RAND WATER ANNUAL REPORT 2023

Consolidated Annual Financial Statements for the year ended 30 June 2023

Notes to the Consolidated Annual Financial Statements 42. Financial instruments (Continued)

Counterparty risk •

The Group’s exposure to counterparty risk result from investment of Rand Water funds with various Board approved financial institutions and bonds. The Group’s exposure is with well‑established financial institutions with investment grade credit ratings assigned by reputable credit‑rating agencies. The Group’s exposure to counterparty is managed within approved credit limits that are reviewed and approved by the Board annually. The counterparty limits are expressed as a percentage of the limits set of; credit ratings by rating agencies; or that of the counterparty’s Tier One Capital Reserves; or a percentage of the surplus cash. The Group limits its exposure to credit risk by: • Investing only with Board approved counterparties with a minimum national long‑term rating of “A+ (Zaf)” and short‑term rating of “F1 (Zaf)”. • Diversification of counterparties to manage concentration risk. • Investing within the Board approved counterparty limits.

Definition of default

The Group consider financial assets held by various counterparties to be in default when there is an objective evidence or occurrence of the following events which become available to the Group without undue cost or effort:

Investments •

Counterparty under financial distress;

• Defaulting on interest and/or principal payments; • Adverse change in regulatory, economic, or technological environment which may result in inability to meet its obligation when they become due; • Probability that the counterparty will enter bankruptcy or placed under curatorship/ administration; and • Exposures which are outstanding for more than 90 days. Exposure to concentration risk Currently, the Group has high customer concentration risk on its potable water receivable class. The potable water debtors’ book has the top 3 (three) customers constituting about 76% (2022: 76%) of the total recognized revenue, these customers are all in the Gauteng region and are the Metropolitan municipalities. The Group is working towards diluting the percentage of the concentration by evaluating different available investment opportunities with a possibility of entering new markets. We also do ensure that the customer relationships are not tied to just one person in the organisation by keeping multiple points of contacts who will advocate for The Group needs. Exposure to credit risk The carrying amount of financial assets represents the maximum credit exposure that the Group is exposed to. The maximum exposure to credit risk with different financial institutions that the Group is exposed to is reflected below. The carrying amount of financial assets represents the credit concentration of the Group by long/ short term credit ratings at reporting date.

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