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Fair Value Of Financial Instruments | 12 Months Ended
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Jun. 30, 2019
Fair Value Of Financial Instruments [Abstract] |
Fair Value Of Financial Instruments | 7. FAIR VALUE OF FINANCIAL INSTRUMENTS Fair value of financial instruments Initial recognition and measurement Financial instruments are recognized when the Company becomes a party to the transaction. Initial measurements are at cost, which includes transaction costs. Risk management The Company manages its exposure to currency exchange, translation, interest rate, customer concentration, credit and equity price and liquidity risks as discussed below. Currency exchange risk The Company is subject to currency exchange risk because it purchases inventories that it is required to settle in other currencies, primarily the euro and U.S. dollar. The Company has used forward contracts in order to limit its exposure in these transactions to fluctuations in exchange rates between the South African rand, on the one hand, and the U.S. dollar and the euro, on the other hand. Translation risk Translation risk relates to the risk that the Company's results of operations will vary significantly as the U.S. dollar is its reporting currency, but it earns most of its revenues and incurs most of its expenses in ZAR. The U.S. dollar to ZAR exchange rate has fluctuated significantly over the past three years. As exchange rates are outside the Company's control, there can be no assurance that future fluctuations will not adversely affect the Company's results of operations and financial condition. Interest rate risk As a result of its normal borrowing and lending activities, the Company's operating results are exposed to fluctuations in interest rates, which it manages primarily through regular financing activities. The Company generally maintains limited investments in cash equivalents and held to maturity investments and has occasionally invested in marketable securities. Credit risk Credit risk relates to the risk of loss that the Company would incur as a result of non-performance by counterparties. The Company maintains credit risk policies with regard to its counterparties to minimize overall credit risk. These policies include an evaluation of a potential counterparty's financial condition, credit rating, and other credit criteria and risk mitigation tools as the Company's management deems appropriate. With respect to credit risk on financial instruments, the Company maintains a policy of entering into such transactions only with South African and European financial institutions that have a credit rating of "B" (or its equivalent) or better, as determined by credit rating agencies such as Standard & Poor's, Moody's and Fitch Ratings. Microlending credit risk The Company is exposed to credit risk in its microlending activities, which provide unsecured short-term loans to qualifying customers. The Company manages this risk by performing an affordability test for each prospective customer and assigning a "creditworthiness score", which takes into account a variety of factors such as other debts and total expenditures on normal household and lifestyle expenses. Equity price risk Equity price risk relates to the risk of loss that the Company would incur as a result of the volatility in the exchange-traded price of equity securities that it holds. The market price of these securities may fluctuate for a variety of reasons and, consequently, the amount that the Company may obtain in a subsequent sale of these securities may significantly differ from the reported market value. Equity liquidity risk Liquidity risk relates to the risk of loss that the Company would incur as a result of the lack of liquidity on the exchange on which these securities are listed. The Company may not be able to sell some or all of these securities at one time, or over an extended period of time without influencing the exchange traded price, or at all. Financial instruments Fair value is defined as the price that would be received upon sale of an asset or paid upon transfer of a liability in an orderly transaction between market participants at the measurement date and in the principal or most advantageous market for that asset or liability. The fair value should be calculated based on assumptions that market participants would use in pricing the asset or liability, not on assumptions specific to the entity. In addition, the fair value of liabilities should include consideration of non-performance risk including the Company's own credit risk. Fair value measurements and inputs are categorized into a fair value hierarchy which prioritizes the inputs into three levels based on the extent to which inputs used in measuring fair value are observable in the market. Each fair value measurement is reported in one of the three levels which is determined by the lowest level input that is significant to the fair value measurement in its entirety. These levels are: Level 1 – inputs are based upon unadjusted quoted prices for identical instruments traded in active markets. Level 2 – inputs are based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Level 3 – inputs are generally unobservable and typically reflect management's estimates of assumptions that market participants would use in pricing the asset or liability. The fair values are therefore determined using model-based techniques that include option pricing models, discounted cash flow models, and similar techniques. The following section describes the valuation methodologies the Company uses to measure financial assets and liabilities at fair value. Asset measured at fair value using significant unobservable inputs – investment in Cell C The Company's Level 3 asset represents an investment of 75,000,000 class "A" shares in Cell C, a significant mobile telecoms provider in South Africa. The Company used a discounted cash flow model developed by the Company to determine the fair value of its investment in Cell C as of June 30, 2019, and valued Cell C at $0.0 (zero) at June 30, 2019. The Company changed its valuation methodology from a Company developed adjusted EV/ EBITDA model to a discounted cash flow approach due to anticipated changes in Cell C's business model and the current challenges faced by the business, which would not have been captured by the previous valuation approach. The Company believes the Cell C business plan is reasonable based on the current performance and the expected changes in the business model. The Company utilized the latest business plan provided by Cell C management for the period ending December 31, 2024, and following key valuation inputs were used:
Weighted Average Cost of Capital: | Between 15% and 20% over the period of the forecast |
Long term growth rate: | 4.5 | %
Marketability discount: | 10.0 | %
Minority discount: | 15.0 | %
Net adjusted external debt(1) : | ZAR 13.9 billion ($648.9 million), includes R6.4 billion of leases liabilities |
Deferred tax (incl. assessed tax losses(1) ): | ZAR 2.9 billion ($20.6 million) |
(1) translated from ZAR to U.S. dollars at exchange rates applicable as of June 30, 2019. The primary inputs to the valuation model as of June 30, 2018, were Cell C's annualized adjusted EBITDA for the 11 months ended June 30, 2018, of ZAR 3.9 billion ($284.8 million, translated at exchange rates applicable as of June 30, 2018), an EBITDA multiple of 6.75, Cell C's net external debt of ZAR 8.8 billion ($641.1 million, translated at exchange rates applicable as of June 30, 2018) and a marketability discount of 10%. The EBITDA multiple was determined based on an analysis of Cell C's peer group, which comprises eight African and emerging market mobile telecommunications operators. The fair value of Cell C utilizing the adjusted EV/EBITDA valuation model developed by the Company is sensitive to the following inputs: (i) the Company's determination of adjusted EBITDA; (ii) the EBITDA multiple used; and (iii) the marketability discount used. Utilization of different inputs, or changes to these inputs, may result in significantly higher or lower fair value measurement. The fair value of Cell C as of June 30, 2019, utilizing the discounted cash flow valuation model developed by the Company is sensitive to the following inputs: (i) the ability of Cell C to achieve the forecasts in their business case; (ii) the weighted average cost of capital ("WACC") rate used; and (iii) the minority and marketability discount used. Utilization of different inputs, or changes to these inputs, may result in a significantly higher or lower fair value measurement. The following table presents the impact on the carrying value of the Company's Cell C investment of a 1% increase and 1% decrease in the WACC rate and the EBITDA margins used in the Cell C valuation on the June 30, 2019, all amounts translated exchange rates applicable as of June 30, 2019:
Sensitivity for fair value of Cell C investment |  | 1% increase |  | 1% decrease
WACC rate | $ | - | $ | 9,632
EBITDA margin | $ | 9,875 | $ | -
The fair value of the Cell C shares as of June 30, 2019, represented approximately 0% of the Company's total assets, including these shares. The Company expects to hold these shares for an extended period of time and that there will be short-term equity price volatility with respect to these shares particularly given the current situation of Cell C's business. Liability measured at fair value using significant unobservable inputs – DNI contingent consideration The salient terms of the Company's investment in DNI is described in Note 3. Under the terms of its subscription agreements with DNI, the Company agreed to pay to DNI an additional amount of up to ZAR 400.0 million ($27.6 million, translated at exchange rates applicable as of June 30, 2019), in cash, subject to the achievement of certain performance targets by DNI. The Company expected to pay the additional amount during the first quarter of the year ended June 30, 2020, and recorded an amount of ZAR 373.6 million ($27.2 million), in long-term liabilities as of June 30, 2018, which amount represented the present value of the ZAR 400.0 million to be paid (amounts translated at the exchange rate applicable as of June 30, 2018, respectively). As described in Note 3 and Note 20, the Company settled the ZAR 400 million ($27.6 million) due to DNI as of March 31, 2019. The Company recorded accreted interest during year ended June 30, 2019, of $1.8 million (ZAR 26.4 million, translated at the applicable average exchange rates during the periods specified). Derivative transactions - Foreign exchange contracts As part of the Company's risk management strategy, the Company enters into derivative transactions to mitigate exposures to foreign currencies using foreign exchange contracts. These foreign exchange contracts are over-the-counter derivative transactions. Substantially all of the Company's derivative exposures are with counterparties that have long-term credit ratings of "B" (or equivalent) or better. The Company uses quoted prices in active markets for similar assets and liabilities to determine fair value (Level 2). The Company has no derivatives that require fair value measurement under Level 1 or 3 of the fair value hierarchy. The Company had no outstanding foreign exchange contracts as of June 30, 2019 and 2018. The following table presents the Company's assets measured at fair value on a recurring basis as of June 30, 2019, according to the fair value hierarchy:
|  | Quoted price in |  | Significant |  |  |
|  | active markets |  | other | Significant |  |
|  | for identical |  | observable | unobservable |  |
|  | assets |  | inputs | inputs |  |
|  | (Level 1) |  | (Level 2) | (Level 3) |  | Total
Assets |  |  |  |  |  |  |
Investment in Cell C | $ | - | $ | - | $- | $ | -
Related to insurance business: |  |  |  |  |  |  |
Cash and cash equivalents (included in other |  |  |  |  |  |  |
long-term assets) |  | 619 |  | - | - |  | 619
Fixed maturity investments (included in |  |  |  |  |  |  |
cash and cash equivalents) |  | 5,201 |  | - | - |  | 5,201
Other |  | - |  | 413 | - |  | 413
Total assets at fair value | $ | 5,820 | $ | 413 | $- | $ | 6,233
The following table presents the Company's assets and liabilities measured at fair value on a recurring basis as of June 30, 2018, according to the fair value hierarchy:
|  | Quoted price in |  | Significant |  |  |  |
|  | active markets |  | other |  | Significant |  |
|  | for identical |  | observable |  | unobservable |  |
|  | assets |  | inputs |  | inputs |  |
|  | (Level 1) |  | (Level 2) |  | (Level 3) |  | Total
Assets |  |  |  |  |  |  |  |
Investment in Cell C | $ | - | $ | - | $ | 172,948 | $ | 172,948
Related to insurance business: |  |  |  |  |  |  |  |
Cash and cash equivalents (included in other |  |  |  |  |  |  |  |
long-term assets) |  | 610 |  | - |  | - |  | 610
Fixed maturity investments (included in |  |  |  |  |  |  |  |
cash and cash equivalents) |  | 8,304 |  | - |  | - |  | 8,304
Other |  | - |  | 18 |  | - |  | 18
Total assets at fair value | $ | 8,914 | $ | 18 | $ | 172,948 | $ | 181,880
Liabilities |  |  |  |  |  |  |  |
DNI contingent consideration (Note 3) | $ | - | $ | - | $ | 27,222 | $ | 27,222
Total liabilities at fair value | $ | - | $ | - | $ | 27,222 | $ | 27,222
There have been no transfers into or out of Level 3 during the years ended June 30, 2019, 2018 and 2017. Summarized below is the movement in the carrying value of assets and liabilities measured at fair value on a recurring basis, and categorized within Level 3, during the year ended June 30, 2019:
|  | Carrying value |
Assets |  |  |
Balance as at June 30, 2018 | $ | 172,948 |
Loss on fair value re-measurements |  | (167,459 | )
Foreign currency adjustment(1) |  | (5,489 | )
Balance as of June 30, 2019 | $ | - |
Liabilities |  |  |
Balance as at June 30, 2018 | $ | 27,222 |
Accretion of interest |  | 1,848 |
Settlement of contingent consideration (Note 3 and Note 20) |  | (27,626 | )
Foreign currency adjustment(1) |  | (1,444 | )
Balance as of June 30, 2019 | $ | - |
(1) The foreign currency adjustment represents the effects of the fluctuations of the South African rand and the U.S. dollar on the carrying value. Summarized below is the movement in the carrying value of assets measured at fair value on a recurring basis, and categorized within Level 3, during the year ended June 30, 2018:
|  | Carrying value |
Assets |  |  |
Acquisition of investment in Cell C | $ | 151,003 |
Change in fair value of Cell C |  | 32,473 |
Foreign currency adjustment |  | (10,528 | )
Balance as of June 30, 2018 | $ | 172,948 |
Trade, finance loans and other receivables Trade, finance loans and other receivables originated by the Company are stated at cost less allowance for doubtful accounts receivable. The fair value of trade, finance loans and other receivables approximates their carrying value due to their short-term nature. Trade and other payables The fair values of trade and other payables approximates their carrying amounts, due to their short-term nature. Assets and liabilities measured at fair value on a nonrecurring basis The Company measures equity investments without readily determinable fair values at fair value on a nonrecurring basis. The fair values of these investments are determined based on valuation techniques using the best information available, and may include quoted market prices, market comparables, and discounted cash flow projections. An impairment charge is recorded when the cost of the asset exceeds its fair value and the excess is determined to be other-than-temporary. The Company has not recorded any impairment charges during the reporting periods presented herein. The Company has no liabilities that are measured at fair value on a nonrecurring basis.

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- Definition The entire disclosure for derivative instruments and hedging activities including, but not limited to, risk management strategies, non-hedging derivative instruments, assets, liabilities, revenue and expenses, and methodologies and assumptions used in determining the amounts. + References Reference 1: http://fasb.org/us-gaap/role/ref/legacyRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -URI http://asc.fasb.org/topic&trid=2229140 + Details
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