Implats

9.1

Adoption of IFRS 15 – Revenue from Contracts with Customers

This standard replaces IAS 18, Revenue.

In accordance with the transition provisions in IFRS 15, the new rules were adopted retrospectively, to open, unfulfilled customer contracts on 1 July 2017, and the effect of the adoption reflected in current year opening retained earnings. The financial impact of the application of the revenue recognition adjustments to opening retained earnings was Rnil.

The Group’s accounting policy has been revised to align with IFRS 15, and additional disclosures have been introduced, particularly on the disaggregation of revenue as per this note.

9.2

Revenue

Sales revenue

The Group generates revenue from the mining, concentrating, refining and the sale of platinum group metals (PGMs) and associated base metal. Revenue is measured based on the consideration specified in the customer contract.

The Group recognises revenue on inventory sold to a customer on delivery to the contractually agreed upon delivery point. This is the point at which the performance obligation is satisfied and a receivable is recognised as the consideration is unconditional and only the passage of time is required before payment is due. No element of financing is present due to the short term nature of Group contracts and credit terms are consistent with market practice. The total sales consideration in the sales contract is allocated to each product based on the contractually agreed-upon metal prices. Metal sales prices are determined based on observable spot prices when revenue is recognised.

Toll income

The Group derives toll income revenue from processing and refining of metal concentrate and matte. Income is recognised when the refined metals have been produced, are contractually due to be returned to the customer and have passed through the value creating stages of production. Total income is measured at the transaction price agreed under the contract.

Due to the nature of the Group’s revenue streams and contractual terms with customers, no significant judgement in respect of accounting for contracts with customers was necessary.

15.1

Fair value hedge accounting

Market risk

The Group’s activities expose it to a variety of financial risks, including foreign currency exposure, and commodity price risk. The Group’s overall risk management programme focuses on the unpredictability of financial markets and seeks to minimise potentially adverse effects on the Group’s financial performance. The Group, from time to time, uses derivative financial instruments to hedge certain risk exposures.

In the current year, management adopted a hedging strategy and accounting policy to manage the fair value risk (commodity price and foreign currency exchange risk) to which purchased metal, the hedged instrument, is exposed. The financial instrument used to hedge this risk is trade payables, related to metal purchases, measured at fair value through profit or loss. The fair value movements on this financial liability have been designated to hedge the price and foreign currency exchange risk on purchased metal inventory.

To the extent that the hedging relationship is effective, that is, when the fair value gains and losses on both the hedged item and hedged instrument are offset against each other, the gains and losses on trade payables (R121 million loss) and purchased metal inventory (R121 million gain) respectively are recognised in profit or loss in other income and expenses. Due to the high correlation between the fair value movements in trade payables and inventory, no source of hedge ineffectiveness is expected to affect this hedging relationship during its term.

15.2

Adoption of IFRS 9 – Financial Instruments

This standard replaces IAS 39 – Financial Instruments.

The adoption of IFRS 9 Financial Instruments from 1 July 2018 resulted in changes in accounting policies and resulted in an adjustment to opening “other reserves”. The adjustment of R94 million is as result of the valuation of the equity investment in Rand Mutual Assurance (RMA) which was previously measured at cost (Rnil) in accordance with IAS 39 and has now been measured at fair value through other comprehensive income. The Group has not restated comparatives on transition because the Group was not able to meet the requirement in the standard to do so without the use of hindsight. IFRS 9 adoption has impacted both the classification and impairment requirements of financial assets. The Group now classifies former loans and receivables and held-to-maturity financial assets as measured at amortised cost. Derivative financial instruments and availabe-for-sale financial assets have now been classified as measured at fair value through profit and loss (FVTPL) and fair value through other comprehensive income (FVOCI) respectively.

The following table indicates the reclassifications and adjustments recognised for each individual line item as per the statement of financial position as at 1 July 2018:

The reclassification detailed in the table on the previous page was informed by the following Implats business models and financial asset characteristics:

Reclassify equity instruments previously classified as available-for-sale to FVOCI

The Group elected to present changes in the fair value of all its equity investments previously classified as available-for-sale in other comprehensive income. The cumulative fair value gains and losses on these instruments were not reclassified and will continue to be recognised in “other reserves” in equity. These gains and losses on these investments will not be reclassified to profit or loss upon derecognition.

Reclassification to amortised cost

Held-to-maturity financial assets and loans and receivables (including cash and cash equivalents) carried at amortised cost were reclassified to financial assets at amortised cost. The Group intends to hold the assets to maturity, to collect contractual cash flows that consists solely of payments of principal and interest on the outstanding amount.

Impairment of financial assets

The Group has five types of financial assets that are subject to IFRS 9’s new expected credit loss model (ECL):

• Trade receivables for sales of inventory and tolling refining services;
• Other receivables, which consist mainly of employee receivables;
• Interest-free housing loans to employees;
• Debt investments carried at amortised cost, and
• Cash and cash equivalents.

The Group was required to revise its impairment methodology under IFRS 9 for each of these classes of assets. The group applies the IFRS 9 simplified approach to measuring expected credit losses which uses a lifetime expected loss allowance for all trade receivables.

The expected credit loss model was applied to the outstanding trade receivable balances at 1 July 2018 which resulted in a negligible amount of impairment. All trade receivable balances have been recovered in full for the past 5 years.

The 12 month expected credit loss model has been applied to the following financial assets as credit risk is considered to be low:

• Housing loans
• Employee receivables;
• Debt instruments held at a financial institution.
• Cash and cash equivalents.

Employee housing loans consist of housing loans advanced to Implats employees in terms of Implats housing scheme. These loans are secured by a second bond over residential properties. An impairment rate of 0.5% was applied to housing loans. This impairment assumption is based on historical default rates on the overdue loans, employees showing signs of financial distress and expected changes in macro economic circumstances that could affect employees.

Employee receivables consist of short term advance. These receivables are generally recovered within 30 day and due to their short term nature are consider to have a low credit risk.

Debt investments at amortised cost are considered to have low credit risk and are mostly held with investment grade entities and the loss assessments was therefore limited to 12 months expected losses.

The Group’s cash and cash equivalents are also subject to the impairment requirements of IFRS 9. The Group’s cash is held at investment grade financial institutions, which are considered to have a low credit risk and the expected credit losses was immaterial.

The outcome of the 12 month expected credit loss model assessments on the above financial assets was immaterial at 1 July 2018, therefore no adjustment was made to opening retained earnings.

At 31 December 2018 the expected credit loss was reassessed and no provisions were required.

Financial liabilities

All non-derivative financial liabilities will continue to be measured at amortised cost with the exception of metal purchase trade payables. On adoption of IFRS 9, the Group elected to classify and measure trade payables relating to metal purchases at fair value through profit or loss. Derivative financial liabilities will also continue to be measured at fair value through profit or loss.

15.3

Financial Instruments

Financial assets and financial liabilities are recognised when a Group entity becomes a party to the contract. Financial assets and financial liabilities are initially measured at fair value. Transaction costs directly attributable to the acquisition or issue of financial assets and financial liabilities other than financial assets and financial liabilities at fair value through profit or loss are added to, or deducted from the fair value of the financial assets or financial liabilities, as appropriate, on initial recognition. Transaction costs directly attributable to the acquisition of financial assets and financial liabilities at fair value through profit or loss are recognised immediately in profit or loss.

15.3.1 Financial assets

Classification

The Group classifies its financial assets in the following categories on the basis of both the Group’s business model for managing the financial assets and the contractual cash flow characteristics of the financial assets:

• financial assets at fair value through profit or loss,
• financial assets at amortised cost and
• financial assets at fair value through other comprehensive income.

Purchases and sales of investments are recognised on the trade date, being the date on which the Group commits to purchase or sell the asset. A financial asset is derecognised when the contractual rights to the cash flows from the financial asset expire, or when the Group transfers the contractual rights to receive the cash flows of the financial asset, or retains the contractual rights to receive the cash flows of the financial asset, but assumes a contractual obligation to pay the cash flows to one or more recipients.

15.3.1.1 Debt instruments

Subsequent measurement of debt instruments depends on the Group’s business model for managing the asset and the cash flow characteristics of the asset. There is currently only one measurement category to which the Group classifies its debt instruments:

Financial asset measured at amortised cost

Assets that are held for collecting contractual cash flows where those cash flows are comprised solely of payments of principal and interest are measured at amortised cost. Interest income from these financial assets is included in finance income on the effective interest rate method. Any gain or loss arising on derecognition is recognised directly in profit or loss and presented in other gains/(losses), together with foreign exchange gains and losses. Impairment losses are presented separately in the statement of profit or loss. These assets are included in current assets, except for those with maturities greater than 12 months after the reporting date which are classified as non-current assets.

15.3.1.2 Equity instruments

Implats subsequently measures all equity investments at fair value.

Financial asset measured at fair value through other comprehensive income

Where the Group’s management has elected to present fair value gains and losses on equity investments in OCI, there is no subsequent reclassification of fair value gains and losses to profit or loss following the derecognition of the investment. Dividends from such investments continue to be recognised in profit or loss as other income when the Group’s right to receive payments is established.

15.3.1.3 Other financial assets

Financial assets measured at fair value through profit and loss

Financial assets that are not measured at amortised cost or at fair value through other comprehensive income are classified as measured at fair value through profit and loss. These include the cross-currency interest rate swap (CCIRS).

The cash flow received and paid in terms of the CCIRS interest rate swap is included in finance cost paid and received in the statement of cash flows.

15.3.2 Impairment of financial assets

The expected credit losses associated with its debt instruments carried at amortised cost are assessed by the Group on a forward looking basis. The impairment methodology applied is determined by whether there has been a significant increase in credit risk.

For trade receivables, the Group applies the simplified approach permitted by IFRS 9, which requires expected lifetime losses to be recognised from initial recognition of the receivables. Trade receivables are written off when there is no reasonable expectation of recovery. Indicators that there is no reasonable expectation of recovery, among others, include the failure of a debtor to engage in a repayment agreement with the Group.

The 12 month ECL model is applied to other receivables and financial assets at amortised cost. The expected credit loss allowance recognised during the period is therefore limited to 12 months expected losses. These instruments are considered to be low credit risk when they have a low risk of default and the issuer has a strong capacity to meet its contractual cash flow obligations in the near term.

When financial assets at amortised cost (other than trade receivables) have an increase in credit risk, the lifetime ECL model, which is the result of all possible default events over the expected life of the financial instrument, is used to impair the asset.

The calculation of the loss allowances for financial assets are based on assumptions about risk of default and expected loss rates. The Group applies judgement in making these assumptions and selecting the inputs to the impairment calculation, based on the Group’s historical information, existing market conditions and forward looking estimates at the end of each reporting period.

15.3.3 Financial liabilities

All financial liabilities are subsequently measured at amortised cost, except for financial liabilities at fair value through profit or loss. These liabilities, including derivatives that are liabilities, are subsequently measured at fair value.

The Group has also made an irrevocable election to measure trade payables relating to metal purchases at fair value through profit or loss. Trade payables contracts host two embedded derivatives, namely fluctuations in PGM prices, and foreign currency exchange rates. This financial liability is used as a hedging instrument in the fair value hedge of a recognised asset, being purchased inventory.

15.3.4 Financial instruments used for hedge accounting

The Group uses the fair value movements in metal purchase trade payables measured at fair value through profit or loss, to manage the exposure of purchased metal inventory to fluctuations in foreign currency exchange rates and commodity prices.

At inception of a qualifying hedging relationship, the Group documents the relationship between hedging instrument, being trade payables, and inventory, the hedged item, as well as its risk management objective and strategy for undertaking the hedging transaction. At hedge inception and on an on-going basis, the Group assesses whether the instrument used in hedging transaction is expected to be, and has been, highly effective in offsetting changes in the fair value of inventory. The fair value of the trade payable used for hedging purposes is disclosed in this note.

The method of recognising the resulting gain or loss arising on remeasurement of the financial instrument used for hedging is dependent on the nature of the item being hedged, which is fair value movements on inventory. The Group has designated trade payables measured at fair value through profit or loss as a fair value hedge of inventory. Changes in the fair value of this financial liability that are effective to the hedging relationship are recorded in the income statement in other income and expenses, along with changes in the fair value of inventory that are attributable to the hedged risk.

Hedge accounting is discontinued from the date when the qualifying criteria are no longer met. This is when the commodity prices on the trade payables designated as the hedging instrument is reliably determined. Subsequent gains and losses from foreign currency fluctuations will be recognised in other operating income and expenses.