In the course of its business, the Group is exposed to a number of financial risks: credit risk, liquidity risk and market risk (including foreign currency, interest rate and other price risks). This note presents the Group’s objectives, policies and processes for managing its financial risk and capital.

Risk management is monitored and managed by key personnel of each entity in the Group on a daily basis based on their specific operational requirements.

Credit risk

Credit risk arises because a counterparty may fail to meet its obligations to the Group.

The Group is exposed to credit risk on financial assets mainly in respect of trade receivables, loan receivables and cash and cash equivalents.

Trade receivables consist primarily of invoiced amounts from normal trading activities. The Group has a diversified customer base and policies are in place to ensure sales are made to customers with an appropriate credit history and payment history. Individual credit limits are set for each customer and the utilisation of these credit limits is monitored regularly. Customers cannot exceed their set credit limit, without specific Senior Management approval. Such approval is assessed and granted on a case-by-case basis. Management regularly reviews the debtors age analysis and follows up on long-outstanding debtors. Where necessary, a provision for impairment is made. A portion of the Group’s customer base is made up of major retailers and wholesalers with the balance of the customer base being widely dispersed.

The risk of starter pack receivables is assessed as low due to the fact that annuity income can be utilised in the settlement of the receivable balances and are recoverable within a period which may exceed 12 months.

Loans are only granted to holders with an appropriate credit history, taking into account the holder’s financial position and past experience.

The Group places cash and cash equivalents with major banking groups and quality institutions that have high credit ratings.

The Group has significant concentrations of credit risk with Investec Bank Limited in line with its treasury function.

The Group’s maximum credit risk exposure is the carrying amount of all financial assets on the statement of financial position and sureties provided with the maximum amount the Group could have to pay if the sureties are called on, amounting to R62 million (2014: R1.9 million). The Group holds collateral in the form of sureties in respect of 50% of the loan receivable from 2DFine Holdings Mauritius. Refer to note 29.

The Group considers its maximum exposure per class, without taking into account any collateral and financial guarantees, to be as follows:

Refer to note 9 for a breakdown of the provision raised for trade receivables. The effect of discounting of the trade receivables is not taken into account in the table above.

The Group has subordinated a portion of its loan to a joint venture in favour of other creditors, to the value of R45 million.

The rating groups for counterparties are categorised as follows:

Group 1 – New customers/related parties (less than six months).
Group 2 – Existing customers/related parties (more than six months) with no defaults in the past.
Group 3 – Existing customers/related parties (more than six months) with some defaults in the past. All defaults were fully recovered or are in the process of being recovered.

Liquidity risk

Liquidity risk arises when a company encounters difficulties in meeting commitments associated with liabilities and other payment obligations. The Group’s objective is to maintain prudent liquidity risk management by 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. Due to the dynamic nature of the underlying businesses, the Group aims to maintain flexibility in funding by keeping committed credit lines available.

Cash flow forecasting is performed in the operating entities of the Group to ensure sufficient cash to meet operational needs while maintaining sufficient headroom to ensure that borrowing limits (where applicable) are not breached.

Surplus cash held by the operating entities over and above the balance required for working capital management is transferred to the Group treasury. Group treasury invests surplus cash in interest-bearing accounts, identifying instruments with sufficient liquidity to provide adequate headroom as determined by the abovementioned forecasts.

The Group has a short-term loan facility with Investec Bank Limited of R1.5 billion (2014: R1 billion). The facility was unutilised. Drawdowns were made and fully repaid during the year.

The facility bears certain debt covenants. The Group has not been in breach in respect of these covenants. The Group has pledged certain securities in respect of this facility. Refer to notes 9, 11 and 12.

The Company and a subsidiary company issued a cross surety in respect of an overdraft facility in the amount of R19.85 million (2014: R19.85 million) in favour of FNB, a division of First National Bank Limited (FNB). This facility was unutilised as at 31 May 2015. In addition, the Company and four of its subsidiaries issued a cross surety in the amount of R1.3 million in respect of credit card facilities granted by FNB.

The table below analyses the Group’s non-derivative financial liabilities into relevant maturity groupings based on the remaining period at the statement of financial position date to the contractual maturity date.

The amounts disclosed in the table are the contractual undiscounted cash flows.

Maturity of financial liabilities

* Trade and other payables exclude non-financial instruments, being VAT and certain amounts included within accruals and sundry creditors.

Market risk

Market risk is the risk that changes in market prices (interest rate and currency risk) will affect the Group’s income or the value of its holding of financial instruments. The objective of market risk management is to manage and control market risk exposures within acceptable parameters, while optimising the return.

The Group is exposed to risks from movements in foreign exchange rates and interest rates that affect its assets, liabilities and anticipated future transactions. The Group is not exposed to significant levels of price risk.

Fair value estimation

Fair value measurement hierarchy:

Contingent consideration, included in trade and other payables, are level 3 financial liabilities.

Changes in level 3 instruments are as follows:

Cash flow and fair value interest rate risk
The Group’s cash flow interest rate risk arises from loans receivable, cash and cash equivalents andborrowings carrying interest at variable rates. The Group is not exposed to fair value interest rate riskas the Group does not have any fixed interest-bearing instruments carried at fair value.

As part of the process of managing the Group’s exposure to interest rate risk, interest ratecharacteristics of new borrowings and the refinancing of existing borrowings are positioned accordingto expected movements in interest rates.

Foreign currency risk
The Group is exposed to foreign currency risk from transactions and translation. Transaction exposurearises because affiliated companies undertake transactions in currencies other than their functionalcurrency. Translation exposure arises where affiliated companies have a functional currency other thanthe rand.

The Group manages its exposure to foreign currency risk by ensuring that the net foreign currencyexposure remains within acceptable levels. Hedging instruments may be used in certain instances toreduce risks arising from foreign currency fluctuations.

IFRS 7 – Sensitivity Analysis
The Group has used a sensitivity analysis technique that measures the estimated change to thestatement of comprehensive income of either an instantaneous increase or decrease of 1% (100 basispoints) in market interest rates or a 10% strengthening or weakening of the rand against all othercurrencies, from the rates applicable at 31 May 2015, for each class of financial instrument with allother variables remaining constant. This analysis is for illustrative purposes only, as in practice marketrates rarely change in isolation.

Interest rate sensitivity
The interest rate sensitivity analysis is based on the following assumptions:

Foreign currency sensitivity

Financial instruments by currency

* Trade and other receivables and trade and other payables exclude non-financial instruments.

With a 10% strengthening or weakening in the rand against all other currencies, profit before tax would have decreased or increased by R21.2 million. In the prior year, with a 10% strengthening or weakening in the rand against all other currencies, profit before tax would have decreased or increased by R15.3 million.

Capital risk

The Group’s objectives when managing capital are to safeguard the Group’s ability to continue as a going concern in order to provide returns for shareholders and benefits for other stakeholders and to maintain an optimal capital structure to reduce the cost of capital.

In order to maintain or adjust this capital structure, the Company may issue new shares, adjust the amount of dividends paid to shareholders, return capital to shareholders or sell assets to reduce debt. The Group defines capital as capital and reserves and non-current borrowings. The Group is not subject to externally imposed capital requirements.

There were no changes to the Group’s approach to capital management during the year.