Disclosure financial assets and liabilities

Disclosure financial assets and liabilities

– provides a narrative providing guidance on users of financial statements’ needs to present financial disclosures in the notes to the financial statements grouped in more logical orders. But there is and never will be a one-size fits all.

Here it has been decided to separately disclose financial assets and liabilities and non-financial assets and liabilities, because of the distinct different nature of these classes of assets and liabilities and the resulting different types of disclosures, risks and tabulations.

Disclosure financial assets and liabilities guidance

Disclosing financial assets and liabilities (financial instruments) in one note

Users of financial reports have indicated that they would like to be able to quickly access all of the information about the entity’s financial assets and liabilities in one location in the financial report. The notes are therefore structured such that financial items and non-financial items are discussed separately. However, this is not a mandatory requirement in the accounting standards.

Accounting policies, estimates and judgements

For readers of Financial Statements it is helpful if information about accounting policies that are specific to the entityDisclosure financial assets and liabilitiesand about significant estimates and judgements is disclosed with the relevant line items, rather than in separate notes. However, this format is also not mandatory. For general commentary regarding the disclosures of accounting policies refer to note 25. Commentary about the disclosure of significant estimates and judgements is provided in note 11.

Scope of accounting standard for disclosure of financial instruments

­

IFRS 7 does not apply to the following items as they are not financial instruments as defined in paragraph 11 of IAS 32:

  1. prepayments made (right to receive future good or service, not cash or a financial asset)
  2. tax receivables and payables and similar items (statutory rights or obligations, not contractual), or
  3. contract liabilities (obligation to deliver good or service, not cash or financial asset).

While contract assets are also not financial assets, they are explicitly included in the scope of IFRS 7 for the purpose of the credit risk disclosures. Liabilities for sales returns and volume discounts (see note 7(f)) may be considered financial liabilities on the basis that they require payments to the customer. However, they should be excluded from financial liabilities if the arrangement is executory. the Reporting entity Plc determined this to be the case. [IFRS 7.5A]

Classification of preference shares

Preference shares must be analysed carefully to determine if they contain features that cause the instrument not to meet the definition of an equity instrument. If such shares meet the definition of equity, the entity may elect to carry them at FVOCI without recycling to profit or loss if not held for trading.

If they do not, they must be further analysed to determine the underlying business model and whether the contractual cash flows are solely payments of principal and interest. the Reporting entity Plc undertook this analysis and concluded that the preference shares should be held at fair value through profit or loss, as the shares do not meet the definition of equity and their cash flows relating to interest payments can be deferred and such deferral does not result in interest accruing on the deferred amount (such that the contractual cash flows are not solely payments of principal and interest).

Where the classification involves significant judgement and the relevant amounts are material, the entity should consider disclosing the rationale for classifying such shares as debt instruments. [IFRS 9.4.1.2(b), IFRS 9.B4.1.7-B4.1.26, IAS 1.122]

Fair value disclosures: financial instruments carried at other than fair value

An entity shall disclose the fair value for each class of financial assets and financial liabilities in a way that permits it to be compared with its carrying amount. However, fair values do not need to be disclosed for the following: [IFRS 7.25, IFRS 7.29]

  • where the carrying amount is a reasonable approximation of fair value (eg for cash, short-term trade receivables and payables), or
  • for lease liabilities

Guidance on what are appropriate classes of financial assets and liabilities is given in paragraph 6 of IFRS 7, see guidance in section ‘Classes of financial instruments‘ in Financial risk management.

Carrying amounts are a reasonable approximation of fair value

A statement that the carrying amount of financial assets or financial liabilities is a reasonable approximation of their fair value should only be made if it can be substantiated. That is, entities must have made a formal assessment of the carrying amounts of their financial assets and liabilities in comparison to their fair values and documented this assessment. If the fair values are not a reasonable approximation of the carrying amounts, the fair values must be disclosed.

Holding more than 50% of voting rights without control

IFRS 12 Disclosure of Interests in Other Entities requires disclosure of the reasons why the ownership, directly or indirectly through subsidiaries, of more than half of the voting or potential voting power of an investee does not constitute control. We have used the example of a corporate trustee for one of the group’s pension plans to illustrate this requirement.

While the shares in these trustee companies are commonly held by the employer sponsor of the plan, the trustee company will not usually be controlled by the employer sponsor under the principles in IFRS 10, as the employer will not have the power to direct the relevant activities of the trustee company and will not be exposed, or have rights, to variable returns.

However, in many cases, these types of entities will not be significant to the group’s financial position and performance. Where this is the case, disclosure would not be necessary because of materiality. [IFRS 12.7, IFRS 12.9(a)]

Financial liabilities

Terms and conditions of financial instruments

Entities shall disclose sufficient information that enables users of its financial statements to evaluate the significance of financial instruments for its financial position and performance, and the nature and extent of risks arising from these financial instruments.

However, the intention of IFRS 7 was to decrease the potentially voluminous disclosures that were required by IAS 32 and replace them with shorter but more meaningful information. Under normal circumstances, entities will therefore not need to disclose the significant terms and conditions for each of their major borrowings.

Having said that, if an entity has a borrowing (or other financial instrument) with unusual terms and conditions, it should provide sufficient information to enable users to assess the nature and extent of risks associated with these instruments. [IFRS 7.7, IFRS 7.31]

Fair value measurements

Classes of assets and liabilities

The disclosures in IFRS 13 must be made separately for each class of assets and liabilities. Entities shall determine appropriate classes of assets and liabilities by considering:

  1. the nature, characteristics and risks of the asset or liability, and
  2. the level of the fair value hierarchy within which the fair value measurement is categorised. [IFRS 13.94]

A class of assets and liabilities will often require greater disaggregation than the line items presented in the balance sheet. The number of classes may also need to be greater for fair value measurements categorised within level 3 of the hierarchy, as those measurements have a greater degree of uncertainty and subjectivity. Entities shall disclose sufficient information to allow a reconciliation back to the line items disclosed in the balance sheet. [IFRS 13.94]

Unrealised gains and losses relating to recurring level 3 measures

IFRS 13 does not provide guidance on how to calculate the unrealised gains and losses for recurring level 3 measures. A similar requirement previously existed under US GAAP where three methods were acceptable. All of these methods would be acceptable under IFRS, provided they are consistently applied. The methods are:

  1. Balance sheet view: determine unrealised gains and losses as the fair value of the security less its amortised cost base. Under this view, gains and losses are realised at maturity or sale date. Therefore the entire gain or loss is considered unrealised until maturity.
  2. Statement of profit or loss view: determine unrealised gains and losses as the total gains and losses during the period less the cash received or paid for those items. Under this view each cash receipt or settlement represents a realised gain or loss in its entirety.
  3. Cash flow view: first determine any realised gains or losses as the difference between the expected cash flows at the beginning of the period and the actual cash flows at the end of the period. Then determine unrealised gains or losses for items still held at the reporting date as the remaining expected cash flows for future periods at the end of the period less the remaining expected cash flows for future periods at the beginning of the period. [IFRS 13.93(f)]

Other potential disclosures

Financial assets and liabilities at fair value through profit or loss (FVPL)

Issue not disclosed

Relevant disclosures or references

The entity has financial assets measured at FVPL of which:

  • some were designated as such upon initial recognition
  • some were designated as such in accordance with paragraph 6.7.1 of IFRS 9
  • some are mandatorily measured at FVPL in accordance with the requirements of IFRS 9 [IFRS 7.8(a), IFRS 7.20(a)(i)]

Disclose each of these financial assets and the associated gains/losses separately.

All of the Reporting entity Plc’s financial assets are mandatorily measured at FVPL; hence this disclosure does not apply.

The entity has designated financial assets at FVPL which would otherwise be measured at FVOCI or amortised cost

Provide additional disclosures as per paragraph 9 of IFRS 7.

The entity believes that the disclosures on how credit risk is calculated in relation to financial assets or liabilities designated at FVPL do not faithfully represent the fair value changes due to credit risk [IFRS 7.11(b)]

Disclose the reason for reaching this conclusion and what alternative factors would be relevant.

The entity has financial liabilities designated at FVPL

A number of additional disclosures apply as set out in paragraphs 8, 10, 10A, 11 and 20 of IFRS 7. Some, but not all of these, are illustrated below.

Financial assets at fair value through other comprehensive income (FVOCI)

Issue not disclosed

Relevant disclosures or references

A gain or loss recognised on disposal of debt instruments held at FVOCI [IFRS 7.20(a)(viii)]

Show separately:

  • the amount of gain or loss recognised in other comprehensive income during the period, and
  • the amount reclassified upon derecognition from accumulated other comprehensive income to profit or loss for the period.
Financial assets and liabilities at amortised cost

Issue not disclosed

Relevant disclosures or references

Disposal of financial assets at amortised cost [IFRS 7.20A]

Disclose an analysis of the gain or loss recognised and the reasons for derecognising the financial assets.

Disclosure in future periods for financial assets held at fair value reclassified to be held at amortised cost, where the new carrying amount is deemed to be the current fair value [IFRS 7.42N]

Disclose the effective interest rate determined at the date of reclassification and the interest revenue or expense recognised, in each period, until the financial asset is derecognised.

Other financial instrument disclosures

Issue not disclosed

Relevant disclosures or references

Defaults and breaches in relation to financial liabilities [IFRS 7.18, IFRS 7.19]

Disclose details of defaults (see illustrative example below).

Fair value determined using valuation techniques – gain or loss on initial recognition [IFRS 7.28]

Disclose the accounting policy for recognising the difference in profit or loss, the aggregate difference yet to be recognised, and why the transaction price was not the best evidence of fair value.

Fee income and expense on financial assets and liabilities that are not at FVPL [IFRS 7.20(c)]

Disclose amount, if material.

Transferred financial assets not derecognised in their entirety [IFRS 7.42D]

Provide additional disclosures where the entity has recognised the assets only to the extent of its continuing involvement and where the counterparty to the liabilities has recourse only to the transferred assets.

Reclassifications of financial assets from one measurement category to another made in accordance with paragraph 4.4.1 of IFRS 9 [IFRS 7.12B-12D]

Various disclosures, see paragraphs 12B – 12D of IFRS 7 for details.

Something else -   Long-term supply contracts
Fair value disclosures

Issue not disclosed

Relevant disclosures or references

Fair values are not disclosed for financial liability contracts with discretionary participation features

Disclose information to help users make their own judgements about the extent of possible differences between the carrying amount and the fair value.

Financial assets and financial liabilities with offsetting positions in market risk or counterparty credit risk [IFRS 13.96]

Disclose the fact that the exception in paragraph 48 of IFRS 13 is applied.

Financial liabilities with inseparable third-party credit enhancements [IFRS 13.98]

Disclose the existence of that enhancement and whether it is reflected in the fair value measurement of the liability.

Other potential disclosuresDisclosure financial assets and liabilities

The following illustrative disclosures may be useful where relevant to an entity:

Put option arrangements

(a) Entities that have put option arrangements should consider explaining the accounting for these, as the individual terms and conditions (and hence the accounting) may vary. An illustrative policy could read as follows (but will need to be tailored depending on the specific arrangements):

The group has written put options over the equity of its XYZ subsidiary which permit the holder to put their shares in the subsidiary back to the group at their fair value on specified dates over a five year period. The amount that may become payable under the option on exercise is initially recognised at the present value of the redemption amount within borrowings with a corresponding charge directly to equity. The charge to equity is recognised separately as written put options over non-controlling interests, adjacent to non-controlling interests in the net assets of consolidated subsidiaries. [IAS 32.11, IAS 32.23]

The liability is subsequently accreted through finance charges up to the redemption amount that is payable at the date at which the option first becomes exercisable. In the event that the option expires unexercised, the liability is derecognised with a corresponding adjustment to equity.

Financial liabilities designated at FVPL

(b) Entities that have designated financial assets or financial liabilities as at fair value through profit or loss must disclose the nature of the relevant assets and liabilities and provide additional information in relation to the designation. This could read along the following lines: [IFRS 7.B5(a), IFRS 7.21, IFRS 9.4.3.5, IFRS 9.5.7.7]

The group has convertible debentures which are classified entirely as liabilities because they were issued in a currency other than the functional currency of the company. As the instrument contains an embedded derivative, it has been designated as at fair value through profit or loss on initial recognition and as such the embedded conversion feature is not separated. All transaction costs related to financial instruments designated as at fair value through profit or loss are expensed as incurred.

The component of fair value changes relating to the company’s own credit risk is recognised in other comprehensive income. Amounts recorded in OCI related to credit risk are not subject to recycling in profit or loss, but are transferred to retained earnings when realised. Fair value changes relating to market risk are recognised in profit or loss.

Amounts in CU’000

2020

2019

Carrying amount

104,715

88,863

Includes:

Cumulative change in fair value of convertible debentures attributable to changes in credit risk, recognised in the FVOCI reserve [IFRS 7.10(a)]

225

210

Amount the company is contractually obligated to pay to holders of the convertible debentures at maturity

102,620

87,086

Difference between carrying amount and the amount the company is contractually obligated to pay to holders of convertible debentures at maturity [IFRS 7.10(b)]

2,095

1,777

The company determines the amount of fair value changes which are attributable to credit risk by first determining the changes due to market conditions which give rise to market risk, and then deducting those changes from the total change in fair value of the convertible debentures. Market conditions which give rise to market risk include changes in the benchmark interest rate. Fair value movements on the conversion option embedded derivative are included in the assessment of market risk fair value changes. [IFRS 7.11(a)]

The company believes that this approach most faithfully represents the amount of change in fair value due to the company’s own credit risk, as the changes in factors contributing to the fair value of the convertible debentures other than changes in the benchmark interest rate are not deemed to be significant. [IFRS 7.11(b)]

Defaults and breaches in relation to financial liabilities

(c) Example disclosures for a default in relation to a borrowing could read as follows:

In the third quarter, the group was overdue paying interest on bank borrowings with a carrying amount of CU2,000,000. The group experienced a temporary shortage of cash, because cash outflows in the second and third quarters were higher than anticipated due to business expansions. As a result, interest of CU75,000 was not paid on the due date of 31 September 2020. [IFRS 7.18]

The company has since paid all outstanding amounts (including additional interest and penalties for late payment) during the fourth quarter.

Management expects that the company will be able to meet all contractual obligations from borrowings on a timely basis going forward.

Example Disclosure financial instruments

7 Financial assets and financial liabilities

This note provides information about the group’s financial instruments, including:

  • an overview of all financial instruments held by the group
  • specific information about each type of financial instrument
  • accounting policies
  • information about determining the fair value of the instruments, including judgements and estimation uncertainty involved.

The group holds the following financial instruments: [IFRS 7.8]

Amounts in CU’000

Notes

2020

2019

Financial assets

Financial assets at amortised cost

– Trade receivables

7(a)

15,662

8,220

– Other financial assets at amortised cost

7(b)

4,598

3,471

– Cash and cash equivalents

7(e)

55,083

30,299

Financial assets at fair value through other comprehensive income (FVOCI)

7(c)

6,782

7,148

Financial assets at fair value through profit or loss (FVPL)

7(d)

13,690

11,895

Derivative financial instruments

– Used for hedging

12(a)

2,162

2,129

97,975

63,162

Disclosure financial assets and liabilities

Financial liabilities

Liabilities at amortised cost

– Trade and other payables1

7(f)

13,700

10,281

– Borrowings

7(g)

97,515

84,595

– Lease liabilities

8(b)

11,501

11,291

Derivative financial instruments

– Used for hedging

12(a)

766

777

Held for trading at FVPL

12(a)

610

621

124,092

107,565

The group’s exposure to various risks associated with the financial instruments is discussed in note 12. The maximum exposure to credit risk at the end of the reporting period is the carrying amount of each class of financial assets mentioned above. [IFRS 7.36(a), IFRS 7.31, IFRS 7.34(c)]

7(a) Trade receivables

Table based on – [IFRS 15.116(a), IAS 1.77]

Amounts in CU’000

31/12/20

31/12/19

01/01/19

Current assets

16,308

8,570

5,238

Loss allowance (see note 12 (c))

-646

-350

-115

15,662

8,220

5,123

(i) Classification as trade receivables IAS 1.117

Trade receivables are amounts due from customers for goods sold or services performed in the ordinary course of business. They are generally due for settlement within 30 days and are therefore all classified as current. Trade receivables are recognised initially at the amount of consideration that is unconditional, unless they contain significant financing components, when they are recognised at fair value. [IFRS 7.21, IFRS 9.5.1.3, IFRS 9.4.1.2, IFRS 9.5.4.1]

The group holds the trade receivables with the objective of collecting the contractual cash flows and therefore measures them subsequently at amortised cost using the effective interest method. Details about the group’s impairment policies and the calculation of the loss allowance are provided in note 12(c).Disclosure financial assets and liabilities

(ii) Transferred receivables

The carrying amounts of the trade receivables include receivables which are subject to a factoring arrangement. Under this arrangement, the Reporting entity Manufacturing Limited has transferred the relevant receivables to the factor in exchange for cash and is prevented from selling or pledging the receivables. However, the Reporting entity Manufacturing Limited has retained late payment and credit risk. [IFRS 7.42D(a)-(c),(e), IFRS 9.B4.1.3]

The group therefore continues to recognise the transferred assets in their entirety in its balance sheet. The amount repayable under the factoring agreement is presented as secured borrowing. The group considers that the held to collect business model remains appropriate for these receivables and hence continues measuring them at amortised cost.

The relevant carrying amounts are as follows:

Amounts in CU’000

2020

2019

Transferred receivables

3,250

Associated secured borrowing (bank loans – see note 7(g) below)

3,100

(iii) Fair values of trade receivables

Due to the short-term nature of the current receivables, their carrying amount is considered to be the same as their fair value. [IFRS 7.25, IFRS 7.29(a), IFRS 13.97, IFRS 13.93(b),(d)]

(iv) Impairment and risk exposure

Information about the impairment of trade receivables and the group’s exposure to credit risk and foreign currency risk can be found in note 12(b) and (c). [IFRS 7.31, IFRS 7.34(c)]

7(b) Other financial assets at amortised cost

(i) Classification of financial assets at amortised cost IAS 1.117

The group classifies its financial assets as at amortised cost only if both of the following criteria are met:

  • the asset is held within a business model whose objective is to collect the contractual cash flows, and
  • the contractual terms give rise to cash flows that are solely payments of principal and interest. [IFRS 9.4.1.2]

See note 25(o) for the remaining relevant accounting policies.

Financial assets at amortised cost include the following debt investments:

Table based on – IAS 1.77, IAS 1.78(b), IFRS 7.6]

Disclosure financial assets and liabilities

2020

2019

Amounts in CU’000

Current

Non-current

Total

Current

Non-current

Total

Loans to related parties (ii)

1,300

1,300

700

700

Loans to key management personnel (ii)

166

551

717

126

480

606

Debenture assets

750

750

750

750

Zero coupon bonds

460

460

425

425

Listed corporate bonds

94

94

90

90

Other receivables (ii)

939

375

1,314

716

200

916

1,105

3,530

4,635

842

2,645

3,487

Less: loss allowance for debt investments at amortised cost (note 12(c))

-5

-34

-39

-16

-16

1,100

3,496

4,596

842

2,629

3,471

(ii) Other receivables

These amounts generally arise from transactions outside the usual operating activities of the group. Interest may be charged at commercial rates where the terms of repayment exceed six months. Collateral is not normally obtained. The non-current other receivables are due and payable within three years from the end of the reporting period. [IFRS 7.7, IFRS 7.38]

Further information relating to loans to related parties and key management personnel is set out in note 20. [IAS 24.18]

(iii) Fair values of other financial assets at amortised cost

Fair value for the following investments was determined by reference to published price quotations in an active market (classified as level 1 in the fair value hierarchy – see note 7(h) below for further information). [IFRS 7.25, IFRS 7.6]

Amounts in CU’000

2020

2019

Debenture assets

795

767

Zero coupon bonds

482

433

Listed corporate bonds

150

100

Due to the short-term nature of the other current receivables, their carrying amount is considered to be the same as their fair value. For the majority of the non-current receivables, the fair values are also not significantly different from their carrying amounts. An exception is the loans to key management personnel, which have a fair value of CU481,000 as at 31 December 2020, compared to a carrying amount of CU551,000 (2019: fair value of CU424,000 and carrying amount of CU480,000). [IFRS 7.25, IFRS 7.29(a), IFRS 13.97, IFRS 13.93(b),(d)]

The fair values were calculated based on cash flows discounted using a current lending rate. They are classified as level 3 fair values in the fair value hierarchy due to the inclusion of unobservable inputs including counterparty credit risk (see note 7(h) below).Disclosure financial assets and liabilities

(iv) Impairment and risk exposure

Note 12(c) sets out information about the impairment of financial assets and the group’s exposure to credit risk.

All of the financial assets at amortised cost are denominated in Neverland currency units. As a result, there is no exposure to foreign currency risk. There is also no exposure to price risk as the investments will be held to maturity. [IFRS 7.34]

7(c) Financial assets at fair value through other comprehensive income

(i) Classification of financial assets at fair value through other comprehensive income IAS 1.117

Financial assets at fair value through other comprehensive income (FVOCI) comprise:

  • Equity securities which are not held for trading, and which the group has irrevocably elected at initial recognition to recognise in this category. These are strategic investments and the group considers this classification to be more relevant.
  • Debt securities where the contractual cash flows are solely principal and interest and the objective of the group’s business model is achieved both by collecting contractual cash flows and selling financial assets. [IFRS 7.11A(b), IFRS 7.21, IFRS 9.4.1.4, IFRS 9.5.7.5, IFRS 9.4.1.2A]
Something else -   Narrative reporting the right way
(ii) Equity investments at fair value through other comprehensive income

Equity investments at FVOCI comprise the following individual investments: [IFRS 7.11A(a),(c)]

Amounts in CU’000

2020

2019

Non-current assets

Listed securities

– Hardwood Ltd

1,900

– Furniture Suppliers Plc

870

– Furniture Purchasers Inc

1,305

975

– Sleep Willow Plc

653

250

– Pine Oak Property Inc

1,286

1,001

4,114

4,126

Disclosure financial assets and liabilities Disclosure financial assets and liabilities

Unlisted securities

Softwood Ltd

690

1,072

Mahogany Ltd

460

550

1,150

1,622

5,264

5,748

On disposal of these equity investments, any related balance within the FVOCI reserve is reclassified to retained earnings. Note 25(o) sets out the remaining accounting policies. [IFRS 7.21, IFRS 9.B5.7.1]

(iii) Disposal of equity investments

Since 1 January 2020, the group has sold its shares in Hardwood Ltd as a result of a takeover offer for cash. The shares sold had a fair value of CU2,275,000, and the group realised a gain of CU646,000 which had already been included in OCI. This gain has been transferred to retained earnings, net of tax of CU194,000, see note 9(c). [IFRS 7.11B, IFRS 7.11A(e)]

In the previous financial period, the group sold its investment in Second Floor Ltd, as this investment no longer suited the group’s investment strategy. The shares sold had a fair value of CU2,143,000 at the time of the sale and the group realised a loss of CU548,000 which was transferred to retained earnings, net of tax of CU164,000. [IFRS 9.7.2.1]

(iv) Debt investments at fair value through other comprehensive income

Debt investments at FVOCI comprise the following investments in listed and unlisted bonds: [IAS 1.77]

Amounts in CU’000

2020

2019

Non-current assets

Listed bonds

728

650

Unlisted debt securities

790

750

1,518

1,400

On disposal of these debt investments, any related balance within the FVOCI reserve is reclassified to other gains/(losses) within profit or loss. [IFRS 9.5.7.10]

The unlisted debt securities include CU250,000 (2019 – CU nil) of securities issued by entities that are controlled by the ultimate parent entity, Goat AG. [IAS 24.18]

(v) Amounts recognised in profit or loss and other comprehensive income

During the year, the following gains/(losses) were recognised in profit or loss and other comprehensive income:

Amounts in CU’000

2020

2019

Gains/(losses) recognised in other comprehensive income (see note 9(c))

– Related to equity investments [IFRS 7.20(a)(vii)]

632

-1,230

– Related to debt investments [IFRS 7.20(a)(viii)]

118

-228

750

-1,458

Disclosure financial assets and liabilities Disclosure financial assets and liabilities

Dividends from equity investments held at FVOCI recognised in profit or loss in other income (see note 5(a)) [IFRS 7.11A(d)]

– Related to investments derecognised during the period

963

– Related to investments held at the end of the reporting period

642

800

1,605

800

(vi) Non-current assets pledged as security

Refer to note 24 for information on non-current assets pledged as security by the group. [IFRS 7.14]

(vii) Fair value, impairment and risk exposure

Information about the methods and assumptions used in determining fair value is provided in note 7(h), and information about the loss allowance recognised on debt investments at FVOCI is provided in note 12(c). [IFRS 13.93]

All of the financial assets at FVOCI are denominated in Neverland currency units. For an analysis of the sensitivity of the assets to price and interest rate risk refer to note 12(b). [IFRS 7.34]

(viii) Significant estimates

The fair value of financial instruments that are not traded in an active market is determined using valuation techniques. The group uses its judgement to select a variety of methods and make assumptions that are mainly based on market conditions existing at the end of each reporting period. For details of the key assumptions used and the impact of changes to these assumptions see note 7(h) below. [IFRS 13.91(a), IAS 1.125]

(ix) Significant judgements

The directors have determined that they do not control a company called the Reporting entity Trustee Limited even though the Reporting entity Plc owns 100% of the issued capital of this entity. the Reporting entity Trustee Limited is the trustee of the the Reporting entity Employees’ Superannuation Fund. It is not a controlled entity of the Reporting entity Plc because the Reporting entity Plc is not exposed, and has no right, to variable returns from this entity and is not able to use its power over the entity to affect those returns. The investment has a fair value of CU2 (2019 – CU2) and is included in unlisted securities. [IFRS 12.7, IFRS 12.9(a), IAS 1.122]

7(d) Financial assets at fair value through profit or loss

(i) Classification of financial assets at fair value through profit or loss [IAS 1.117]

The group classifies the following financial assets at fair value through profit or loss (FVPL):

  • debt investments that do not qualify for measurement at either amortised cost (see note 7(b) above) or FVOCI (note 7(c))
  • equity investments that are held for trading, and
  • equity investments for which the entity has not elected to recognise fair value gains and losses through OCI. [IFRS 9.4.1.2, IFRS 9.4.1.2A, IFRS 9.5.7.5]

Financial assets mandatorily measured at FVPL include the following:[IAS1.77, IFRS 7.6, IFRS 7.31]

Amounts in CU’000

2020

2019

Non-current assets

Unlisted preference shares

1,100

980

Contingent consideration (note 15(c))

1,290

2,390

980

Disclosure financial assets and liabilities Disclosure financial assets and liabilities

Current assets

US listed equity securities

5,190

4,035

Neverland listed equity securities

6,110

6,880

11,300

10,915

13,690

11,895

See note 25(o) for the remaining relevant accounting policies.

(ii) Amounts recognised in profit or loss

During the year, the following gains/(losses) were recognised in profit or loss: [IFRS 7.20(a)(i)]

Amounts in CU’000

2020

2019

Fair value gains (losses) on equity investments at FVPL recognised in other gains/(losses) (see note 5(b))

835

-690

Fair value gains (losses) on debt instruments at FVPL recognised in other gains/(losses) (see note 5(b))

120

100

Fair value gain on contingent consideration recognised in profit from discontinued operations (see note 15(c))

90

(iii) Risk exposure and fair value measurements

Information about the group’s exposure to price risk is provided in note 12(b). For information about the methods and assumptions used in determining fair value refer to note 7(h) below. [IFRS 7.31, IFRS 13.93]

7(e) Cash and cash equivalents

Amounts in CU’000

2020

2019

Current assets

Cash at bank and in hand

750

600

Deposits at call

54,333

29,699

55,083

30,299

(i) Reconciliation to cash flow statement

The above figures reconcile to the amount of cash shown in the statement of cash flows at the end of the financial year as follows: [IAS 7.45]

Amounts in CU’000

2020

2019

Balances as above

55,083

30,299

Bank overdrafts (see note 7(g) below)

-2,650

-2,250

Balances per statement of cash flows

52,433

28,049

(ii) Classification as cash equivalents

Term deposits are presented as cash equivalents if they have a maturity of three months or less from the date of acquisition and are repayable with 24 hours’ notice with no loss of interest. See note 25(k) for the group’s other accounting policies on cash and cash equivalents. [IAS 7.46]

(iii) Restricted cash

The cash and cash equivalents disclosed above and in the statement of cash flows include CU7,314,000 which are held by the Reporting entity Overseas Ltd. These deposits are subject to regulatory restrictions and are therefore not available for general use by the other entities within the group. [IAS 7.48]

7(f) Trade and other payables

Amounts in CU’000

2020

2019

Current liabilities

Trade payables [IAS 1.77]

10,000

8,231

Payroll tax and other statutory liabilities

1,570

1,207

Refund liabilities (i) [IFRS 15.105]

490

235

Other payables [IAS 1.77]

3,700

2,050

15,760

11,723

Trade payables are unsecured and are usually paid within 30 days of recognition.

The carrying amounts of trade and other payables are considered to be the same as their fair values, due to their short-term nature. [IFRS 7.29(a), IFRS 13.97, IFRS 13.93(b),(d)]

(i) Refund liabilities [IAS1.117]

Where a customer has a right to return a product within a given period, the group recognises a refund liability for the amount of consideration received for which the entity does not expect to be entitled (CU221,000; 2019 – CU110,000). The group also recognises a right to the returned goods measured by reference to the former carrying amount of the goods (CU76,000 as at 31 December 2020 and CU38,000 as at 31 December 2019; see note 8(g)). The costs to recover the products are not material because the customers usually return them in a saleable condition. [IFRS 15.55, IFRS 15.B20-B27]

Refund liabilities are further recognised for volume discounts payable to wholesale customers (CU269,000; 2019 – CU125,000). Note 3(c) has further explanations about both types of refund liabilities.

7(g) Borrowings

Disclosure financial assets and liabilities

2020

2019

Amounts in CU’000

Current

Non-current

Total

Current

Non-current

Total

Secured [IAS 1.77]

2,650

2,650

2,250

2,250

Bank overdrafts

2,650

2,650

2,250

2,250

Bank loans (i)

4,250

37,535

41,785

2,865

45,500

48,365

Debentures (v)

2,000

2,000

4,000

Other loans

450

8,580

9,030

150

14,100

14,250

Total secured borrowings (i)

7,350

46,115

53,465

7,265

61,600

68,865

Disclosure financial assets and liabilities

Unsecured  [IAS 1.77]

Bills payable

1,050

1,050

730

730

Convertible notes (iii)

16,815

16,815

Redeemable preference shares (iv)

11,000

11,000

11,000

11,000

Loans from related parties *

15,185

15,185

4,000

4,000

Total unsecured borrowings

1,050

43,000

44,050

730

15,000

15,730

Total borrowings

8,400

89,115

97,515

7,995

76,600

84,595

* Further information relating to loans from related parties is set out in note 20.

(i) Secured liabilities and assets pledged as security

Of the bank loans, CU3,100,000 relate to transferred receivables (see note 7(a)(ii) above). The remaining bank loans and overdrafts are secured by first mortgages over the group’s freehold land and buildings, including those classified as investment properties. [IFRS 7.7, IFRS 7.14(b), IFRS 7.42D]

The debentures were secured by a floating charge over the assets of the Reporting entity Plc.

Lease liabilities are effectively secured as the rights to the leased assets recognised in the financial statements revert to the lessor in the event of default.

The other loans are secured by a negative pledge that imposes certain covenants on the subsidiary that has received those loans. The negative pledge states that (subject to certain exceptions) the subsidiary will not provide any other security over its assets, and will ensure that the following financial ratios are met:

  • debt will not, at any time, exceed 50% of total tangible assets, and
  • borrowing costs will not exceed 50% of earnings before borrowing costs and taxation for each half-year period.

The carrying amounts of financial and non-financial assets pledged as security for current and non-current borrowings are disclosed in note 24. [IFRS 7.14(a)]

(ii) Compliance with loan covenants

The Reporting entity Plc has complied with the financial covenants of its borrowing facilities during the 2020 and 2019 reporting period, see note 13 for details. [IAS 1.135(d)]

(iii) Convertible notes

The Reporting entity Plc issued 1,500,000 7% convertible notes for CU20 milGoat on 23 January 2020. The notes are convertible into ordinary shares of the entity, at the option of the holder, or repayable on 23 January 2024. The conversion rate is 2 shares for each note held, which is based on the market price per share at the date of the issue of the notes (CU6.10), but subject to adjustments for reconstructions of equity. The convertible notes are presented in the balance sheet as follows: [IFRS 7.17, IAS 1.79(a)(vii)]

Amounts in CU’000

2020

2019

Face value of notes issued

20,000

Other equity securities – value of conversion rights (note 9(b))

-3,500

16,500

Interest expense *

842

Interest paid

-527

Non-current liability

16,815

* Interest expense is calculated by applying the effective interest rate of 9.6% to the liability component.

The initial fair value of the liability portion of the bond was determined using a market interest rate for an equivalent non-convertible bond at the issue date. The liability is subsequently recognised on an amortised cost basis until extinguished on conversion or maturity of the bonds. The remainder of the proceeds is allocated to the conversion option and recognised in shareholders’ equity, net of income tax, and not subsequently remeasured. [IAS 32.17, IAS 32.18, IAS 32.28, IAS 32.29, IAS 32.AG31(a)]

(iv) Redeemable preference shares

The redeemable preference shares represent 5,000,000 fully paid 6% cumulative redeemable preference shares. The shares are redeemable at CU2.20 per share on 31 December 2027, or by the Reporting entity Plc at any time before that date. The shares are entitled to dividends at the rate of 6% per annum. If insufficient profits are available in a particular financial year, the dividends accumulate and are payable when sufficient profits are available. The shares participate in a winding up of the company only to the extent of CU2.20 per share. [IFRS 7.7, IAS 1.79(a)(v)]

Since the shares are mandatorily redeemable on a specified date, they are recognised as liabilities. [IAS 32.17, IAS 32.18]

(v) Repurchase of debentures

During the reporting period, the Reporting entity Plc repurchased the remaining outstanding debentures for a lump sum payment of CU1,605,000. The carrying amount of the debentures at the time of the payment was CU2,000,000 and costs incurred were CU40,000, resulting in a net gain on settlement of CU355,000 which is included in finance income in the statement of profit or loss. [IFRS 7.7, IFRS 9.3.3.3, IFRS 7.20(a)(v)]

Something else -   What happened in the reporting period
(vi) Set-off of assets and liabilities

See note 23 below for information about the group’s offsetting arrangements.

(vii) Fair value

For the majority of the borrowings, the fair values are not materially different from their carrying amounts, since the interest payable on those borrowings is either close to current market rates or the borrowings are of a short-term nature. Material differences are identified only for the following borrowings: [IFRS 7.25, IFRS 7.29(a)]

Amounts in CU’000

2020

2019

Disclosure financial assets and liabilities Disclosure financial assets and liabilities Disclosure financial assets and liabilities Disclosure financial assets and liabilities

Carrying amount

Fair value

Carrying amount

Fair value

Bank loans

41,320

40,456

47,900

48,950

Convertible notes

16,815

17,175

Redeemable preference shares

11,000

9,475

11,000

10,860

The fair values of non-current borrowings are based on discounted cash flows using a current borrowing rate. They are classified as level 3 fair values in the fair value hierarchy (see note 7(h)) due to the use of unobservable inputs, including own credit risk. [IFRS 13.97, IFRS 13.93(b),(d)]

(viii) Risk exposures

Details of the group’s exposure to risks arising from current and non-current borrowings are set out in note 12. [IFRS 7.31]

7(h) Recognised fair value measurements

(i) Fair value hierarchy

This section explains the judgements and estimates made in determining the fair values of the financial instruments that are recognised and measured at fair value in the financial statements. To provide an indication about the reliability of the inputs used in determining fair value, the group has classified its financial instruments into the three levels prescribed under the accounting standards.

An explanation of each level follows underneath the table.

Recurring fair value measurements at 31 December 2020

Amounts in CU’000

Notes

Level 1

Level 2

Level 3

Total

Financial assets

Financial assets at fair value through profit or loss (FVPL)

Disclosure financial assets and liabilities Disclosure financial assets and liabilities Disclosure financial assets and liabilities Disclosure financial assets and liabilities Disclosure financial assets and liabilities

– US listed equity securities

7(d)

5,190

5,190

– Neverland listed equity securities

7(d)

6,110

6,110

– Preference shares – property sector

7(d)

1,100

1,100

– Other (contingent consideration)

7(d)

1,290

1,290

Hedging derivatives – interest rate swaps

12(a)

453

453

Hedging derivatives – foreign currency options

12(a)

1,709

1,709

Financial assets at fair value through other comprehensive income (FVOCI)

Disclosure financial assets and liabilities Disclosure financial assets and liabilities Disclosure financial assets and liabilities Disclosure financial assets and liabilities Disclosure financial assets and liabilities

– Equity securities – property sector

7(c)

1,286

1,286

– Equity securities – retail sector

7(c)

2,828

2,828

– Equity securities – forestry sector

7(c)

1,150

1,150

– Debentures – property sector

7(c)

378

378

– Debentures – retail sector

7(c)

350

790

1,140

Total financial assets

14,142

4,052

2,440

22,634

Financial liabilities

Disclosure financial assets and liabilities Disclosure financial assets and liabilities Disclosure financial assets and liabilities Disclosure financial assets and liabilities Disclosure financial assets and liabilities

Hedging derivatives – foreign currency forwards

12(a)

766

766

Trading derivatives

12(a)

275

335

610

Total financial liabilities

1,041

335

1,376

Recurring fair value measurements at 31 December 2019

Amounts in CU’000

Notes

Level 1

Level 2

Level 3

Total

Financial assets

Disclosure financial assets and liabilities Disclosure financial assets and liabilities Disclosure financial assets and liabilities Disclosure financial assets and liabilities Disclosure financial assets and liabilities

Financial assets at fair value through profit or loss (FVPL)

Disclosure financial assets and liabilities Disclosure financial assets and liabilities Disclosure financial assets and liabilities Disclosure financial assets and liabilities Disclosure financial assets and liabilities

– US listed equity securities

7(d)

4,035

4,035

– Neverland listed equity securities

7(d)

6,880

6,880

– Preference shares – property sector

7(d)

980

980

Hedging derivatives – interest rate swaps

12(a)

809

809

Hedging derivatives – foreign currency options

12(a)

1,320

1,320

Financial assets at fair value through other comprehensive income (FVOCI)

Disclosure financial assets and liabilities Disclosure financial assets and liabilities Disclosure financial assets and liabilities Disclosure financial assets and liabilities Disclosure financial assets and liabilities

– Equity securities – property sector

7(c)

1,378

1,378

– Equity securities – retail sector

7(c)

2,748

2,748

– Equity securities – forestry sector

7(c)

1,622

1,622

– Debentures – property sector

7(c)

300

300

– Debentures – retail sector

7(c)

350

750

1,100

Total financial assets

15,691

3,859

1,622

21,172

Financial liabilities

Disclosure financial assets and liabilities Disclosure financial assets and liabilities Disclosure financial assets and liabilities Disclosure financial assets and liabilities Disclosure financial assets and liabilities

Hedging derivatives – foreign currency forwards

12(a)

777

777

Trading derivatives

12(a)

621

621

Total financial liabilities

Disclosure financial assets and liabilities

1,398

1,398

There were no transfers between levels 1 and 2 for recurring fair value measurements during the year. For transfers into and out of level 3 measurements see (iii) below. [IFRS 13.93(c)]

The group’s policy is to recognise transfers into and out of fair value hierarchy levels as at the end of the reporting period. [IFRS 13.95]

Level 1: The fair value of financial instruments traded in active markets (such as publicly traded derivatives, and equity securities) is based on quoted market prices at the end of the reporting period. The quoted market price used for financial assets held by the group is the current bid price. These instruments are included in level 1. [IFRS 13.76, IFRS 13.91(a)]

Level 2: The fair value of financial instruments that are not traded in an active market (for example, over-the-counter derivatives) is determined using valuation techniques which maximise the use of observable market data and rely as little as possible on entity-specific estimates. If all significant inputs required to fair value an instrument are observable, the instrument is included in level 2. [IFRS 13.81, IFRS 13.91(a)]

Level 3: If one or more of the significant inputs is not based on observable market data, the instrument is included in level 3. This is the case for unlisted equity securities. [IFRS 13.86]

(ii) Valuation techniques used to determine fair values

Specific valuation techniques used to value financial instruments include:

  • the use of quoted market prices or dealer quotes for similar instruments
  • for interest rate swaps – the present value of the estimated future cash flows based on observable yield curves
  • for foreign currency forwards – the present value of future cash flows based on the forward exchange rates at the balance sheet date
  • for foreign currency options – option pricing models (eg Black-Scholes model), and
  • for other financial instruments – discounted cash flow analysis. [IFRS 13.91(a), IFRS 13.93(d)]

All of the resulting fair value estimates are included in level 2, except for unlisted equity securities, a contingent consideration receivable and certain derivative contracts, where the fair values have been determined based on present values and the discount rates used were adjusted for counterparty or own credit risk. [IFRS 13.93(b)]

(iii) Fair value measurements using significant unobservable inputs (level 3)

The following table presents the changes in level 3 items for the periods ended 31 December 2020 and 31 December 2019: [IFRS 13.93(e)]

Amounts in CU’000

Unlisted equity securities

Contingent consideration

Trading derivatives at FVPL

Total

Opening balance 1 January 2019

1,322

1,322

Gains recognised in other comprehensive income

300

300

Closing balance 31 December 2019

1,622

1,622

Transfer from level 2

-365

-365

Acquisitions

1200

1,200

Disposals

-200

-200

(Losses) recognised in other comprehensive income

-272

-272

Gains recognised in discontinued operations *

90

90

Gains/(losses) recognised in other income *

30

30

Closing balance 31 December 2020

1,150

1290

-335

2,105

Disclosure financial assets and liabilities

* includes unrealised gains or (losses) recognised in profit or loss attributable to balances held at the end of the reporting period [IFRS 13.93(f)]

Disclosure financial assets and liabilities Disclosure financial assets and liabilities Disclosure financial assets and liabilities Disclosure financial assets and liabilities

2020

90

15

105

2019

(iv) Transfers between levels 2 and 3

In 2020 the group transferred a hedging foreign currency forward from level 2 into level 3 as the counterparty for the derivative encountered significant financial difficulties. This resulted in a significant increase to the discount rate which is not based on observable inputs, as it reflects credit risk specific to the counterparty. Credit risk was not considered to be a significant input factor in previous years. [IFRS 13.93(d)]

(v) Valuation inputs and relationships to fair value

The following table summarises the quantitative information about the significant unobservable inputs used in level 3 fair value measurements (see (ii) above for the valuation techniques adopted): [IFRS 13.93(d), IFRS 13.99]

Table based on [IFRS 13.91(a), IFRS 13.93(d),(h)(i),(ii), IFRS 13.99]

Reporting line

Fair value at

Level 3 inputs *

Range of inputs (probability-weighted average)

Relationship of unobservable inputs to fair value

31/12/20

31/12/19

2020

2019

Unlisted equity securities

1,150

1,622

Earnings growth factor

2.5% – 3.5% (3%)

2% – 3%

(2.7%)

2020: Increased earnings growth factor (+50 basis points (bps)) and lower discount rate (-100 bps) would increase FV by CU70,000; lower growth factor (-50 bps) and higher discount rate (+100 bps) would decrease FV by CU80,000.

2019: increasing/decrea-sing the growth factor and the discount rate by +/- 50bps and 100 bps respectively would change the FV by +CU55,000/-CU65,000

Risk-adjusted discount rate

9% – 11% (10%)

9.5% – 11%

(10.2%)

Trading derivatives

-335

-365

Credit default rate

25%

30%

A shift of the credit default rate by +/- 5% results in a change in FV of CU30,000 (2019: change in default rate by +/- 6% changed FV by CU33,000)

Contingent conside-ration

1,290

n/a

Risk-adjusted discount rate

14%

n/a

A change in the discount rate by 100 bps would increase/decrease the FV by CU40,000

Expected cash inflows

CU2,150,000 – CU2,570,000

(CU2,360,000)

n/a

If expected cash flows were 10% higher or lower, the FV would increase/ decrease by CU35,000

* There were no significant inter-relationships between unobservable inputs that materially affect fair values. [IFRS 13.93(h)(i)]

IFRS 13.93(g)

(vi) Valuation processes

The finance department of the group includes a team that performs the valuations of non-property items required for financial reporting purposes, including level 3 fair values. This team reports directly to the chief financial officer (CFO) and the audit committee (AC). Discussions of valuation processes and results are held between the CFO, AC and the valuation team at least once every six months, in line with the group’s half-yearly reporting periods.

The main level 3 inputs used by the group are derived and evaluated as follows:

  • Discount rates for financial assets and financial liabilities are determined using a capital asset pricing model to calculate a pre-tax rate that reflects current market assessments of the time value of money and the risk specific to the asset.
  • Risk adjustments specific to the counterparties (including assumptions about credit default rates) are derived from credit risk gradings determined by the Reporting entity Plc’s internal credit risk management group.
  • Earnings growth factors for unlisted equity securities are estimated based on market information for similar types of companies.
  • Contingent consideration – expected cash inflows are estimated based on the terms of the sale contract (see note 15) and the entity’s knowledge of the business and how the current economic environment is likely to impact it.

Changes in level 2 and level 3 fair values are analysed at the end of each reporting period during the half-yearly valuation discussion between the CFO, AC and the valuation team. As part of this discussion the team presents a report that explains the reason for the fair value movements.

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Something else -   IFRS 9 Financial assets continued involvement at best

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Disclosure financial assets and liabilities

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