NOTES TO FINANCIAL STATEMENTS
FOR THE SIXTEEN MONTHS MONTHS ENDED 30 JUNE 2023
3.1 FINANCIAL INSTRUMENTS
Measurement methods
Amortised cost and effective interest rates The amortised cost is the amount at which the financial asset or financial liability is measured at initial recognition minus the principal repayments, plus or minus the cumulative amortisation using the effective interest method of any difference between that initial amount and the maturity amount and, for financial assets, an adjustment for any loss allowance.
The effective interest rate is the rate that exactly discounts estimated future cash payments or receipts through the expected life of the financial asset or financial liability to the gross carrying amount of a financial asset (i.e. its amortised cost before any impairment allowance) or to the amortised cost of a financial liability. The calculation does not consider expected credit losses and includes transaction costs, premiums or discounts and fees and points paid or received that are integral to the effective interest rate, such as origination fees. For purchased or originated credit-impaired (‘POCI’) financial assets – assets that are credit-impaired at initial recognition - the MicroBank calculates the credit-adjusted effective interest rate, which is calculated based on the amortised cost of the financial asset instead of its gross carrying amount and incorporates the impact of expected credit losses in estimated future cash flows.
When the MicroBank revises the estimates of future cash flows, the carrying amount of the respective financial assets or financial liability is adjusted to reflect the new estimate discounted using the original effective interest rate. Any changes are recognised in profit or loss.
Interest income
Interest income is calculated by applying the effective interest rate to the gross carrying amount of financial assets, except for:
a) Purchased or originated credit-impaired (POCI) financial assets, for which the original credit-adjusted effective interest rate is applied to the amortised cost of the financial asset.
b) Financial assets that are not ‘POCI’ but have subsequently become credit-impaired (or ‘stage 3’), for which interest revenue is calculated by applying the effective interest rate to their amortised cost (i.e. net of the expected credit loss provision).
Initial recognition and measurement
Financial assets and financial liabilities are recognised when the entity becomes a party to the contractual provisions of the instrument. Regular way purchases and sales of financial assets are recognised on trade-date, the date on which the MicroBank commits to purchase or sell the asset.
At initial recognition, the MicroBank measures a financial asset or financial liability at its fair value plus or minus, in the case of a financial asset or financial liability not at fair value through profit or loss; transaction costs that are incremental and directly attributable to the acquisition or issuance of the financial asset or financial liability respectively, such as fees and commissions. Transaction costs of financial assets and financial liabilities carried at fair value through profit or loss are expensed in profit or loss. Immediately after initial recognition, an expected credit loss allowance (ECL) is recognised for financial assets measured at amortised cost and investments in debt instruments measured at FVOCI, which results in an accounting loss being recognised in profit or loss when an asset is newly originated.
When the fair value of financial assets and liabilities differs from the transaction price on initial recognition, the entity recognises the difference as follows: a) When the fair value is evidenced by a quoted price in an active market for an identical asset or liability (i.e. a Level 1 input) or based on a valuation technique that uses only data from observable markets, the difference is recognised as a gain or loss.
b) In all other cases, the difference is deferred and the timing of recognition of deferred day one profit or loss is determined individually. It is either amortised over the life of the instrument, deferred until the instrument’s fair value can be determined using market observable inputs, or realised through settlement.
Financial assets
The Company applies IFRS 9 and classifies its financial assets in the following measurement categories:
• Fair value through profit or loss (FVPL);
• Fair value through other comprehensive income (FVOCI); or
• Amortised cost.
Investment securities
Savings bonds are classified as investment securities and are held to collect contractual cash flows and sell if the need arises. These are measured at fair value.
3.2 FEES AND COMMISSION INCOME
Fees and commission income and expense that are integral to the effective interest rate on a financial asset or financial liability are included in the measurement of the EIR.
Other fees and commission – including retail banking changes, InnBucks BFF wallet charges to customers, InnBucks wallet withdrawal charges, airtime commission and merchant acquiring fees and credit related fees, fees from financial guarantee contracts, are recognised as the related services are performed.
The performance obligations, as well as the timing of their satisfaction, are identified, and determined, at the inception of the contract.
3.3 INTEREST INCOME
For all financial instruments measured at amortised cost and financial instruments designated at fair value through profit or loss, interest income or expense is recorded using the effective interest rate (EIR), which is the rate that exactly discounts the estimated future cash payments or receipts through the expected life of the financial instrument or a shorter period, where appropriate, to the net carrying amount of the financial asset or liability.
Interest income includes income arising out of the MicroBanking activities of lending and investing.
3.4 INTEREST EXPENSE
Interest expense arises from deposit taking and borrowings. The expense is recognised in profit or loss as it accrues, taking into account the effective interest cost of the liability.
4. USE OF ESTIMATES, JUDGEMENTS AND ASSUMPTIONS
In preparation of the financial statements, Directors have made judgements, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income and expenses. Actual results may differ from these estimates.
Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to estimates are recognised prospectively.
Information about assumptions and estimation uncertainties that have a significant risk of resulting in a material adjustment in the year ending 30 June 2023 is included in the following notes.
Impairment losses on loans and advances
The MicroBank reviews its individually significant loans and advances at each reporting date to assess whether an impairment loss should be recorded in profit or loss. In particular, judgement by management is required in the estimation of the amount and timing of future cash flows when determining the impairment loss. In estimating these cash flows, the MicroBank makes judgements about the borrower’s financial situation and the net realisable value of collateral. These estimates are based on assumptions about a number of factors and actual results may differ, resulting in future changes to the allowance. Loans and advances that have been assessed individually and found not to be impaired and all individually insignificant loans and advances are then assessed collectively, in groups of assets with similar risk characteristics, to determine whether provision should be made due to incurred loss events for which there is objective evidence but whose effects are not yet evident.
Determination of the functional currency.
According to the Statutory Instrument 118A of 2022 titled “Presidential Powers (Temporary Measures) (Amendment of Exchange Control Act) Regulations, 2022”, the Exchange Control Act [Chapter 22:05] (“the principal Act”), published on 16 November 2021, was amended to permit for the settlement of any transaction or payment for goods and services in foreign currency. This amendment is valid until December 2030 per the Presidential Powers (Temporary measures) (Amendment of Exchange Control Act Regulatory, 2023.
For the accounting period, the MicroBank has intermediated and transacted in various foreign currencies and ZWL. Closing balances are also denominated in both the local currency and foreign currencies. Management has carried out an assessment based on IAS 21 and concluded that the US$ is the functional currency of the MicroBank. The following indicators were considered in making the assessment: i. Legal indicators ii. Sales indicators iii. Expenses indicators, and iv. Financing indicators
Lease arrangements
The Directors have exercised significant judgement on determining whether the various contractual relationships which the MicroBank is party to, contain lease arrangements which fall into the scope of IFRS 16. Significant judgement was also exercised in determining whether the MicroBank is reasonably certain that it will exercise extension options present in lease contracts as well.