This note presents information about the group’s exposure to each of the aforementioned risks, the group’s objectives, policies and processes for measuring and managing risk, and the group’s management of capital. IFRS 7 requires certain disclosures by class of instrument which the group has determined would be the segments as disclosed in the segmental report.

The group’s major financial risks are mitigated in the way that it operates firstly through diversification of geography and secondly through decentralisation of the business model. Bidcorp is an international group with operations in the United Kingdom, Europe, Asia, Australia, New Zealand, South America, Middle East and various southern African countries.

Bidcorp’s philosophy has always been to empower management through a decentralised structure thereby making operational management responsible and accountable for the performance of its operations, including managing the financial risks of the operation. The operational management report to divisional management who in turn report to the Bidcorp board of directors. The divisional management is also held responsible for managing financial risks of the operations within its divisions. Operational management’s remuneration is based on its operation’s performance and divisional management based on its division’s performance resulting in a decentralised and entrepreneurial environment.

Due to the diverse structure and decentralised management of the group, the group audit and risk committee has implemented guidelines of acceptable practices and basic procedures to be followed by divisional and operational management. The information provided below for each financial risk has been collated for disclosure based on the manner in which the business is managed and what is believed to be useful information for stakeholders.

The overall process of risk management in Bidcorp, which includes the related system of control, is the responsibility of the Bidcorp board of directors. The audit and risk committee is governed by a charter and reports regularly to the board of directors on its activities.

The primary purposes of the Bidcorp Group audit and risk committee in respect of risk are:

• to establish and maintain a common understanding of the risk universe (framework), which needs to be addressed in order to meet Bidcorp’s objectives;
• to identify the risk profile and agree the risk appetite of the group;
• to satisfy the risk management reporting requirements;
• to coordinate the group’s risk management and assurance efforts;
• to report to the Bidcorp board of directors on the risk management work undertaken and the extent of any action taken by management to address areas identified for improvement; and
• to report to the Bidcorp board of directors on the company’s process for monitoring compliance with laws and regulations.

Bidcorp has, due to the diversity of its operations in terms of geographical spread, determined that is better to have an in-house strategy for risk management, as opposed to adopting a recognised strategy and forcing its operations to adapt to the constraints of the strategy selected. Bidcorp has determined that utilising a common framework for the identification of risk assists the divisions to reduce the implementation time and cost, and give some assurance that all inherent identified risks have been considered. The group’s risk management policies are established to identify and analyse the risks faced by the group, to set appropriate risk limits and controls, and to monitor risks and adherence to limits. Risk management policies and systems are reviewed regularly to reflect changes in market conditions. Bidcorp aims to develop a disciplined and constructive control environment in which all employees understand their roles and responsibilities.

Each division has an audit and risk committee, which subscribes to the same philosophies and practices as the group audit and risk committee. The divisional audit committees report to the group audit and risk committee. The divisional audit committees oversee how divisional and operational management monitors compliance with the group’s policies and guidelines in respect of the financial reporting process, the system of internal control, the management of financial risks, the audit process (both internal and external) and code of business conduct. The divisional audit committees are assisted in their oversight role by the internal audit department. Divisional internal audit undertakes both regular and ad hoc reviews of financial and operational risk management controls and procedures, the results of which are regularly reported to the relevant divisional audit committee.

Credit risk is the risk of financial loss to the group if a customer or counterparty to a financial instrument fails to meet its contractual obligations, and arises principally from the group’s receivables from customers, cash and cash equivalents and investments.

The board has implemented a “delegation of authority matrix” which provides guidelines to the divisions as to the level of authorisation required for various types of transactions.

The carrying amount of financial assets recorded in the financial statements, which is net of impairment losses amounting to R20 205 million (2015: R15 238 million), represents the group’s maximum exposure to credit risk after taking into account the value of any collateral obtained.

This includes carrying values, net of impairment allowances, of R13 945 million (2015: R11 246 million) for trade receivables (refer to note 20), R5 506 million (2015: R3 632 million) for cash and cash equivalents and R754 million (2015: R360 million) for investments (refer to note 18).

The impairment allowance account in respect of trade receivables is used to record impairment losses unless the group is satisfied that no recovery of the amount owing is possible. At that point, the amount which is considered irrecoverable is written off directly against the respective assets.

Impairments of investments classified as available-for-sale or held-for-trading are written off against the investment directly and an impairment allowance account is not utilised.

The group has a general credit policy of only dealing with creditworthy counterparties and obtaining sufficient collateral, where appropriate, as a means of mitigating the risk of financial loss from defaults. In accordance with the decentralised structure, the operational management, under the guidance of the divisional management, are responsible for implementation of policies to meet the above objective. This includes credit policies under which new customers are analysed for creditworthiness before the operation’s standard payment and delivery terms and conditions are offered, determining whether collateral is required, and if so the type of collateral to be obtained, and setting of credit limits for individual customers based on their references and credit ratings. Certain operations in the group have a policy of taking out credit insurance to cover a portion of their risk. Operational management is held responsible for monitoring the operations’ credit exposure.

Trade receivables consist of a large number of customers spread across diverse markets and geographical areas. Ongoing credit evaluation is performed by the operational management on the financial condition of the operations’ customers.

The group does not have any significant credit risk exposure to any single counterparty or any group of counterparties having similar characteristics. It was noted that the group’s largest exposure to a single customer group, across multiple geographies is R556 million (2015: R494 million). Management, in the various geographies, has assessed the recoverability of these amounts due in its geographies, and believes that the amounts due and not impaired are recoverable in full.

The total number of debtors per reporting division was obtained and the average turnover per trade debtor was calculated for each reporting division. Based on the average turnover per trade debtor in comparison to the group’s total turnover for the year, there was no significant concentration of credit risk to any single trade debtor. The concentration of credit risk is therefore limited due to the customer base being large and independent.

As a function of the decentralised structure, each operation establishes an impairment allowance that represents its estimate of incurred losses in respect of trade and other receivables. The main components of this allowance are a specific loss component that relates to individually significant exposures, and a collective loss component established for groups of similar assets in respect of losses that have been incurred but not yet identified.

The review of the impairment allowances in respect of trade and other receivables is monitored under the oversight of the divisional audit committees, and ultimately the group audit and risk committee. The operations’ average credit periods depend on the local trends as well as the creditworthiness of their customers. The majority of the customers are given credit terms ranging from cash on delivery to 60 days from statement. The largest impairment raised for a specific trade receivable was obtained for each reporting operation and calculated as a percentage of the group’s total impairment allowance. It was determined that such percentage did not exceed 2,3% (2015: 2,6%) of the total allowance raised at year-end.

Collateral held on past due amounts

There was an impairment loss of R119,1 million (2015: Rnil) that was recognised in respect of investments which related to Icelandic Water Holdings ehf. Management’s best estimate of the fair value of the Icelandic Water investment was based on an offer to the holders of convertible loan notes and warrants which are convertible into common company stock.

The group manages its borrowings centrally for each segment. The divisions within each segment are therefore not responsible for the management of liquidity risk but rather senior management for each of these segments are responsible for implementing procedures to manage the regional liquidity risk.

There were no defaults or breaches of any of the borrowing terms or conditions.

Borrowings are matched to the same foreign currency as the division raising the loan thereby limiting the divisions’ exposure to changes in a foreign currency which differs to their functional currency. Interest on borrowings is denominated in currencies that match the cash flows generated by the underlying divisions of the group thereby providing an economic hedge for each class of borrowing.

The group incurs currency risk as a result of purchases and sales which are denominated in a currency other than the group entities’ functional reporting currency. It is group policy that group entities hedge all trade receivables and trade payables denominated in a foreign currency which differs to its functional currency. At any point in time the entities also take out economic hedges over their estimated foreign currency exposure resulting from sales and purchases. The group entities hedge their foreign currency risk exposure either by taking out forward exchange contracts (FECs) or alternatively by purchasing in advance the foreign currency which will be required to settle the trade payables. Most of the FECs have maturities of less than one year after the reporting date. Where necessary, the FECs are rolled over at maturity. It is the group’s policy not to trade in derivative financial instruments for speculative purposes.

Changes in the fair value of FECs that economically hedge monetary assets and liabilities in foreign currencies (in relation to the operations’ functional currencies) and for which no hedge accounting is applied are recognised in the statement of profit or loss. Both the changes in fair value of the FECs and the foreign exchange gains and losses relating to the monetary items are recognised in operating profit (refer to note 3).

The periods in which the cash flows associated with the FECs are expected to occur are detailed below under the heading “settlement”. The periods in which the cash flows are expected to impact the statement of profit or loss are believed to be in the same timeframe as when the actual cash flows occur.

The variable rates are influenced by movements in the prime borrowing rates.

This sensitivity analysis has been prepared using the average borrowings for the financial year as the actual borrowings at June 30 are not representative of the borrowings during the year. This analysis assumes that all other variables, in particular foreign currency rates, remain constant. The analysis is performed on the same basis as 2015. A decrease in interest rates would have an equal and opposite effect on profit after taxation as detailed below.

The interest rates used to discount cash flows, in order to determine fair values, are based on market-related rates at June 30 2016 plus an adequate constant credit spread, and range from 0,00% to 18,24% (2015: 0,25% to 12,5%).

• Level 1: quoted prices (unadjusted) in active markets for identical assets or liabilities.
• Level 2: inputs other than quoted prices included in level 1 that are observable for the asset or liability, either directly (ie as prices) or indirectly (ie derived from prices).
• Level 3: inputs for the asset or liability that are not based on observable market data (unobservable inputs).

The following table shows the valuation techniques used in measuring the puttable non-controlling interests and vendors for acquisition fair values at June 30.