Page 200 - Capricorn IAR 2020

GLOSSARY OF TERMS ANNUAL FINANCIAL GLOSSARY OF TERMS STATEMENTS
NOTES TO THE CONSOLIDATED AND SEPARATE ANNUAL FINANCIAL STATEMENTS (continued)
for the year ended 30 June 2020
3. FINANCIAL RISK MANAGEMENT (continued)
3.5 Fair values of financial assets and liabilities
(a) Fair value estimation
The Group is presumed to be a going concern and the fair value methodology is therefore appropriate. Fair value is the current price to purchase an asset or to transfer a liability. Such a transaction is characterised by an arm’s length and orderly transaction in a free market (neither party is compelled to act), between hypothetical willing, able and well-informed market participants. In addition, the fair value methodology is utilised to accurately reflect the current market conditions and the appropriate market price of such a transaction on the reporting date.
The fair value of financial assets and liabilities traded in active markets (such as publicly traded derivatives, trading and available-for- sale securities) is based on quoted market prices at the reporting date. The active market should be characterised by sufficient supply and demand by market participants, supported by adequate frequency and volumes to accurately approximate the true market price of such a transaction on an ongoing basis. The quoted market price used for financial assets held by the Group is the price within the current bid-ask price, which is the most representative of fair value.
The fair value of financial assets and liabilities that are not traded in an active market is determined by using valuation techniques to approximate the fair value. The Group uses a variety of methods and makes assumptions that are based on market conditions existing at each reporting date. These valuation techniques include quoted market prices or dealer quotes for similar instruments in active and inactive markets, and discounted cash flow valuation techniques.
(i) Cash and balances with the central bank
Due to its short-term nature, the carrying amount approximates the fair value of these financial assets.
(ii) Derivative financial instruments (included in other assets/liabilities)
Derivative financial instruments are classified as fair value through profit or loss using valuation techniques supported by observable market prices or rates (exchange traded). Over-the-counter (“OTC”) transactions are also measured at fair value based on the following valuation techniques:
• Forward contracts are valued based on the daily mark-to-market value of the forward contract. The market rates are obtained
from the Thompson Reuters foreign currency rate platform. Spot foreign currency transactions not yet matured are marked-to-
market based on end of trading day quoted Thompson Reuters market rates.
• Interest rate swaps are valued by discounting the expected future fixed and floating interest rate cash flow streams with the
applicable South African money market yield curves. The future fixed rate cash flows are based on the terms of the contractual agreements, while the floating rate cash flows are approximated using the estimated forward rate yield curve in line with contractual agreements.
• Option contract values are determined using the Black-Scholes pricing model, utilising real-time market data on the required inputs.
(iii) Financial assets at fair value through profit or loss
Treasury bills
Treasury bills are measured at fair value through other comprehensive income based on the discounted valuation technique using quoted market prices and rates.
Government stock
Government stock and other bonds guaranteed by the Namibian, South African or Botswana governments are measured at fair value through other comprehensive income based on the discounted valuation technique using quoted market prices. The Bond Exchange of South Africa bond pricing model is utilised to determine the fair value.
Unit trust investments
The fair value of unit trust investments is determined with reference to the daily published market prices.
Money market investments
For money market investments, the carrying value approximates its fair value.
Other debt securities
Repo investments
Repo investments are designated at fair value using discounted valuation techniques and available dealer quotes for similar instruments.
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