RAND WATER ANNUAL REPORT 2023

Consolidated Annual Financial Statements for the year ended 30 June 2023

Summary of Principal Accounting Policies and Significant Judgements 3.6 Financial instruments (Continued)

Impairment recognition and measurement financial assets

The Group recognises expected credit losses on financial assets measured at amortised cost and fair value through other comprehensive income. A general approach is applied by the Group to derive expected credit losses for cash and cash equivalent, investment in bonds and term deposit investments. Expected credit losses on these financial assets is calculated on unbiased, probability weighted amount which is determined by evaluating the range of reasonably possible outcomes, the time value of money and considering all reasonable and supportable forward‑looking information which were available to the Group without undue cost or effort at the reporting date. Expected credit losses calculation considers the probability of expected credit loss occurring by looking at the probability of default of the applicable counterparties which the Group had exposure with at reporting date. The Group assessed and recognised expected credit losses relating to financial assets measured at amortised cost and fair value through other comprehensive income using the table below.

ECL Stage

Definition

Type of investment

Stage 1

No significant increase in credit risk of the counterparty since recognition. Loss allowance measured at an amount equal to 12 months expected credit losses and interest revenue is calculated on the gross carrying amount of the asset. Significant increase in credit risk of the counterparty since recognition with a likelihood or risk of a default occurring. Loss allowance measured at an amount equal to lifetime expected credit losses and interest revenue is calculated on the gross carrying amount of the asset. Stage 2

Relates to performing and low credit risk investments with no default history.

Relates to under‑performing investments which have experienced increase in credit risk investments. Key indicators of these risks for stage are but not limited to the list below: Distressed counterparty ‑ adverse change in regulatory, economic, or technological environment which may result in inability to meet its obligation when they become due. Defaulting and servicing coupon/ interest payment outside contractual terms. Significant change in external credit rating. Significant deterioration in financial performance i.e. actual or expected decline in revenues or margins, working capital challenges.

RSA government bonds Fixed/ notice deposit

Call deposit

Treasury bills

Money market funds.

Stage 3

When there is objective evidence of credit impairment at the reporting date. Loss allowance measured at an amount equal to lifetime expected credit losses and interest revenue is calculated on the net carrying amount (that is, net of credit allowance).

Relates to non‑performing investments which have been credit impaired due to:

Counterparty under curatorship/ administration

Defaulting counterparty. with miniature prospect to honour principal/interest payment when they become due.

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