RAND WATER ANNUAL REPORT 2023

Consolidated Annual Financial Statements for the year ended 30 June 2023 Summary of Principal Accounting Policies and Significant Judgements 2.3 Water use licence Where actual costs cannot be derived, management values its water use licence based on the income approach valuation technique. The model determines the estimated future business cash flow earnings derived from a group of assets, over a 20 year period and apportions earnings to each class of contributory assets. Management uses the weighted average cost of capital as its discount rate. 2.4 Impairment of assets The Group reviews whether the carrying value of its non‑financial assets is recoverable, or whether a reversal of previous impairment losses is required. In making assessments for impairment, management necessarily applies its judgement in allocating assets that do not generate independent cash flows to appropriate cash generating units (CGU), and also in estimating the timing and value of underlying cash flows within the calculation of the recoverable amount. Assets under construction is normally tested for indicators of any existence of a loss in value. All capital projects that have not achieved beneficial use, will be scrutinised for such indicators. If such indicators are present, management will make an estimate of such loss in value taking cognisance of the current state of the asset to its state and required at the completion of construction. An appropriate adjustment is then made for such loss in value based on the assessment made by a qualified professional or subject matter expert, to support the estimation. The calculation of the recoverable amount of a cash generating unit is based on assessments of the higher of the fair value less costs of disposal or value in use. The cash flow projections used in these assessments are subject to the areas of judgement outlined above. The Group further assesses its financial assets and certain non‑financial assets for impairment at each reporting date. In determining whether an impairment loss should be recorded in profit or loss, the Group makes judgements as to whether there is observable data indicating a measurable decrease in the estimated future cash flows from such financial asset. 2.5 Assessment of fair value The assessment of fair value is principally used in accounting for impairment testing and the valuation of certain financial assets and liabilities. The fair value of financial instruments traded in active markets (such as available‑for‑sale securities) is based on quoted market prices at the reporting date. The quoted market price used for financial assets held by the Group is the current bid price. Fair value less cost to sell is determined based on observable market data or discounted cash flow (DCF) models (and other valuation techniques) using assumptions considered to be reasonable and consistent with those that would be applied by a market participant. Where DCF’s are used, the resulting fair value measurements are considered to be at level 3 in the fair value hierarchy as defined in IFRS 13 Fair Value Measurement as they depend, to a significant extent, on unobservable valuation inputs. The determination of assumptions used in assessing the fair value of identifiable assets and liabilities is subjective and the use of different valuation assumptions could have a significant impact on financial results. In particular, expected future cash flows, which are used in discounted cash flow models, are inherently uncertain and could materially change over time. They are significantly affected by a number of factors, together with economic factors such as exchange rates, discount rates and estimates of production costs and future capital expenditure.

Cash flow projections

Cash flow projections are based on financial budgets, incorporating key assumptions as detailed below:

Discount rates • Cash flow projections used in fair value less costs of disposal impairment models are discounted. To the extent that specific risk factors were not incorporated into the discount rate, adjustments are made to the cash flow projections.

197