Oxford Street East London 5201

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2 General Information Legal form of Municipality Nature of business and principal activities Grading of local authority City Manager Chief Finance Officer Jurisdiction Business address Municipality Local Government Grade 6 Municipality Mr. A. Sihlahla Mr. V. Pillay The demarcation board has determined that Buffalo City Metropolitan Municipality (BUF) includes the towns of East London, Bhisho, King Williams Town, Berlin as well as the townships of Mdantsane, Gompo, Zwelitsha, Dimbaza, Phakamisa, Ndevana, Ilitha, Ginsberg and the surrounding rural areas. Trust Centre Oxford Street East London 5201 Postal address PO Box 134 East London 5200 Bankers Auditors Absa Bank Auditor General of South Africa Members of Audit Committee Ms. R. Shaw (Chairperson) - appointment 03 July 2017 Ms. Y. Roboji (Member) - appointment 03 July 2017 Mr. P. Ntuli (Member) - appointment 03 July 2017 Mr. S. Sokutu (Member) - appointment 03 July 2017 Ms. P. Mzizi (Member) - appointment 03 July 2017 Mr. T. Zororo (Member) - appointment 03 July 2017 Members of Previous Audit Committee Mr. V. Pangwa (Chairperson) - appointment 01 November 2011 (contract ended 30 November 2016) Mr. S. Mkebe (Member) - appointment 01 November 2011 (contract ended 30 November 2016) Ms. E. Ameyaw - Gyarko (Member) - appointment 01 November 2011 (contract ended 30 November 2016) Ms. W. Dukuza (Member) - appointment 03 March 2014 (contract ended 30 June 2017) Mr. H. Marsberg (Member) - appointment 03 March 2014 (contract ended 30 June 2017) Prof. T.M. Jordan (Member) - appointment 03 March 2014 (contract ended 30 June 2017) 1

3 General Information Legislation Governing the Municipality The Constitution of the Republic of South Africa,1996 The Local Government: Municipal Structures Act, 1998 (Act 117 of 1998) The Local Government: Municipal Systems Act, 2000 (Act 32 of 2000) The Local Government: Municipal Finance Management Act, 2003 (Act 56 of 2003) Local Government: Municipal Property Rates Act, 2004 (Act 6 of 2004) Municipal Fiscal Powers and Functions Act, 2007 (Act 12 of 2007) Local Government: Municipal Demarcation Act, 1998 (Act 27 of 1998) Intergovernmental Relations Framework Act, 2005 (Act 13 of 2005) 2

4 Index The statements and notes set out below comprise the audited separate annual financial statements: Index Page Statement of Financial Position 4 Statement of Financial Performance 5 Statement of Changes in Net Assets 6 Cash Flow Statement 7 Statement of Comparison of Budget and Actual Amounts 8-12 Accounting Policies

5 Statement of Financial Position as at June 30, 2017 Figures in Rand Note(s) Restated* Assets Current Assets Inventories 10 38,544,536 36,030,237 Current portion of operating leases 8 2,638,016 2,929,996 Receivables from non-exchange transactions ,538, ,976,604 VAT receivable ,029,519 96,847,762 Receivables from exchange transations ,665, ,053,489 Cash and cash equivalents 14 1,686,753,585 2,373,900,234 3,172,168,998 3,665,738,322 Non-Current Assets Investment property 3 408,315, ,030,031 Property, plant and equipment 4 15,825,553,968 12,974,859,351 Intangible assets 5 5,486,753 85,947,744 Heritage assets 6 49,779,875 49,632,925 Investments in associates 7 127,539, ,291,660 Non-current portion of operating leases 8 72,081,541 69,017,614 16,488,756,860 13,633,779,325 Total Assets 19,660,925,858 17,299,517,647 Liabilities Current Liabilities Borrowings 17 47,641,565 50,709,031 Payables from exchange transactions ,538,011 1,080,606,886 Consumer deposits 23 57,321,210 53,708,070 Post - retirement medical obligations 9 20,347,264 16,966,927 Unspent conditional grants and receipts ,830, ,266,395 Provisions ,377, ,862,785 Deferred income 21 61,317,334-1,368,372,773 1,588,120,094 Non-Current Liabilities Borrowings ,126, ,767,675 Post - retirement medical obligations 9 506,950, ,148,977 Provisions 18 10,114,962 10,222, ,192, ,139,344 Total Liabilities 2,283,564,803 2,532,259,438 Net Assets 17,377,361,056 14,767,258,215 Reserves: Revaluation reserve 15 6,972,904,509 4,613,940,840 Accumulated surplus 10,404,456,547 10,153,317,375 Total Net Assets 17,377,361,056 14,767,258,215 * See Note 47 4

6 Statement of Financial Performance Figures in Rand Restated* Revenue Revenue from exchange transactions Service charges 25 2,867,969,702 2,758,687,738 Rental of facilities and equipment 19,062,021 16,583,409 Licences and permits 14,107,061 12,611,825 Other revenue ,099, ,234,769 Interest received ,236, ,367,781 Total revenue from exchange transactions 3,236,474,848 3,168,485,522 Revenue from non-exchange transactions Taxation revenue Property rates ,230, ,354,384 Transfer revenue Government grants & subsidies 30 1,563,585,284 1,634,064,238 Other revenue 31 70,432,097 68,657,119 Fines 16,895,710 5,593,754 Fuel levy 410,031, ,461,000 Total revenue from non-exchange transactions 3,039,174,959 2,951,130,495 Total revenue 24 6,275,649,807 6,119,616,017 Expenditure Employee related costs 32 (1,550,852,130) (1,410,452,051) Remuneration of councillors 33 (55,023,304) (53,689,005) Depreciation and amortisation 35 (806,718,861) (857,415,892) Finance costs 36 (49,359,417) (63,334,552) Debt impairment 37 (310,915,665) (210,111,414) Repairs and maintenance 34 (382,954,054) (344,238,201) Bulk purchases 38 (1,558,513,807) (1,426,744,459) Grants and subsidies paid 29 (410,698,494) (241,686,261) General expenses 39 (888,593,436) (909,346,628) Total expenditure (6,013,629,168) (5,517,018,463) Operating surplus 262,020, ,597,554 Gain/( loss) on disposal of assets 4 (31,097,166) (499,569) Fair value adjustments 40 4,968,023 12,978,070 Share of surplus of associate accounted for under the equity method 7 15,247,675 30,383,365 (10,881,468) 42,861,866 Surplus for the year ,139, ,459,420 * See Note 47 5

7 Statement of Changes in Net Assets Figures in Rand Revaluation reserve Accumulated surplus Total net assets Opening balance as previously reported 4,622,680,892 9,382,218,466 14,004,899,358 Adjustments: Prior year adjustments (prior to 2015/16) Refer note ,639, ,639,489 Balance at July 1, 2015 as restated* 4,622,680,892 9,507,857,955 14,130,538,847 Changes in net assets: Revaluation reserve realised (3,007,379) - (3,007,379) Disposal of asset (5,732,673) - (5,732,673) Sub-Total (8,740,052) - (8,740,052) Surplus for the year (2015/16 restated) Refer note ,459, ,459,420 Total recognised income and expenses for the year (8,740,052) 645,459, ,719,368 Total changes (8,740,052) 645,459, ,719,368 Restated* Balance at July 1, ,613,940,840 10,153,317,376 14,767,258,216 Changes in net assets: Revaluation reserve 2,358,963,669-2,358,963,669 Net income recognised directly in net assets 2,358,963,669-2,358,963,669 Surplus for the year - 251,139, ,139,171 Total recognised income and expenses for the year 2,358,963, ,139,171 2,610,102,840 Total changes 2,358,963, ,139,171 2,610,102,840 Balance at June 30, ,972,904,509 10,404,456,547 17,377,361,056 Note(s) * See Note 47 6

8 Cash Flow Statement Figures in Rand Note(s) Restated* Cash flows from operating activities Receipts Sale of goods and services 57 4,043,495,674 3,613,661,614 Government grants & subsidies 57 1,563,585,284 1,634,064,238 Interest received ,236, ,367,781 5,805,317,495 5,435,093,633 Payments Employee costs & Councillors remuneration 32&33 (1,605,875,434) (1,464,141,056) Suppliers 57 (3,510,193,645) (2,513,202,170) Finance costs 36 (49,359,417) (63,334,552) (5,165,428,496) (4,040,677,778) Net cash flows used in operating activities ,888,999 1,394,415,855 Cash flows from in investing activities Purchase of property, plant and equipment 4 (1,275,762,568) (1,180,665,914) Proceeds / (loss) from sale of property, plant and equipment 4 (564,050) 10,928,429 Net movement in long term receivables - 26,992 Net cash flows used in investing activities (1,276,326,618) (1,169,710,493) Cash flows from financing activities Net movement on borrowings 17 (50,709,030) (46,097,194) Net movement on finance leases - (3,505,282) Net cash flows used in financing activities (50,709,030) (49,602,476) Net (decrease)/increase in cash and cash equivalents (687,146,649) 175,102,886 Cash and cash equivalents at the beginning of the year 2,373,900,234 2,198,797,348 Cash and cash equivalents at the end of the year 14 1,686,753,585 2,373,900,234 7

9 Statement of Comparison of Budget and Actual Amounts 2017 Financial Performance Original budget Budget Final adjustments adjustments (i.t.o. s28 and budget s31 of the MFMA) Shifting of funds (i.t.o. s31 of the MFMA) Virement (i.t.o. council approved policy) Final budget Actual outcome Unauthorised expenditure Variance Actual Actual outcome outcome as % of final budget as % of original budget % % % % Property rates 1,122,920,106-1,122,920,106-1,122,920, ,230,868 (144,689,238) % Service charges 2,928,610,040-2,928,610,040-2,928,610,040 2,867,969,702 (60,640,338) % Investment revenue 143,775, ,775, ,775, ,811,044 4,036,024 % Transfers recognised - 1,319,728,331 34,307,008 1,354,035,339-1,354,035,339 1,303,835,949 (50,199,390) % operational Other own revenue 391,736, ,736, ,736, ,989,932 (78,747,024) 80 % 80 % Total revenue (excluding 5,906,770,453 34,307,008 5,941,077,461-5,941,077,461 5,610,837,495 (330,239,966) 94 % 95 % capital transfers and contributions) Employee costs (1,531,068,329) 18,640,870 (1,512,427,459) - - (1,512,427,459)(1,550,852,130) - (38,424,671) 103 % 101 % Remuneration of councillors (58,098,804) 3,000,003 (55,098,801) - - (55,098,801) (55,023,304) - 75, % 95 % Debt impairment (303,864,761) (7,050,905) (310,915,666) (310,915,666) (310,915,665) % 102 % Depreciation and asset impairment (748,339,019) (46,330,874) (794,669,893) (794,669,893) (806,718,861) - (12,048,968) 102 % 108 % Finance charges (57,105,142) 7,700,000 (49,405,142) - - (49,405,142) (49,359,417) - 45, % 86 % Materials and bulk purchases (1,521,587,433) (36,926,380)(1,558,513,813) - - (1,558,513,813)(1,558,513,807) % 102 % Transfers and grants (288,467,764) (121,680,622) (410,148,386) - - (410,148,386) (410,698,494) - (550,108) 100 % 142 % Other expenditure (1,397,161,107) 148,340,899 (1,248,820,208) - - (1,248,820,208)(1,271,547,490) - (22,727,282) 102 % 91 % Total expenditure (5,905,692,359) (34,307,009)(5,939,999,368) - - (5,939,999,368)(6,013,629,168) - (73,629,800) 101 % 102 % Surplus/(Deficit) 1,078,094-1,078,094-1,078,093 (402,791,673) (403,869,766)(37,361)%(37,361)% 8

10 Statement of Comparison of Budget and Actual Amounts Figures in Rand Original budget Budget adjustments (i.t.o. s28 and s31 of the MFMA) Final adjustments budget Shifting of funds (i.t.o. s31 of the MFMA) Virement (i.t.o. council approved policy) Final budget Actual outcome Unauthorised expenditure Variance Actual outcome as % of final budget Actual outcome as % of original budget Transfers recognised - capital Surplus (Deficit) after capital transfers and contributions 848,269,030 (115,641,227) 732,627, ,627, ,780,335 (62,847,468) 91 % 79 % 849,347,124 (115,641,227) 733,705, ,705, ,988,662 (466,717,234) 36 % 31 % Gain on disposal of assets (31,097,166) (31,097,166) DIV/0 % DIV/0 % and liabilities Fair value adjustment ,968,023 4,968,023 DIV/0 % DIV/0 % Share of associate ,247,675 15,247,675 DIV/0 % DIV/0 % Surplus/(Deficit) for the year 849,347,124 (115,641,227) 733,705, ,705, ,139,171 (482,566,725) 34 % 30 % 9

11 Capital expenditure and funds sources Total capital expenditure 1,558,133,958 (64,306,846) 1,493,827,112-1,493,827,112 1,275,762,568 (218,064,544) 85 % 82 % Sources of capital funds Transfers recognised - 848,269,030 (115,641,228) 732,627, ,627, ,780,335 (62,847,467) 91 % 79 % capital Borrowing 69,581,825 (69,581,825) DIV/0 % - % Internally generated funds 640,283, ,916, ,199, ,199, ,982,233 (155,217,077) 80 % 95 % Total sources of capital funds Cash flows Net cash from (used) operating Net cash from (used) investing Net cash from (used) financing Net increase/(decrease) in cash and cash equivalents Cash and cash equivalents at the beginning of the year Cash and cash equivalents at year end 1,558,133,958 (64,306,846) 1,493,827,112-1,493,827,112 1,275,762,568 (218,064,544) 85 % 82 % 1,648,937,578 (147,577,999) 1,501,359,579-1,501,359, ,888,999 (861,470,580) 43 % 39 % (1,558,133,958) 64,306,846 (1,493,827,112) - (1,493,827,112)(1,276,326,618) 217,500, % 82 % 17,756,930 (69,581,825) (51,824,895) - (51,824,895) (50,709,030) 1,115, % (286)% 108,560,550 (152,852,978) (44,292,428) - (44,292,428) (687,146,649) (642,854,221) 1,551 % (633)% 2,382,186,465-2,382,186,465-2,382,186,465 2,373,900,234 (8,286,231) 100 % 100 % 2,490,747,015 (152,852,978) 2,337,894,037-2,337,894,037 1,686,753, ,140, % 68 % 10

12 Statement of Comparison of Budget and Actual Amounts Figures in Rand Original budget Budget adjustments (i.t.o. s28 and s31 of the MFMA) Final adjustments budget Shifting of funds (i.t.o. s31 of the MFMA) Virement (i.t.o. council approved policy) Final budget Actual outcome Reasons for material variances shown on the Statement of Comparison of Budget and Actual Amounts are detailed below: REVENUE Property Rates The current rating tariff for vacant land is three (3) times higher than the residential tariff, leading to reduction of revenue in most cases when a property is improved, as the value of the property will increase, whereas a lower rating factor is applied. CAPITAL EXPENDITURE AND FUNDS SOURCES The major contributing factors on low expenditure are procurement and project management challenges that resulted in the slow progress in implementing own funded capital projects, however most of the projects are already awarded and the funding of such projects is fully committed. Other Own Revenue Other revenue is made of numerous miscellaneous items ( e.g. town planning fees, fire levy charges, market income, road & transport registration fees, cemetery and burial fees, etc). The revenue items contributing to the material variance are the following: Transport fees: loss of revenue is due to reduced bus services, buses have been reduced from twenty-one(21) to five (5) as they will be completed by July 2017, the purpose of the study is to assess whether the municipality should run or outsource the bus service Vehicle Registration Fees: loss of revenue can be attributed to the fact that licences and permits can be renewed at the Post Office and Provincial Traffic Departmet in Wilsonia. Collection Charges: this relates to the recoverable legal costs to be recovered from debtors Legal action could not be taken due to the fact that the contract with the Collection Agents had expired, and the subsequent contract has been challenged by the unsuccessful bidder. Therefore, legal collection action is on hold until that process has been concluded CAPITAL EXPENDITURE AND FUNDS SOURCES The major contributing factors on low expenditure are procurement and project management challenges that resulted in the slow progress in implementing own funded capital projects, however most of the projects are already awarded and the funding of such projects is fully committed. CASH FLOWS Net cash from (used) operating Payments: Suppliers and employee costs recognised were above the levels originally budgeted for. Much of this relates to employee related expenditure caused by back-pay of salaries standardisation. 11

13 Statement of Comparison of Budget and Actual Amounts Figures in Rand Original budget Budget adjustments (i.t.o. s28 and s31 of the MFMA) Final adjustments budget Shifting of funds (i.t.o. s31 of the MFMA) Virement (i.t.o. council approved policy) Final budget Actual outcome Net cash from (used) investing Capital assets paid for were less than the original budget due to under expenditure on the capital budget. Under expenditure occurred on both own funded and grant funded projects (INEP & PTIG). Net cash from (used) financing BCMM did not take up the originally budgeted loan funding during 2016/17. 12

14 Accounting Policies 1. Presentation of Audited Separate Annual Financial Statements The audited separate annual financial statements have been prepared in accordance with the Standards of Generally Recognised Accounting Practice (GRAP), issued by the Accounting Standards Board in accordance with Section 122(3) of the Municipal Finance Management Act (No. 56 of 2003). These audited separate annual financial statements have been prepared on an accrual basis of accounting and are in accordance with historical cost convention as the basis of measurement, unless specified otherwise. They are presented in South African Rand. A summary of the significant accounting policies, which have been consistently applied in the preparation of these audited separate annual financial statements, are disclosed below. 1.1 Significant judgements and sources of estimation uncertainty In preparing the audited separate annual financial statements, management is required to make estimates and assumptions that affect the amounts represented in the audited separate annual financial statements and related disclosures. Use of available information and the application of judgement is inherent in the formation of estimates. Actual results in the future could differ from these estimates which may be material to the audited separate annual financial statements. Significant judgements include: Trade receivables / Held to maturity investments and/or loans and receivables The municipality assesses its trade receivables, held to maturity investments and loans and receivables for impairment at the end of each reporting period. In determining whether an impairment loss should be recorded in surplus or deficit, the management makes judgements as to whether there is observable data indicating a measurable decrease in the estimated future cash flows from a financial asset. Allowance for slow moving, damaged and obsolete stock An allowance has been made for stock to write stock down to the lower of cost or net realisable value. Management have made estimates of the selling price and direct cost to sell on certain inventory items. The write down is included in the notes to the financial statements per inventory note 10. Fair value estimation The fair value of financial instruments traded in active markets (such as trading and available-for-sale securities) is based on quoted market prices at the end of the reporting period. The quoted market price used for financial assets held by the municipality is the current bid price. The carrying value less impairment provision of trade receivables and payables are assumed to approximate their fair values. The fair value of financial liabilities for disclosure purposes is estimated by discounting the future contractual cash flows at the current market interest rate that is available to the municipality for similar financial instruments. Impairment testing The recoverable amounts of cash-generating units and individual assets have been determined based on the higher of valuein-use calculations and fair values less costs to sell. These calculations require the use of estimates and assumptions. The municipality reviews and tests the carrying value of assets when events or changes in circumstances suggest that the carrying amount may not be recoverable. Assets are grouped at the lowest level for which identifiable cash flows are largely independent of cash flows of other assets and liabilities. If there are indications that impairment may have occurred, estimates are prepared of expected future cash flows for each group of assets. Expected future cash flows used to determine the value in use of goodwill and tangible assets are inherently uncertain and could materially change over time. They are significantly affected by a number of factors i.e. production estimates, supply demand, together with economic factors such as exchange rates, inflation, interest. Provisions Provisions were raised and management determined an estimate based on the information available. Additional disclosure of these estimates of provisions are included in note 18 - Provisions. 13

15 Accounting Policies 1.1 Significant judgements and sources of estimation uncertainty (continued) Useful lives of waste and water network and other assets The municipality's management determines the estimated useful lives and related depreciation charges for the waste water and water networks. This estimate is based on industry norm. Management will increase the depreciation charge where useful lives are less than previously estimated useful lives. Post retirement benefits The present value of the post retirement obligation depends on a number of factors that are determined on an actuarial basis using a number of assumptions. The assumptions used in determining the net cost (income) include the discount rate. Any changes in these assumptions will impact on the carrying amount of post retirement obligations. The municipality determines the appropriate discount rate at the end of each year. This is the interest rate that should be used to determine the present value of estimated future cash outflows expected to be required to settle the pension obligations. In determining the appropriate discount rate, the municipality considers the interest rates of high-quality corporate bonds that are denominated in the currency in which the benefits will be paid, and that have terms to maturity approximating the terms of the related pension liability. Other key assumptions for pension obligations are based on current market conditions. Additional information is disclosed in Note 9. Effective interest rate The municipality used the prime interest rate to discount future cash flows. Allowance for doubtful debts Impairment loss is recognised in surplus and deficit when there is objective evidence that debtors are impaired. The impairment is measured as the difference between the debtors carrying amount and the present value of estimated future cash flows discounted at the effective interest rate, computed at initial recognition. 1.2 Investment property Investment property is property (land or a building - or part of a building - or both - or under construction) held to earn rentals or for capital appreciation or both, rather than for: use in the production or supply of goods or services, or for administrative purposes, or sale in the ordinary course of operations. Investment property excludes owner-occupied property. Owner-occupied property is property held for use in the production or supply of goods or services or for administrative purposes. Investment property is recognised as an asset when it is probable that the future economic benefits or service potential that are associated with the investment property will flow to the municipality, and the cost or fair value of the investment property can be measured reliably. Investment property is initially recognised at cost. Transaction costs are included in the initial measurement. Where investment property is acquired through a non-exchange transaction, its cost is its fair value as at the date of acquisition. Costs include costs incurred initially and costs incurred subsequently to add to, or to replace a part of, or service a property. If a replacement part is recognised in the carrying amount of the investment property, the carrying amount of the replaced part is derecognised. 14

16 Accounting Policies 1.2 Investment property (continued) Fair value Subsequent to initial measurement investment property is measured at fair value. The fair value of investment property reflects market conditions at the reporting date. A gain or loss arising from a change in fair value is included in net surplus or deficit for the period in which it arises. If the municipality determines that the fair value of an investment property under construction is not reliably determinable but expects the fair value of the property to be reliably measurable when construction is complete, it measures that investment property under construction at cost until either its fair value becomes reliably determinable or construction is completed (whichever is earlier). If the municipality determines that the fair value of an investment property (other than an investment property under construction) is not reliably determinable on a continuing basis, the municipality measures that investment property using the cost model (as per the accounting policy on Property, plant and equipment). The residual value of the investment property is then assumed to be zero. The municipality applies the cost model (as per the accounting policy on Property, plant and equipment) until disposal of the investment property. Once the municipality becomes able to measure reliably the fair value of an investment property under construction that has previously been measured at cost, it measures that property at its fair value. Once construction of that property is complete, it is presumed that fair value can be measured reliably. If this is not the case, the property is accounted for using the cost model in accordance with the accounting policy on Property, plant and equipment. Investment property is derecognised on disposal or when the investment property is permanently withdrawn from use and no future economic benefits or service potential are expected from its disposal. When classification is difficult, the criteria used to distinguish investment property from owner-occupied property and from property held for sale in the ordinary course of operations, are as follows: Transfers to, or from, investment property shall be made when, and only when, there is a change in use, evidenced by: (a) commencement of owner-occupation, for a transfer from investment property to owner-occupied property; (b) commencement of development with a view to sale, for a transfer from investment property to inventories; (c) end of owner-occupation, for a transfer from owner-occupied property to investment property; or (d) commencement of an operating lease (on a commercial basis) to another party, for a transfer from inventories to investment property. The initial cost of a property interest held under a lease and classified as an investment property has been recognised at the lower of the fair value of the property and the present value of the minimum lease payments. 1.3 Property, plant and equipment Property, plant and equipment are tangible and intangible assets associated with land and are non-current assets (including infrastructure assets) that are held for use in the production or supply of goods or services, rental to others, or for administrative purposes, and are expected to be used during more than one period. The cost of an item of property, plant and equipment is recognised as an asset when: it is probable that future economic benefits or service potential associated with the item will flow to the municipality; and the cost of the item can be measured reliably. Property, plant and equipment is initially measured at cost. The cost of an item of property, plant and equipment is the purchase price and other costs attributable to bring the asset to the location and condition necessary for it to be capable of operating in the manner intended by management. Trade discounts and rebates are deducted in arriving at the cost. Where an asset is acquired through a non-exchange transaction, its cost is its fair value as at date of acquisition. Where an item of property, plant and equipment is acquired in exchange for a non-monetary asset or monetary assets, or a combination of monetary and non-monetary assets, the asset acquired is initially measured at fair value (the cost). If the acquired item's fair value was not determinable, it's deemed cost is the carrying amount of the asset(s) given up. 15

17 Accounting Policies 1.3 Property, plant and equipment (continued) When significant components of an item of property, plant and equipment have different useful lives, they are accounted for as separate items (major components) of property, plant and equipment. Costs include costs incurred initially to acquire or construct an item of property, plant and equipment and costs incurred subsequently to add to, replace part of, or service it. If a replacement cost is recognised in the carrying amount of an item of property, plant and equipment, the carrying amount of the replaced part is derecognised. The initial estimate of the costs of dismantling and removing the item and restoring the site on which it is located is also included in the cost of property, plant and equipment, where the municipality is obligated to incur such expenditure, and where the obligation arises as a result of acquiring the asset or using it for purposes other than the production of inventories. Recognition of costs in the carrying amount of an item of property, plant and equipment ceases when the item is in the location and condition necessary for it to be capable of operating in the manner intended by management. Major spare parts and standby equipment which are expected to be used for more than one period are included in property, plant and equipment. In addition, spare parts and standby equipment which can only be used in connection with an item of property, plant and equipment are accounted for as property, plant and equipment. Major inspection costs which are a condition of continuing use of an item of property, plant and equipment and which meet the recognition criteria above are included as a replacement in the cost of the item of property, plant and equipment. Any remaining inspection costs from the previous inspection are derecognised. Property, plant and equipment is carried at cost less accumulated depreciation and any impairment losses, except for land, buildings, other properties, community properties, roads, electricity, water and sanitation which is carried at revalued amount being the fair value at the date of revaluation less any subsequent accumulated depreciation and subsequent accumulated impairment losses. Revaluations are made with sufficient regularity such that the carrying amount does not differ materially from that which would be determined using fair value at the end of the reporting period. When an item of property, plant and equipment is revalued, any accumulated depreciation at the date of the revaluation is restated proportionately with the change in the gross carrying amount of the asset so that the carrying amount of the asset after revaluation equals its revalued amount. Any increase in an asset s carrying amount, as a result of a revaluation, is credited directly to a revaluation surplus. The increase is recognised in surplus or deficit to the extent that it reverses a revaluation decrease of the same asset previously recognised in surplus or deficit. Any decrease in an asset s carrying amount, as a result of a revaluation, is recognised in surplus or deficit in the current period. The decrease is debited directly to a revaluation surplus to the extent of any credit balance existing in the revaluation surplus in respect of that asset. The revaluation surplus in net assets related to a specific item of property, plant and equipment is transferred directly to retained earnings when the asset is derecognised. Property, plant and equipment are depreciated on the straight line basis over their expected useful lives to their estimated residual value except for furniture and fittings, which are depreciated using the diminishing balance method at 10% per annum. The useful lives of items of property, plant and equipment have been assessed as follows: Item Depreciation method Average useful life Land landfill sites Straight line 50 Buildings Straight line 30 to 60 Plant and machinery Straight line 3 to 30 Motor vehicles Straight line 4 to 15 Furniture and fittings Diminishing balance 3 to 7 Electricity Straight line 30 to 60 Community - Buildings Straight line 30 to 60 Community - Recreation Straight line 15 to 60 Other properties Straight line 5 to 60 16

18 Accounting Policies 1.3 Property, plant and equipment (continued) Finance Leased Assets Straight line 5 Roads Straight line 5 to 100 Wastewater network Straight line 5 to 80 Water network Straight line 5 to 150 Heritage Assets Straight line Indefinite Servitudes Straight line Indefinite The Municipality acquires and maintains assets to provide social service to the community, with no intention of disposing of the assets for any economic gain, and thus no residual values are determined other than that of certain Plant and Equipment, and Transport assets with significant carrying values. For Plant and Equipment and Transport assets (Above R5000) the residual value and the useful life of an asset and the deprecation method is reviewed annually and any changes are recognised prospectively as a change in accounting estimates in the Statement of Financial Performance. Minor assets (Below R5000) are recognised and depreciated annually to R1 and are included in the asset register mainly for completeness and monitoring purposes. The residual value, and the useful life and depreciation method of each asset are reviewed at the end of each reporting date. If the expectations differ from previous estimates, the change is accounted for as a change in accounting estimate. Reviewing the useful life of an asset on an annual basis does not require the municipality to amend the previous estimate unless expectations differ from the previous estimate. Each part of an item of property, plant and equipment with a cost that is significant in relation to the total cost of the item is depreciated separately. The depreciation charge for each period is recognised in surplus or deficit unless it is included in the carrying amount of another asset. Items of PPE are derecognised when the asset is disposed of or when there are no further economic benefits or service potential expected from the use of the asset. The gain or loss arising from the derecognition of an item of property, plant and equipment is included in surplus or deficit when the item is derecognised and will be classified as revenue. The gain or loss arising from the derecognition of an item of property, plant and equipment is determined as the difference between the net disposal proceeds, if any, and the carrying amount of the item. Assets which the municipality holds for rentals to others and subsequently routinely sell as part of the ordinary course of activities, are transferred to inventories when the rentals end and the assets are available-for-sale. These assets are not accounted for as non-current assets held for sale. Proceeds from sales of these assets are recognised as revenue. All cash flows on these assets are included in cash flows from operating activities in the municipality. Servitudes are recognised as a component of property, plant and equipment as it is directly linked to the location and construction of infrastructure assets. 1.4 Site restoration and dismantling cost The municipality has an obligation to dismantle, remove and restore items of property, plant and equipment. Such obligations are referred to as decommissioning, restoration and similar liabilities. The cost of an item of property, plant and equipment includes the initial estimate of the costs of dismantling and removing the item and restoring the site on which it is located, the obligation which a municipality incurs either when the item is acquired or as a consequence of having used the item during a particular period for purposes other than to produce inventories during that period. If the related asset is measured using the cost model: (a) subject to (b), changes in the liability are added to, or deducted from, the cost of the related asset in the current period; (b) if a decrease in the liability exceeds the carrying amount of the asset, the excess is recognised immediately in surplus or deficit; and (c) if the adjustment results in an addition to the cost of an asset, the municipality considers whether this is an indication that the new carrying amount of the asset may not be fully recoverable. If it is such an indication, the asset is tested for impairment by estimating its recoverable amount and any impairment loss is recognised in accordance with the accounting policy on impairment of cash-generating assets and/or impairment of non-cashgenerating assets. 17

19 Accounting Policies 1.4 Site restoration and dismantling cost (continued) If the related asset is measured using the revaluation model: (a) changes in the liability alter the revaluation surplus or deficit previously recognised on that asset, so that: - a decrease in the liability (subject to (b)) is credited to revaluation surplus in net assets, except that it is recognised in surplus or deficit to the extent that it reverses a revaluation deficit on the asset that was previously recognised in surplus or deficit - an increase in the liability is recognised in surplus or deficit, except that it is debited to the revaluation surplus to the extent of any credit balance existing in the revaluation surplus in respect of that asset. (b) in the event that a decrease in the liability exceeds the carrying amount that would have been recognised had the asset been carried under the cost model, the excess is recognised immediately in surplus or deficit; and (c) a change in the liability is an indication that the asset may have to be revalued in order to ensure that the carrying amount does not differ materially from that which would be determined using fair value at the end of the reporting period. Any such revaluation is taken into account in determining the amounts to be taken to surplus or deficit or net assets under (a). If a revaluation is necessary, all assets of that class are revalued. 1.5 Intangible assets An intangible asset is an identifiable non-monetary asset without physical substance. An asset is identified as an intangible asset when it: is capable of being separated or divided from a municipality and sold, transferred, licensed, rented or exchanged, either individually or together with a related contract, asset or liability, or arises from contractual rights or other legal rights, regardless of whether those rights are transferable or separable from the municipality or from other rights and obligations. An intangible asset is recognised when: it is probable that the expected future economic benefits or service potential that are attributable to the asset will flow to the municipality; and the cost or fair value of the asset can be measured reliably. Intangible assets are initially recognised at cost. An intangible asset acquired through a non-exchange transaction, the cost shall be its fair value as at the date of acquisition. Expenditure on research (or on the research phase of an internal project) is recognised as an expense when it is incurred. An intangible asset arising from development (or from the development phase of an internal project) is recognised when: it is technically feasible to complete the asset so that it will be available for use or sale. there is an intention to complete and use or sell it. there is an ability to use or sell it. it will generate probable future economic benefits or service potential. there are available technical, financial and other resources to complete the development and to use or sell the asset. the expenditure attributable to the asset during its development can be measured reliably. Intangible assets are carried at cost less any accumulated amortisation and any impairment losses. The amortisation period and the amortisation method for intangible assets are reviewed at each reporting date. Reassessing the useful life of an intangible asset with a finite useful life after it was classified as indefinite is an indicator that the asset may be impaired. As a result the asset is tested for impairment and the remaining carrying amount is amortised over its useful life. Internally generated brands, mastheads, publishing titles, customer lists and items similar in substance are not recognised as intangible assets. Amortisation is provided to write down the intangible assets, on a straight line basis, to their residual values as follows: Item Computer software Useful life 3 years 18

20 Accounting Policies 1.5 Intangible assets (continued) Intangible assets are derecognised: on disposal; or when no future economic benefits or service potential are expected from its use or disposal. 1.6 Heritage assets Heritage assets are assets that have a cultural, environmental, historical, natural, scientific, technological or artistic significance and are held indefinitely for the benefit of present and future generations. Assets are resources controlled by a municipality as a result of past events and from which future economic benefits or service potential are expected to flow to the municipality. A class of heritage assets means a grouping of heritage assets of a similar nature or function in a municipality s operations that is shown as a single item for the purpose of disclosure in the audited separate annual financial statements. Cost is the amount of cash or cash equivalents paid or the fair value of the other consideration given to acquire an asset at the time of its acquisition or construction or, where applicable, the amount attributed to that asset when initially recognised in accordance with the specific requirements of other Standards of GRAP. Fair value is the amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm s length transaction. Recognition The municipality recognises a heritage asset as an asset if it is probable that future economic benefits or service potential associated with the asset will flow to the municipality, and the cost or fair value of the asset can be measured reliably. If a municipality holds an asset that might be regarded as a heritage asset but which, on initial recognition, does not meet the recognition criteria of a heritage asset because it cannot be reliably measured, relevant and useful information about it shall be disclosed in the notes to the financial statements. Initial measurement Heritage assets are measured at cost. Where a heritage asset is acquired through a non-exchange transaction, its cost is measured at its fair value as at the date of acquisition. Subsequent measurement After recognition as an asset, a class of heritage assets is carried at its cost less any accumulated impairment losses. Impairment The municipality assess at each reporting date whether there is an indication that a heritage asset may be impaired. If any such indication exists, the municipality estimates the recoverable amount or the recoverable service amount of the heritage asset. Transfers Transfers from heritage assets are only made when the particular asset no longer meets the definition of a heritage asset. Transfers to heritage assets are only made when the asset meets the definition of a heritage asset. Derecognition The municipality derecognises heritage assets on disposal, or when no future economic benefits or service potential are expected from its use or disposal. The gain or loss arising from the derecognition of a heritage asset is determined as the difference between the net disposal proceeds, if any, and the carrying amount of the heritage asset. Such difference is recognised in surplus or deficit when the heritage asset is derecognised. 19

21 Accounting Policies 1.7 Investments in associates An associate is a municipality over which the municipality is in a position to exercise significant influence, through participation in the financial and operating policy decisions of the investment. The results and assets and liabilities of associates are incorporated in these financial statements using the equity method of accounting. The carrying value of the investment in associates is adjusted for the municipality's share of operating surpluses/ (deficits) less any dividends received. Where the municipality or its entities transact with an associate, unrealised gains and losses are eliminated to the extent of the municipality's or its municipal entities' interest in the relevant associate, except where unrealised losses provide evidence of an impairment of the asset transferred. Where the municipality is no longer able to exercise significant influence over the associate, the equity method of accounting is discontinued. The municipality uses the most recent available financial statements of the associate in applying the equity method. When the reporting dates are different, the municipality makes adjustments for the effects of any significant events or transactions between the investor and the associate that occur between the different reporting dates. Adjustments are made to ensure consistency between the accounting policies of the associate and the municipality. 1.8 Financial instruments A financial instrument is any contract that gives rise to a financial asset of one municipality and a financial liability or a residual interest of another municipality. The amortised cost of a financial asset or financial liability is the amount at which the financial asset or financial liability is measured at initial recognition minus principal repayments, plus or minus the cumulative amortisation using the effective interest method of any difference between that initial amount and the maturity amount, and minus any reduction (directly or through the use of an allowance account) for impairment or uncollectibility. A concessionary loan is a loan granted to or received by a municipality on terms that are not market related. Credit risk is the risk that one party to a financial instrument will cause a financial loss for the other party by failing to discharge an obligation. Currency risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in foreign exchange rates. Derecognition is the removal of a previously recognised financial asset or financial liability from a municipality s statement of financial position. The effective interest method is a method of calculating the amortised cost of a financial asset or a financial liability (or group of financial assets or financial liabilities) and of allocating the interest income or interest expense over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash payments or receipts through the expected life of the financial instrument or, when appropriate, a shorter period to the net carrying amount of the financial asset or financial liability. When calculating the effective interest rate, a municipality shall estimate cash flows considering all contractual terms of the financial instrument (for example, prepayment, call and similar options) but shall not consider future credit losses. The calculation includes all fees and points paid or received between parties to the contract that are an integral part of the effective interest rate, transaction costs, and all other premiums or discounts. There is a presumption that the cash flows and the expected life of a group of similar financial instruments can be estimated reliably. However, in those rare cases when it is not possible to reliably estimate the cash flows or the expected life of a financial instrument (or group of financial instruments), the municipality shall use the contractual cash flows over the full contractual term of the financial instrument (or group of financial instruments). Fair value is the amount for which an asset could be exchanged, or a liability settled, between knowledgeable willing parties in an arm s length transaction. A financial asset is: cash; a residual interest of another municipality; or 20

22 Accounting Policies 1.8 Financial instruments (continued) a contractual right to: - receive cash or another financial asset from another municipality; or - exchange financial assets or financial liabilities with another municipality under conditions that are potentially favourable to the municipality. A financial guarantee contract is a contract that requires the issuer to make specified payments to reimburse the holder for a loss it incurs because a specified debtor fails to make payment when due in accordance with the original or modified terms of a debt instrument. A financial liability is any liability that is a contractual obligation to: deliver cash or another financial asset to another municipality; or exchange financial assets or financial liabilities under conditions that are potentially unfavourable to the municipality. Interest rate risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market interest rates. Liquidity risk is the risk encountered by a municipality in the event of difficulty in meeting obligations associated with financial liabilities that are settled by delivering cash or another financial asset. Loan commitment is a firm commitment to provide credit under pre-specified terms and conditions. Loans payable are financial liabilities, other than short-term payables on normal credit terms. Market risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market prices. Market risk comprises three types of risk: currency risk, interest rate risk and other price risk. Other price risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market prices (other than those arising from interest rate risk or currency risk), whether those changes are caused by factors specific to the individual financial instrument or its issuer, or factors affecting all similar financial instruments traded in the market. A financial asset is past due when a counterparty has failed to make a payment when contractually due. Transaction costs are incremental costs that are directly attributable to the acquisition, issue or disposal of a financial asset or financial liability. An incremental cost is one that would not have been incurred if the municipality had not acquired, issued or disposed of the financial instrument. Financial instruments at amortised cost are non-derivative financial assets or non-derivative financial liabilities that have fixed or determinable payments, excluding those instruments that: the municipality designates at fair value at initial recognition; or are held for trading. Financial instruments at cost are investments in residual interests that do not have a quoted market price in an active market, and whose fair value cannot be reliably measured. Financial instruments at fair value comprise financial assets or financial liabilities that are: derivatives; combined instruments that are designated at fair value; instruments held for trading. A financial instrument is held for trading if: - it is acquired or incurred principally for the purpose of selling or repurchasing it in the near-term; or - on initial recognition it is part of a portfolio of identified financial instruments that are managed together and for which there is evidence of a recent actual pattern of short term profit-taking; - non-derivative financial assets or financial liabilities with fixed or determinable payments that are designated at fair value at initial recognition; and - financial instruments that do not meet the definition of financial instruments at amortised cost or financial instruments at cost. 21