C17 ZAR 9.24 - May-20 5,000 - 5,049 - Fixed rate notes Class A10 ZAR 10.44 10.44 May-20 115,000 115,000 116,282 116,216 Class B10 ZAR 10.64 10.64 May-20 11,000 11,000 11,125 11,119 Class C10 ZAR 10.84 10.84 May-20 5,000 5,000 5,058 5,055 1,660,000 1,660,000 1,674,815 1,673,559 During the period, there were no loans overdue. Class A11, A16, A17, A18, A19, B15, B16, B17, C15, C16, C17, D5, D6 and D7 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: ● 1.25% per annum in relation to Class A11 Notes; ● 0.85% per annum in relation to Class A16 Notes; ● 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; ● 1.25% 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; ● 2.64% per annum in relation to Class D6 Notes; and ● 1.55% per annum in relation to Class D7 Notes; 30 Nqaba Finance 1 (RF) Ltd Notes to the financial statements for the year ended 31 March 2016 12. Debt securities issued (continued) Class A10, B10 and C10 are Secured fixed rate notes. The fixed interest rate of these notes were: ● 10.435% per annum in relation to Class A10 Notes; ● 10.635% per annum in relation to Class B10 Notes; and ● 10.835% 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 2016. 2016 2015 13. First loss credit enhancement loan R '000 R '000 Subordinated loan - Eskom Finance Company SOC Limited 290,000 290,000 Accrued interest 3,720 3,269 293,720 293,269 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 1,511 712 Maturity analysis Current 1,511 712 15. Interest income Interest revenue 175,816 167,269 16. Finance expense Interest paid on debt securities issued 127,865 121,405 Interest paid on sub loan 32,999 31,798 160,864 153,203 31 Nqaba Finance 1 (RF) Ltd Notes to the financial statements for the year ended 31 March 2016 2016 2015 17. Other income R '000 R '000 Swap income received 2,718 3,151 Call account - ABSA Bank Limited 4,041 3,440 6,759 6,591 18. Net impairment loss Impairment charge / (reversal) 1,457 (1,800) Loan losses 463 1,051 1,920 (749) 19. Net fair value (loss)/gain on financial instruments Interest rate swaps (5,160) 3,570 (5,160) 3,570 20. Other operating expenses Auditors fees 589 330 Management fees 570 571 Servicer fees 3,307 3,272 Liquidity facility fee 196 42 Redraw facility fees 2,477 479 Back up servicer fees 193 191 JSE fixed fee 80 53 Owner trustee fee 237 170 Rating fee 245 245 Rating fee expense (19) - National Credit Regulator fee 87 87 Credit ombudsman 80 50 Bond issue fees 57 - Strate fixed fee 219 - 8,318 5,490 21. Taxation Major components of tax expense Income tax 3,519 1,044 Deferred tax (1,058) 4,412 Total income tax in profit or loss 2,461 5,456 Reconciliation of tax expense Taxation as a percentage of profit before tax 38.98% 28.00% Taxation effect of: Expenses not deductible for tax purposes -1.48% 0.00% Prior year adustments -9.50% 0.00% Other 0.00% 0.00% Standard tax rate 28.00% 28.00% 22. Cash generated from operations Profit before taxation 6,313 19,486 Adjustments for: Irrecoverable advances written off 463 1,051 Finance income (6,759) (6,591) Finance costs 160,864 153,203 Net impairment loss (excluding bad debts recovered) 1,457 (1,800) Net fair value gain/(loss) on financial instruments 5,160 (3,570) Changes in working capital: Trade and other receivables (3,320) 2,723 Trade and other payables 799 (536) 32 164,977 163,966 Nqaba Finance 1 (RF) Ltd Notes to the financial statements for the year ended 31 March 2016 23. Commitments 2016 2015 R '000 R '000 Nqaba further loans approved but not yet disbursed Loans and advances 5,186 380,916 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 (2015: 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 R33 million (2015: R32 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 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 2016 2015 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 3,720 3,269 Servicing fees 315 299 294,035 293,568 Transactions Purchases of goods and services Servicing fees 3,281 3,272 Finance cost Eskom Finance Company SOC Limited 32,999 31,798 33 Nqaba Finance 1 (RF) Ltd Notes to the financial statements for the year ended 31 March 2016 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. 2016 2015 R '000 R '000 Transactions Owner trustee fees 170 170 Outstanding balances (due by related parties) Owner trustee fees 50 20 50 20 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 2016, are scheduled to be re-financed on 22 May 2016. 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. 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. The fee paid to Maitland for their services to the securitisation structure is disclosed in note 25. 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: IFRS 9, Financial instruments (effective 1 January 2018) IFRS 9 retains but simplifies the mixed measurement model in IAS 39 and establishes three primary measurement categories for financial assets: amortised cost, fair value through other comprehensive income and fair value through profit and loss. The basis of classification depends on the entity’s business model and the contractual cash flow characteristics of the financial asset includes a new expected credit loss model that replaces the incurred loss model used in IAS 39. There are no changes to classification and measurement for financial liabilities except changes in own credit risk for liabilities designated at fair value through profit or loss are recognised in other comprehensive income. 34 Nqaba Finance 1 (RF) Ltd Notes to the financial statements for the year ended 31 March 2016 28.2 Standards, interpretations and amendments to published standards that are effective and applicable to the company The company has adopted the following new standards, interpretation and amendments to existing standards for the first time for the financial year ended 31 March 2016. The nature and effect of the changes are as follows: Annual improvements 2012 (effective 1 July 2014) These improvements amend standards from the 2010 – 2012 reporting cycle. The changes affect IFRS 2 Share based payments, IFRS 3 Business combinations, IFRS 8 Operating segments, IFRS 13 Fair value, IFRS 16 Property, plant and equipment and IAS 24 Related party disclosures. Annual improvements 2013 (effective 1 July 2014) These improvements amend standards from the 2011 – 2013 reporting cycle. The changes affect IFRS 1 First time adoption of IFRS, IFRS 3 Business combinations, IFRS 13 Fair value and IAS 40 Investment property. 35