Notes:

• Level one classification is used when the valuation is determined using quoted prices in an active market.
• Level two classification is used when valuation inputs used to determine fair value are observable for the asset/(liability), either directly as prices or indirectly when derived from prices.
• Level three classification is used when unobservable valuation inputs are used to determine the fair value for the asset/(liability).

The Group’s treasury function provides a centralised service to the Group for co-ordinating access to domestic and international financial markets and the managing of foreign currency, interest rate and liquidity risk. The aforementioned risks are managed, subject to the limitations of the local markets and the Regulations of the central bank of the country in which the various Group companies operate. Treasury operations are conducted within a framework of policies and guidelines authorised and reviewed annually by the Board.

The Group uses a number of derivative instruments that are transacted for foreign currency and interest rate risk management purposes only. There has been no significant change during the reporting period to the types of financial risks faced by the Group, the measures used to measure them or the objectives, policies and processes for managing them.

Since the end of the reporting period, two of the three international rating agencies, Standard and Poor’s and Fitch, downgraded South Africa’s sovereign credit rating due to increased perception of political risk and the risk of policy shifts that could undermine fiscal and economic growth in South Africa. Fitch downgraded the local and foreign currency rating to sub- investment grade whereas Standard and Poor’s only downgraded the foreign currency rating to sub-investment grade and downgraded the local currency rating by one notch which is still investment grade. Moody’s is still reflecting the sovereign credit risk of South Africa as investment grade and has not downgraded South Africa’s sovereign credit rating. This has led to the downgrade of various financial and parastatal institutions and companies in South Africa. The Group has identified three main areas of risk as a result of this downgrade, which are:

• Reduced consumer spending and increased credit risk;
• Exchange rate volatility; and
• Increased cost of capital.

The Group has implemented strategies in order to manage the impact of ratings downgrades through segmented propositions and micro bundles, more relevant data offerings to evolve with customer behaviour, using hedging instruments such as forward contracts, and continuously extending our debt maturity profile to alleviate refinancing­ and reallocation risk. The Group is also targeting to balance the debt structure between fixed and floating interest rates to protect against upward movement in rates but allowing for participation in downward movements.

Market risk exposures are measured using sensitivity analyses, which show how profit post tax or equity post tax would have been affected by changes in the relevant risk variable that were reasonably possible at the reporting date. Sensitivity analyses are for illustrative purposes only as, in practice, market rates rarely change in isolation. Details of changes in the methods and assumptions used in preparing the sensitivity analyses are disclosed in the respective sensitivity analyses.

The Group’s South African operations manages its exposure to fluctuations in foreign currency exchange rates by entering into foreign exchange forward contracts for foreign-denominated transactions. The contracts are entered into for specific transactions and are matched with anticipated future cash flows, in foreign currencies, primarily for the purchase of capital equipment and to a lesser extent operating expenditure. The Group’s policy is generally that entities within the Group borrow funds denominated in their respective functional currencies, however, in those instances where funds are borrowed in foreign-denominated currencies and a forward market exists, exposure to fluctuations in foreign currency exchange rates is managed by entering into foreign exchange forward contracts.

Notes:
Foreign contract values amount to:
• €7 million (2016: €2 million).
• US$9 million (2016: US$35 million).

Of the R26 million net asset (2016: R70 million net liability), R72 million (2016: R62 million) is reported in trade and other receivables and R46 million (2016: R132 million) in trade and other payables.

Foreign currency sensitivity analysis
The analysis below, expressed in the Group’s presentation currency, discloses the Group’s sensitivity to the specified percentage change in the material functional currencies against the relevant foreign currencies exposed to. Management’s assessment of a reasonable possible change in prevailing non-African and African foreign currency exchange rates is based on estimated interest rate differentials.

The analysis includes outstanding foreign-denominated monetary items only and adjusts their translations, at the reporting date, to the relevant functional currencies with the specified percentage change.

A positive number indicates an increase and a negative number a decrease in profit post tax, where the functional currencies are expected to strengthen against the relevant foreign currencies. For the same percentage weakening the impact would be equal and opposite.

Closing exchange rates used at the reporting date are as follows:

Included in the fixed rate financial assets above is cash held in restricted deposits relating to M-Pesa customers in Tanzania, for which the Group has an obligation to pay the interest earned to the customer after deducting expenses.

The floating rates which the Group is exposed to, is the South African prime, JIBAR, South African money market, LIBOR, Lesotho prime, Democratic Republic of Congo Central Bank lending rate and Tanzanian reference treasury bill rates.

The Group’s policy is to maintain an appropriate mix between fixed and floating rate instruments. The Group specifically manages its exposure to interest rate risk relating to interest bearing borrowings through a target ratio of fixed and variable rate borrowings. The Group is targeting to balance the debt structure between fixed and floating interest rates to protect against upward movements in rates but allowing for participation in downward movements. To achieve this ratio the Group may borrow at fixed rates or enter into approved derivative financial instruments.

Interest rate sensitivity analysis
The analysis below, expressed in the Group’s presentation currency, discloses the Group’s sensitivity to the specified basis point change in the market interest rates exposed to. Management’s assessment of a reasonable possible change in market interest rates are based on economic forecasts as published by Bloomberg.

The analysis includes both derivative and non-derivative instruments at the reporting date and in the case of floating rate instruments, the analysis is prepared assuming the amount outstanding at the reporting date was outstanding for the whole year.

A negative number indicates a decrease in profit post tax if interest rates were higher by the specified basis points. If interest rates were lower by the specified basis points, the impact would be equal and opposite. There would be no material impact on equity.

A reasonable possible change in the remaining interest rates exposed to, being LIBOR, Lesotho prime, Democratic Republic of Congo Central Bank lending rate and Tanzanian reference treasury bill rates, would have no material impact on profit.

The carrying amounts of financial assets, which are net of impairment losses, represent the Group’s maximum exposure to credit risk, with the exception of financial guarantees granted where the amount the Group could be required to pay or fund, if called on, represents the Group’s maximum exposure. The Group considers its maximum exposure per geographical class, without taking into account any collateral and financial guarantees, to be as follows:

In addition, the Group holds cash in restricted deposits of R3 245 million (2016: R2 454 million) mainly as a result of its M-Pesa activities, which cash is held in accounts with reputable financial institutions.

The Group’s policy is to deal with creditworthy counterparties only and to obtain sufficient collateral, where appropriate, to mitigate the risk of financial loss from counterparty defaults.

The Group generally transacts with counterparties rated the equivalent of investment grade¹ and above. This information is supplied by independent rating agencies or credit bureaus, where available. If not available, other publicly available financial information, the financial standing of counterparties, the Group’s own trading records or the Group’s internal grading system is used for rating the credit quality of counterparties. Contractual arrangements are entered into with network operator customers as determined by regulatory requirements and industry norms. Credit exposure is further controlled by defining credit limits per counterparty which are reviewed and approved by the credit risk department. The Group’s exposure and credit ratings of counterparties are continuously monitored and the aggregate value of transactions concluded is spread amongst approved counterparties. In determining the recoverability of trade receivables, the Group considers changes in credit quality.

The Group’s largest customer represents 29.7% (2016: 21.2%) of the total trade receivable balance. With the exception of the aforementioned, the credit risk for trade, finance and other receivables is generally limited due to the customer base being large and unrelated in conjunction with stringent credit approval processes. Due to this, management believes there is no further provision required in excess of the normal provision for doubtful receivables. Credit risk is limited for loans receivable due to collateral held and for cash and cash equivalents as they are placed with high credit quality financial institutions. Credit risk relating to investments and derivatives is minimised by limiting the counterparties to major local and international banks, which are closely monitored, and the Group does not expect to incur any losses as a result of non-performance by these counterparties.

The average legally agreed credit period on trade receivables is between 0 and 60 days, for all reporting periods, for the South African operations and between 30 and 89 days, for all reporting periods, for the non-South African operations.

The Group holds collateral to the value of R3 518 million (2016: R3 401 million) over certain trade and other receivables, which is made up of demand guarantees from financial institutions, exercisable on overdue invoices. Collateral held over loans receivable is disclosed in Note 11.

The table below discloses the credit quality of the trade receivables of the Group’s South African-based operations which are neither past due nor impaired:

Notes:
• Further details regarding the downgrading of South Africa’s sovereign credit rating may be found in Note 30.4.
• High: probability of default in payments exists and possible delinquency scenario.
• Medium: probability of financial difficulties exists resulting in arrears.
• Low: no default in payment occurred or anticipated.

Note:
• In addition, the Group holds cash in restricted deposits of R3 245 million (2016: R2 454 million) relating to mainly M-Pesa creditors, for which cash is held in accounts with reputable financial institutions.

The Group ensures that adequate funds are available to meet its expected and unexpected financial commitments through undrawn borrowing facilities. At the reporting date the Group had undrawn rand-denominated borrowing facilities of R3 331 million (2016: R3 776 million) and undrawn foreign-denominated borrowing facilities of US$27 million (2016: US$20 million), MZN888 million (2016: MZN888 million) and LSL45 million (2016: LSL25 million) available to manage its liquidity. The Group uses bank facilities and the normal operating cycle to manage short-term liquidity. The Group raises funds in bank markets and via loan funding from Vodafone Investments Luxembourg s.a.r.l and ensures a reasonable balance is maintained between the period over which assets generate funds and the period over which the respective assets are funded to manage long-term liquidity. Liquidity on long-term borrowings is managed by maintaining a varied maturity profile thereby minimising refinancing risk.

The capital structure of the Group consists of net debt and equity. The Group manages its capital to ensure that entities within the Group will be able to continue as going concerns while maximising return to shareholders. Capital is monitored on the basis of net debt to EBITDA.

Net debt comprises interest bearing borrowings, non-interest bearing borrowings, derivative financial instruments, bank and cash balances, bank overdrafts and financial guarantees.

EBITDA comprises earnings before interest, taxation, depreciation, amortisation, impairment losses, BBBEE charge, profit/loss on disposal of property, plant and equipment, intangible assets, subsidiaries and investment properties.

The Group’s strategy is to maintain a net debt to EBITDA multiple of less than two. The Group’s overall strategy remains unchanged from prior reporting periods. This internal ratio establishes levels of debt that the Group should not exceed other than for relatively short periods of time and it is reviewed on a semi-annual basis to ensure it is being met. The Group complied with this ratio throughout the year.

The Group is not subject to externally imposed capital requirements.

The following table summarises the capital of the Group: