Entire Document - Chris Hani District Municipality

6. FINANCIAL INSTRUMENTS (continued)1.4Impairment of Financial AssetsCHRIS HANI DISTRICT MUNICIPALITY ANNUAL REPORT 2011 / 2012Financial Assets, other than those at fair value, are assessed for indicators ofimpairment at the end of each reporting period. Financial Assets are impairedwhere there is objective evidence of impairment of Financial Assets (such as theprobability of insolvency or significant financial difficulties of the debtor). If thereis such evidence the recoverable amount is estimated and an impairment loss isrecognised in accordance with GRAP 104.1.4.1Financial Assets at Amortised Cost:Accounts Receivables encompass Long-term Debtors, Receivables from ExchangeTransactions (Consumer Debtors) and Receivables from Non-exchange Transactions(Other Debtors).Initially Accounts Receivable are valued at fair value and subsequently carried atamortised cost using the Effective Interest Rate Method. An estimate is made fordoubtful debt based on past default experience of all outstanding amounts at yearend.Bad debts are written off the year in which they are identified as irrecoverable.Amounts receivable within 12 months from the date of reporting are classified ascurrent.A provision for impairment of Accounts Receivables is established when there isobjective evidence that the municipality will not be able to collect all amounts dueaccording to the original terms of receivables. The provision is made in accordancewith GRAP 104 whereby the recoverability of accounts receivable is assessedindividually and then collectively after grouping the assets in financial assets withsimilar credit risk characteristics. The amount of the provision is the differencebetween the Financial Asset’s carrying amount and the present value of estimatedfuture cash flows, discounted at the original effective interest rate. Future cashflows in a group of Financial Assets that are collectively evaluated for impairmentare estimated on the basis of historical loss experience for assets with credit riskcharacteristics similar to those in the group. Cash flows relating to short-termreceivables are not discounted where the effect of discounting is immaterial.Government accounts are not provided for as such accounts are regarded asreceivable.The carrying amount of the Financial Asset is reduced by the impairment loss directlyfor all Financial Assets carried at Amortised Cost with the exception of ConsumerDebtors, where the carrying amount is reduced through the use of an allowanceaccount. When a Consumer Debtor is considered uncollectible, it is written off againstthe allowance account. Subsequent recoveries of amounts previously written off arecredited against revenue. Changes in the carrying amount of the allowance accountare recognised in the Statement of Financial Performance.258