GRAP 26 Impairment of Cash-generating Assets
43.9 Bulk Electricity and Water Losses in terms of Section 125 (2)(d)(i) of the MFMA (Continued)
Water:
Lost Units Tariff Value
30 June 2013 Unaccounted Water Losses 732,444 3.7000 2,710,043
30 June 2012 Unaccounted Water Losses 711,163 3.2500 2,311,280
2013 2012
R R
Volumes in Kl/year:
System Input Volume 2,179,992 2,095,131
Billed Consumption 1,447,548 1,383,968
Distribution Loss 732,444 711,163
Percentage Distribution Loss 33.60% 33.94%
Loss (R): 2,710,043 2,311,280
44 COMMITMENTS FOR EXPENDITURE 44.1 Capital Commitments
Commitments in respect of Capital Expenditure:
- Approved and Contracted for:- 36,236,551 21,654,632
Infrastructure 34,236,551 19,975,632
Other 2,000,000 1,679,000
- Approved but Not Yet Contracted for:- - 2,440,000
Infrastructure - -
Other - 2,440,000
Total Capital Commitments 36,236,551 24,094,632
This expenditure will be financed from:
Government Grants 36,236,551 24,094,632
Own Resources - -
36,236,551
24,094,632 0.00-
0.00- 44.2 Lease Commitments
44.3 Other Commitments
45 FINANCIAL INSTRUMENTS 45.1 Classification FINANCIAL ASSETS:
Long-term Receivables
Housing Loans Amortised cost 62,976 82,165
Receivables from Exchange Transactions
Electricity Amortised cost 1,366,352 1,084,520
Refuse Amortised cost 249,567 (19,042)
Sewerage Amortised cost 681,887 1,250,778
Water Amortised cost 1,838,663 866,632
Other Receivables Amortised cost 335,362 197,837
Receivables from Non-exchange Transactions
The municipality has entered into a contract with Geo-spatial Informations Solutions (Pty) Ltd Consultants on 01 November 2012 for an annual license fee of R 35 482 as well as a fee for monthly Support and Maintenance of R 6 118 that increases by 10% per annum. The contract
In accordance with GRAP 104.13 the Financial Assets of the municipality are classified as follows:
Financial Assets Classification
Finance Lease Liabilities are disclosed in Notes 17.
The municipality has entered into a 3 year contract with Ducharme Consulting Services during June 2013 for assistance with the compilation of the Annual Financial Statements, the charges will be billed on a monthly basis as assistance is required.
Water Losses occur due tointer alia, leakages, the tampering of meters, the incorrect ratios used on bulk meters, faulty meters and illegal water connections. The problem with tampered meters and illegal connections is an ongoing process, with regular action being taken against defaulters.
Faulty meters and leakages are replaced/repaired as soon as they are reported.
45 FINANCIAL INSTRUMENTS (Continued):
SUMMARY OF FINANCIAL ASSETS Financial Assets at Amortised Cost:
Long-term Receivables Housing Loans 62,976 82,165
Receivables from Exchange Transactions Electricity 1,366,352 1,084,520
Receivables from Exchange Transactions Refuse 249,567 (19,042)
Receivables from Exchange Transactions Sewerage 681,887 1,250,778
Receivables from Exchange Transactions Water 1,838,663 866,632
Receivables from Exchange Transactions Other Debtors 335,362 197,837
Receivables from Non-exchange Transactions Assessment Rates Debtors 1,116,291 1,377,453 Receivables from Non-exchange Transactions Payments made in Advance 20,000 - Receivables from Non-exchange Transactions Sundry Deposits 26,389 25,033
Receivables from Non-exchange Transactions Sundry Debtors 463,160 934,102
Receivables from Non-exchange Transactions Suspense Accounts 40,106 33,015 Receivables from Non-exchange Transactions Irregular Expenditure 61,820 -
Short-term Receivables VAT Receivable 214,687 -
Current Portion of Long-term Receivables Housing Loans 16,987 14,044
6,494,246
5,846,538 Financial Assets at Fair Value:
Cash and Cash Equivalents Bank Balances 2,813,727 1,721,278
Cash and Cash Equivalents Cash Floats and Advances 800 800
2,814,527
1,722,078
Total Financial Assets 9,308,773 7,568,616
-
- FINANCIAL LIABILITIES:
Long-term Liabilities
Finance Lease Liabilities Amortised cost 2,081,336 2,601,292
Payables from Exchange Transactions
Trade Creditors Amortised cost 8,183,254 4,941,097
Other Creditors Amortised cost 1,156,326 781,674
Payables from Non-exchange Transactions
Staff Bonuses Amortised cost 945,347 786,329
Staff Leave Accrued Amortised cost 1,205,297 932,479
Staff Task Evaluation Amortised cost - 416,548
Staff Salaries Amortised cost - -
Sundry Deposits Amortised cost 4,286,579 1,473,477
VAT Payables Amortised cost - 379,706
Current Portion of Long-term Liabilities
Finance Lease Liabilities Amortised cost 519,957 471,139
18,378,095
12,783,741 SUMMARY OF FINANCIAL LIABILITIES
Financial Liabilities at Amortised Cost:
Long-term Liabilities Finance Lease Liabilities 2,081,336 2,601,292
Payables from Exchange Transactions Trade Creditors 8,183,254 4,941,097
Payables from Exchange Transactions Other Creditors 1,156,326 781,674
Payables from Non-exchange Transactions Staff Bonuses 945,347 786,329
Payables from Non-exchange Transactions Staff Leave Accrued 1,205,297 932,479
Payables from Non-exchange Transactions Staff Task Evaluation - 416,548 Payables from Non-exchange Transactions Staff Salaries - -
Payables from Non-exchange Transactions Sundry Deposits 4,286,579 1,473,477
Short-term Payables VAT Payables - 379,706
In accordance with GRAP 104.13 the Financial Liabilities of the municipality are classified as follows:
Financial Liabilities Classification
45.2 Fair Value (Continued):
Long-term Investments
Loan Receivables/Payables
Trade and Other Receivables/Payables
Other Financial Assets and Liabilities
Long-term Liabilities
Carrying Fair Carrying Fair
Amount Value Amount Value
R R R R
FINANCIAL ASSETS
Measured at Amortised Cost: 6,494,246 6,494,246 5,846,538 5,846,538 Long-term Receivables 62,976 62,976 82,165 82,165 Trade Receivables from Exchange Transactions 4,471,831 4,471,831 3,380,725 3,380,725 Trade Receivables from Non-exchange Transactions 1,727,765 1,727,765 2,369,603 2,369,603 Short-term Receivables 214,687 214,687 - - Current Portion of Long-term Receivables 16,987 16,987 14,044 14,044 Measured at Fair Value 2,814,527 2,814,527 1,722,078 1,722,078 Bank Balances and Cash 2,814,527 2,814,527 1,722,078 1,722,078 Total Financial Assets 9,308,773 9,308,773 7,568,616 7,568,616
0.00-
0.00-
FINANCIAL LIABILITIES
Measured at Amortised Cost: 18,378,095 18,378,095 12,783,741 12,783,741 Finance Lease Liabilities 2,081,336 2,081,336 2,601,292 2,601,292 Short-term Payables - - 379,706 379,706 Trade and Other Payables:
- Payables from Exchange Transactions 9,339,580 9,339,580 5,722,771 5,722,771 - Payables from Non-exchange Transactions 6,437,223 6,437,223 3,608,833 3,608,833 - Current Portion of Long-term Liabilities 519,957 519,957 471,139 471,139 Measured at Fair Value - - - - Bank Overdraft - - - - Total Financial Liabilities 18,378,095 18,378,095 12,783,741 12,783,741
0.00-
0.00-
Total Financial Instruments (9,069,322) (9,069,322) (5,215,126) (5,215,126)
Unrecognised Gain / (Loss) - -
Assumptions used in determining Fair Value of Financial Assets and Financial Liabilities
Management considers the carrying amounts of Financial Assets and Financial Liabilities recorded at amortised cost in the Annual Financial Statements to approximate their Fair Values on 30 June 2013, as a result of the short-term maturity of these assets and liabilities.
The Fair Values of Financial Assets and Financial Liabilities, together with the carrying amounts shown in the Statement of Financial Position, are as follows:
30 June 2013 30 June 2012
The Financial Instruments of the municipalitity have been reclassified as disclosed in Note 35.2, Change in Accounting Policy.
No Financial Instruments of the municipalitity have been reclassified during the year.
The table below analyses Financial Instruments carried at Fair Value at the end of the reporting period by the level of fair-value hierarchy as Interest-bearing Borrowings and Receivables are generally at interest rates in line with those currently available in the market on a floating-rate basis, and therefore the Fair Value of these Financial Assets and Liabilities closely approximates their carrying values. Fixed interest-rate instruments are fair valued based on the present value of future principal and interest cash flows, discounted at the market rate of interest at the reporting date.
The Fair Value of Trade and Other Payables is estimated at the present value of future cash flows.
The management of the municipality is of the opinion that the carrying value of Trade and Other Receivables recorded at amortised cost in the Annual Financial Statements approximate their fair values. The Fair Value of Trade Receivables were determined after considering the standard terms and conditions of agreements entered into between the municipality and other parties as well as the the current payment ratio's of the municipality's debtors.
The Fair Value of Other Financial Assets and Financial Liabilities (excluding Derivative Instruments) is determined in accordance with generally accepted pricing models based on discounted cash flow analysis using prices from observable current market transactions and dealer quotes for similar instruments.
The Fair Value of Long-term Liabilities was determined after considering the standard terms and conditions of agreements entered into between the municipality and the relevant financing institutions.
The Fair Value of some Investments are estimated based on quoted market prices of those or similar investments. Unlisted Equity Investments are estimated using the discounted cash flow method.
30 June 2013
Level 1 Level 2 Level 3 Total
R R R R
FINANCIAL ASSETS
Financial Instruments at Fair Value:
Bank Balances and Cash - 2,814,527 - 2,814,527 Total Financial Assets - 2,814,527 - 2,814,527 FINANCIAL LIABILITIES
Financial Instruments at Fair Value:
Bank Overdraft - - - - Total Financial Liabilities - - - - Total Financial Instruments - 2,814,527 - 2,814,527 30 June 2012
Level 1 Level 2 Level 3 Total
R R R R
FINANCIAL ASSETS
Financial Instruments at Fair Value:
Bank Balances and Cash - 1,722,078 - 1,722,078 Total Financial Assets - 1,722,078 - 1,722,078 FINANCIAL LIABILITIES
Financial Instruments at Fair Value:
Bank Overdraft - - - - Total Financial Liabilities - - - - Total Financial Instruments - 1,722,078 - 1,722,078 45.3 Capital Risk Management
Gearing Ratio
Debt 9,038,515 7,060,970
Cash and Cash Equivalents (2,814,527) (1,722,078)
Net Debt 6,223,988 5,338,892
Equity 247,577,054 237,401,511
Net debt to equity ratio 2.51% 2.25%
45.4 Financial Risk Management Objectives
Due to the largely non-trading nature of activities and the way in which they are financed, municipalities are not exposed to the degree of financial risk faced by business entities. Financial Instruments play a much more limited role in creating or changing risks that would be typical of listed companies to which the IAS's mainly apply. Generally, Financial Assets and Liabilities are generated by day-to-day operational activities and are not held to manage the risks facing the municipality in undertaking its activities.
The Department Financial Services monitors and manages the financial risks relating to the operations through internal policies and procedures.
These risks include interest rate risk, credit risk and liquidity risk. Compliance with policies and procedures is reviewed by the internal auditors on a continuous basis, and annually by external auditors. The municipality does not enter into or trade financial instruments for speculative purposes.
In terms of themunicipality’s five year financial plan, financial benchmarks, year-on-year in respect of the debt-to-equity ratio, is reflected at 2,61%, increasing 0,36%. This ratio is as a result of the Municipalities structure where they rely on government grants to fund all major projects and they seldom use external; funding. The rate of borrowing is at market related rates.
The gearing ratio at the year-end was as follows:
Debt is defined as Long- and Short-term Liabilities.
Equity includes all Funds and Reserves of the municipality, disclosed as Net Assets in the Statement of Financial Performance and Net Debt as described above.
The Accounting Officer has overall responsibility for the establishment and oversight of the municipality's risk management framework. The municipality's risk management policies are established to identify and analyse the risks faced by the municipality, to set appropriate risk limits and controls and to monitor risks and adherence to limits.
The municipality manages its capital to ensure that the municipality will be able to continue as a going concern while delivering sustainable services to consumers through the optimisation of the debt and equity balance. The municipality’s overall strategy remains unchanged from 2012.
The capital structure of the municipality consists of debt, which includes the Long-term Liabilities disclosed in Note 17, Cash and Cash Equivalents and Equity, comprising Funds, Reserves and Accumulated Surplus as disclosed in Note 20 and the Statement of Changes in Net
45.5 Significant Risks (Continued):
Market Risk
Credit Risk
Liquidity Risk
45.6 Market Risk
45.6.1 Interest Rate Risk Management
Interest Rate Sensitivity Analysis
Finance Lease Liabilities:
45.7 Credit Risk Management
Credit Riskrefers to the risk that a counterparty will default on its contractual obligations resulting in financial loss to the municipality. The municipality has a sound credit control and debt collection policy and obtains sufficient collateral, where appropriate, as a means of mitigating the risk of financial loss from defaults. The municipality uses its own trading records to assess its major customers. Themunicipality’s exposure of its counterparties are monitored regularly.
If interest rates had been 100 basis points higher / lower and all other variables were held constant, the municipality’s:
• Surplus for the year ended 30 June 2013 would have decreased / increased by R19,699 (30 June 2012: decreased / increased by R22,142).
This is mainly attributable to the municipality’s exposure to interest rates on its variable rate borrowings; and
Themunicipality’s sensitivity to interest rates has decreased during the current period mainly due to the reduction in variable rate debt instruments.
The sensitivity analysis below was determined based on the exposure to interest rates at the reporting date. For variable rate long-term instruments, the analysis is prepared assuming the amount of the instrument outstanding at the reporting date was outstanding for the whole year.
A 100 basis point increase or decrease was used, which representsmanagement’s assessment of the reasonably possible change in interest rates. The short and long-term financial instruments at year-end with variable interest rates are set out in Appendix A.
Consumer Debtors comprise of a large number of ratepayers, dispersed across different industries and geographical areas. Ongoing credit evaluations are performed on the financial condition of these debtors. Consumer debtors are presented net of a provision for impairment.
In the case of debtors whose accounts become in arrears, it is endeavoured to collect such accounts by "levying of penalty charges", "demand for payment", "restriction of services" and, as a last resort, "handed over for collection", whichever procedure is applicable in terms of Council's Credit Control and Debt Collection Policy. Consumer Deposits are increased accordingly.
Long-term Receivables and Other Debtors are individually evaluated annually at Balance Sheet date for impairment or discounting. A report on the various categories of debtors is drafted to substantiate such evaluation and subsequent impairment / discounting, where applicable.
The municipality is exposed to interest rate risk as the municipality borrows funds at both fixed and floating interest rates. The risk is managed by the municipality by maintaining a steady inflow of cash in order to finance the interest expense.
Themunicipality’s activities expose it primarily to the financial risks of changes in interest rateS. No formal policy exists to hedge volatilities in the interest rate market.
There has been no change to the municipality’s exposure to market risks or the manner in which it manages and measures the risk.
Interest Rate Riskis defined as the risk that the fair value or future cash flows associated with a financial instrument will fluctuate in amount as a result of market interest changes.
Financial Assets and Liabilities that are sensitive to interest rate risk are cash and cash equivalents, investments, and loan payables. The municipality is not exposed to interest rate risk on these financial instruments as the rates applicable are fixed interest rates, except for one loan Risks and exposures are disclosed as follows:
Market Risk is the risk that changes in market prices, such as foreign exchange rates, interest rates and equity prices will affect themunicipality’s income or the value of its holdings in Financial Instruments. The objective of market risk management is to manage and control market risk exposures within acceptable parameters, while optimising the return.
Credit Risk is the risk of financial loss to the municipality if a customer or counterparty to a Financial Instrument fails to meet its contractual obligations and arises principally from the municipality’s receivables from customers and investment securities.
Liquidity Risk is the risk that the municipality will encounter difficulty in meeting the obligations associated with its Financial Liabilities that are settled by delivering cash or another financial asset. Themunicipality’s approach to managing liquidity is to ensure, as far as possible, that it will always have sufficient liquidity to meet its liabilities when due, under both normal and stressed conditions, without incurring unacceptable losses or risking damage to the municipality’s reputation.
Liquidity Risk is managed by ensuring that all assets are reinvested at maturity at competitive interest rates in relation to cash flow requirements.
Liabilities are managed by ensuring that all contractual payments are met on a timeous basis and, if required, additional new arrangements are established at competitive rates to ensure that cash flow requirements are met.
The municipality’s activities expose it primarily to the financial risks of changes in interest rates.
Investments/Bank, Cash and Cash Equivalents
Trade and Other Receivables
Trade and Other Receivables are amounts owed by consumers and are presented net of impairment losses. The municipality has a credit risk policy in place and the exposure to credit risk is monitored on an ongoing basis. The municipality is compelled in terms of its constitutional mandate to provide all its residents with basic minimum services without recourse to an assessment of creditworthiness. Subsequently, the municipality has no control over the approval of new customers who acquire properties in the designated municipal area and consequently incur debt for rates, water and electricity services rendered to them.
Consumer Debtors comprise of a large number of ratepayers, dispersed across different industries and geographical areas within the jurisdiction of the municipality. Ongoing credit evaluations are performed on the financial condition of these debtors. Consumer debtors are presented net of a provision for impairment.
In the case of debtors whose accounts become in arrears, it is endeavoured to collect such accounts by "levying of penalty charges", "demand for payment", "restriction of services" and, as a last resort, "handed over for collection", whichever procedure is applicable in terms of Council's Credit Control and Debt Collection Policy.
The municipality limits this risk exposure in the following ways, in addition to its normal credit control and debt management procedures:
• The application of section 118(3) of the Municipal Systems Act (MSA), which permits the municipality to refuse connection of services whilst any amount remains outstanding from a previous debtor on the same property;
• A new owner is advised, prior to the issue of a revenue clearance certificate, that any debt remaining from the previous owner will be transferred to the new owner, if the previous owner does not settle the outstanding amount;
• The consolidation of rates and service accounts, enabling the disconnecting services for the non-payment of any of the individual debts, in terms of section 102 of the MSA;
• The requirement of a deposit for new service connections, serving as guarantee and are reviewed annually;
The municipality limits its counterparty exposures from its money market investment operations (financial assets that are neither past due nor impaired) by only dealing with Absa Bank, First National Bank, Nedbank and Standard Bank. No investments with a tenure exceeding twelve
• Encouraging residents to install water management devices that control water flow to households, and/or prepaid electricity meters.
45.7 Credit Risk Management (Continued):
Trade and Other Receivables (Continued):
2013 2012
R R
Long-term Receivables 92,709 106,754
Consumer Debtors 4,471,831 3,380,725
Other Debtors 1,727,765 2,369,603
Bank, Cash and Cash Equivalents 158,522 1,324,061
Maximum Credit and Interest Risk Exposure 6,450,828 7,181,143
% Consumer Debtors:
- Household 85.14%
- Industrial / Commercial 6.91%
- National and Provincial Government 1.48%
- Other Classes 1.34%
Other Debtors:
- Other not Classified 5.12%
Total Credit Risk 99.99%
Bank and Cash Balances
ABSA Bank Ltd 2,813,727 1,721,278
First National Bank - -
Nedbank - -
Standard Bank - -
Cash Equivalents 800 800
Total Bank and Cash Balances 2,814,527 1,722,078
Credit quality of Financial Assets:
Long-term Receivables
Group 1 - -
Group 2 - -
Group 3 62,976 82,165
Total Long-term Receivables 62,976 82,165
-
- Receivables from Exchange Transactions
Counterparties without external credit rating:-
Group 1 - -
Group 2 - -
Group 3 4,471,831 3,380,725
Total Receivables from Exchange Transactions 4,471,831 3,380,725
Except as detailed in the following table, the carrying amount of financial assets recorded in the Annual Financial Statements, which is net of impairment losses, represents themunicipality’s maximum exposure to credit risk without taking account of the value of any collateral obtained:
The maximum credit and interest risk exposure in respect of the relevant financial instruments is as follows:
The major concentrations of credit risk that arise from the municipality's receivables from exchange transactions in relation to customer classification are as follows:
The credit quality of financial assets that are neither past due nor impaired can be assessed by reference to external credit ratings (if available) or to historical information about counterparty default rates:
Payment of accounts of consumer debtors, who are unable to pay, are renegotiated as an ongoing customer relationship in response to an adverse change in the circumstances of the customer in terms of the Credit Control and Debt Collection Policy.
Long-term Receivables and Other Debtors are individually evaluated annually at reporting date for impairment or discounting. A report on the various categories of debtors is drafted to substantiate such evaluation and subsequent impairment / discounting, where applicable.
The municipality does not have any significant credit risk exposure to any single counterparty or any group of counterparties having similar characteristics. The municipality defines counterparties as having similar characteristics if they are related entities. Concentration of credit risk did not exceed 5% of gross monetary assets at any time during the year. The credit risk on liquid funds and derivative financial instruments is limited because the counterparties are banks with high credit-ratings assigned by international credit-rating agencies.
The municipality does not have any significant credit risk exposure to any single counterparty or any group of counterparties having similar characteristics. The municipality defines counterparties as having similar characteristics if they are related entities. The credit risk on liquid funds is limited because the counterparties are banks with high credit-ratings.
There were no material changes in the exposure to credit risk and its objectives, policies and processes for managing and measuring the risk during the year under review. Themunicipality’s maximum exposure to credit risk is represented by the carrying value of each financial asset in the Statement of Financial Position, without taking into account the value of any collateral obtained. The municipality has no significant concentration of credit risk, with exposure spread over a large number of consumers, and is not concentrated in any particular sector or The municipality establishes an allowance for impairment that represents its estimate of anticipated losses in respect of trade and other