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)

The Group continues to review its well‑established Credit Management Policy that firmly addresses credit risk management, bad debt management and bad debt recovery. The policy addresses credit control measures which monitors activity on customer accounts and allow for remedial action, should the customer not comply with the Group’s standard payment terms. Stringent controls that have been exercised to curb the late or non‑payments include, limitation and discontinuation of water supply, interest on overdue accounts in line with Section 51(b)(i) of the PFMA, monthly reports of municipalities default status sent to National Treasury and Department of Water and Sanitation in compliance to Section 41 of the MFMA, and participation in the Provincial Treasury, CoGTA Debt Committees together with municipality address defaulting customers and concurrently aid in the recovery process. Furthermore, we have recently adopted a multi‑pronged collection approach from our different collection strategies bucket which include among others interventions like the collaborative efforts with the parties above to address credit risk. The Group is also spending more time and focus on the high risk customers especially due to the impact they have on Rand Water’s cash flow requirements. Other debt relief initiatives are also being rolled out to assist customers to liquidate their old debt sooner and ring‑fence these debts in the balance sheet while they also benefit from the cash flow relief in the process. Credit Loss Allowance

The Group recognise expected credit loss on classification of the following financial assets : • Trade and other receivables; • Loans receivable; • Bond investments measured at fair value through other comprehensive income; • Term deposit investment; and • Cash and cash equivalent.

T rade and other receivables

The Group calculated the expected credit losses for trade receivables for segments using a Simplified Approach applying a Provision Matrix and Time Value of Money (TVM) loss approach. The loss rates are calibrated based on historical loss experiences, taking into account the time value of money and further adjusted for forward looking information. The following assumptions are made on the expected credit losses calculation: • Expected credit loss constitute what is eventually written‑off for the respective segments. • 100% of outstanding balances from the Performing and underperforming segment are eventually settled thereby making TVM loss the expected credit losses on the segment. • The applicable discount rate is the prime rate of lending for South Africa as at the measurement date. • Cash flows to settle some of the debt between time buckets settles the earlier bucket first then the later bucket if the payment exceeds the former when calculating 90 days’ roll rate for debtors. • Where it’s evident that collectability is not probable based on the payment patterns and customer engagement, the Group assume 100% loss rate. Time value of money loss approach is based on the premise that all debtors will be collected as described under assumptions, the time value of money loss is the ultimate IFRS 9 impairment and there is no write‑off. To incorporate forward‑looking information (FLI), as an enhanced information set that includes credit information pertaining to future developments (including for example macroeconomic developments). To incorporate the impact of forward‑looking information (FLI) in determining the Expected Credit Loss, the relationship between the historical quarterly Loss Rates and identified macroeconomic factors is first established by determining the correlation coefficients between the Loss Rates and each macroeconomic factor. Then, regression is used to predict reasonable and supportable expected Loss Rate as informed

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