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AFRICAN DAWN ANNUAL REPORT 2020

Notes to the Financial Statements continued
Annual Financial Statements For the year ended 29 February 2020

Analysis of financial assets

Trade receivables are Grouped in terms of the accounting policy into:

- Current receivables - includes debtors that are paying within their credit terms as well as those that are up to 75 days overdue where
after they are transferred to the collections book. A transfer to collection and underperforming receivables also
takes place for debtors where a significant increase in credit risk is noted. These are events where a loan did not
have a performing status for the last 6 months, at any time during the last 6 months, any one of the debtors’ loans
were restructured or the debtor was referred to the debt review process; or subsequent to a claim made on the
credit life insurance policy, the outstanding balances on the client’s loans are not zero.
- Collection and under-performing receivables - debtors remain in collections and will move through the ageing brackets with Provisions
recognised at varying percentages until they are 180 days overdue at which point they are fully written off unless:
* The debtor was previously written off because it was sequestrated or deceased; or
* The debtor was transferred to the legal book.

- Legal receivables - includes debtors transferred from the collections book when the debtors have the following legal status:
* A debt pack has been signed that would lead to an emolument attachment order; or
* The debtor is placed under administration; or
* The debtor is placed under debt review.

The trade receivables constitute short term debt. The advances are for a 3 months to 6 months period and therefore lifetime expected credit
losses will always apply.

The group uses an independent third party to evaluate the ECL, the following was noted in relation to each of the categories of trade and other
receivables as explained in note 28.

• On the current book, the ECL’s as a percentage of balance declined from 4.5% to 4.1% since the previous year-end. We believe this is a result
of data volatility and it is appropriate to maintain this overall provision as a percentage of outstanding balance in line with the previous
financial year. This resulted in a small upward adjustment to the overall impairment of R27,559.

• We note a relatively small movement in total balance distribution from the current to the collection book over the last year. This is not large
enough to be concerning and may just be due to normal fluctuations. This is also consistent with Management observation relating to
financial health statistics of the book that are being monitored. These statistics suggests that the overall default probability on the book has
been roughly stable over the last year.

• Within the collections book itself, the model is responding to potentially deteriorating payment experience that may follow in future. This
pushes the ECL as a percentage of outstanding balance on the collections category up to 79.3% (2019: 67.7%). This is the main reason for the
overall increase in the impairments compared to the previous financial year. We believe this is a strong provision against the collections
category, even in the current market conditions. This observation is not contradicting to Management observations around the financial health
statistics and it is positive/prudent to witness the model responding to the updated data in this manner. The impairments model appears to
be suggesting that there is a possibility that collections on accounts that are already in the collections book at the moment may decline, even
though the probability of default may remain stable.

The forward looking information applied in the ECL determination includes allowances for macro-economic factors and asymmetric risk on the
loan book. The group incorporates future changes in the Consumer Price Index, the petrol price, the unemployment rate, the real wage rate and
the real credit extension to households to link these scenario’s to probability of default and used to derive a forward looking ECL.

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