Annual financial statements for the year ended 31 March 2017
General Information Country of incorporation and domicile Nature of business and principal activities Directors Registered office Business address South Africa Financial Services R J Jaspan R Thanthony B J Korb O H Shabangu 3rd floor 82 on Maude 82 Maude Street Sandton 2196 82 Maude Street Sandton 2196 Postal address P O Box 651098 Benmore 2010 Securitisation company Ultimate holding entity Bankers Auditor Secretary Merchant West Proprietary Limited incorporated in Republic of South Africa MW Issuer Owner Trust incorporated in Republic of South Africa Rand Merchant Bank Limited Nedbank Limited Investec Bank Limited Grant Thornton Johannesburg Partnership Chartered Accountants (SA) Registered Auditors South African member of Grant Thornton International Morestat Corporate Services Proprietary Limited Company registration number 2002/030074/06 Level of assurance Preparer These annual financial statements have been audited in compliance with the applicable requirements of the Companies Act 71 of 2008. The annual financial statements were internally compiled by: Michael Ross CA(SA) Head of Finance 1
Index The reports and statements set out below comprise the annual financial statements presented to the shareholder: Index Page Corporate Governance Report 3-4 Audit Committee Report 5 Directors' Responsibilities and Approval 6 Company Secretary s Certification 7 Independent Auditor's Report 8-9 Directors' Report 10-11 Statement of Financial Position 12 Statement of Profit or Loss and Other Comprehensive Income 13 Statement of Changes in Equity 14 Statement of Cash Flows 15 Accounting Policies 16-19 Notes to the Annual Financial Statements 20-33 The following supplementary information does not form part of the annual financial statements and is unaudited: Detailed Income Statement 34 Published 22 September 2017 2
Corporate Governance Report MW Asset Rentals (RF) Limited (the Company) is, as far as applicabley, fully committed to the principles of the Code of Corporate Practices (the code) as set out in the King III Report on Corporate Governance. In supporting the code, the directors recognise the need to govern, the Company with integrity and in accordance with the generally accepted corporate practices. The Company is a special purpose public Company and is a subsidiary of The MW Issue Owner Trust. The Company has no employees and its management is outsourced to Merchant West Proprietary Limited. In the context of the above, the directors of the Company are of the opinion that it has complied with the principles and recommendations of the code, in all material respects, with regard to the period under review. 1. Board of Directors The board consists of the following directors (refer to Director's Report note 4, page 10): 2017 2016 Independent non-executive 3 3 Executive director 1 1 4 4 The board has the following committee: Audit Committee 3
Corporate Governance Report 2. Compliance with King III The Company endeavours at all times to apply the principles of the King Code of Governance Principles for SA (King III Code/King III) in such a way that these requirements are met. For the period under review the board indicated that it was satisfied with the way in which the Company applied the recommendations of King III, or put alternative measures in place where necessary. In terms of the JSE Debt Listing Requirements, the Company has complied with King III Code, and is required to provide an explanation of which principles are not applied along with reasons for non-application. At 31 March 2017 the Company did not apply the below principles. Principles not applied The board has not appointed a Chief Executive Officer (CEO). Reason for Non-application The Company is a ring fenced special purpose securitisation vehicle. All its services are outsourced to Merchant West Proprietary Limited and the Company has no employees. Therefore it is not necessary for the board to appoint a CEO. Evaluations of the board have not been performed every year. An evaluation of the Board will be performed from 2018. There is not an effective risk-based internal audit. The Company does not produce an integrated report. The board of directors does not have a Board charter and an evaluation of the board members has not been performed. The board of directors does not delegate it's functions to a risk, nomination or remuneration committee and a framework for the delegation of authority has not been stablished. Due to the fact that the Company is a ring fenced special purpose vehicle there is not an internal audit department. The Board has delegated the responsibility that effective internal controls are implemented. As the Company is a ring fenced special purpose entity an integrated report is not compiled. A Board charter is currently being produced and it will be adopted in 2018 together with the evaluation of the Board. The Company is a ring fenced special purpose entity, and all of its services are outsourced to Merchant West Proprietary Limited and the Company has no employees. Therefore, it is not necessary for the Company to have a Remuneration Committee. All services performed by Merchant West are subject to the servicing agreement as well as other governance committees within Merchant West Proprietary Limited. 3. Independent advice A director or any member of a board committee may, if necessary, take independent professional advice at the expense of the Company. 4. Company secretary All directors have access to the advice and services of the Company secretary, who provides guidance to the board as a whole and to individual directors with regard to how their responsibilities should be discharged in the best interest of the Company. 5. Audit committee The board has concluded that the audit committee has fulfilled its responsibilities for the year under review in compliance with its terms of reference and statutory requirements. 6. Remuneration committee The Company is a special purpose vehicle which does not employ any employees and no remuneration is paid. The independent non-executive directors are provided by TMF Corporate Services (South Africa) Proprietary Limited and its fee for providing the service is agreed with Merchant West Proprietary Limited. 7. Integrated sustainability reporting and disclosure As a special purpose Company, the Company does not play an active role where the environment and the community is involved, therefore the integrated sustainability report will not form part of the Annual Financial Statements. 8. Fundamental and affected transactions The Company does not conduct business with entities in which its directors have an interest. Directors are required to declare their directorships in other companies on an annual basis. 4
Directors' Report The directors have pleasure in submitting their report on the annual financial statements of MW Asset Rentals (RF) Limited for the year ended 31 March 2017. 1. Nature of business MW Asset Rentals (RF) Limited was incorporated in South Africa with interests in the Financial services industry. The Company is a securitisation special purpose vehicle created solely to acquire equipment finance agreements from group companies. There have been no material changes to the nature of the Company's business from the prior year. 2. Review of financial results and activities The annual financial statements have been prepared in accordance with International Financial Reporting Standards and the requirements of the Companies Act 71 of 2008. The accounting policies have been applied consistently compared to the prior year. Full details of the financial position, results of operations and cash flows of the Company are set out in these annual financial statements, and in our opinion, do not require any further comments. 3. Share capital Refer to note 7 of the annual financial statements for detail of the movement in authorised and issued share capital. 4. Directorate The directors in office at the date of this report are as follows: Directors Changes Office R J Jaspan Executive Related W H Swanepoel Resigned 03 April 2017 Non-executive Independent R Thanthony Non-executive Independent B Harmse Resigned 31 December 2016 Non-executive Independent B J Korb Appointed 31 December 2016 Non-executive Independent O H Shabangu Appointed 31 December 2016 Non-executive Independent 5. Holding entity The Company's ultimate holding entity is MW Issuer Owner Trust which is incorporated in Republic of South Africa. 6. Borrowing powers In terms of the Memorandum of Incorporation, the borrowing powers of the Company are unlimited. However all borrowings by the company are subject to board approval as required by the board delegation of authority. 7. Events after the reporting period The directors are not aware of any other material event which occurred after the reporting date and up to the date of this report that would have a material effect on the current years financial statements. 8. Going concern The directors believe that the Company has adequate financial resources to continue in operation for the foreseeable future and accordingly the annual financial statements have been prepared on a going concern basis. The directors have satisfied themselves that the Company is in a sound financial position and that it has access to sufficient borrowing facilities to meet its foreseeable cash requirements. The directors are not aware of any new material changes that may adversely impact the Company. The directors are also not aware of any material noncompliance with statutory or regulatory requirements or of any pending changes to legislation which may affect the Company. 9. Auditors Grant Thornton Johannesburg Partnership will continue in office in accordance with section 90 of the Companies Act of South Africa. 10
Directors' Report 10. Secretary The company secretary is Morestat Corporate Services Proprietary Limited. Business address: 24A 18th Street Menlo Park Pretoria 0081 11. Dividends During the year under review, preference share dividends were declared and paid to the value of R 41 301 903. 12. Debentures During the year under review, debentures to the value of R 70 000 000 (2016: R 121 000 000) were issued by the company. The debentures are secured by cession of finance debtors and equipment underlying to the finance debtors (refer to note 4 and 8). Debentures bear interest ranging between prime less 1.5% to prime less 0.75%. During the year under review, debentures to the value of R 435 259 888 were settled. The debentures were replaced by Class A Floating Rate Notes. (Refer to note 8) 13. Class A Floating Rate Notes Towards 30 June 2016, the company's Notes on offer have been rated by Standard and Poor (S&P) and was listed on the interest Rate Market of the JSE. A Preliminary rating of za/aaa has been assigned to the Class A Notes. Class A Floating Rate Notes with a nominal amount of R 450 000 000 were issued. The floating notes were issued at an interest rate of 3 month JIBAR plus 2.10%.(refer to note 8) The Class A Floating Rate Notes are secured by cession of finance debtors and equipment underlying to the finance debtors (refer to note 4 and 9). 11
Statement of Financial Position as at 31 March 2017 2017 2016 Notes R R Assets Non-Current Assets Loans and advances to customers 4 349 506 618 379 760 505 Current Assets Amounts due from group companies 11 6 068 481 - Loans and advances to customers 4 234 093 664 252 612 029 Other receivables 5 2 381 908 1 575 181 Cash and cash equivalents 6 75 600 010 40 821 080 318 144 063 295 008 290 Total Assets 667 650 681 674 768 795 Equity and Liabilities Equity Share capital 7 121 120 Subordinated loan 20 44 645 000 44 645 000 Retained income 145 904 692 140 755 587 Liabilities 190 549 813 185 400 707 Non-Current Liabilities Borrowings 8 450 000 000 307 499 310 Deferred tax 9 13 648 303 12 272 762 463 648 303 319 772 072 Current Liabilities Borrowings 8 4 299 349 138 438 908 Trade and other payables 10 3 590 916 1 540 074 Amounts due to group companies 11 2 408 892 27 284 011 Current tax payable 3 153 408 2 333 023 13 452 565 169 596 016 Total Liabilities 477 100 868 489 368 088 Total Equity and Liabilities 667 650 681 674 768 795 12
Statement of Profit or Loss and Other Comprehensive Income 2017 2016 Notes R R Interest income 12 97 853 949 79 896 664 Interest expense 13 (49 012 809) (46 549 977) Net interest income 48 841 140 33 346 687 Non-interest income 14 26 579 329 18 000 445 Total income 75 420 469 51 347 132 Impairment charges (9 217 263) - Gross income 66 203 206 51 347 132 Operating expenses (1 180 693) (1 296 988) Profit before taxation 65 022 513 50 050 144 Taxation 15 (18 571 505) (12 856 532) Total comprehensive income for the year 46 451 008 37 193 612 13
Statement of Changes in Equity Share capital Subordinated Retained income Total equity loan R R R R Balance at 01 April 2015 120 44 645 000 103 561 975 148 207 095 Total comprehensive income for the year - - 37 193 612 37 193 612 Balance at 01 April 2016 120 44 645 000 140 755 587 185 400 707 Total comprehensive income for the year - - 46 451 008 46 451 008 Issue of shares 1 - - 1 Dividends - - (41 301 903) (41 301 903) Total contributions by and distributions to owners of company recognised directly in equity 1 - (41 301 903) (41 301 902) Balance at 31 March 2017 121 44 645 000 145 904 692 190 549 813 Notes 7 20 14
Statement of Cash Flows 2017 2016 Notes R R Cash flows from operating activities Cash generated from operations 16 66 266 628 48 546 726 Tax paid 17 (16 375 579) (8 967 219) Net cash from operating activities 49 891 049 39 579 507 Cash flows from investing activities Loans and advances to customers 4 48 772 252 (59 042 571) Cash flows from financing activities Preference shares 7 1 - Proceeds from notes issued 450 000 000 - Repayment of debentures (441 638 869) (6 176 524) Dividends paid (41 301 903) - (Repayment)/Proceeds of amounts from group companies (30 943 600) 11 530 019 Net cash from financing activities (63 884 371) 5 353 495 Total cash movement for the year 34 778 930 (14 109 569) Cash at the beginning of the year 40 821 080 54 930 649 Total cash at end of the year 6 75 600 010 40 821 080 15
Accounting Policies 1. Presentation of annual financial statements The annual financial statements have been prepared in accordance with International Financial Reporting Standards ( IFRS ) and its interpretations adopted by the International Accounting Standards Board ( IASB ), the South African Institute of Chartered Accountants Financial Reporting Guides as issued by the Accounting Practices Committee and Financial Reporting Pronouncements as issued by the Financial Reporting Standards Council, the South African Companies Act, No 71 of 2008, as amended, and the JSE Listings Requirements. The financial statements are presented in South African Rands( Rands ), rounded to the nearest rand. They are prepared on the basis that the Company is a going concerns, using the historical cost basis of measurement, and incorporate the principal accounting policies set out below. These accounting policies are consistent with the previous year. 1.1 Significant judgements and sources of estimation uncertainty In preparing the annual financial statements, management is required to make estimates and assumptions that affect the amounts represented in the 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 annual financial statements. Significant judgements include: Loans and advances to customers and Loans and receivables The company assesses its loans and advances to customers and Loans and receivables for impairment at the end of each reporting period. In determining whether an impairment loss should be recorded in profit or loss, the company makes judgements as to whether there is observable data indicating a measurable decrease in the estimated future cash flows from a financial asset. The impairment for loans and advances to customers and Loans and receivables is calculated on a portfolio basis, based on historical loss ratios, adjusted for national and industry-specific economic conditions and other indicators present at the reporting date that correlate with defaults on the portfolio. These annual loss ratios are applied to loan balances in the portfolio and scaled to the estimated loss emergence period. Taxation Judgement is required in determining the provision for income taxes due to the complexity of legislation. There are many transactions and calculations for which the ultimate tax determination is uncertain during the ordinary course of business. The company recognises liabilities for anticipated tax audit issues based on estimates of whether additional taxes will be due. Where the final tax outcome of these matters is different from the amounts that were initially recorded, such differences will impact the income tax and deferred tax provisions in the period in which such determination is made. 1.2 Financial instruments Classification The company classifies financial assets and financial liabilities into the following categories: Loans and receivables Financial liabilities measured at original cost plus accrued interest. Classification depends on the purpose for which the financial instruments were obtained / incurred and takes place at initial recognition. Classification is re-assessed on an annual basis. Initial recognition and measurement Financial instruments are recognised initially when the company becomes a party to the contractual provisions of the instruments. The company classifies financial instruments, or their component parts, on initial recognition as a financial asset, a financial liability or an equity instrument in accordance with the substance of the contractual arrangement. For financial instruments which are not at fair value through profit or loss, transaction costs are included in the initial measurement of the instrument. 16
Accounting Policies 1.2 Financial instruments (continued) Impairment of financial assets At each reporting date the company assesses all financial assets, other than those at fair value through profit or loss, to determine whether there is objective evidence that a financial asset or group of financial assets has been impaired. For amounts due to the company, significant financial difficulties of the debtor, probability that the debtor will enter bankruptcy and default of payments are all considered indicators of impairment. Impairment losses are recognised in profit or loss. Where financial assets are impaired through use of an allowance account, the amount of the loss is recognised in profit or loss within operating expenses. When such assets are written off, the write off is made against the relevant allowance account. Subsequent recoveries of amounts previously written off are credited against operating expenses. Loans to (from) group companies These include loans to and from holding companies and fellow subsidiaries, and are recognised initially at fair value plus direct transaction costs. Loans to group companies are classified as loans and receivables. Loans from group companies are classified as financial liabilities measured at amortised cost. Loans and advances to customers and other receivables Loans and advances to customers and other receivables are measured at initial recognition at fair value, and are subsequently measured at amortised cost using the effective interest rate method. An allowance is made for the amortised cost when a Rental Agreement is defaulting. A Rental Agreement is defaulting when the customer has been liquidated or placed under judicial management or where the rental remains outstanding for more than 30 days for rentals collected by debit order or where the rental remains outstanding for more than 90 days for rentals collected by electronic fund transfer or cheque. A Rental Agreement ceases to be defaulting if the overdue rental is paid or the liquidation order or the judicial management is set aside. The carrying amount of the asset is reduced through an allowance account. No loss is recognized in profit or loss within operating expenses as the originator is obligated to repurchase the rental agreement. Trade and other payables Trade payables are initially measured at fair value, and are subsequently measured at amortised cost, using the effective interest rate method. Cash and cash equivalents Cash and cash equivalents comprise cash on hand. These are initially recorded at fair value, and subsequently at amortised cost, using the effective interest rate method. Borrowings Borrowings are initially measured at fair value, and are subsequently measured at amortised cost, using the effective interest rate method. Debentures These financial liabilities are initially recognised at fair value plus direct transaction costs, and are subsequently measured at amortised cost using the effective interest rate method. 17
Accounting Policies 1.3 Tax Current tax assets and liabilities Current tax for current and prior periods is, to the extent unpaid, recognised as a liability. If the amount already paid in respect of current and prior periods exceeds the amount due for those periods, the excess is recognised as an asset. Current tax liabilities (assets) for the current and prior periods are measured at the amount expected to be paid to (recovered from) the tax authorities, using the tax rates (and tax laws) that have been enacted or substantively enacted by the end of the reporting period. Deferred tax assets and liabilities A deferred tax liability is recognised for all taxable temporary differences, except to the extent that the deferred tax liability arises from the initial recognition of an asset or liability in a transaction which at the time of the transaction, affects neither accounting profit nor taxable profit (tax loss). A deferred tax asset is recognised for all deductible temporary differences to the extent that it is probable that taxable profit will be available against which the deductible temporary difference can be utilised. A deferred tax asset is not recognised when it arises from the initial recognition of an asset or liability in a transaction at the time of the transaction, affects neither accounting profit nor taxable profit (tax loss). Deferred tax assets and liabilities are measured at the tax rates that are expected to apply to the period when the asset is realised or the liability is settled, based on tax rates (and tax laws) that have been enacted or substantively enacted by the end of the reporting period. Taxation expenses Current and deferred taxes are recognised as income or an expense and included in profit or loss for the period, except to the extent that the taxation arises from: a transaction or event which is recognised, in the same or a different period, to other comprehensive income, or a business combination. Current tax and deferred taxes are charged or credited directly to equity if the tax relates to items that are credited or charged, in the same or a different period, directly in equity. 1.4 Leases A lease is classified as a finance lease if it transfers substantially all the risks and rewards incidental to ownership. A lease is classified as an operating lease if it does not transfer substantially all the risks and rewards incidental to ownership. Finance leases - lessor The company recognises finance lease receivables in the statement of financial position. Finance income is recognised based on a pattern reflecting a constant periodic rate of return on the company s net investment in the finance lease. Instalment finance Rental, lease and instalment sale contracts are financing transactions, with rentals and instalments receivable, less unearned finance charges, being reflected as loans and advances to customers in the Statement of Financial Position. 1.5 Impairment of assets The company assesses at each end of the reporting period whether there is any indication that an asset may be impaired. If any such indication exists, the company estimates the recoverable amount of the asset. If there is any indication that an asset may be impaired, the recoverable amount is estimated for the individual asset. If it is not possible to estimate the recoverable amount of the individual asset, the recoverable amount of the cash-generating unit to which the asset belongs is determined. An entity assesses at each reporting date whether there is any indication that an impairment loss recognised in prior periods for assets other than goodwill may no longer exist or may have decreased. If any such indication exists, the recoverable amounts of those assets are estimated. 1.6 Share capital and equity An equity instrument is any contract that evidences a residual interest in the assets of an entity after deducting all of its liabilities. 18
Accounting Policies 1.7 Provisions and contingencies Provisions are recognised when: the company has a present obligation as a result of a past event; it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation; and a reliable estimate can be made of the obligation. The amount of a provision is the present value of the expenditure expected to be required to settle the obligation. Provisions are not recognised for future operating losses. 1.8 Revenue Interest is recognised, in profit or loss, using the effective interest rate method. Ancillary rental income is recognised on an invoice basis when earned. Settlement profit is recognised on settlement date. Profit on sale of secondary equipment is recognised when the significant risks and rewards of ownership are transferred to the buyer and it is probable that the economic benefits, which can be measured reliably, will flow to the enterprise. 1.9 Borrowing costs Borrowing costs are recognised as an expense in the period in which they are incurred. 19
Notes to the Annual Financial Statements 2017 2016 R R 2. New Standards and Interpretations At the date of approval of these annual financial statements, certain new accounting standards, amendments and interpretations to existing standards have been published but are not yet effective, and have not been adopted early by the entity. Management anticipates that all of the pronouncements will be adopted in the entity's accounting policies for the first period beginning after the effective date of the pronouncement. Information on new standards, amendments and interpretations that are expected to be relevant to the entity's financial statements is presented below. Certain other new standards and interpretations have been issued but are not expected to have a material impact on the entity's annual financial statements. 2.1 Standards and interpretations effective and adopted in the current year In the current year, the company has adopted the following standards and interpretations that are effective for the current financial year and that are relevant to its operations: Standard/ Interpretation: Disclosure Initiative: Amendment to IAS 1: Presentation of Financial Statements Effective date: Expected impact: Years beginning on or after 01 January 2016 The impact of the amendment is not material. 2.2 Standards and interpretations not yet effective The company has chosen not to early adopt the following standards and interpretations, which have been published and are mandatory for the company s accounting periods beginning on or after 01 April 2017 or later periods: Standard/ Interpretation: Effective date: Expected impact: Years beginning on or after IFRS 16 Leases 01 January 2019 Impact is currently being assessed IFRS 9 Financial Instruments 01 January 2018 Impact is currently being assessed IFRS 15 Revenue from Contracts with Customers 01 January 2018 Impact is currently being assessed Amendments to IFRS 15: Clarifications to IFRS 15 Revenue from Contracts with Customers 01 January 2018 Impact is currently being assessed Amendments to IAS 7: Disclosure initiative 01 January 2017 Impact is currently being assessed Amendments to IAS 12: Recognition of Deferred Tax Assets for Unrealised Losses 01 January 2017 Impact is currently being assessed 3. Controlling entities The MW Issuer Owner Trust holds 100% of the issued ordinary shares of MW Asset Rentals (RF) Limited. In terms of the International Financial Reporting Standards (IFRS) 10 Consolidated Financial Statements, an entity is consolidated when it is controlled by an investor. Control is achieved when the investor is exposed, or has rights to, variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee. Specifically, an investor controls an investee if and only if the investor has power over the investee (i.e. existing rights that give it the current ability to direct the relevant activities): exposure, or rights to variable returns from its involvement with the Investee and the ability to use its power over the investee to affect its returns. In terms of IFRS 10, the company is regarded to be controlled by Merchant West Proprietary Limited and is consolidated in the annual financial statements of Merchant West Proprietary Limited which is incorporated in South Africa. 20
Notes to the Annual Financial Statements 2017 2016 R R 4. Loans and advances to customers Gross investment in the lease due - within one year 241 125 883 263 087 825 - in second to fifth year inclusive 560 695 813 514 920 132 801 821 696 778 007 957 less: Unearned finance income (210 082 586) (135 159 627) Present value of minimum lease payments receivable 591 739 110 642 848 330 less: non-performing loans (8 138 829) (10 475 796) 583 600 281 632 372 534 Present value of minimum lease payments due - within one year 241 125 883 263 087 825 - in second to fifth year inclusive 350 613 227 379 760 505 591 739 110 642 848 330 less: non-performing loans (8 138 829) (10 475 796) 583 600 281 632 372 534 Non-current assets 349 506 618 379 760 505 Current assets 234 093 664 252 612 029 583 600 282 632 372 534 The advances to customers are ceded as security for the debentures issued by the company, refer to note 8. Credit quality of loans and advances to customers The credit quality of loans and advances to customers that are neither past due nor impaired are assessed by reference to the probabilities of default percentages as prescribed and regulated according to South African Reserve Bank regulations and standards, or by applying external International Credit Rating Agency's rating scales, or alternatively by considering historical information about counterparty default rates. Reconciliation of provision for impairment of loan balances 2017 Opening balance Charge to income statement Provision utilisation Closing balance Specific provision for non-performing loans (10 475 796) (4 537 263) 11 554 230 (3 458 829) General bad debt provision non-preforming loans - (4 680 000) - (4 680 000) 2016 Opening balance (10 475 796) (9 217 263) 11 554 230 (8 138 829) Charge to income statement Provision utilisation Closing balance Specific provision for non-performing loans (2 300 232) - (8 175 564) (10 475 796) General bad debt provision non-preforming loans (1 140 000) - 1 140 000 - (3 440 232) - (7 035 564) (10 475 796) The MW Asset Rentals (RF) Limited Lease Receivables Backed Note Programme Memorandum was restructured on 18 November 2016. Under the Initial Programme memorandum, loans which were impaired were required to be repurchased by Merchant West Proprietary Limited. Due to this requirement, no impairments were charged to the Statement of Comprehensive Income. This is no longer required under the current Programme Memorandum. Impairments are charged to the Statement of Comprehensive Income. 21
Notes to the Annual Financial Statements 2017 2016 R R 4. Loans and advances to customers (continued) Loans and advances to customers past due but not impaired Finance lease receivables which are less than 3 months past due are not considered to be impaired. At 31 March 2017 R 2 337 744 (2016: R 2 766 343) were past due but not impaired. The ageing of amounts past due but not impaired is as follows: Local finance lease receivables 1 month past due 314 816 1 102 103 2 months past due 79 124 444 696 3 months past due 1 943 804 1 219 544 2 337 744 2 766 343 5. Other receivables VAT 2 381 908 1 575 181 Other receivables are short term in nature. The net carrying value of other receivables is considered a reasonable approximation of fair value. 6. Cash and cash equivalents Cash and cash equivalents consist of: Bank balances 75 600 010 40 821 080 7. Share capital Authorised 1 000 Ordinary no par value shares 1 000 1 000 100 No par value preference shares 100 100 1 100 1 100 The authorised share capital was increased through the creation of 100 no par value preference shares. Issued 120 Ordinary no par value shares 120 120 1 Preference shares of R1 1-121 120 On the 18 Novemeber 2016 the Preference Shareholder subscribe for one Preference Share for a subscription price of R1. 22
Notes to the Annual Financial Statements 2017 2016 R R 8. Borrowings Held at amortised cost Class A Floating Rate Notes (i) 454 299 349 - Debentures in issue (ii) - 445 938 218 (i) Class A Floating Rate Notes On the 8 June 2016 a R 2 500 000 000 Lease Receivables Backed Note Programme was registered with the JSE Limited. 454 299 349 445 938 218 On 18 November 2016, the company sold Class A Floating Rate Notes with a nominal amount of R 450 000 000. The issuance comprised floating rate notes with a tenor of three years. The floating notes were issued at an interest rate of 3 month JIBAR plus 2.10%. At 31 March 2017 this interest rate was 9.425%. The notes are listed on the Johannesburg Stock Exchange. The Notes were rated za.aaa (sf) by Standard and Poor Global Ratings. (ii) Debentures issued Held at amortised cost Long-term portion of debentures issued Nedbank Limited - 181 995 805 ABSA Bank Limited - 24 341 195 First Rand Bank Limited - 101 162 310-307 499 310 Short-term portion of debentures issued Nedbank Limited - 74 432 437 ABSA Bank Limited - 15 642 207 First Rand Bank Limited - 48 364 264-138 438 908 The debentures obtained a credit rating of A1.za by Moody's. The debentures bear interest at rates ranging between prime less 1,5% to prime less 0.75%. The debentures were paid in full on the 18 November 2016. Non-current liabilities At amortised cost 450 000 000 307 499 310 Current liabilities At amortised cost 4 299 349 138 438 908 454 299 349 445 938 218 23
Notes to the Annual Financial Statements 2017 2016 R R 9. Deferred tax Deferred tax liability Deferred tax liability arising out of temporary differences (13 648 303) (12 272 762) The deferred tax assets and the deferred tax liability relate to income tax in the same jurisdiction, and the law allows net settlement. Therefore, they have been offset in the statement of financial position as follows: Deferred tax liability (13 648 303) (12 272 762) Reconciliation of deferred tax asset / (liability) At beginning of year (12 272 762) (12 769 200) Recoupments and wear and tear (102 818 656) (89 443 242) Provisions 1 709 154 (319 200) Operating lease instalments 99 114 624 90 023 980 Instalments received in advance 254 136 234 900 Adjustment to prior year deferred tax 365 201 - (13 648 303) (12 272 762) 10. Trade and other payables Instalments received in advance 2 551 310 868 660 Accrued expenses 156 799 3 035 Accrued audit and rating fees 882 807 668 379 3 590 916 1 540 074 All amounts are short term. The net carrying value of trade and other payables is considered a reasonable approximation of fair value. 11. Amounts due from (due to) group companies Merchant West Collections SPV Proprietary Limited 6 068 481 - Merchant West Proprietary Limited (689 537) (27 284 011) MWAR Warehouse SPV (RF) Proprietary Limited (1 719 355) - 3 659 589 (27 284 011) The amounts are unsecured, interest free and terms of repayment are reviewed on a month to month basis. Current assets 6 068 481 - Current liabilities (2 408 892) (27 284 011) 3 659 589 (27 284 011) The maximum exposure to credit risk at the reporting date is the fair value of each class of loan mentioned above. The company does not hold any collateral as security. 12. Interest income Interest received 97 853 949 79 896 664 The weighted yield on 95.51% (2016: 92.10%) of loans and advances to customers yields a return of 3.61% (2016: 3.32%) above the prime interest rate. The weighted yield on 4.49% (2016: 7.90%) of the loans and advances to customers yields a fixed return of 15.80% (2016: 15.19%). 24
Notes to the Annual Financial Statements 2017 2016 R R 13. Interest expense Utilisation of capital Interest expense on subordinated loan 7 314 338 11 231 435 Interest expense on corporate bonds 15 504 127 - Interest expense on debentures 26 194 344 35 318 542 49 012 809 46 549 977 14. Non-interest income Ancillary rental income 21 504 583 14 966 472 Documentation fees received 884 490 650 950 Settlement profit 3 497 162 2 182 866 Sundry income 693 094 200 157 26 579 329 18 000 445 15. Taxation Major components of the taxation expense Current Local income tax - current period 17 195 964 13 352 970 Deferred Deferred taxation arising from temporary differences 1 375 541 (496 438) 18 571 505 12 856 532 Reconciliation of the tax expense Reconciliation between accounting profit and tax expense. Accounting profit 65 022 513 50 050 144 Tax at the applicable tax rate of 28% (2016: 28%) 18 206 304 14 014 040 Tax effect of adjustments on taxable income Adjustment to prior year deferred tax 365 201 (1 044 321) Permanent difference - (113 187) 18 571 505 12 856 532 16. Cash generated from operations Profit before taxation 65 022 513 50 050 144 Changes in working capital: Other receivables (806 727) (142 579) Trade and other payables 2 050 842 (1 360 839) 66 266 628 48 546 726 17. Taxation paid Balance at beginning of the year (2 333 023) 2 052 728 Current taxation for the year recognised in profit or loss (17 195 964) (13 352 970) Balance at end of the year 3 153 408 2 333 023 (16 375 579) (8 967 219) 25
Notes to the Annual Financial Statements 2017 2016 R R 18. Directors' emoluments Executive Executive director fees are paid by Merchant West Proprietary Limited for management services provided to MW Asset Rentals (RF) Limited. Non-executive S Naidoo - 3 000 R Mohlala - 3 000 B Harmse* - - W H Swanepoel* - - R Thanthony* - - B J Korb* - - O H Shabangu* - - - 6 000 *Non executive directors fees are paid to TMF Corporate Services (South Africa) Proprietary Limited who supply the services of non executive directors. A total of R 103 444 (2016: R Nil) was paid to TMF Corporate Services (South Africa) Proprietary Limited. 26
Notes to the Annual Financial Statements 19. Categories of financial instruments Notes Loans and receivables Financial liabilities at amortised cost Leases Equity and non financial assets and liabilities Total Categories of financial instruments - 2017 Assets Non-Current Assets Advances to customers 4 - - 349 506 618-349 506 618 Current Assets Amounts due from group companies 11 6 068 481 - - - 6 068 481 Trade and other receivables 5 - - - 2 381 908 2 381 908 Loans and advances to customers 4 - - 234 093 664-234 093 664 Cash and cash equivalents 6 75 600 010 - - - 75 600 010 81 668 491-234 093 664 2 381 908 318 144 063 Total Assets 81 668 491-583 600 282 2 381 908 667 650 681 Equity and Liabilities Equity Equity Attributable to Equity Holders of Parent: Share capital 7 - - - 121 121 Subordinated loan 20 - - - 44 645 000 44 645 000 Retained income 7 - - - 145 904 692 145 904 692 - - - 190 549 813 190 549 813 Total Equity - - - 190 549 813 190 549 813 Liabilities Non-Current Liabilities Other financial liabilities 8-450 000 000 - - 450 000 000 Deferred tax 9 - - - 13 648 303 13 648 303-450 000 000-13 648 303 463 648 303 Current Liabilities Trade and other payables 10-1 039 607-2 551 309 3 590 916 Amounts due to group companies 11-2 408 892 - - 2 408 892 Other financial liabilities 8-4 299 349 - - 4 299 349 Current tax payable - - - 3 153 408 3 153 408-7 747 848-5 704 717 13 452 565 Total Liabilities - 457 747 848-19 353 020 477 100 868 Total Equity and Liabilities - 457 747 848-209 902 833 667 650 681 27
Notes to the Annual Financial Statements Notes Loans and receivables Financial liabilities at amortised cost Leases Equity and non financial assets and liabilities Total Categories of financial instruments - 2016 Assets Non-Current Assets Advances to customers 4 - - 379 760 505-379 760 505 Current Assets Trade and other receivables 5 - - - 1 575 181 1 575 181 Loans and advances to customers 4 - - 252 612 029-252 612 029 Cash and cash equivalents 6 40 821 080 - - - 40 821 080 40 821 080-252 612 029 1 575 181 295 008 290 Total Assets 40 821 080-632 372 534 1 575 181 674 768 795 Equity and Liabilities Equity Equity Attributable to Equity Holders of Parent: Share capital 7 - - - 120 120 Subordinated loan 20 - - - 44 645 000 44 645 000 Retained income 7 - - - 140 755 587 140 755 587 - - - 185 400 707 185 400 707 Total Equity - - - 185 400 707 185 400 707 Liabilities Non-Current Liabilities Other financial liabilities 8-307 499 310 - - 307 499 310 Deferred tax 9 - - - 12 272 762 12 272 762-307 499 310-12 272 762 319 772 072 Current Liabilities Trade and other payables 10-671 414-868 660 1 540 074 Amounts due to group companies 11-27 284 011 - - 27 284 011 Other financial liabilities 8-138 438 908 - - 138 438 908 Current tax payable - - - 2 333 023 2 333 023-166 394 333-3 201 683 169 596 016 Total Liabilities - 473 893 643-15 474 445 489 368 088 Total Equity and Liabilities - 473 893 643-200 875 152 674 768 795 28
Notes to the Annual Financial Statements 2017 2016 R R 20. Related parties ` Relationships Ultimate controlling company Securitisation company Holding entity Fellow subsidiary Directors Merchant West Holdings Proprietary Limited Merchant West Proprietary Limited MW Issuer Owner Trust Merchant West Capital Finance Proprietary Limited Merchant West Collections SPV Proprietary Limited Ariva Rentals Proprietary Limited Merchant West Capital Markets Proprietary Limited MW Brands Proprietary Limited Merchant West Working Capital Solutions Proprietary Limited Merchant West Specialised Finance Proprietary Limited MWAR Warehouse SPV (RF) Proprietary Limited MW Working Capital Solutions (RF) Proprietary Limited Refer to note 4, on page 10 in the Directors' Report Related party balances Amounts - due from (due to) related parties Merchant West Collections SPV Proprietary Limited 6 068 481 - Merchant West Proprietary Limited (689 537) (27 284 011) MWAR Warehouse SPV (RF) Proprietary Limited (1 719 355) - Subordinated Loan accounts - Owing (to) by related parties Merchant West Proprietary Limited (44 645 000) - Merchant West Capital Finance Proprietary Limited - (44 645 000) Subordinated funds - reclassified as equity The loan is unsecured, bears interest at a rate to be decided from time to time up to a maximum of 25% nominal annual compound monthly in arrears and is repayable on demand. From 18 November 2016, bears an interest rate of 3 month JIBAR plus 10% nominal annual compounded quaterly in arrers and is payable on a monthly basis. The loan is in terms of a loan agreement where interest will accrue on the outstanding capital of the loan balance once the company's assets, fairly valued, exceed it's liabilities. In terms of the trust deed relating to the MW Asset Rentals Debentures Holders Trust, a minimum amount of R Nil (2016: R Nil) may not be repaid in order to meet the required subordinated funding ratios. Subordinated funds are reclassified as equity and disclosed as capital and reserves. Related party transactions Interest paid to related parties Merchant West Capital Finance Proprietary Limited 4 157 508 11 231 435 Merchant West Specialised Finance Proprietary Limited - 2 574 448 Merchant West Proprietary Limited 3 156 831 - Securitisation fees paid to related parties Merchant West Specialised Finance Proprietary Limited - 1 000 000 29
Notes to the Annual Financial Statements 21. Risk management Capital risk management The company's objectives when managing capital are to safeguard the company's ability to continue as a going concern in order to provide returns for shareholder and benefits for other stakeholders and to maintain an optimal capital structure to reduce the cost of capital. The capital structure of the company consists of debt, which includes the borrowings disclosed in notes 8 & 11 cash and cash equivalents disclosed in note 6, and equity as disclosed in the statement of financial position. Consistent with others in the industry, the company monitors capital on the basis of the debt: equity ratio. This ration is calculated as net debt divided by total equity. Net debt is calculated as total borrowings (including 'current and non-current borrowings' as shown in the statement of financial position) less cash and cash equivalents. Total equity is represented in the statement of financial position. Financial risk management The company s activities expose it to a variety of financial risks: market risk (including cash flow interest rate risk), credit risk and liquidity risk. Liquidity risk The company s risk to liquidity is a result of the funds available to cover future commitments. The company manages liquidity risk through an ongoing review of future commitments and credit facilities. Cash flow forecasts are prepared and adequate utilised borrowing facilities are monitored. At 31 March 2017 < 1 month > 1 month <= 3months >3 months <=1 year >1 year <=5 years > 5 years and non-cash items Assets 114 265 661 60 100 775 143 777 626 349 506 619-667 650 681 Liabilities (6 018 704) (7 433 861) (450 000 000) - (13 648 303) (477 100 868) Equity - - - - - 190 549 813 Liquidity gap/interest rate sensitivity gap Cumulative liquidity gap/interest rate gap Cumulative earnings risk: 1% changes in rates At 31 March 2016 < 1 month > 1 month <= 3months Total 108 246 957 52 666 914 (306 222 374) 349 506 619 (13 648 303) - 108 246 957 160 913 871 (145 308 503) 204 198 116 190 549 813 - - 180 412 1 206 854 (5 812 340) 10 209 906 - >3 months <=1 year >1 year <=5 years > 5 years and non-cash items Assets 75 054 633 63 478 396 156 475 261 379 760 505-674 768 795 Liabilities (1 701 632) (62 276 128) (105 618 256) (307 499 310) (12 272 762) (489 368 088) Equity - - - - - 185 400 707 Liquidity gap/interest rate sensitivity gap Cumulative liquidity gap/interest rate gap Cumulative earnings risk: 1% changes in rates Total 73 353 001 1 202 268 50 857 005 72 261 195 (12 272 762) - 73 353 001 74 555 269 125 412 274 197 673 469 185 400 707 - - 128 800 559 165 5 016 491 9 883 673-30
Notes to the Annual Financial Statements 21. Risk management (continued) Interest rate risk The Company's interest rate risk arises from borrowings. Borrowings issued at variable rates expose the company to cash flow interest rate risk. Cash flow interest rate risk The company is exposed to cash flow interest rate risk on floating rate borrowings detailed in note 8. The following table illustrates the sensitivity of profit and equity to a reasonably possible change in interest rates of +/-1% (2016: +/-1%). These changes are considered to be reasonably possible based on observation of current market conditions. Profit for the year +1% -1% 31 March 2017 464 510 (464 510) 31 March 2016 371 936 (371 936) Equity +1% -1% 31 March 2017 1 905 498 (1 905 498) 31 March 2016 1 854 007 (1 854 007) 31
Notes to the Annual Financial Statements 21. Risk management (continued) Credit risk Credit risk consists mainly of cash deposits, cash equivalents, derivative financial instruments and trade debtors. The company only deposits cash with major banks with high quality credit standing and limits exposure to any one counter-party. Financial assets exposed to credit risk at year end were as follows: 2017 <1-3 months 3 months - 1 year 1-5 years 5 years and non-cash items Carrying amount Non-current assets Long term portion of loans receivable - - 349 506 618-349 506 618 Current assets Amounts due from group companies 6 068 481 - - - 6 068 481 Trade and other receivables 2 381 908 - - - 2 381 908 Short term portion of loans receivable 90 316 038 143 777 626 - - 234 093 664 Cash and cash equivalents 75 600 010 - - - 75 600 010 174 366 437 143 777 626 349 506 618-667 650 681 Non-current liabilitie Borrowings - - 450 000 000-450 000 000 Deferred tax - - - 13 648 303 13 648 303 Current liabilities Amount due to group companies 2 408 892 - - - 2 408 892 Borrowings 4 299 349 - - - 4 299 349 Current tax payable 3 153 408 - - - 3 153 408 Trade and other payables 3 590 916 - - - 3 590 916 13 452 565-450 000 000 13 648 303 477 100 868 2016 <1-3 months 3 months - 1 year 1-5 years 5 years and non-cash items Carrying amount Non-current assets Long term portion of loans receivable - - 379 760 505-379 760 505 Current assets Trade and other receivables 1 575 181 - - - 1 575 181 Cash and cash equivalents 40 821 080 - - - 40 821 080 Short-term portion of loans receivable 96 136 768 156 475 261 - - 252 612 029 Subtotal 138 533 029 156 475 261 379 760 505-674 768 795 138 533 029 156 475 261 379 760 505-674 768 795 Non-current liabilities Borrowings - - 307 499 310-307 499 310 Deferred tax - - - 12 272 762 12 272 762 Current liabilities Amount due to group companies 27 284 011 - - - 27 284 011 Borrowings 35 153 675 103 285 233 - - 138 438 908 Current tax payable - 2 333 023 - - 2 333 023 Trade and other payables 1 540 074 - - - 1 540 074 63 977 760 105 618 256 307 499 310 12 272 762 489 368 088 Credit risk is reduced by the following: Exposure to any one client is limited to 3.0% (2016: 2.5%) of the aggregate net present value of the rental book. Exposure of the top five clients is limited to 12.5% (2016: 10.0%) of the aggregate net present value of the rental book. Exposure to the top ten clients is limited to 20.0% (2016: 17.5%) of the aggregate net present value of the rental book. Exposure to the top thirty clients is limited to 40.00% (2016: 0.0%) of the aggregate net present value of the rental book. 32