Financial guarantee contracts
Financial guarantee contracts are recognised at fair value on the date that the Group becomes a party to an irrevocable commitment. Financial guarantee contracts are subsequently stated at the higher of the amount determined by the expected credit loss (ECL) model and the amount initially recognised. Any difference between the redemption value guarantee obligation and the amount paid is recognised in the income statement.
A portion of the financial guarantee contract obligation to RBL Bank was called upon in the current period.
| 2020 R'000 |
2019 R'000 |
|
| Opening balance | 243 492 | – |
|---|---|---|
| Adjustment on the initial application of IFRS 9 | – | 19 029 |
| Foreign exchange movement | 10 166 | – |
| Additional liability raised during the year through profit and loss – continuing operations | 671 | 62 132 |
| Additional liability raised during the year through investment in joint venture – continuing operations | – | 40 631 |
| Acquisition of subsidiaries | – | 125 000 |
| Used during the year | (44 190) | – |
| Amounts released through profit and loss – continuing operations | (8 500) | (3 300) |
| Amounts released through profit and loss – discontinued operations | (165) | – |
| Closing carrying amount | 201 474 | 243 492 |
Included in the closing balance above is a parent guarantee of USD5 million to the value of R87.6 million (2019: R73.4 million) which has been issued in favour of RBL Bank on behalf of Oxigen Services India Private Limited. Should this guarantee be called upon, the Group will be required to settle the amount within seven days.
During the financial year, a cash-backed guarantee of USD3 million to the value of R44.2 million was called upon by RBL Bank and settled. An amount of R48.2 million was provided for in respect of this guarantee in the prior year.
An amount of R113.2 million (2019: R121.7 million) is owed to Investec Limited by Glocell Proprietary Limited, and has been guaranteed by Glocell Distribution Proprietary Limited should the former not be able to meet its obligations.
The Group has not raised a liability for its guarantee to the consortium of financial institutions in respect of Cell C's funding of R959 million (2019: R1.25 billion) due to the fact that it holds sufficient collateral, which the Group expects to realise should the guarantee be called upon and the residual financial risk not be material.
Financial guarantee in respect of Cell C's facility
On 2 August 2018, Cell C procured R1.4 billion of funding from a consortium of financial institutions for a tenure of 12 months, secured by airtime to the value of R1.75 billion. In the event of default, The Prepaid Company could have been required by the consortium to purchase such inventory from the consortium on a piecemeal basis over a specified period that has been agreed upon. These purchases would be made in lieu of purchases that would have been made from Cell C within that period.
An extension was concluded on 31 May 2020 with an agreed quantum of airtime purchases required to be made by The Prepaid Company on a monthly basis. This will result in the Cell C facility reducing to nil by 28 February 2021. As at 31 May 2020, the above funding had declined to R959 million (2019: R1.25 billion) as a result of BLT purchasing from the security airtime.
It is the intention of The Prepaid Company to accelerate payments to the banking consortium in order to distribute the vault stock in full if there is risk/indication that Cell C will not be able to meet its obligations to the banking consortium in terms of the agreement. The fair value of the financial guarantee issued in respect of Cell C's facility was valued to be insignificant taking into account the inventory held as collateral.
Management has performed detailed assessments considering seasonality of trading and has determined that, based on current inventory holdings and anticipated sales cycles, should circumstances dictate the need to purchase the above mentioned inventory from the consortium, acceleration of such payments could result in the debt being expunged within two and a half months through its trading capabilities in the ordinary course of business at normal operating margins.
Critical accounting judgements and assumptions
Financial guarantee
As explained above under "Financial guarantee in respect of Cell C's facility", Cell C procured R1.4 billion of funding in August 2018 and utilised a portion of this funding to repay the R1.029 billion loan that was due to The Prepaid Company as at that date. Since the Group was a party to this new funding agreement, the Group considered whether it met the derecognition requirements of IFRS 9 for the loan receivable from Cell C. Specifically, the Group considered whether the loan receivable was extinguished and replaced with a new financial instrument, or whether this represented the continuation of the Group's loan receivable from Cell C. The Group applied its judgement, and concluded that the R1.4 billion of funding represented a new financial instrument and therefore derecognised the loan receivable from Cell C. The qualitative factors that the Group considered in making this judgement included the fact that the original term of the loan receivable had come to an end and the new funding was for a different period of time compared to the initial term, an increase in the amount of the borrowing, a change in the interest rate from variable to fixed and changes to the repayment schedule from a bullet repayment schedule to an amortising repayment schedule.
Management is of the view that the purchasing of such inventory will not result in an onerous contract as this inventory is capable of being realised in the ordinary course of business without any negative impact being incurred by The Prepaid Company.