SBN HOLDINGS LIMITED Annual Report 2022

KEY MANAGEMENT ASSUMPTIONS continued 72 Consolidation of entities The group controls and consolidates an entity where the group has power over the entity's relevant activities; is exposed to variable returns from its involvement with the investee; and has the ability to affect the returns through its power over the entity. Determining whether the group controls another entity requires judgement by identifying an entity's relevant activities, being those activities that significantly affect the investee's returns, and whether the group controls those relevant activities by considering the rights attached to both current and potential voting rights, de facto control and other contractual rights, including whether such rights are substantive. Goodwill impairment In terms of IFRS, the group is required on an annual basis to test its recognised goodwill for impairment. The impairment tests are performed by comparing the cash-generating units' (CGU) recoverable amounts to the carrying amounts in the functional currency of the CGU being assessed for impairment. The recoverable amount is defined as the higher of the entity's fair value less costs of disposal and its value in use. The review and testing of goodwill for impairment inherently requires significant management judgment as management needs to estimate the identified CGU's future cash flows. The principal assumptions considered in determining an entity's value in use include: ■Future cash flows - the forecast periods adopted reflect a set of cash flows which, based on management's judgement and expected market conditions, could be sustainably generated over such a period. A forecast period of five years has been used. ■ Discount rates - the weighted average cost of capital (WACC) was calculated based on comparable companies in the industry. In determining the WACC, we have used the capital asset pricing model (CAPM). Cost of debt was calculated using the risk-free rate in Namibia of 9.19% - 9.47% (2021: 6.54% - 7.07%) and adding a credit spread of 2.0% - 3.0% (2021: 2.0% - 3.0%). The after tax cost of debt was derived after taking into account the Namibian tax at a rate of 32% (2021: 32%). The following table summarises the impairment test methodology applied and the key inputs used in testing the group's goodwill relating to Mobicash Payments Solutions (Proprietary) Limited. Mobicash Payments Solutions (Proprietary) Limited 2022 2021 Properties in possession As a result of default by a client, Standard Bank Namibia called upon the property owning entities of which the property were put up as collateral. These entities are presented under interest in subsidiary and initially measured at fair value of date of acquisition. The fair value was determined by reference to property valuation certificates obtained from independent valuers adjusted by Standard Bank management for events or conditions in existence at year end in accordance with the requirements of IFRS. The independent valuers determined the fair values considering, among other factors, whether the property within the property owning entity is commercial or residential, using the following methods as applicable: 1. Direct sales comparisons method The sales comparison approach consists of comparing the subject property with sales of similar properties that have sold. It is based upon the principle of substitution and implies that a prudent investor will not pay more for an existing property than he will to buy an identical substitute property. Physical characteristics such as zoning, site location, access, land size, shape of earth, topography, drainage, nature of structure, quality and condition, age, features, problems, and orientation are factors that are considered to establish a comparative market value. 2. Land residual approach This approach contains elements of the market and the income capitalisation approaches, as well as a cash flow analysis. It comprises an investor's model based on the concept that the land value is equivalent to the net present value of the difference between the income that will be derived from the sale of the sub-divided erven and the costs that would be incurred in producing that income, taking the development and sales periods into account. Deducted from the total gross sell-out-value based on comparable sales will be marketing costs, constructions costs, service installation costs, professional fees, municipal costs and any other general costs associated with township development. This sell-out-value less holding costs is discounted over the time period it would take to sell all the serviced erven. The value takes the location and bulk services into consideration as well as the layout. Specific aspects considered determining a market value: ■Market conditions in terms of the demand for similar properties. The local economic outlook. The location of the subject property. Size of the land available for development. NOTES TO THE ANNUAL FINANCIAL STATEMENTS 1. 2. Cash and balances with the central bank Coins and bank notes¹ Balances with the Bank of Namibia 1.2 Cash balances Total SBN HOLDINGS LIMITED Annual report 2022 73 GROUP COMPANY 2022 N$'000 2021 N$'000 2022 N$'000 2021 N$'000 543 548 478 714 1 129 789 1 009 783 291 326 312 401 1 673 337 1 488 497 291 326 312 401 1 Coins and bank notes and the reserve balance with the BoN are classified as FVTPL while temporary excess balance with BoN is classified at amortised cost. 2 These balances primarily comprise reserving requirements levied by BoN. These balances are available for use by the group, subject to certain restrictions and limitations imposed by BoN. These balances are held at FVTPL. Derivative instruments All derivatives are classified as either derivatives held-for-trading or held-for-hedging. A summary of the fair values of the derivative assets and derivative liabilities is as follows: GROUP Held-for-trading Held-for-hedging Total Fair value of assets Fair value of liabilities 2022 N$'000 2021 N$'000 2022 N$'000 2021 N$'000 138 918 138 918 71 896 1 430 73 326 (136 263) (4 500) (70 576) (140 763) (70 576) 2.1 Use and measurement of derivative instruments 2.2 The risks associated with derivative instruments are monitored in the same manner as for the underlying instruments. Risks are also measured across the product range in order to take into account possible correlations. In the normal course of business, the group enters into a variety of foreign exchange, interest rate, commodity, credit and equity derivative transactions for trading purposes. Derivative instruments used by the group in trading activities include swaps, options, forwards, futures and other similar types of instruments. Derivatives held-for-trading The group transacts derivative contracts to address client demand, both as a market maker in the wholesale markets and in structuring tailored derivatives for clients. The company also takes proprietary positions for its own account. Trading derivative products include the following: Fair value of assets 2022 N$'000 2021 N$'000 Fair value of liabilities 2022 N$'000 2021 N$'000 Notional amount¹ 2022 N$'000 2021 N$'000 derivatives 125 676 62 796 Interest rate derivatives 13 242 Total 138 918 9 100 71 896 (123 021) (13 242) (136 263) (61 476) (9 100) 3 885 351 369 918 99 924 (70 576) 3 885 351 469 842 1 The notional amount is the sum of the absolute value of all bought and sold contracts for both derivative assets and liabilities. The amount cannot be used to assess the market risk associated with the positions held and should be used only as a means of assessing the group's participation in derivative contracts. Discounted cash flow Discount rate (nominal) (%) 15.50 14.36 Forecast period (years) Terminal growth (nominal) (%) 5 5.1 5 4.1 The application of these assumptions did not result in an impairment. Post-employment benefits The group and company's post-employment benefits consist of both post-employment retirement funds and healthcare benefits. The group and company's obligations to fund these benefits are derived from actuarial valuations performed by the appointed actuaries taking into account various assumptions. The funds are subject to a statutory financial review by the group's independent actuaries at intervals of not more than three years. The principal assumptions used in the determination of the group and company's post-employment benefits obligation are set out in note 34. ■ Cost related to the providing of bulk infrastructure services, considering the topography of the terrain. ■ As applicable, that no development be allowed in a 50 year flood line and that a proper river crossing be designed by a registered professional Engineer to at least be accommodative of a 50 year flood level. 3. Income capitalisation rate method The income capitalisation approach assumes that a purchaser will not pay more for a property with a certain income flow than the amount for which he can obtain a similar income flow with a similar risk elsewhere. The conversion of the net income stream into a present value is known as capitalisation and the rate of conversion is known as the capitalisation rate. The rate of capitalisation is the initial yield obtained from the investment, i.e., the ratio between the net income and the present worth (value) or purchase price, expressed as a percentage on an annual basis. The rates applied range for the applicable properties as follows: 5.2% - 12%. Conditions in existence at year end that were considered in accordance with the requirements of IFRS include forced sale discounts estimated based on historical discounts which considers the time to sell. Refer to note 42 for further details. GROUP Foreign exchange