MTN Group Limited – Financial report – 31 December 2021
7 FINANCIAL RISK (extracts)
7.1 Financial risk management and financial instruments (extract)
Under IFRS 9 the Group calculates its allowance for credit losses as ECLs for financial assets measured at amortised cost, debt investments at FVOCI and contract assets (unbilled handset component for contract). ECLs are a probability weighted estimate of credit losses. Credit losses are measured as the present value of all cash shortfalls (i.e. the difference between the cash flows due to the Group in accordance with the contract and the cash flows that the Group expects to receive). ECLs are discounted at the original effective interest rate (EIR) of the financial asset.
To calculate ECLs the Group segments/groups trade receivables by customer type i.e. interconnect, Enterprise Business Unit (EBU), mobile (billed handset and network services component for contracts) etc. The Group applies the simplified approach to determine the ECL for trade receivables and contract assets. This results in calculating lifetime ECLs for trade receivables and contract assets. ECLs for trade receivables are calculated using a provision matrix. For contract assets and mobile trade receivables relating to the South African operation, ECLs are determined using a simplified parameter-based approach. Refer to note 7.1.4 for more detail about ECLs and how these are calculated.
7.1.4 Credit risk
Credit risk, or the risk of financial loss to the Group due to customers or counterparties not meeting their contractual obligations, is managed through the application of credit approvals, limits and monitoring procedures. The Group’s maximum exposure to credit risk is represented by the carrying amount of the financial assets and contract assets that are exposed to credit risk.
The Group considers its maximum exposure per class, without taking into account any collateral and financial guarantees, to be as follows:
1 2020 includes non-current assets held for sale relating to MTN Syria.
The risk rating grade of cash and cash equivalents and restricted cash are set out below. Given these credit ratings, management does not expect any counterparty to fail to meet its obligations.
1 2020 includes non-current assets held for sale relating to MTN Syria.
The Group’s treasury bills and foreign currency deposits denominated in Nigerian naira and Rwandan franc respectively have credit risk rating grades ranging from A- to B+ (2020: B- to B).
Cash and cash equivalents, restricted cash and current investments
The Group determines appropriate internal credit limits for each counterparty. In determining these limits, the Group considers the counterparty’s credit rating established by an accredited ratings agency and performs internal risk assessments. The Group manages its exposure to a single counterparty by spreading transactions among approved financial institutions. The Group Treasury Committee regularly reviews and monitors the Group’s credit exposure.
Investment in insurance cell captives
The Group has exposure to the credit risk of the insurance company through its investment in preference shares in its cell captive arrangements.
MoMo deposits are balances that are held with banks for and on behalf of MoMo customers. Regulations in certain jurisdictions specify the types of permissible liquid instruments that these deposits may be invested in. MoMo deposits are spread among approved, reputable financial institutions based on internal risk assessments or guidance provided by regulators, to manage the concentration of credit risk to a single counterparty. Many risk mitigations are in place and banks are also obliged to pay insurance premiums to protect MoMo customer deposits (or a portion thereof) in the event of bank failure.
As a result of the uncertain and evolving legal and regulatory environment, the assessment of which party in a MoMo arrangement is exposed to a bank credit risk event, has become increasingly complex and dependent on legal interpretations that are largely untested in the respective markets in which the Group operates. Consequently, the assessment of the Group’s credit risk exposure with regards to MoMo remains subject to legal and regulatory developments.
The treatment of MoMo in the financial statements is not, and should not be construed as a waiver by members of the Group of any legal, contractual or statutory rights, remedies and defences they may have, or as an admission of liability enforceable against any of them in law or otherwise. The legal, contractual and statutory rights, remedies and defences of members of the Group are reserved.
Trade receivables and contract assets (unbilled handset component)
A large portion of the Group’s postpaid market revenues are generated in South Africa. There are no other significant concentrations of credit risk, since the other operations within the Group operate largely within the prepaid market. The Group has policies in place to ensure that retail sales of products and services are made to customers with an appropriate credit history. Before credit is granted to a customer, the Group performs credit risk assessments through credit bureaus. The Group insures some of its trade receivables in its South African operation, in which instance the credit risk assessments are performed by the credit insurer prior to the granting of credit by the Group. In terms of this arrangement R6.1 billion (2020: R6.3 billion) has been insured for which the Group’s risk is limited to R1.0 billion (2020: R1.1 billion). In addition, some entities within the Group require potential customers to obtain guarantees from banks before credit is granted. During the current year the Group did not recognise ECLs amounting to R44.5 million (2020: R33.7 million) as a result of collateral held.
The recoverability of interconnect receivables in certain international operations is uncertain; however, this is actively managed within acceptable limits and has been incorporated in the assessment of an appropriate revenue recognition policy (note 2.2) and the ECL of trade receivables where applicable. In addition, in certain countries there exists a right of set-off with interconnect parties to enable collection of outstanding amounts.
Ageing and impairment analysis
Total past due per significant operation
Expected credit losses
The Group has the following financial assets subject to the ECL model:
- Trade and other receivables;
- Contract assets;
- Loans and other non-current receivables;
- Debt investments carried at amortised cost;
- Treasury bills and foreign deposits carried at amortised cost;
- Cash and cash equivalents;
- Restricted cash; and
- MoMo deposits.
Application of the ECL model had an immaterial impact on all financial assets except for contract assets and trade receivables.
Included in other receivables are amounts receivable from related parties (note 10.1) to which the Group has applied the general impairment model. The Group has considered the financial performance, external debt and future cash flows of the related parties and concluded that the credit risk relating to these receivables is limited and consequently the probability of default relating to these balances is low.
Provision matrix – ECLs are calculated by applying a loss ratio to the aged balance of trade receivables at each reporting date. The loss ratio is calculated according to the ageing/payment profile of sales by applying historical/proxy write offs to the payment profile of the sales population. In instances where there was no evidence of historical write offs management used a proxy write off. Trade receivable balances have been grouped so that the ECL calculation is performed on groups of receivables with similar risk characteristics and ability to pay. Similarly, the sales population selected to determine the ageing/payment profile of the sales is representative of the entire population and in line with future payment expectations. The historic loss ratio is then adjusted for forward-looking information (including forecast economic indicators, as affected by the COVID-19 pandemic) to determine the ECL for the portfolio of trade receivables at the reporting date to the extent that there is a strong correlation between the forward-looking information, and the ECL.
The Group used 12 – 36 months sales data to determine the payment profile of the sales. Where the Group has information about actual historical write-offs, actual write-offs have been used to determine a historic loss ratio. Alternatively, management has used a proxy write-off based on management’s best estimate. The Group has considered quantitative forward-looking information such as the core inflation rate. Qualitative assessments have also been performed, of which the impact was found to be immaterial.
The loss allowance for trade receivables to which the provision matrix has been applied is determined as follows:
Simplified parameter-based approach – ECL is calculated using a formula incorporating the following parameters: Exposure at Default (EAD), Probability of Default (PD), Loss Given Default (LGD) discounted using the Effective Interest Rate (EIR) (i.e. PD x LGD x EAD = ECL). The probability of default has been increased for the estimated deteriorated gross domestic product growth in South Africa. Exposures are mainly segmented by customer type i.e. corporate, consumer etc, ageing, device vs. SIM only contracts and months in contract. This is done to allow for risk differentiation. The probability of a customer defaulting as well as the realised loss with defaulted accounts has been determined using historical data of 12 months. The EIR represents a weighted average rate which is representative of the portfolio of customers and incorporates a risk-free rate plus a risk premium on initial recognition of the trade receivables.
A qualitative assessment of the impact of forward-looking information has been performed and found to be immaterial.
For corporate customers management rebutted the presumption that a customer is in default when 90 days past due and have determined default as 180 days past due. This is on the basis of billing disputes taking time to resolve resulting in a high cure rate.
The balance of trade receivables and contract assets to which the simplified parameter-based approach has been applied is as follows:
Trade receivables are written off when there is no reasonable expectation of recovery. This is assessed individually by each operation and includes for example where the trade receivables have been handed over for collection and remain outstanding or the debtor has entered bankruptcy.
¹ A net impairment loss of R579 million (2020: R1 009 million) was recognised during the year. In addition to the R689 million (2020: R486 million) provision utilised, R357 million (2020: R999 million) was written off directly to profit or loss during the year.
² Including the effect of hyperinflation.
4 WORKING CAPITAL (extract)
4.2 Trade and other receivables
Trade receivables are amounts due from customers for merchandise sold or services rendered in the ordinary course of business and are accounted for at amortised cost in accordance with the accounting policy disclosed in note 7.1.
Prepayments and other receivables are stated at their nominal values.
As the functional currencies of MTN South Sudan, MTN Sudan and MTN Syria are currencies of hyperinflationary economies, prepayments relating to these subsidiaries are restated by applying the change in the general price indices from the date of payment to the current reporting date.
1 This balance relates to a loan receivable from Irancell and was due on 30 September 2017 but remains outstanding at year-end. The amount outstanding was translated at the CBI rate (note 1.5.3 and note 7.6).
2 Receivables denominated in Iranian rial to the value of R1 525 million (2020: R840 million) were translated at the SANA rate (note 1.5.3 and note 7.6), while the remaining Iranian rial amounts outstanding at year-end were translated at the CBI rate.
3 Sundry debtors and advances include advances to suppliers and receivables from related parties (note 10.1).
Impairment of trade receivables
An allowance for impairment of R579 million (2020: R1 009 million) was incurred in the current year. This amount is included in impairment of trade receivables and contract assets in profit or loss (note 2.3). Additionally, R357 million (2020: R999 million) was written-off directly to profit or loss.
The Group’s exposure to credit and currency risk relating to trade and other receivables is disclosed in note 7.1.
Secured facilities and collateral
MTN Ghana has secured facilities through the pledge of its trade and other receivables amounting to R1 821 million (2020: R1 514 million) (note 6.1).
Irancell loan and receivable
On 20 September 2019, the US Treasury Department’s Office of Foreign Assets Control (OFAC) designated the CBI as being subject to sanctions. Sanctions imposed on the CBI create a secondary sanctions risk if the CBI allocates foreign currency to an MTN entity for the purpose of repatriating the receivable and/or loan. As at 31 December 2021, Iranian rial denominated receivables amounted to R1 531 million (2020: R1 037 million) and the Iranian rial denominated loan amounted to R1 882 million (2020: R1 733 million).