NOTE

16.

FINANCIAL ASSETS AND LIABILITIES

The group has the following financial instruments:

	●	Loans and receivables: Trade receivables, loans to customers, other receivables, preferred shares, and current and non-current financial assets.
	●	Equity instruments: Holdings of publicly traded securities.
	●	Loans, borrowings and payables: Interest-bearing loans, lease liabilities, trade payables, other payables and other current and non-current financial liabilities.

The table below shows the various financial assets and liabilities, grouped in the different categories of financial instruments.

[US$ thousands]	As of December 31,
Financial assets	2018		2019
Financial assets at amortized cost
Non-current financial assets (1)		2,025		1,351
Trade receivables		37,468		49,371
Other short-term receivables (2)		4,031		59,112
Other current financial assets		89		1,535
Total financial assets at amortized cost		43,612		111,369

Financial assets at fair value through profit or loss
Preferred shares in associates (3)		30,000		80,000
Loans to customers		3,092		93,115
Listed equity instruments		1,165		42,146
Total financial assets at fair value through profit or loss		34,257		215,261

Total financial assets		77,869		326,630

(

)

Includes long-term deposits for office rent

(

)

Includes cash of

US$52,878

thousand deposited into an escrow account as security for loans from a credit institution. See Note

for more information.

(

)

Carrying amount of preferred shares is presented as Investments in associates and joint ventures in the Statement of Financial Position, while changes in fair value is presented as Change in fair value of preferred shares in associates in the Statement of Operations. In

2019,

the Group recognized an unrealized gain on the preferred shares of

US$37,900

thousand (

2018:

US$0

). See Note

for more information.

[US$ thousands]	As of December 31,
Financial liabilities	2018		2019
Financial liabilities at amortized cost
Lease liabilities and other loans (1)		4,761		56,974
Trade and other payables		17,957		57,125
Other financial liabilities		9,413		15,279
Total financial liabilities at amortized cost		32,132		129,378

Financial liabilities at fair value through profit or loss
Short position in listed equity instruments		500		-
Total financial liabilities at fair value through profit or loss		500		-

Total financial liabilities		32,632		129,378

(

) As of

December 31, 2019,

US$42,247

thousand was related to short term loans used to partially fund the microlending business in India. See Notes

and

for more information.

The tables below specify the gains (losses) from the Group’s investments in listed equity instruments.

[US$ thousands]
Gain (loss) on listed equity instruments in 2018	Realized gain (loss)			Unrealized gain (loss)			Total
Long positions		(1,353	)		(169	)		(1,522	)
Short positions		48			(11	)		38
Total		(1,305	)		(180	)		(1,485	)

[US$ thousands]
Gain (loss) on listed equity instruments in 2019	Realized gain (loss)			Unrealized gain (loss)		Total
Long positions		6,278			2,564		8,842
Short positions		(365	)		-		(365	)
Total		5,913			2,564		8,477

Net gain from publicly traded securities in

2019

is recognized in the Statement of Operations as finance income, while net loss in

2018

was presented as a finance expense. The Group did

not

hold investments in listed equity instruments in

2017.

16.1

Fair value of financial instruments

The fair values of cash and cash equivalents, trade receivables, trade payables and other current liabilities approximate their carrying amounts largely due to the relatively short-term maturities of these instruments. For lease liabilities and other loans, the difference between the carrying amount and fair value is

not

material.

The fair values of financial assets and liabilities are measured as the price that would be received to sell the assets or paid to transfer the liabilities in an orderly transaction between market participants at the measurement date.

Fair values of listed equity instruments are determined by reference to published price quotations in active markets.

See Note

for information about fair value measurement of loans to customers.

Fair value of preferred shares in OPay and StarMaker

The fair values of preferred shares in OPay and StarMaker as of

December 31, 2019

are measured using methods and techniques that reflect the economic rights and benefits of the preferred shares. These rights and benefits include a right to redeem the preferred shares at the preferred share issue price plus

interest rate per year and a right to receive the invested amount in the event of liquidation before payments are made to holders of ordinary shares. Moreover, the preferred shares in StarMaker have a priority on dividends by providing a right to

annual return to the Group prior to dividends being made to holders of ordinary shares. The Group's preferred shares in both OPay and StarMaker have the same voting rights as ordinary shares.

A combination of the following

three

valuation methods was used to estimate the fair value of the preferred shares:

	●	Probability weighted expected return model (“PWERM”)
	●	Option pricing model (“OPM”)
	●	Current value method (“CV”)

Under the probability weighted expected return model, fair value of the preferred shares is estimated based upon the probability-weighted present value of expected future investment returns, considering a range of possible future scenarios and outcomes available to the company, as well as the rights of each share class. The PWERM is most appropriate when there are a set of visible future liquidity events and when the time to liquidity is short.

The option pricing model treats ordinary and preferred shares as call options on the company’s equity value, with exercise prices based on the liquidation preferences of the preferred shares. Under this model, the ordinary shares have a positive fair value only if the funds available for distribution to shareholders exceed the value of the liquidation preferences. The OPM is most appropriate when specific future liquidity events are challenging to forecast.

The current value method allocates value to each share class based on an estimated equity value (on a controlling basis). The method bases allocation of value as of the valuation date and

not

a future date. It is most appropriate when a liquidity event, such as an acquisition or dissolution, is imminent, or when the company is very early stage.

Under all

three

methods, a discount for lack of marketability (“DLOM”) was applied to reflect that the shares in a private and early stage company are considered to be illiquid. Shares that cannot be readily liquidated generally have a lower fair value and it is therefore appropriate to consider a discount when estimating fair value. For the preferred shares in OPay, a DLOM in the range

15%

was applied, while for the preferred shares in StarMaker, a DLOM in the range of

35%

was applied. That a lower DLOM range was applied for the preferred shares in OPay reflect that there were multiple transactions in equity instruments of the company in

2019,

including transactions with investors that are

not

related parties of the Group.

The option pricing model and the current value method builds on estimates of the fair value of the equity in the investees. For OPay, the estimate of fair value of equity as of

December 31, 2019

was

US$500

million, while for StarMaker it was

US$155

million. The value of equity in OPay was observed to increase through

2019

following several transactions of equity instruments in the company during the year. The estimated fair values of OPay and StarMaker at year-end was primarily based on discounted future expected cash flows and valuation multiples, but also, for OPay, to a lesser extent indications of the value of equity as expressed in a term sheet for a capital increase in OPay signed in early

2020.

The Group determined that the rounded mid-points of the averages of estimated ranges of fair values reflect the best estimate of the price that would be received in orderly transactions if the preferred shares were sold as of

December 31, 2019.

Consequently, the preferred shares in OPay were measured at

US$46,000

thousand, while the preferred shares in StarMaker were measured at

US$34,000

thousand (

December 31, 2018:

US$30,000

thousand). The preferred shares in OPay were acquired in

2019

for

US$12,100

thousand, while the preferred shares in StarMaker were acquired in

2018

for

US$30,000

thousand.

A key unobservable input in all the

three

methods was the discount for lack of marketability. Other key unobservable input included the weighted average cost of capital for PWERM method and the value of equity for the OPM and CV methods. The table below show the sensitivities to the key unobservable inputs in the measurement of the fair value of the preferred shares in OPay.

[US$ thousands]			WACC %
PWERM sensitivity - fair value of preferred shares			20%		22%		24%		26%		28%
	5	%		65,529		61,957		57,991		55,572		52,715
DLOM %	10	%		62,080		58,696		54,939		52,647		49,941
	15	%		58,631		55,435		51,887		49,722		47,166

[US$ thousands]			Value of equity in the company (US$ million)
OPM sensitivity - fair value of preferred shares			400		450		500		550		600
	5	%		34,739		39,657		44,570		49,479		54,383
DLOM %	10	%		32,910		37,570		42,225		46,875		51,521
	15	%		31,082		35,482		39,879		44,271		48,659

[US$ thousands]			Value of equity in the company (US$ million)
CVM sensitivity - fair value of preferred shares			400		450		500		550		600
	5	%		33,870		38,734		43,598		48,462		53,327
DLOM %	10	%		32,087		36,696		41,304		45,912		50,520
	15	%		30,305		34,657		39,009		43,361		47,713

The table below show the sensitivities to the key unobservable inputs in the measurement of the fair value of the preferred shares in StarMaker.

[US$ thousands]			WACC %
PWERM sensitivity - fair value of preferred shares			13%		15%		17%		19%		21%
	25	%		32,151		31,332		30,552		29,809		29,101
DLOM %	30	%		30,008		29,243		28,515		27,822		27,161
	35	%		27,864		27,154		26,479		25,835		25,221

[US$ thousands]			Value of equity in the company (US$ million)
OPM sensitivity - fair value of preferred shares			145		150		155		160		165
	25	%		37,011		37,787		38,558		39,327		40,092
DLOM %	30	%		34,544		35,268		35,988		36,705		37,419
	35	%		32,076		32,749		33,417		34,083		34,746

[US$ thousands]			Value of equity in the company (US$ million)
CVM sensitivity - fair value of preferred shares			145		150		155		160		165
	25	%		39,194		39,919		40,645		41,371		42,097
DLOM %	30	%		36,581		37,258		37,935		38,613		39,290
	35	%		33,968		34,597		35,226		35,855		36,484

The following table provides the fair value measurement hierarchy of the Group’s assets and liabilities.

Fair value measurement hierarchy for assets as at

December 2018:

		Fair value measurement using
[US$ thousands]	Date of valuation	Quoted prices in active markets (Level 1)		Significant observable inputs (Level 2)		Significant unobservable inputs (Level 3)
Assets measured at fair value
Preferred shares in associates	December 31, 2018		-		-		30,000
Loans to customers	December 31, 2018		-		-		3,092
Listed equity instruments	December 31, 2018		1,165		-		-

Fair value measurement hierarchy for liabilities as at

December 2018:

Fair value measurement using

[US$ thousands]

Date of valuation

Quoted prices in

active markets

(Level 1)

Significant

observable inputs

(Level 2)

Significant

unobservable inputs

(Level 3)

Liabilities measured at fair value

Short position

December 31, 2018

500

Fair value measurement hierarchy for assets as at

December 2019:

		Fair value measurement using
[US$ thousands]	Date of valuation	Quoted prices in active markets (Level 1)		Significant observable inputs (Level 2)		Significant unobservable inputs (Level 3)
Assets measured at fair value
Preferred shares in associates	December 31, 2019		-		-		80,000
Loans to customers	December 31, 2019		-		-		93,115
Listed equity instruments	December 31, 2019		42,146		-		-

For all financial liabilities recognized as of

December 31, 2019,

the estimates of fair values were

not

materially different from the carrying amounts. There were

liabilities measured at fair value as of

December 31, 2019.

There were

transfers between the fair value measurement levels during

2018

and

2019.