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Fair Value Of Financial Instruments | 12 Months Ended
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Jun. 30, 2023
Fair Value Of Financial Instruments [Abstract] |
Fair Value Of Financial Instruments | 6. 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, credit, microlending credit and equity price and liquidity risks as discussed below. Currency exchange risk The Company is subject to currency exchange risk because it purchases components for its safe assets, that the Company assembles, and inventories that it is required to settle in other currencies, primarily the euro, renminbi, 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 (“ZAR”), 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 a significant amount of its revenues and incurs a significant amount of its expenses in ZAR. The U.S. dollar to the 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 activities, the Company’s operating results are exposed to fluctuations in interest rates, which it manages primarily through regular financing activities. Interest rates in South Africa are trending upwards and the Company expects higher interest rates in the foreseeable future which will increase its cost of borrowing. The Company periodically evaluates the cost and effectiveness of interest rate hedging strategies to manage this risk. The Company generally maintains surplus cash in cash equivalents and held to maturity investments and has occasionally invested in marketable securities. 6. FAIR VALUE OF FINANCIAL INSTRUMENTS (continued) Risk management (continued) 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 in respect of 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. Consumer microlending credit risk The Company is exposed to credit risk in its Consumer microlending activities, which provides unsecured short-term loans to qualifying customers. Credit bureau checks as well as an affordability test are conducted as part of the origination process, both of which are in line with local regulations. The Company considers this policy to be appropriate because the affordability test it performs takes into account a variety of factors such as other debts and total expenditures on normal household and lifestyle expenses. Additional allowances may be required should the ability of its customers to make payments when due deteriorate in the future. A significant amount of judgment is required to assess the ultimate recoverability of these finance loan receivables, including ongoing evaluation of the creditworthiness of each customer. Merchant lending The Company maintains an allowance for doubtful finance loans receivable related to its Merchant services segment with respect to short-term loans to qualifying merchant customers. The Company’s risk management procedures include adhering to its proprietary lending criteria which uses an online-system loan application process, obtaining necessary customer transaction-history data and credit bureau checks. The Company considers these procedures to be appropriate because it takes into account a variety of factors such as the customer’s credit capacity and customer-specific risk factors when originating a loan. Equity price and liquidity 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 relates to the risk of loss that the Company would incur as a result of the lack of liquidity on the exchange on which those 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. 6. FAIR VALUE OF FINANCIAL INSTRUMENTS (continued) Financial instruments (continued) 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 its significant 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, 2023 and June 30, 2022, respectively, and valued Cell C at $ 0.0 (zero) and $ 0.0 (zero) as of June 30, 2023, and June 30, 2022, respectively. The Company incorporates the payments under Cell C’s lease liabilities into the cash flow forecasts and assumes that Cell C’s deferred tax assets would be utilized over the forecast period. The Company has increased the marketability discount from 10 % to 20 % and the minority discount from 15 % to 24 % due to the reduction in the Company’s shareholding percentage from 15 % to 5 % as well as current market conditions. The Company utilized the latest revised business plan provided by Cell C management for the period ended December 31, 2025, for the June 30, 2023, and June 30, 2022 valuations. Adjustments have been made to the WACC rate to reflect the Company’s assessment of risk to Cell C achieving its business plan. The following key valuation inputs were used as of June 30, 2023 and 2022: Weighted Average Cost of Capital ("WACC"): Between 20 % and 31 % over the period of the forecast Long-term growth rate: 4.5 % ( 3 % as of June 30, 2022) Marketability discount: 20 % ( 10 % as of June 30, 2022) Minority discount: 24 % ( 15 % as of June 30, 2022) Net adjusted external debt - June 30, 2023: (1) ZAR 8.1 billion ($ 0.4 billion), no lease liabilities included Net adjusted external debt - June 30, 2022: (2) ZAR 13.5 billion ($ 0.8 billion), no lease liabilities included (1) translated from ZAR to U.S. dollars at exchange rates applicable as of June 30, 2023. (2) translated from ZAR to U.S. dollars at exchange rates applicable as of June 30, 2022. The fair value of Cell C as of June 30, 2023, 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 1.0 % increase and 1.0 % decrease in the WACC rate and the EBITDA margins used in the Cell C valuation on June 30, 2023, all amounts translated at exchange rates applicable as of June 30, 2023: Sensitivity for fair value of Cell C investment 1.0% increase 1.0% decrease WACC rate $ - $ 616 EBITDA margin $ 1,196 $ - The fair value of the Cell C shares as of June 30, 2023, 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. 6. FAIR VALUE OF FINANCIAL INSTRUMENTS (continued) Financial instruments (continued) 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, 2023 and June 30, 2022, respectively. Derivative transactions - Foreign exchange option contracts The Company held a significant amount of U.S. dollars in early fiscal 2022 and intended to use a portion of these funds to settle part of the purchase consideration related to the Connect acquisition. The purchase consideration was expected to be settled in ZAR. Accordingly, the Company entered into foreign exchange option contracts with FirstRand Bank Limited acting through its Rand Merchant Bank division (“RMB”) in November 2021 in order to manage the risk of currency volatility and to fix the ZAR amount to be utilized for part of the purchase consideration settlement. These foreign exchange option contracts, also known as synthetic forwards, were over-the-counter derivative transactions (Level 2). RMB’s long -term credit rating is “BB”. The Company used quoted prices in active markets for similar assets and liabilities to determine fair value of the foreign exchange option contracts (Level 2). The Company marked-to-market the synthetic forwards as of December 31, 2021, using a Black-Scholes option pricing model which determined the respective fair value of the options utilizing current market parameters. During the year ended June 30, 2022, the Company recorded a net gain of $ 3.7 million, which comprised a net gain of $ 6.1 million (which includes the reversal of the $ 2.4 . million unrealized loss which was previously recognized) recorded during the three months ended March 2022, and the unrealized loss of $ 2.4 million recorded during the three months ended December 31, 2021. The net gain is included in the caption gain related to fair value adjustment to currency options in the Company’s consolidated statements of operations for the year ended June 30, 2022. The following table presents the Company’s assets measured at fair value on a recurring basis as of June 30, 2023, according to the fair value hierarchy: Quoted Price in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Total Assets Investment in Cell C $ - $ - $ - $ - Related to insurance business: Cash, cash equivalents and restricted cash (included in other long-term assets) 258 - - 258 Fixed maturity investments (included in cash and cash equivalents) 3,119 - - 3,119 Total assets at fair value $ 3,377 $ - $ - $ 3,377 6. FAIR VALUE OF FINANCIAL INSTRUMENTS (continued) Financial instruments (continued) The following table presents the Company’s assets measured at fair value on a recurring basis as of June 30, 2022, according to the fair value hierarchy: Quoted Price in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Total Assets Investment in Cell C $ - $ - $ - $ - Related to insurance business Cash and cash equivalents (included in other long-term assets) 371 - - 371 Fixed maturity investments (included in cash and cash equivalents) 1,196 - - 1,196 Total assets at fair value $ 1,567 $ - $ - $ 1,567 There have been no transfers in or out of Level 3 during the years ended June 30, 2023, 2022 and 2021, respectively. There was no movement in the carrying value of assets measured at fair value on a recurring basis, and categorized within Level 3, during the years ended June 30, 2023 and 2022. 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, 2023: Carrying value Assets Balance as of June 30, 2022 $ - Foreign currency adjustment (1) - Balance as of June 30, 2023 $ - (1) The foreign currency adjustment represents the effects of the fluctuations of the South African rand against the U.S. dollar on the carrying value. 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, 2022: Carrying value Assets Balance as at June 30, 2021 $ - Foreign currency adjustment (1) - Balance as of June 30, 2022 $ - (1) The foreign currency adjustment represents the effects of the fluctuations of the South African rand against the U.S. dollar on the carrying value. 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. 6. FAIR VALUE OF FINANCIAL INSTRUMENTS (continued) Financial instruments (continued) 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. Refer to Note 9 for impairment charges recorded 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 https://asc.fasb.org/topic&trid=2229140 Reference 2: http://www.xbrl.org/2003/role/disclosureRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 40 -Section 50 -Paragraph 5 -Subparagraph (f) -URI https://asc.fasb.org/extlink&oid=126731327&loc=d3e90205-114008 + Details
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