7. FAIR VALUE OF FINANCIAL INSTRUMENTS

Fair value of financial instruments

Initial recognition and measurement

Financial instruments are recognized when the Company becomes a party to the transaction. Initial measurements are at cost, which includes transaction costs.

Risk management

The Company seeks to reduce its exposure to currencies other than the South African rand through a policy of matching, to the extent possible, assets and liabilities denominated in those currencies. In addition, the Company uses financial instruments in order to economically hedge its exposure to exchange rate and interest rate fluctuations arising from its operations. The Company is also exposed to equity price and liquidity risks as well as credit risks.

Currency exchange risk

The Company is subject to currency exchange risk because it purchases inventories that it is required to settle in other currencies, primarily the euro and U.S. dollar. The Company has used forward contracts in order to limit its exposure in these transactions to fluctuations in exchange rates between the South African rand, on the one hand, and the U.S. dollar and the euro, on the other hand.

Translation risk

Translation risk relates to the risk that the Company's results of operations will vary significantly as the U.S. dollar is its reporting currency, but it earns most of its revenues and incurs most of its expenses in ZAR. The U.S. dollar to ZAR exchange rate has fluctuated significantly over the past three years. As exchange rates are outside the Company's control, there can be no assurance that future fluctuations will not adversely affect the Company's results of operations and financial condition.

Interest rate risk

As a result of its normal borrowing and leasing activities, the Company's operating results are exposed to fluctuations in interest rates, which it manages primarily through regular financing activities. The Company generally maintains limited investment in cash equivalents and has occasionally invested in marketable securities.

Credit risk

Credit risk relates to the risk of loss that the Company would incur as a result of non-performance by counterparties. The Company maintains credit risk policies with regard to its counterparties to minimize overall credit risk. These policies include an evaluation of a potential counterparty's financial condition, credit rating, and other credit criteria and risk mitigation tools as the Company's management deems appropriate.

With respect to credit risk on financial instruments, the Company maintains a policy of entering into such transactions only with South African and European financial institutions that have a credit rating of BBB or better, as determined by credit rating agencies such as Standard & Poor's, Moody's and Fitch Ratings.

UEPS-based microlending credit risk

The Company is exposed to credit risk in its UEPS-based microlending activities, which provides unsecured short-term loans to qualifying customers. The Company manages this risk by performing an affordability test for each prospective customer and assigns a "creditworthiness score", which takes into account a variety of factors such as other debts and total expenditures on normal household and lifestyle expenses.

Equity price and liquidity risk

Equity price risk relates to the risk of loss that the Company would incur as a result of the volatility in the exchange-traded price of equity securities that it holds and the risk that it may not be able to liquidate these securities. The market price of these securities may fluctuate for a variety of reasons, consequently, the amount the Company may obtain in a subsequent sale of these securities may significantly differ from the reported market value.

Liquidity risk relates to the risk of loss that the Company would incur as a result of the lack of liquidity on the exchange on which these securities are listed. The Company may not be able to sell some or all of these securities at one time, or over an extended period of time without influencing the exchange traded price, or at all.

Financial instruments

Fair value is defined as the price that would be received upon sale of an asset or paid upon transfer of a liability in an orderly transaction between market participants at the measurement date and in the principal or most advantageous market for that asset or liability. The fair value should be calculated based on assumptions that market participants would use in pricing the asset or liability, not on assumptions specific to the entity. In addition, the fair value of liabilities should include consideration of non-performance risk including the Company's own credit risk.

Fair value measurements and inputs are categorized into a fair value hierarchy which prioritizes the inputs into three levels based on the extent to which inputs used in measuring fair value are observable in the market. Each fair value measurement is reported in one of the three levels which is determined by the lowest level input that is significant to the fair value measurement in its entirety.

These levels are:

Level 1 – inputs are based upon unadjusted quoted prices for identical instruments traded in active markets.
Level 2 – inputs are based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3 – inputs are generally unobservable and typically reflect management's estimates of assumptions that market participants would use in pricing the asset or liability. The fair values are therefore determined using model-based techniques that include option pricing models, discounted cash flow models, and similar techniques.

The following section describes the valuation methodologies the Company uses to measure financial assets and liabilities at fair value.

Investments in common stock

In general, and where applicable, the Company uses quoted prices in active markets for identical assets or liabilities to determine fair value. This pricing methodology would apply to Level 1 investments. If quoted prices in active markets for identical assets or liabilities are not available to determine fair value, then the Company uses quoted prices for similar assets and liabilities or inputs other than the quoted prices that are observable either directly or indirectly. These investments would be included in Level 2 investments. In circumstances in which inputs are generally unobservable, values typically reflect management's estimates of assumptions that market participants would use in pricing the asset or liability. The fair values are therefore determined using model-based techniques that include option pricing models, discounted cash flow models, and similar techniques. Investments valued using such techniques are included in Level 3 investments.

Asset measured at fair value using significant unobservable inputs – investment in Finbond Group Limited ("Finbond")

During the year ended June 30, 2016, the Company determined that it was able to exert significant influence on Finbond due to its representation on the board of directors (from April 2016) and the level of its shareholding. Accordingly, the Company has recognized its investment in Finbond using the equity method from April 1, 2016. Up until this date, the Company had no rights to participate in the financial, operating, or governance decisions made by Finbond. The Company also had no participation on Finbond's board of directors whether through contractual agreement or otherwise. Consequently, the Company had concluded that it did not have significant influence over Finbond and therefore equity accounting was not appropriate up until March 31, 2016, and Finbond was carried as an available for sale asset up until that date. The Company's ownership interest in Finbond as of June 30, 2016, was approximately 26% (representing 197,522,435 shares of common stock). In March 2016, Finbond completed a rights offering in which the Company acquired an additional 40,733,723 shares for approximately $8.9 million.

The Company's Level 3 asset as of June 30, 2015, represented an investment of 156,788,712 shares of common stock of Finbond, which are exchange-traded equity securities. Finbond's shares are traded on the Johannesburg Stock Exchange ("JSE") and the Company has designated such shares as available for sale investments. The Company had concluded that the market for Finbond shares was not active and consequently had employed alternative valuation techniques in order to determine the fair value of such stock. Finbond issues financial products and services under a mutual banking licence and also has a microlending offering. In determining the fair value of Finbond, the Company considered amongst other things Finbond's historical financial information (including its most recent public accounts), press releases issued by Finbond and its published net asset value. The Company believed that the best indicator of fair value of Finbond is its published net asset value and used this value to determine the fair value.

The fair value of these securities as of June 30, 2015, represented approximately 1% of the Company's total assets, including these securities. The Company expects to hold these securities for an extended period of time and it is not concerned with short-term equity price volatility with respect to these securities provided that the underlying business, economic and management characteristics of the company remain sound.

Derivative transactions - Foreign exchange contracts

As part of the Company's risk management strategy, the Company enters into derivative transactions to mitigate exposures to foreign currencies using foreign exchange contracts. These foreign exchange contracts are over-the-counter derivative transactions. Substantially all of the Company's derivative exposures are with counterparties that have long-term credit ratings of BBB or better. The Company uses quoted prices in active markets for similar assets and liabilities to determine fair value (level 2). The Company has no derivatives that require fair value measurement under level 1 or 3 of the fair value hierarchy.

The Company's outstanding foreign exchange contracts are as follows:

As of June 30, 2016

Fair market

Notional amount

Strike price

value price

Maturity

EUR 573,765.00

ZAR 15.9587

ZAR 16.3393

July 20, 2016

EUR 554,494.50

ZAR 16.0643

ZAR 16.4564

August 19, 2016

EUR 465,711.00

ZAR 16.1798

ZAR 16.582

September 20, 2016

EUR 393,675.00

ZAR 16.2911

ZAR 16.7017

October 20, 2016

EUR 302,368.50

ZAR 16.4085

ZAR 16.8301

November 21, 2016

As of June 30, 2015

Fair market

Notional amount

Strike price

value price

Maturity

EUR 526,263.00

ZAR 15.1145

ZAR 13.6275

July 20, 2015

EUR 526,263.00

ZAR 15.2025

ZAR 13.7062

August 20, 2015

EUR 526,263.00

ZAR 15.2944

ZAR 13.7898

September 21, 2015

EUR 526,263.00

ZAR 15.3809

ZAR 13.8683

October 20, 2015

EUR 509,516.00

ZAR 15.4728

ZAR 13.9540

November 20, 2015

EUR 529,865.00

ZAR 15.5654

ZAR 14.0397

December 21, 2015

EUR 526,663.00

ZAR 15.6625

ZAR 14.1239

January 20, 2016

The following table presents the Company's assets measured at fair value on a recurring basis as of June 30, 2016, according to the fair value hierarchy:

		Quoted
		Price in
		Active		Significant
		Markets for		Other		Significant
		Identical		Observable		Unobservable
		Assets		Inputs		Inputs
		(Level 1)		(Level 2)		(Level 3)		Total
Assets
Related to insurance business (included in
other long-term assets):
Cash and cash equivalents	$	533	$	-	$	-	$	533
Foreign exchange contracts		-		62		-		62
Other		-		37		-		37
Total assets at fair value	$	533	$	99	$	-	$	632

The following table presents the Company's assets and liabilities measured at fair value on a recurring basis as of June 30, 2015, according to the fair value hierarchy:

		Quoted
		Price in
		Active		Significant
		Markets for		Other		Significant
		Identical		Observable		Unobservable
		Assets		Inputs		Inputs
		(Level 1)		(Level 2)		(Level 3)		Total
Assets
Related to insurance business (included in
other long-term assets):
Cash and cash equivalents	$	1,640	$	-	$	-	$	1,640
Investment in Finbond (available for sale
assets included in other long-term assets)		-		-		7,488		7,488
Other		-		1,259		-		1,259
Total assets at fair value	$	1,640	$	1,259	$	7,488	$	10,387
Liabilities
Foreign exchange contracts	$	-	$	452	$	-	$	452
Total liabilities at fair value	$	-	$	452	$	-	$	452

Changes in the Company's investment in Finbond (Level 3 that are measured at fair value on a recurring basis) were insignificant during the years ended June 30, 2016 and 2015, respectively. During the year ended June 30, 2016, the Company determined that it was able to exert significant influence on Finbond and transferred the carrying value as of April 1, 2016, to equity-accounted investments. There have been no transfers in or out of Level 3 during the years ended June 30, 2015.

Trade, finance loans and other receivables

Trade, finance loans and other receivables originated by the Company are stated at cost less allowance for doubtful accounts receivable. The fair value of trade, finance loans and other receivables approximate their carrying value due to their short-term nature.

Trade and other payables

The fair values of trade and other payables approximates their carrying amounts, due to their short-term nature.

Assets and liabilities measured at fair value on a nonrecurring basis

The Company measures its assets at fair value on a nonrecurring basis when they are deemed to be other-than-temporarily impaired. The Company has no liabilities that are measured at fair value on a nonrecurring basis. The Company reviews the carrying values of its assets when events and circumstances warrant and considers all available evidence in evaluating when declines in fair value are other-than-temporary. The fair values of the Company's assets are determined using the best information available, and may include quoted market prices, market comparables, and discounted cash flow projections. An impairment charge is recorded when the cost of the assets exceeds its fair value and the excess is determined to be other-than-temporary. The Company has not recorded any impairment charges during the reporting periods presented herein. The Company owns 25% of One Credit Limited and has provided it a credit facility of up to $10 million in the form of convertible debt, none of which had been utilized as of June 30, 2016 and 2015, respectively.