ZESCO LIMITED REPORT AND FINANCIAL STATEMENTS for the year ended 31 December 2017 ZESCO LIMITED (Incorporated in Zambia) REPORT AND FINANCIAL STATEMENTS for the year ended 31 December 2017 CONTENTS PAGES Report of the directors 1-3 Statement of responsibility for annual financial statements 4 Independent auditor's report 5- 7 Financial statements: Statement of profit or loss and other comprehensive income 8 Statement of financial position 9 Statement of changes in equity 10 Statement of cash flows 11 Notes to the financial statements 12 - 52 Five year financial record 53 Detailed operating statement 54 ZESCO LIMITED REPORT OF THE DIRECTORS The Directors present their report and audited financial statements for the year ended 31 December 2017. PRINCIPAL ACTIVITY The Company's principal activities are the generation, transmission, distribution and supply of electricity. REGISTERED OFFICE AND PRINCIPAL PLACE OF BUSINESS The address of the Company's registered office and principal place of business is: Stand 6949, Great East Road Lusaka FINANCIAL RESULTS 2017 2016 K' 000 K' 000 Revenue 7 424 850 8 237 828 Profit for the year 345 568 1 308 640 Total assets 58 136 557 30 022 298 Total equity 24 701 611 7 616 059 Total liabilities 33 434 946 22 406 239 Revenue The Company's revenue decreased by 10% from K8.2 billion in 2016 to K7.4 billion in 2017 mainly on account of the tariff reversal of the US cents 10.35/kWh implemented in 2016 on Mining Customers. The Company agreed an interim tariff which was applicable in 2017. However, there was an increase in the volume sales by 12% from 12,436 GWh in 2016 to 13,882 GWh in 2017. Further, the customer base grew by 8% from 831,476 in 2016 to 901,047 in the 2017 financial year under review. Loss for the year The loss during the year is due to increase in the purchase of power from Independent Power Producers during the year. The average tariff of buying power from Independent Power Producers is higher than the average tariff ZESCO sells to it's customers, resulting in errosion of the gross profit margin from 53% in 2016 to 38% in 2017. Total assets The increase in assets is mainly due to additional investments in generation, transmission and distribution infrastructure during the year amounting to K3.9 billion. Total equity There were no changes to the Company's equity. Total liabilities The increase in liabilities is due to additional borrowings on loan facilities of K1.1 billion and in payables of K3.2 billion. Dividends The Directors do not recommend payment of a dividend in respect of the year ended 31 December 2017. The loss will be transferred from reserves. DIRECTORS The Directors who held office during the year and to date of sign off of these financial statements were: Dr. Mbita Chintundya Chitala Board Chairperson Mr. Victor M. Mundende Brig General. Emeldah Chola Mr. George Mpundu Kanja Mr. Pythias Mulenga Mr. Chibwe D. Mwelwa Ms. Kavumbu Hakachima The above Directors were appointed on 17 July 2017. 1 ZESCO LIMITED REPORT OF THE DIRECTORS (CONTINUED) CORPORATE GOVERNANCE The Board continued to be committed to high standards of corporate governance, which is fundamental to discharging their leadership responsibilities. The Board applies integrity, principles of good governance and accountability throughout its activities. PROPERTY, PLANT AND EQUIPMENT The Company invested a total of K3.9 billion (2016: K3.7 billion ) in property, plant and equipment during the year. INTANGIBLE ASSETS During the year the Company did not acquire any software EXPORTS During the year, the value of electricity exports by the Company were K729 million (2016: K598 million). DONATIONS The Company as part of Corporate Social Investment made donations during the year amounting to K3.4 million (2016: K3.4 million). RESEARCH AND DEVELOPMENT The Company's research and development activities during the year amounted to K6.1 million (2016: 4.8 million). SHARE CAPITAL The Company's authorised and issued share capital remained unchanged during the year. However, subsequent to the reporting date on 5 April 2018 authorised share capital was increased to K5 billion divided into 2.5 billion shares at K2 per share from K400,000. EMPLOYEES The total remuneration and other related staff costs paid to the employees was K1,525 million (2016: K1,214 million). The Company's establishment is 7,000. The average number of employees during each month of the year was as follows: 2017 2016 January 6 762 6 818 February 6 753 6 828 March 6759 6 831 April 6 753 6 819 May 6748 6820 June 6786 6829 July 6 778 6 819 August 6 769 6 824 September 6 764 6 814 October 6 784 6 810 November 6 784 6 800 December 6772 6791 In addition to the staff establishment, the Company does employ seasonal workers depending on when the need arises. KEY DEVELOPMENTS DURING THE YEAR * The generation of electricity at Kafue Gorge Power increased significantly by an average of 26%, while Kariba North Bank, Victoria Falls and Small Hydro Power Stations and Diesel Generation Stations recorded reduced generation by an average of 9%, resulting in an average increase in generation by 12% to 10,854 GWh from 9,683 GWh in 2016. The increase in generation was attributed to significant increase in water levels at Itezhi Tezhi Dam, which provides for Kafue Gorge Power Station. Subsequently, the cost of importing emergency power reduced by 490/, to K1.4 million per day from K2.7 million in 2016. The Government continues to subsidise the cost of emergency power imports, having disbursed K368.5 million (2016: K1.0 billion) during the year, towards the cost of emergency power. 2 ZESCO LIMITED REPORT OF THE DIRECTORS (CONTINUED) KEY DEVELOPMENTS DURING THE YEAR (CONTINUED) * During the year, the Company signed the senior debt financing facility agreement with China Exim Bank and International Commercial Bank of China (ICBC) amounting to US$1.5 billion to finance the construction of Kafue Gorge Lower Hydro Power Station. The contractor Sinohrdro Corporation Limited has made about 24% progress in the construction of the 750 MW Kafue Gorge Lower Hydro Power Station and it is expected to be completed by 2020. In addition, the connection of North Western Province to the National Grid was completed following the commission of 132 KV transmission line. This resulted in decommission of the costly Diesel Generation machines. The completion of the transmission lines positions the Company to access the market for new minining projects in the Region. * During the year the Company embarked on the Asset Identification, Verification and Revaluation project of Core and Non-Core Assets. The objective of the project was to be in compliance with 1AS 16 and also to form key input into the Cost of Service Study which will be used as a base for fixing future tariffs. The Revalued Assets at the close of the 2017 financial year was US$4 billion. * The Energy Regulation Board awarded ZESCO an average tariff increase of 75/6 to domestic customers, which was effected in parts with 50% effected in May 2017 and 25% in September 2017. Further, during the year the Company renegotiated its tariff with mining customers, which resulted in a reversal of US cents 10.35/kWh in an agreement of a weighted average interim tariff of US$8.40/kWh, up to the end of the year. * The Special Purpose Vehicle - Batoka Hydro Power Corporation Limited was formed to oversee the construction of a 1,200 MW Hydro Power Station. The Project is a joint commission between Zambia and Zimbabwe with a total expected capacity of 2,400 MW, split 1,200 MW on each side. The dam will be constructed by Zambezi River Authority. The Zambezi River Authority engaged a consultant to update the feasibility studies during the year. * During the year, Fibrecom Limited was formed to run the Fibrecom business as a subsidiary of ZESCO Limited. The Company will focus on growing the commercial aspects of the Fibrecom which has excess capacity to lease out. The Company is also implementing Metropolitan project which is expected to be completed by 31 October 2018. The Project upon completion will enable Fibrecom Limited to apply for a service license from ZICTA to provide internet services to retail customers. HEALTH AND SAFETY OF EMPLOYEES The Company has a Safety, Health, Environment and Quality system called SHEQ. The SHEQ programme conforms to international standards/specifications such as ISO 9001, ISO 14001, OHASA 18001 and IS027001 by complying with the objectives and targets of: * Minimizing risk and eliminating harm to employees, customers and the environment; * Ensuring elimination of waste; * Minimizing risks and guarantee confidentiality, integrity and availability to our Information Communications and Technology ICT (systems); * Ensuring reliable and safe supply of electricity that sustains business continuity; * Identifying, developing and maintaining the required resources to deliver reliable and high quality power supply of our customers safely as per their identified needs; and * Effectively communicating with all stakeholders on all matters relating to SHEQ and service provision. It is the duty of each employee and contractors to comply with the SHEQ policy to enable the Company achieve its strategic objectives and establish and entrench a SHEQ driven culture within the Company. AUDITORS Messrs Deloitte & Touche's term of office comes to end at the next Annual General Meeting. A resolution proposing their re-appointment as auditors and authorising the Directors to fix their remuneration will be put to the Annual General Meeting. By order of the Board. Mr. McRobby Chiwale COMPANY SECRETARY Lusaka 3 ZESCO LIMITED STATEMENT OF RESPONSIBILITY FOR ANNUAL FINANCIAL STATEMENTS Section 164 (6) of the Companies Act, 1994 (as amended) requires the Directors to prepare financial statements for each financial year which give a true and fair view of the state of affairs of the Company and the profit or loss for that period. The Directors are responsible for the maintenance of adequate accounting records and the preparation and integrity of the financial statements and related information. The independent external auditors, Messrs Deloitte & Touche, have audited the financial statements and their report is shown on pages 5 to 7. The Directors are also responsible for the systems of internal control. These are designed to provide reasonable, but not absolute, assurance as to the reliability of the financial statements, and to adequately safeguard, verify and maintain accountability for assets, and to prevent and detect material misstatements. The systems are implemented and monitored by suitably trained personnel with an appropriate segregation of authority and duties. Nothing has come to the attention of the Directors to indicate that any material breakdown in the functioning of these controls, procedures and systems has occurred during the year under review. The financial statements are prepared on a going concern basis except as set out under Note 3.2 to the financial statements. Nothing has come to the attention of the Directors to indicate that the Company will not remain a going concern in the foreseeable future. In the opinion of the Directors: * the statement of profit or loss and other comprehensive income is drawn up so as to give a true and fair view of the profit of the Company for the year ended 31 December 2017; * the statement of financial position is drawn up so as to give a true and fair view of the state of affairs of the Company as at 31 December 2017; * there are reasonable grounds to believe that the Company will be able to pay its debts as and when they fall due; and * the financial statements have been prepared in accordance with International Financial Reporting Standards and in the manner required by the Companies Act, 1994 (as amended). Signed on behalf of the Board by: CHAIRMAN MANAGING DIRECTOR 4 PO Box 30030 Deloitte & Touche Lusaka Registered Auditors Zambia Abacus Square Thabo Mbeki Road Lusaka Zambia Tel: +260 (211) 228677/8/9 Fax: +260(211)226915 www.deloitte.co.zm INDEPENDENT AUDITOR'S REPORT To the members of ZESCO Limited Report on the Audit of the Financial Statements Opinion We have audited the financial statements of ZESCO Limited, set out on Pages 8 to 52, which comprise the statement of financial position as at 31 December 2017, the statement of profit or loss and other comprehensive income, the statement of changes in equity and the statement of cash flows for the year then ended, and the notes to the financial statements, including a summary of significant accounting policies. In our opinion, the financial statements give a true and fair view of the financial position of ZESCO Limited as at 31 December 2017, and of its financial performance and cash flows for the year then ended in accordance with International Financial Reporting Standards, and in the manner required by the Companies Act, 1994 (as amended). Basis for Opinion We conducted our audit in accordance with International Standards on Auditing (ISAs). Our responsibilities under those standards are further described in the Auditor's Responsibilities for the Audit of the Financial Statements section of our report. We are independent of the Company in accordance with the International Ethics Standards Board for Accountants' Code of Ethics for Professional Accountant's (Part A and B), together with other ethical requirements that are relevant to our audit of the financial statements, and we have fulfilled our other ethical responsibilities in accordance with these requirements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Key audit matters Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the financial statements of the current period. These matters were addressed in the context of our audit of the financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. Key audit matters How our audit addressed the key audit matter Impairment of trade receivables Trade receivables balance at year end was We performed the following audit procedures: K4,841,523,000, the provision for doubtful debts at the close of the year was K3,524,635,000 as shown in note * Testing of inputs into the calculation of the 18 to the financial statements doubtful debts, including the ageing, validity and completeness of the amounts included in the Management raises provisions based on judgements as calculation for doubtful debts; to whether there is any observable data indicating that there is a measurable decrease in the estimated future * Assessing the recoverability taking into account cash flows. the type of debtors being mining, exports, telecoms, domestic receivables and historical Accordingly, an allowance for impairment is made where payment terms; and there is an identified loss event or condition which, based on previous experience, is evidence of a reduction in the * Performing a retrospective review of the provision recoverability of the cash flows. Typically, management previously raised against the subsequent write-offs. provides for: - amounts over 90 days owing from domestic debtors; - disputed amounts; - amounts for which there are no subsequent receipts; and - any other observable data indicating possible non- recovery. 5 Partners C Chungu F Nchimunya AJ Tembo H Mulenga A Njovu Associate of Deloitte Africa, a Member of Deloitte Touche Tohmatsu Limited Key audit matters (continued) Key audit matters How our audit addressed the key audit matter Impairment of trade receivables (continued) We considered impairment against trade receivables as * Testing the collection of subsequent receipts a key audit matter because of the following: received after year-end. * The determination of impairment uses significant * Performing an independent assessment of the judgements coupled with the fact that compliance with provision taking into account the factors above. linternational Accounting Standard 39 Financial Instruments Measurements and Recognition We found the determined provision for doubtful requirements is onerous; and debts to be acceptable. * Economic fundamentals in Zambia together with other Based on the testing undertaken, the presentation factors may impact on the ability of customers to pay. and disclosures in respect of the trade receivables balance are consistent with the requirements of IFRS. Other Information The Directors are responsible for the other information. The other information comprises the Directors' Report, as required by the Companies Act, 1994 (as amended), which we obtained prior to the date of this auditor's report, and the five year financial record and detailed operating statement shown in the appendices. The other information does not include the financial statements and our auditor's report thereon. Our opinion on the financial statements does not cover the other information and we do not express any form of assurance or conclusion thereon. In connection with our audit of the financial statements, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the financial statements or our knowledge obtained on the audit, or otherwise appears to be materially misstated. If, based on the work we have performed on the other information that we obtained prior to the date of this auditor's report, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard. Responsibilities of the Directors for the Financial Statements The Directors are responsible for the preparation and fair presentation of the financial statements which give a true and fair view in accordance with International Financial Reporting Standards and the requirements of the Companies Act, 1994 (as amended), and for such internal control as the Directors determine is necessary to enable the preparation of the financial statements that are free from material misstatement, whether due to fraud or error. In preparing the financial statements, the Directors are responsible for assessing the Company's ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the Directors either intend to liquidate the Company or to cease operations, or have no realistic alternative but to do so. Auditor's Responsibilities for the Audit of the Financial Statements Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor's report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements. As part of an audit in accordance with ISAs, we exercise professional judgement and maintain professional scepticism throughout the audit. We also: Identify and assess the risks of material misstatement of the financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. 6 Auditor's Responsibilities for the Audit of the Financial Statements (Continued) * Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control. * Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by the Directors. * Conclude on the appropriateness of the Directors' use of the going concern basis of accounting and based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Company's ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor's report to the related disclosures in the financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditors' report. However, future events or conditions may cause the Company to cease to continue as a going concern. * Evaluate the overall presentation, structure and content of the financial statements, including the disclosures, and whether the financial statements represent the underlying transactions and events in a manner that achieves fair presentation. * Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the Company to express an opinion on the financial statements. We are responsible for the direction, supervision and performance of the Company audit. We remain solely responsible for our audit opinion. We communicate with the Directors regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit. We also provide the Directors with a statement that we have complied with relevant ethical requirements regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards. Report on other legal requirements Section 173 (3) of the Companies Act, 1994 (as amended) requires that in carrying out our audit, we consider and report to you on the following matter: we confirm that, in our opinion, the accounting and other records and registers have been properly kept in accordance with the Act. DELOITTE & TOUCHE C. CH UNGU PARTNER AUD/F000292 DATE:;O MAY 2018 7 ZESCO LIMITED STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME for the year ended 31 December 2017 2017 2016 NOTES K'000 K'000 REVENUE 5 7424850 8 237 828 Cost of sales 6 (4 569 026) (3 887 866) GROSS PROFIT 2 855 824 4 349 962 Other operating income 7 461 901 279 644 Other gains and losses 8 (63 472) 313 588 Marketing expenses (31 919) (19 400) Administration expenses (2307243) (1 681 039) Other expenses 9 (786 548) (3 054 893) Finance costs 10 (398903) (324433) LOSS BEFORE TAX 11 (270359) (136 571) Income tax credit 12 615927 1 445 211 PROFIT FOR THE YEAR 345 568 1 308 640 OTHER COMPREHENSIVE INCOME Items that will not be reclassified subsequently to profit or loss: Gain on revaluation of property 25 716 999 Income tax relating to items that will not be classified subsequently to profit or loss (8 977 015) Other comprehensive income for the year, net of income tax 16 739 984 - PROFIT AND OTHER COMPREHENSIVE INCOME FOR THE YEAR 17 085 552 1 308 640 8 ZESCO LIMITED STATEMENT OF FINANCIAL POSITION at 31 December 2017 2017 2016 NOTES K000 K'000 ASSETS Non current assets Property, plant and equipment 14 46 043 150 17 169 952 Intangible assets 15 68 740 86 085 Investments 16 1598 697 1 538 032 Deferred tax asset 13 - 2 329 431 Loan due from a related party 21 2 797 701 2 769 565 Total non current assets 50 508 288 23 893 065 Current assets Inventories 17 1 002 763 964 979 Trade and other receivables 18 2 427 547 1 769 777 Amounts due from related parties 21 2 366 232 1 605 959 Bank and cash balances 1 831 727 1 788 518 Total current assets 7 628 269 6 129 233 TOTAL ASSETS 58 136 557 30 022 298 EQUITY AND RESERVES Capital and reserves Issued capital 19 194 194 Amount pending allotment of shares 20 2 824 924 2 824 924 Revaluation reserve 16 976 452 304 851 Retained earnings 4 900 041 4 486 090 Total equity 24 701 611 7 616 059 Non current liabilities Borrowings 23 11 291 554 11 150 318 Retirement benefit obligation 24 2 063 280 1 937 610 Capital grants and contributions 25 2 308 755 1 312 188 Deferred tax liability 13 5 984 797 - Total non current liabilities 21 648 386 14400 116 Current liabilities Trade and other payables 26 7 338 396 4 091 187 Amounts due to related parties 21 1 383 477 738 540 Borrowings 23 1 508901 1 442 126 Retirement benefit obligation 24 125 485 94 912 Capital grants and contributions 25 109 863 217 351 Current tax liabilities 12 1 225 614 1 351 614 Bank overdraft 27 94 824 70 393 Total current liabilities 11 786 560 8 006 123 Total liabilities 33 434 946 22 406 239 TOTAL EQUITY AND LIABILITIES 58 136 557 30 022 298 The responsibilities of the Company's Directors with regard to the preparation of the financial statements are set out on page 4. The financial statements on pages 8 to 52 were approved by the Board of Directors and authorised for issue on 21 May 2018 and were signed on its behalf by: CHAIRMAN MANAGING DIRECTOR 9 ZESCO LIMITED STATEMENT OF CHANGES IN EQUITY for the year ended 31 December 2017 Amount Pending Properties Share Allotment of Revaluation Retained capital Shares reserve earnings Total K'000 K'000 K'000 K'000 K'000 Balance at 1 January 2016 194 2 824 924 349 300 3 109 067 6 283 485 Total comprehensive income for year - - - 1 308 640 1 308 640 Deferred tax on revaluation - - 23 934 - 23 934 Amortisation of revaluation reserve - - (68 383) 68 383 - Balance at 31 December 2016 194 2824924 304851 4486090 7616059 Total comprehensive income for year - - - 345 568 345 568 Other comprehensive income for the year, net of income tax 16 739984 - 16739984 Amortisation of revaluation reserve - - (68 383) 68 383 - Balance at 31 December 2017 194 2824924 16976452 4900041 24701611 10 ZESCO LIMITED STATEMENT OF CASH FLOWS for the year ended 31 December 2017 2017 2016 NOTES K'000 K'000 CASH FLOWS FROM OPERATING ACTIVITIES Profit after tax 345 568 1 308 640 Adjustments for: - Income tax credit 12 (615 927) (1 445 211) - Interest income 7 (5 872) (6 371) - Finance costs recognised in profit and loss 10 398 903 324 433 - Net exchange losses recognised on borrowings 23 (459) (1 301 448) - Gain on disposal of property, plant and equipment (5 162) (2 598) - Depreciation of non current assets 14 773 139 457 260 - Amortisation of intangible assets 15 13 013 9 058 - Elimination of depreciation on revaluation 15 (78 365) - - Loss on revaluation of intangible assets 15 74 708 - - Amortisation of capital grants and contributions 25 (102 387) (90 756) - (Reversal) impairment loss recognised on trade receivables 18 (1 531 523) 2 428 276 (734 364) 1 681 283 Movements in working capital: Increase in inventory (37 784) (356 974) Decrease (increase) in trade and other receivables 873 753 (2 194 804) Increase in amounts due from related parties (760 273) (945 964) Increase in trade and other payables 3247 209 2 637002 Increase in deferred liabilities 156 243 47900 Increase in amounts due to related parties 644 937 496 099 (Increase) decrease in borrowings due from related party (28 136) 320 546 Cash generated from operations 3 361 585 1 685 088 Interest paid (398903) (324433) Income tax paid 12 (172860) (361) Net cash generated by operating activities 2 789 822 1 360 294 CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from disposal of property, plant and equipment 6266 2845 Payments for property, plant and equipment 14 (3 922 453) (3 676 743) Payment to acquire investment 16 (60 665) (1 078 373) Interest received 5 872 6 371 Net cash used in investing activities (3 970 980) (4 745 900) CASH FLOWS FROM FINANCING ACTIVITIES Repayment of borrowings 23 (925 300) (1 267 682) Proceeds from capital grants and contributions 25 991 466 177 881 Proceeds from borrowings 23 1 133 770 4 104 239 Net cash generated from financing activities 1 199 936 3 014 438 Net increase (decrease) in cash and cash equivalents 18 778 (371 168) Cash and cash equivalents at the beginning of the year 1 718 125 2 089 293 Cash and cash equivalents at the end of the year 1736903 1 718 125 COMPRISING OF: Bank and cash balances 1 798 509 1 755 636 Short term deposits 33218 32 882 1 831 727 1 788 518 Bank overdraft 27 (94 824) (70 393) 1 736 903 1 718 125 11 ZESCO LIMITED NOTES TO THE FINANCIAL STATEMENTS for the year ended 31 December 2017 1. GENERAL INFORMATION ZESCO Limited (the "Company") is a limited Company incorporated and domiciled in Zambia. The address of its registered office and principal place of business is shown in the report of the Directors on page 1. The principal activity of the Company continued to be the generation, transmission, distribution and supply of electricity locally and for export in the region. 2. APPLICATION OF NEW AND REVISED INTERNATIONAL FINANCIAL REPORTING STANDARDS (IFRSs) 2.1 Amendments to IFRSs that are mandatorily effective for the current year In the current year, the Company has applied a number of amendments to IFRSs issued by the International Accounting Standards Board (IASB) that are mandatorily effective for an accounting period that begins on or after 1 January 2017. Amendments to IAS 7 Disclosure Initiative The Company has applied these amendments in the current year. The amendments require an entity to provide disclosures that enable users of financial statements to evaluate changes in liabilities arising from financing activities, including both cash and non-cash changes. The Company's liabilities arising from financing activities consist of borrowings and certain other financial liabilities such as finance leases. A reconciliation between the opening and closing balances of these items is provided in note 26. Consistent with the transition provisions of the amendments, the Company has not disclosed comparative information for the prior period. Apart from the additional disclosure in note 26, the application of these amendments has had no impact on the Company's financial statements. Amendments to IAS 12 Recognition of Deferred Tax Assets for Unrealised Losses The Company has applied these amendments in the current year. The amendments clarify how an entity should evaluate whether there will be sufficient future taxable profits against which it can utilise a deductible temporary difference. The application of these amendments has had no impact on the financial statements as the Company already assesses the sufficiency of future taxable profits in a way that is consistent with these amendments. Annual Improvements to IFRSs 2014-2016 Cycle The Company has applied the amendments to IFRS 12 included in the Annual Improvements to IFRSs 2014- 2016 Cycle in the current year. IFRS 12 states that an entity need not provide summarised financial information for interests in subsidiaries, associates or joint ventures that are classified (or included in a disposal group that is classified) as held for sale. The amendments clarify that this is the only concession from the disclosure requirements of IFRS 12 for such interests. The application of these amendments has had no effect on the Company's financial statements. 2.2 New and revised IFRSs in issue but not yet effective The Company has not applied the following new and revised IFRSs that have been issued but are not yet effective: IFRS 9 Financial Instrumentsl IFRS 15 Revenue from Contracts with Customers (and the related Clarifications)1 IFRS 16 Leases2 Amendments to IFRS 2 Classification and Measurement of Share-based Payment Transactions t Amendments to IFRS Sale or Contribution of Assets between an Investor and its Associate or Joint Ven 10 and IAS 28 Amendments to IAS Transfers of Investment Propertyl Amendments to IFRSs Annual Improvements to IFRS Standards 2014-2016 Cyclel IFRIC 22 Foreign Currency Transactions and Advance Considerationl 12 ZESCO LIMITED NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) for the year ended 31 December 2017 2. APPLICATION OF NEW AND REVISED INTERNATIONAL FINANCIAL REPORTING STANDARDS (IFRSs) (CONTINUED) 2.2 New and revised IFRSs in issue but not yet effective (continued) 1 Effective for annual periods beginning on or after 1 January 2018, with earlier application permitted. 2 Effective for annual periods beginning on or after 1 January 2019, with earlier application permitted. 3 Effective for annual periods beginning on or after a date to be determined. IFRS 9 Financial Instruments IFRS 9 issued in November 2009 introduced new requirements for the classification and measurement of financial assets. IFRS 9 was subsequently amended in October 2010 to include requirements for the classification and measurement of financial liabilities and for derecognition, and in November 2013 to include the new requirements for general hedge accounting. Another revised version of IFRS 9 was issued in July 2014 mainly to include a) impairment requirements for financial assets and b) limited amendments to the classification and measurement requirements by introducing a 'fair value through other comprehensive income' (FVTOCI) measurement category for certain simple debt instruments. Key requirements of IFRS 9: * all recognised financial assets that are within the scope of IFRS 9 are required to be subsequently measured at amortised cost or fair value. Specifically, debt investments that are held within a business model whose objective is to collect the contractual cash flows, and that have contractual cash flows that are solely payments of principal and interest on the principal outstanding are generally measured at amortised cost at the end of subsequent accounting periods. Debt instruments that are held within a business model whose objective is achieved both by collecting contractual cash flows and selling financial assets, and that have contractual terms that give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding, are generally measured at FVTOCI. All other debt investments and equity investments are measured at their fair value at the end of subsequent accounting periods. In addition, under IFRS 9, entities may make an irrevocable election to present subsequent changes in the fair value of an equity investment (that is not held for trading nor contingent consideration recognised by an acquirer in a business combination) in other comprehensive income, with only dividend income generally recognised in profit or loss. * with regard to the measurement of financial liabilities designated as at fair value through profit or loss, IFRS 9 requires that the amount of change in the fair value of a financial liability that is attributable to changes in the credit risk of that liability is presented in other comprehensive income, unless the recognition of such changes in other comprehensive income would create or enlarge an accounting mismatch in profit or loss. Changes in fair value attributable to a financial liability's credit risk are not subsequently reclassified to profit or loss. Under IAS 39, the entire amount of the change in the fair value of the financial liability designated as fair value through profit or loss is presented in profit or loss. * in relation to the impairment of financial assets, IFRS 9 requires an expected credit loss model, as opposed to an incurred credit loss model under IAS 39. The expected credit loss model requires an entity to account for expected credit losses and changes in those expected credit losses at each reporting date to reflect changes in credit risk since initial recognition. In other words, it is no longer necessary for a credit event to have occurred before credit losses are recognised. * the new general hedge accounting requirements retain the three types of hedge accounting mechanisms currently available in IAS 39. Under IFRS 9, greater flexibility has been introduced to the types of transactions eligible for hedge accounting, specifically broadening the types of instruments that qualify for hedging instruments and the types of risk components of non-financial items that are eligible for hedge accounting. In addition, the effectiveness test has been overhauled and replaced with the principle of an 'economic relationship'. Retrospective assessment of hedge effectiveness is also no longer required. Enhanced disclosure requirements about an entity's risk management activities have also been introduced. The directors of the company are still in the process of assessing the impact of this standard on the operations of the Company. It is expected that this standard will not have a material impact on how the company recognises its provisions for doubtful debts and how it classifies its financial assets and financial liabilities which will have to be in line with the business model. 13 ZESCO LIMITED NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) for the year ended 31 December 2017 2. APPLICATION OF NEW AND REVISED INTERNATIONAL FINANCIAL REPORTING STANDARDS (IFRSs) (CONTINUED) 2.2 New and revised IFRSs in issue but not yet effective (Continued) IFRS 15 Revenue from Contracts with Customers IFRS 15 establishes a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers. IFRS 15 will supersede the current revenue recognition guidance including IAS 18 Revenue, IAS 11 Construction Contracts and the related Interpretations when it becomes effective. The core principle of IFRS 15 is that an entity should recognise revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Specifically, the Standard introduces a 5-step approach to revenue recognition: * Step 1: Identify the contract(s) with a customer * Step 2: Identify the performance obligations in the contract * Step 3: Determine the transaction price * Step 4: Allocate the transaction price to the performance obligations in the contract * Step 5: Recognise revenue when (or as) the entity satisfies a performance obligation Under IFRS 15, an entity recognises revenue when (or as) a performance obligation is satisfied, i.e. when Icontrol' of the goods or services underlying the particular performance obligation is transferred to the customer. Far more prescriptive guidance has been added in IFRS 15 to deal with specific scenarios. Furthermore, extensive disclosures are required by IFRS 15. In April 2016, the IASB issued Clarifications to IFRS 15 in relation to the identification of performance obligations, principal versus agent considerations, as well as licensing application guidance. The Company recognises revenue from the following major sources: * Mining * Residential * Industrial and agricultural * Exports * Commercial (retail outlets) The Company plans to adopt the new standard on the required effective date using the full retrospective method. The Directors are still in the process of the assessing the impact of this standard on the operations of the company. It is anticipated that the implementation of this standard may not have a material impact on the financial statements of the company. IFRS 16 Leases IFRS 16 introduces a comprehensive model for the identification of lease arrangements and accounting treatments for both lessors and lessees. IFRS 16 will supersede the current lease guidance including IAS 17 Leases and the related interpretations when it becomes effective. IFRS 16 distinguishes leases and service contracts on the basis of whether an identified asset is controlled by a customer. Distinctions of operating leases (off balance sheet) and finance leases (on balance sheet) are removed for lessee accounting, and is replaced by a model where a right-of-use asset and a corresponding liability have to be recognised for all leases by lessees (i.e. all on balance sheet) except for short-term leases and leases of low value assets. The right-of-use asset is initially measured at cost and subsequently measured at cost (subject to certain exceptions) less accumulated depreciation and impairment losses, adjusted for any remeasurement of the lease liability. The lease liability is initially measured at the present value of the lease payments that are not paid at that date. Subsequently, the lease liability is adjusted for interest and lease payments, as well as the impact of lease modifications, amongst others. Furthermore, the classification of cash flows will also be affected as operating lease payments under IAS 17 are presented as operating cash flows; whereas under the IFRS 16 model, the lease payments will be split into a principal and an interest portion which will be presented as financing and operating cash flows respectively. In contrast to lessee accounting, IFRS 16 substantially carries forward the lessor accounting requirements in IAS 17, and continues to require a lessor to classify a lease either as an operating lease or a finance lease. 14 ZESCO LIMITED NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) for the year ended 31 December 2017 2. APPLICATION OF NEW AND REVISED INTERNATIONAL FINANCIAL REPORTING STANDARDS (IFRSs) (CONTINUED) 2.2 New and revised IFRSs in issue but not yet effective (Continued) IFRS 16 Leases (continued) Furthermore, extensive disclosures are required by IFRS 16. IAS 17 does not require the recognition of any right-of-use asset or liability for future payments for these leases. A preliminary assessment indicates that these arrangements will meet the definition of a lease under IFRS 16, and hence the Company will recognise a right-of-use asset and a corresponding liability in respect of all these leases unless they qualify for low value or short-term leases upon the application of IFRS 16. Directors of the company are currently assessing its impact and do not anticipate significant impact on the amounts recognised in the Company's financial statements. In contrast, for finance leases where the Company is a lessee, the Company has already recognised an asset and a related finance lease liability for the lease arrangement. Further in cases where the Company is a lessor (for both operating and finance leases), the application of this standard is not applicable and the directors of the Company do not anticipate that the application of IFRS 16 will have an impact on the amounts recognised in the Company financial statements as the company is not a lesser. Amendments to IFRS 2 Classification and Measurement of Share-based Payment Transactions The amendments clarify the following: 1. In estimating the fair value of a cash-settled share-based payment, the accounting for the effects of vesting and non-vesting conditions should follow the same approach as for equity-settled share-based payments. 2. Where tax law or regulation requires an entity to withhold a specified number of equity instruments equal to the monetary value of the employee's tax obligation to meet the employee's tax liability which is then remitted to the tax authority, i.e. the share-based payment arrangement has a 'net settlement feature', such an arrangement should be classified as equity-settled in its entirety, provided that the share-based payment would have been classified as equity-settled had it not included the net settlement feature. 3. A modification of a share-based payment that changes the transaction from cash-settled to equity-settled should be accounted for as follows: i) the original liability is derecognised; ii) the equity-settled share-based payment is recognised at the modification date fair value of the equity instrument granted to the extent that services have been rendered up to the modification date; and iii) any difference between the carrying amount of the liability at the modification date and the amount recognised in equity should be recognised in profit or loss immediately. The amendments are effective for annual reporting periods beginning on or after 1 January 2018 with earlier application permitted. Specific transition provisions apply. The directors of the Company do not anticipate that the application of the amendments in the future will have a significant impact on the Company's financial statements as the Company does not have any cash-settled share-based payment arrangements or any withholding tax arrangements with tax authorities in relation to share-based payments. Amendments to IFRS 10 and IAS 28 Sale or Contribution of Assets between an Investor and its Associate or Joint Venture The amendments to IFRS 10 and IAS 28 deal with situations where there is a sale or contribution of assets between an investor and its associate or joint venture. Specifically, the amendments state that gains or losses resulting from the loss of control of a subsidiary that does not contain a business in a transaction with an associate or a joint venture that is accounted for using the equity method, are recognised in the parent's profit or loss only to the extent of the unrelated investors' interests in that associate or joint venture. Similarly, gains and losses resulting from the remeasurement of investments retained in any former subsidiary (that has become an associate or a joint venture that is accounted for using the equity method) to fair value are recognised in the former parent's profit or loss only to the extent of the unrelated investors' interests in the new associate or joint venture. 15 ZESCO LIMITED NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) for the year ended 31 December 2017 2. APPLICATION OF NEW AND REVISED INTERNATIONAL FINANCIAL REPORTING STANDARDS (IFRSs) (CONTINUED) 2.2 New and revised IFRSs in issue but not yet effective (Continued) The effective date of the amendments has yet to be set by the IASB; however, earlier application of the amendments is permitted. The directors of the Company anticipate that the application of these amendments may not have an impact on the company's consolidated financial statements in future periods should such transactions arise. Amendments to IAS 40 Transfers of Investment Property The amendments clarify that a transfer to, or from, investment property necessitates an assessment of whether a property meets, or has ceased to meet, the definition of investment property, supported by observable evidence that a change in use has occurred. The amendments further clarify that situations other than the ones listed in IAS 40 may evidence a change in use, and that a change in use is possible for properties under construction (i.e. a change in use is not limited to completed properties). The amendments are effective for annual periods beginning on or after 1 January 2018 with earlier application permitted. Entities can apply the amendments either retrospectively (if this is possible without the use of hindsight) or prospectively. Specific transition provisions apply. The Directors are still in the process of the assessing the impact of this standard on the operations of the company. It is anticipated that the implementation of this standard may not have a material impact on the financial statements of the company. Annual Improvements to IFRSs 2014 - 2016 Cycle The Annual Improvements include amendments to IFRS 1 and IAS 28 which are not yet mandatorily effective for the Company. The package also includes amendments to IFRS 12 which is mandatorily effective for the Company in the current year. The amendments to IAS 28 clarify that the option for a venture capital organisation and other similar entities to measure investments in associates and joint ventures at FVTPL is available separately for each associate or joint venture, and that election should be made at initial recognition of the associate or joint venture. In respect of the option for an entity that is not an investment entity (IE) to retain the fair value measurement applied by its associates and joint ventures that are IEs when applying the equity method, the amendments make a similar clarification that this choice is available for each IE associate or IE joint venture. The amendments apply retrospectively with earlier application permitted. Both the amendments to IFRS 1 and IAS 28 are effective for annual periods beginning on or after 1 January 2018. The directors of the Company do not anticipate that the application of the amendments in the future will have any impact on the financial statements as the Company is neither a first-time adopter of IFRS nor a venture capital organisation. Furthermore, the Company does not have any associate or joint venture that is an investment entity. IFRIC 22 Foreign Currency Transactions and Advance Consideration IFRIC 22 addresses how to determine the 'date of transaction' for the purpose of determining the exchange rate to use on initial recognition of an asset, expense or income, when consideration for that item has been paid or received in advance in a foreign currency which resulted in the recognition of a non-monetary asset or non-monetary liability (e.g. a non-refundable deposit or deferred revenue). The Interpretation specifies that the date of transaction is the date on which the entity initially recognises the non- monetary asset or non-monetary liability arising from the payment or receipt of advance consideration. If there are multiple payments or receipts in advance, the Interpretation requires an entity to determine the date of transaction for each payment or receipt of advance consideration. The Interpretation is effective for annual periods beginning on or after 1 January 2018 with earlier application permitted. Entities can apply the Interpretation either retrospectively or prospectively. Specific transition provisions apply to prospective application. 16 ZESCO LIMITED NOTES TO THE FINANCIAL STATEMENTS for the year ended 31 December 2017 2. APPLICATION OF NEW AND REVISED INTERNATIONAL FINANCIAL REPORTING STANDARDS (IFRSs) (CONTINUED) 2.2 New and revised IFRSs in issue but not yet effective (Continued) IFRIC 22 Foreign Currency Transactions and Advance Consideration (continued) The directors of the Company do not anticipate that the application of the amendments in the future will have an impact on the Company financial statements. This is because the Company already accounts for transactions involving the payment or receipt of advance consideration in a foreign currency in a way that is consistent with the amendments. 3. SIGNIFICANT ACCOUNTING POLICIES 3.1. Statement of compliance The financial statements have been prepared in accordance with International Financial Reporting Standards. 3.2 Basis of preparation The financial statements have been prepared on the historical cost basis except for the revaluation of certain financial instruments that are measured at fair values at the end of each reporting period, as explained in the accounting policies below. Historical cost is generally based on the fair value of the consideration given in exchange for goods and services. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date, regardless of whether that price is directly observable or estimated using another valuation technique. In estimating the fair value of an asset or a liability, the Company takes into account the characteristics of the asset or liability if market participants would take those characteristics into account when pricing the asset or liability at the measurement date. Fair value for measurement and/or disclosure purposes in these financial statements is determined on such a basis, except for share-based payment transactions that are within the scope of IFRS 2, leasing transactions that are within the scope of IAS 17, and measurements that have some similarities to fair value but are not fair value, such as realisable value in IAS 2 or value in use in IAS 36. In addition, for financial reporting purposes, fair value measurements are categorised into Level 1, 2 or 3 based on the degree to which the inputs to the fair value measurements are observable and the significance of the inputs to the fair value measurement in its entirety, which are described as follows: * Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the entity can access at the measurement date; * Level 2 inputs are inputs, other than quoted prices included within Level 1, that are observable for the asset or liability, either directly or indirectly; and * Level 3 inputs are unobservable inputs for the asset or liability. Items included in the financial statements are measured using the currency of the primary economic environment in which the entity operates ('the functional currency'). The financial statements are presented in Zambian Kwacha (K). As at 31 December 2017, the Company's current liabilities exceeded their current assets by K4,158,291,000 (2016: K1,876,890,000). The financial statements have been prepared on the basis of accounting policies applicable to a going concern. This basis presumes that funds will be available to finance future operations and that the realisation of assets and settlement of liabilities, contingent obligations and commitments will occur in the ordinary course of business. The ability of the Company to continue as a going concern is dependent on a number of factors. The most significant of these is that the directors continue to procure funding for the ongoing operations of the Company from the holding company. The Government, through Industrial Development Corporation Zambia Limited, has pledged its continued financial support for the forthcoming financial year, ending 31 December 2018 and confirmed its continued undertaking and ability to provide further financial support to the Company for the foreseeable future, should this be required, enabling it to pay its debts as and when they fall due. 17 ZESCO LIMITED NOTES TO THE FINANCIAL STATEMENTS for the year ended 31 December 2017 3. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 3.2 Basis of preparation (continued) On the basis of cash flow information prepared by the Directors and after consultation with its shareholders, bankers and lessor, the Directors consider that the Company will continue to operate for the foreseeable future within the available financial resources. Accordingly, the Directors are of the opinion that the preparation of these financial statements on the going concern basis is appropriate. 3.3 Revenue recognition Revenue is measured at the fair value of the consideration received or receivable for the sale/provision of goods and services in the ordinary course of the company's activities. Revenue is shown net of value-added tax (VAT), excise duties, discounts and rebates. The Company recognises revenue when the amount of revenue, and the associated costs incurred or to be incurred, can be reliably measured, it is probable that future economic benefits will flow to the company and when specific criteria have been met for each of the company's activities as described below. The amount of revenue is not considered to be reliably measurable until all contingencies relating to the sale have been resolved. The company bases its estimates on historical results, taking into consideration the type of customer, the type of transaction and the specifics of each arrangement. Sale of goods Sale of goods is recognised when significant risks and rewards of ownership have passed and the collectability of the related receivable is reasonably assured. Electricity revenue is recognised when electricity is consumed by the user except in the case of prepaid electricity which is recognised when purchased by the customer. Sale of services Sale of services is recognised in the reporting period in which the services are rendered, by reference to the stage of completion of the specific transaction assessed on the basis of the actual service provided as a proportion of the total services to be provided. 3.4 Interest income Interest revenue is accrued on a time basis, by reference to the principal outstanding and at the effective interest rate applicable, which is the rate that exactly discounts estimated future cash receipts through the expected life of the financial asset to that asset's net carrying amount. 3.5 Rental income Rental income from operating leases is recognised on a straighline basis over the term of the relevant lease. 3.6 Fibre income Fibre income is recognised on the accrual basis in accordance with the substance of the agreement. Connection fees are recognised on the date of activation of the service. Access charges are recognised in the period to which it relates. 3.7 Inventories All Inventories are stated at the lower of cost and net realisable value. Cost is calculated on a weighted average basis and includes all expenditure incurred in bringing the inventories to their present location and condition. Net realisable value is the price at which inventory can be realised in the normal course of business and takes into account all directly related costs to be incurred in marketing, selling and distribution. Provision is made for obsolete, slow moving and defective inventories. 3.8 Foreign currencies In preparing the financial statements of the entity, transactions in currencies other than the entity's functional currency (foreign currencies) are recognised at the rates of exchange prevailing at the dates of the transactions. At the end of each reporting period, monetary items denominated in foreign currencies are retranslated at the rates prevailing at that date. Non-monetary items carried at fair value that are denominated in foreign currencies are retranslated at the rates prevailing at the date when the fair value was determined. Non-monetary items that are measured in terms of historical cost in a foreign currency are not retranslated. 18 ZESCO LIMITED NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) for the year ended 31 December 2017 3. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 3.8 Foreign currencies (continued) Exchange differences on monetary items are recognised in profit or loss in the period in which they arise except for exchange differences: * on foreign currency borrowings relating to assets under construction for future productive use, which are included in the cost of those assets when they are regarded as an adjustment to interest costs on those foreign currency borrowings; and * arising on foreign currency transactions are posted to the profit and loss in the period they arise; and 3.9 Borrowing costs Borrowing costs directly attributable to the acquisition, construction or production of qualifying assets, which are assets that necessarily take a substantial period of time to get ready for their intended use or sale, are added to the cost of those assets, until such time as the assets are substantially ready for their intended use or sale. Investment income earned on the temporary investment of specific borrowings pending their expenditure on qualifying assets is deducted from the borrowing costs eligible for capitalisation. All other borrowing costs are recognised in profit or loss in the period in which they are incurred. All other borrowing costs are recognised in profit or loss in the financial period in which they are incurred. 3.10 Capital grants and contributions Capital grants are not recognised until there is reasonable assurance that the Company will comply with the conditions attached to them and that the grants will be received. Capital grants are recognised in profit or loss on a systematic basis over the periods in which the Company recognises as expenses the related costs for which the grants are intended to compensate. Specifically, government grants whose primary condition is that the Company should purchase, construct or otherwise acquire non-current assets are recognised as deferred revenue in the statement of financial position and transferred to profit or loss on a systematic and rational basis over the useful lives of the related assets. Capital contributions represent money received from electricity consumers towards the capital cost of connections. Capital contributions are deferred and credited to profit or loss in equal annual instalments over the expected useful lives of the related assets. 3.11 Taxation Income tax expense represents the sum of the tax currently payable and deferred tax. (i) Current tax The tax currently payable is based on taxable profit for the financial period. Taxable profit differs from profit as reported in profit or loss because of items of income or expense that are taxable or deductible in other financial periods and items that are never taxable or deductible. The Company's liability for current tax is calculated using tax rates that have been enacted or substantively enacted by the end of the reporting period. (ii) Deferred tax Deferred tax is recognised on differences between the carrying amounts of assets and liabilities in the financial statements and the corresponding tax bases used in the computation of taxable profit. Deferred tax liabilities are generally recognised for all taxable temporary differences. Deferred tax assets are generally recognised for all deductible temporary differences to the extent that it is probable that taxable profits will be available against which those deductible temporary differences can be utilised. The carrying amount of deferred tax assets is reviewed at each reporting date and reduced to the extent that it is no longer probable that sufficient taxable profits will be available to allow all or part of the asset to be recovered. Deferred tax assets and liabilities are measured at the tax rates that are expected to apply in the period in which the liability is settled or the asset realised, based on tax rates (and tax laws) that have been enacted or substantively enacted by the end of the reporting period. The measurement of deferred tax liabilities and assets reflects the tax consequences that would follow from the manner in which the Company expects, at the end of the reporting period, to recover or settle the carrying amount of its assets and liabilities. Deferred tax assets and liabilities are offset when there is a legally enforceable right to set off current tax assets against current tax liabilities and when they relate to income taxes levied by the same taxation authority and the Company intends to settle its current tax assets and liabilities on a net basis. 19 ZESCO LIMITED NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) for the year ended 31 December 2017 3. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 3.11 Taxation (Continued) (iii) Current and deferred tax for the financial period Current and deferred tax are recognised in profit or loss, except when they relate to items that are recognised in other comprehensive income or directly in equity, in which case, the current and deferred tax are also recognised in profit or loss or directly in equity respectively. 3.12 Property, plant and equipment Property, plant and equipment are stated in the statement of financial position at their cost or revalued amounts, being the fair value at the date of revaluation, less any subsequent accumulated depreciation and subsequent impairment losses. Depreciation is charged to write off the cost or revalued amounts of property, plant and equipment over their estimated useful lives, on a straight line basis, over the following number of years: Generation, Transmission and Distribution Systems: Dams, tunnels, power houses and other civil structures 60 years Generators, Turbines, Transformers and Towers 40 years Transmission and distribution systems 25 - 50 years Other Assets: Buildings - Roads, Workshops, Offices and Houses 30-50 years Furniture, Vehicles and IT 3 - 15 years Capital work in progress is not depreciated. Depreciation is recognised so as to write off the cost or revalued amounts of assets less their residual values over their useful lives, using the straight-line method. The estimated useful lives, residual values and depreciation method are reviewed at the end of each reporting period, with the effect of any changes in estimate accounted for on a prospective basis. Properties in the course of construction for production, supply or administrative purposes are carried at cost, less any recognised impairment loss. Cost includes professional fees and, for qualifying assets, borrowing costs capitalised in accordance with the Company's accounting policy. Such properties are classified to the appropriate categories of property and equipment when completed and ready for intended use. Depreciation of these assets, on the same basis as other property assets, commences when the assets are ready for their intended use. Management has estimated the residual values of the property, plant and equipment at 31 December 2017 to be insignificant and for purpose of the financial statements have been assigned a nil value. Repairs and maintenance expenses are charged to profit or loss during the period in which they are incurred. The cost of major renovations is included in the carrying amount of the asset when it is probable that future economic benefits in excess of the originally assessed standard of performance of the existing asset will flow to the Company. An item of property and equipment is derecognised upon disposal or when no future economic benefits are expected to arise from the continued use of the asset. Any gain or loss arising on the disposal or retirement of an item of property, plant and equipment is determined as the difference between the sales proceeds and the carrying amount of the asset and is recognised in profit or loss. The surplus arising on revaluation of tangible assets is credited to a non-distributable reserve. Decreases that offset previous revaluations of the same asset are charged against the revaluation reserve. All other decreases are charged to the statement of comprehensive income. Each year the difference between depreciation based on the revalued carrying amount of the asset (the depreciation charged to the statement of comprehensive income) and depreciation based on the asset's original cost is transferred from the revaluation reserve to revenue reserves. On disposal of revalued assets, amounts in the revaluation reserve relating to that asset are transferred to revenue reserves. Assets held under finance leases are depreciated over their useful lives on the same basis as owned assets. However, when there is no reasonable certainty that ownership will be obtained by the end of the lease term, assets are depreciated over the shorter of the lease term and their useful lives. 20 ZESCO LIMITED NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) for the year ended 31 December 2017 3. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 3.13 Leases Leases are classified as finance leases whenever the terms of the lease transfer substantially all the risks and rewards of ownership to the lessee. All other leases are classified as operating leases. 3.13.1 Finance leases Assets held under finance leases are initially recognised as assets of the Company at their fair value at the inception of the lease or, if lower, at the present value of the minimum lease payments. The corresponding liability to the lessor is included in the statement of financial position as a finance lease obligation. Lease payments are apportioned between finance expenses and reduction of the lease obligation so as to achieve a constant rate of interest on the remaining balance of the liability. Finance expenses are recognised immediately in profit or loss, unless they are directly attributable to qualifying assets, in which case they are capitalised in accordance with the Company's general policy on borrowing costs. Contingent rentals are recognised as expenses in the periods in which they are incurred. 3.13.2 Operating leases Operating lease payments are recognised as an expense on a straight-line basis over the lease term, except where another systematic basis is more representative of the time pattern in which economic benefits from the leased asset are consumed. Contingent rentals arising under operating leases are recognised as an expense in the period in which they are incurred. In the event that lease incentives are received to enter into operating leases, such incentives are recognised as a liability. The aggregate benefit of incentives is recognised as a reduction of rental expense on a straight-line basis, except where another systematic basis is more representative of the time pattern in which economic benefits from the leased asset are consumed. 3.14 Intangible assets Intangible assets with finite useful lives that are acquired separately are carried at cost less accumulated amortisation and accumulated impairment losses. Amortisation is recognised on a straight-line basis over their estimated useful live. The estimated useful life and amortisation method are reviewed at the end of each reporting period, with the effect of any changes in estimate being accounted for on a prospective basis. An intangible asset is derecognised on disposal, or when no future economic benefits are expected from use or disposal. Gains or losses arising from derecognition of an intangible asset, measured as the difference between the net disposal proceeds and the carrying amount of the asset, are recognised in In profit or loss when the asset is derecognised. 3.15 Impairment of tangible and intangible assets At the end of each reporting period the Company reviews the carrying amounts of its tangible and intangible assets to determine whether there is any indication that those assets have suffered an impairment loss. If any such indication exists the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss (if any). Where it is not possible to estimate the recoverable amount of an individual asset the Company estimates the recoverable amount of the cash-generating unit to which the asset belongs. Recoverable amount is the higher of fair value less costs to sell and value in use. In assessing value in use the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset for which the estimates of future cash flows have not been adjusted. If the recoverable amount of an asset (or cash-generating unit) is estimated to be less than its carrying amount the carrying amount of the asset (cash-generating unit) is reduced to its recoverable amount. An impairment loss is recognised immediately in profit or loss unless the relevant asset is carried at a revalued amount, in which case the impairment loss is treated as a revaluation decrease. When an impairment loss subsequently reverses, the carrying amount of the asset (cash-generating unit) is increased to the revised estimate of its recoverable amount, but so that the increased carrying amount does not exceed the carrying amount that would have been determined had no impairment loss been recognised for the asset (cash-generating unit) in prior financial periods. A reversal of an impairment loss is recognised immediately in profit or loss unless the relevant asset is carried at a revalued amount, in which case the reversal of the impairment loss is treated as a revaluation increase. 21 ZESCO LIMITED NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) for the year ended 31 December 2017 3. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 3.16 Financial instruments Financial assets and financial liabilities are recognised when a Company becomes a party to the contractual provisions of the instrument. i. Financial assets The Company classifies its financial assets in the categories of receivables. Management determines the classification of its investments at initial recognition. (a) Effective interest rate method The effective interest method is a method of calculating the amortised cost of a financial instrument and of allocating interest income over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash receipts (including all fees and points paid or received that form an integral part of the effective interest rate, transaction costs and other premiums or discounts) through the expected life of the financial instrument, or, where appropriate, a shorter period, to the net carrying amount on initial recognition. (b) Receivables Receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. Receivables (including trade and other receivables, bank balances and cash) are measured at amortised cost less any impairment. Receivables are stated after the deduction of amounts which, in the opinion of the Directors, are required for specific provision. Specific provisions are made against identified doubtful receivables. (c) Impairment of financial assets Financial assets that are measured at amortised cost are assessed for impairment at the end of each reporting period. Financial assets are considered to be impaired when there is objective evidence that, as a result of one or more events that occurred after the initial recognition of the financial assets, the estimated future cash flows of the asset have been affected. Objective evidence of impairment could include: i significant financial difficulty of the issuer or counterparty; or ii breach of contract, such as a default or delinquency in interest or principal payments; or iii it becoming probable that the borrower will enter bankruptcy or financial re-organisation; or iv the disappearance of an active market for that financial asset because of financial difficulties. For certain categories of financial asset, such as receivables, assets that are assessed not to be impaired individually are, in addition, assessed for impairment on a collective basis. Objective evidence of impairment for a portfolio of receivables could include the Company's past experience of collecting payments, an increase in the number of delayed payments in the portfolio past the average credit period of 60 days, as well as observable changes in national or local economic conditions that correlate with default on receivables. The amount of the impairment loss recognised is the difference between the asset's carrying amount and the present value of estimated future cash flows reflecting the amount of collateral and guarantee, discounted at the financial asset's original effective interest rate. The carrying amount of the financial asset is reduced by the impairment loss directly for all financial assets with the exception of trade receivables, where the carrying amount is reduced through the use of an allowance account. When a receivable is considered uncollectible, it is written off against the allowance account. Subsequent recoveries of amounts previously written off are credited against the allowance account. Changes in the carrying amount of the allowance account are recognised in profit or loss. If, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognised, the previously recognised impairment loss is reversed through profit or loss to the extent that the carrying amount of the investment at the date the impairment is reversed does not exceed what the amortised cost would have been had the impairment not been recognised. 22 ZESCO LIMITED NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) for the year ended 31 December 2017 3. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 3.16 Financial instruments (continued) i. Financial assets (continued) d) Derecognition of a financial asset The Company derecognises a financial asset only when the contractual rights to the cash flows from the asset expire, or when it transfers the financial asset and substantially all the risks and rewards of ownership of the asset to another entity. If the Company neither transfers nor retains substantially all the risks and rewards of ownership and continues to control the transferred asset, the Company recognises its retained interest in the asset and an associated liability for amounts it may have to pay. If the Company retains substantially all the risks and rewards of ownership of a transferred financial asset, the Company continues to recognise the financial asset and also recognises a collateralised borrowing for the proceeds received. On derecognition of a financial asset measured at amortised cost, the difference between the asset's carrying amount and the sum of the consideration received and receivable is recognised in the statement of comprehensive income. ii. Financial liabilities and equity instruments issued by the Company Financial liabilities are classified as trade and other payables, other liabilities and amounts due to related parties. Trade and other payables and other liabilities are initially measured at fair value and are subsequently measured at amortised cost using the effective interest method. The effective interest method is a method of calculating the amortised cost of a financial liability and of allocating interest expense over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash payments through the expected life of the financial liability, or, where appropriate, a shorter period. (a) Equity instruments An equity instrument is any contract that evidences a residual interest in the assets of the Company after deducting all of its liabilities. Equity instruments are recorded at proceeds received, net of direct issue costs. (b) Bank borrowings and overdrafts Interest bearing and overdrafts are initially measured at fair value, and are subsequently measured at amortised cost, using the effective interest rate method. Any difference between the proceeds (net of transaction costs) and the settlement or redemption of borrowings is recognised over the terms of the borrowings in accordance with company's accounting policy for borrowing costs. (c) Other financial liabilities Other financial liabilities are initially measured at fair value, net of transaction costs. Other financial liabilities are subsequently measured at amortised cost using the effective interest method, with interest expense recognised on an effective yield basis. The effective interest method is a method of calculating the amortised cost of a financial liability and of allocating interest expense over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash payments through the expected life of the financial liability, or, where appropriate, a shorter period. (d) Derecognition of financial liabilities The Company derecognises financial liabilities when, and only when, the Company's obligations are discharged, cancelled or they expire. The difference between the carrying amount of the financial liability derecognised and the consideration paid and payable is recognised in profit or loss. 3.17 Investments IAS 27 Separate Financial Statements contains accounting and disclosure requirements for investments in subsidiaries, joint ventures and associates when an entity prepares separate financial statements. The Standard requires an entity preparing separate financial statements to account for those investments at cost or in accordance with IFRS 9 Financial Instruments. The investments represent the equity investments of the Company held at cost in the subsidiaries. These investments are carried at cost as there is no reliable measure of the fair value and regularly reviewed for impairment at each reporting date. 23 ZESCO LIMITED NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) for the year ended 31 December 2017 3. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 3.18 Provisions Provisions are recognised when the Company has a present obligation (legal or constructive) as a result of a past event, it is probable that the Company will be required to settle the obligation, and which a reliable estimate can be made of the amount of the obligation. The amount recognised as a provision is the best estimate of the consideration required to settle the present obligation at the statement of comprehensive income date, taking into account the risks and uncertainties surrounding the obligation. Where a provision is measured using the cash flows estimated to settle the present obligation, its carrying amount is the present value of those cash flows. When some or all of the economic benefits required to settle a provision are expected to be recovered from a third party, the receivable is recognised as an asset if it is virtually certain that reimbursement will be received and the amount of the receivable can be measured reliably. 3.19 Retirement benefits and other employee benefits (i) Defined benefit plan For defined benefit retirement plans, the cost of providing benefits is determined using the projected unit credit method, with actuarial valuations being carried out at the end of each annual reporting period. Remeasurement, comprising actuarial gains and losses, the effect of the changes to the asset ceiling (if applicable) and the return on plan assets (excluding interest), is reflected immediately in the statement of financial position with a charge or credit recognised in other comprehensive income in the period in which they occur. Remeasurement recognised in other comprehensive income is reflected immediately in accumulated funds and will not be reclassified to income or expenditure. Past service cost is recognised in income or expenditure in the period of a plan amendment. Net interest is calculated by applying the discount rate at the beginning of the period to the net defined benefit liability or asset. Defined benefit costs are categorised as follows: * Service cost (including current service cost, past service cost, as well as gains and losses on curtailments and settlements). * Net interest expense or income. * Remeasurement. The retirement benefit obligation recognised in the statement of financial position represents the actual deficit or surplus in the company's defined benefit plans. Any surplus resulting from this calculation is limited to the present value of any economic benefits available in the form of refunds from the plans or reductions in future contributions to the plans. (ii) Defined contribution plan The Company and all its employees contribute to the National Pension Scheme, which is a defined contribution scheme. A defined contribution plan is a retirement benefit plan under which the Company pays fixed contributions into a separate entity. The Company has no legal or constructive obligations to pay further contributions if the fund does not hold sufficient assets to pay all employees the benefits relating to employee service in the current and prior periods. (iii) Termination benefits Employees on non-fixed term contract of employment (commonly known as "Permanent and Pensionable" employment) are entitled also to long service termination benefits. The benefits are computed in accordance with accrued service period and the terminal pay. Provision is raised in profit or loss on a monthly basis. A liability for a termination benefit is recognised at the earlier of when the entity can no longer withdraw the offer of the termination benefit and when the entity recognises any related restructuring costs. (iv) Other entitlements Employee entitlements to annual leave and contract gratuity are recognised when they accrue to employees. Accrued leave pay and gratuity is accounted for in income or expenditure as it arises. 24 ZESCO LIMITED NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) for the year ended 31 December 2017 4. CRITICAL ACCOUNTING JUDGEMENTS AND KEY SOURCES OF ESTIMATION UNCERTAINTY The preparation of financial statements in conformity with the Company's accounting policies which are described in note 3, the Directors are required to make judgements, estimates and assumptions about the carrying amount of assets and liabilities that are readily apparent from other sources. Estimates and judgements are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. Actual results may differ from these estimates. Revisions to accounting estimates are recognised in the period in which the estimate is revised if the revision affects only that period, or in the period of the revision and future periods if the revision affects both current and future periods. 4.1 Critical judgments in applying accounting policies a) Income taxes There are many transactions and calculations for which the ultimate tax determination is uncertain during the ordinary course of business. The Company recognises liabilities for anticipated tax based on estimates of whether additional taxes will be due. Where the final tax outcome of these matters is different from the amounts that were initially recorded, such differences will impact on the income tax and deferred tax provisions in the period in which such determination is made. b) Impairment of trade receivables The Company reviews its receivables to assess impairment on a regular basis. The Company's credit risk is primarily attributable to its receivables. In determining whether impairment losses should be reported in profit or loss, the Company makes judgements as to whether there is any observable data indicating that there is a measurable decrease in the estimated future cash flows. Accordingly, an allowance for impairment is made where there is an identified loss event or condition which, based on previous experience, is evidence of a reduction in the recoverability of the cash flows. (c) Provision for obsolete inventory The Company reviews is inventory to assess loss on account of obsolescence on a regular basis. In determining whether provision for obsolescence should be recorded in profit or loss, the Company makes judgements as to whether there is any observable data indicating that there is any future saleability of the product and the net realizable value for such product. Accordingly, provision for obsolescence is made where the net realizable value is less than cost based on best estimates by the management, ageing of inventories and historical movement of the inventory. 4.2 Key sources of estimation uncertainty The following are the key assumptions concerning the future, and other key sources of estimation uncertainty at the end of the reporting period, that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial period. (a) Estimated useful lives and residual values of property, plant and equipment The Company's management determines the estimated useful lives and related depreciation charge for its items of property, plant and equipment on an annual basis. The Company has carried out a review of the residual values and useful lives of property, plant and equipment as at 31 December 2017 and the management has not highlighted any requirement for an adjustment to the residual lives and remaining useful lives if the assets for the current or future periods. (b) Contingencies Appropriate recognition and disclosure of contingent liabilities is made regarding litigation, tax matters and environmental issues. Accounting for contingencies requires significant judgement by management regarding the estimated probabilities and ranges of exposure to potential loss. The evaluation of these contingencies is performed by various specialists inside and outside of the Company. The Company's assessment of the Company's exposure to contingencies could change as new developments occur or more information. (c) Impairment of investments in joint ventures and associatestl Investments in joint ventures and associates are reviewed for impairment at the reporting date. Determining whether an investment balance is impaired requires an estimation of the value in use of the joint venture or associate. The value in use calculation requires an estimate to be made of the timing and amount of future cash flows expected to arise from the joint venture or associate and the application of a suitable discount rate in order to calculate the present value. The discount rates used are based on the Company's weighted average cost of capital adjusted to reflect the specific economic environment of the joint venture or associate. (d) Actuarial valuation assumptions Actuarial assumptions made in determining the present obligation of retirement benefits. 25 ZESCO LIMITED NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) for the year ended 31 December 2017 5. REVENUE 2017 2016 K'000 K'000 Analysis of the Company's revenue for the financial year is as follows by customer sector: Mining 4 168 070 5 595 447 Residential 1 578 360 1 152 414 Industrial and agricultural 924 033 866 874 Exports 728 968 597 838 Commercial (retail outlets) 25 419 25 255 7 424 850 8 237 828 6. COST OF SALES Local purchases 2854000 1 388 611 Emergency power imports 341 560 797 283 Direct labour costs 781 856 728417 Maintenance costs 368051 482997 Power imports (internally financed) 29 822 263 503 Generation water usage costs 83 274 93 643 Local wheeling charges 84381 83 715 Export wheeling charges 26 081 49 696 4 569 026 3 887 866 The importation of emergency power reduced significant by 49% due to the improvement of internal generation and the coming on board of Independent Power Producers (IPPs). The cost of Local power purchases from IPPs increased by more than 130%. The IPPs include Maamba Coaleries Limited, Ndola Energy and Itezhi Tezhi Power Corporation Limited whose average cost of power exceeds ZESCO's selling price to customers. The generation at full capacity at Kafue Gorge Power Station, compensated for the reduced generation at Kariba North Bank Power Station which operated slightly above 50% due to limited water allocation and on-going rehabiliation of Generator no:1. During the year the Government disbursed a total of K368.5 million (2016: K1 billion) towards the arrears of emergency power purchases and independent power producers. The Company accrues for expected receipts from Government as receivables and are amortised to profit or loss to match with the cost of emergency power purchases. 7. OTHER OPERATING INCOME Interest on late payments 160 436 - Amortisation of capital grants and contributions (note 25) 102 387 85 944 Sundry income 95 438 90 756 Fibrecom income 77 338 78 578 Wheeling income 18429 16080 Interest income 5872 6 371 Rental income 2001 1 915 461 901 279 644 8. OTHER GAINS AND LOSSES Net exchange (loss) gains (68634) 310990 Gain on disposal of property, plant and equipment 5 162 2 598 (63472) 313 588 The Zambian Kwacha depreciated against the US Dollar and other major convertible foreign currencies during the year. The impact of the depreciation of the Zambian Kwacha during the year is that the Company recorded significant exchange losses on its foreign currency denominated liabilities. 26 ZESCO LIMITED NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) for the year ended 31 December 2017 8. OTHER GAINS AND LOSSES (CONTINUED) The table below illustrates the movements in the US Dollar exchange rates during the period: Mid - market Mid - market Average exchange rate exchange rate depreciation Currency as at as at during 1 January 2017 31 December 2017 the year US Dollar (1 US$ = ) K9.853 K9.953 -1% 9. OTHER EXPENSES 2017 2016 K'000 K'O00 Other expenses 781 817 790 046 Provision for bad debts 4 732 2 264 847 786 548 3 054 893 10. FINANCE COSTS These comprise of the following: Interest paid on long-term loans 383 001 309 514 Interest paid on overdraft 15 903 14 919 Finance charges 398 903 324 433 11. LOSS BEFORE TAX Loss before tax is stated after crediting: Net exchange gains (note 8) - 310 990 Amortisation of capital grants and capital contributions 102 387 90 756 Interest income 5872 6371 Gain on disposal of property, plant and equipment 5 162 2 598 and after charging: Employee benefits 1524753 1 214 721 Depreciation and amortisation (note 14 and 15) 786 147 466 318 Finance costs (Note 10) 398903 324433 Pension costs 87 761 80 180 Directors' fees - in connection with the management of the Company 12 135 11 965 - as Directors of the Company 1 504 3 097 Operating lease rental 8785 7 880 Donations 3434 3 369 Net exchange losses (note 8) 68 634 - 12. TAXATION Income tax charge at 35% Deferred taxation (note 13) (662 787) (1 488 418) Income tax charge 46 860 43 207 Income tax credit (615 927) (1 445 211) Subject to agreement with the Zambia Revenue Authority, the Company had estimated tax losses of K9.9 billion (2016: K3.1 billion) which are available for carry forward for a period of 5 years from the year in which they arose and for set off against future taxable profits. The cumulative tax losses comorise: 2016/2017 losses available until 2020 9 924 903 3 089 940 27 ZESCO LIMITED NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) for the year ended 31 December 2017 12. TAXATION (CONTINUED) 2017 2016 Included under current liabilities: Arising during the year 46 860 43 207 Payable in respect of prior year 1 351 614 1 308 768 1 398 474 1 351 975 Paid in year (172 860) (361) Payable at end of year 1 225 614 1 351 614 Reconciliation of tax charge The total income tax expense for the year can be reconciled to the accounting profit as follows: Profit before tax (270 359) (136 571) Applicable tax rate of 35% (94 626) (47 800) Permanent differences: - Capital exchange gains (581 006) (1 442417) - Other disallowable items 57 728 45 006 (617904) (1445 211) 13. DEFERRED TAX At beginning of year (2 329 431) (817 079) Charge to equity 8 977 015 (23 934) Credit to profit or loss for the year (Note 12) (662 787) (1 488 418) At end of year 5 984 797 (2 329 431) The following are the major deferred tax (assets) liabilities recognised by the Company and their movements in the year Net Accelerated 2016 Tax capital Revaluation Provisions losses allowances surplus and other Total K'000 K'000 K'000 K'000 K'000 At beginning of year (1 041 113) 1 141 586 188 084 (1 105 636) (817 079) (Credit) charge to profit or loss (40 367) 582 839 - (2 030 890) (1 488 418) Charge to equity - - ( 2 3 934) - (23934) At end of year (1 081 480) 1 724 425 164 150 (3 136 526) (2 329 431) 2017 Net Accelerated Tax capital Revaluation Provisions losses allowances surplus and other Total K'000 K'000 K'000 K'000 K'000 At beginning of year (1 081 480) 1 724 425 164 150 (3 136 526) (2 329 431) (Credit) charge to profit or loss (2 392 236) 783 457 - 945 993 (662 787) Charge to equity - - 8 977 015 - 8 977 015 At end of year (3 473 716) 2507882 9141165 (2190 533) 5984797 28 ZESCO LIMITED NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) for the year ended 31 December 2017 14. PROPERTY, PLANT AND EQUIPMENT Civil Generation Transmission Capital engineering plant, and work in works and vehicles distribution progress Total buildings equipment systems K'000 K'000 K'000 K'000 K'000 Cost or valuation At 1 January 2016 260 647 950 702 7 715 848 7 898 342 16 825 539 Additions 21 952 148 190 16 518 3 490 083 3 676 743 Transfer of assets from Rural Electrification Authority - - 54 552 - 54 552 Transfers from Capital work in progress 7 306 - 3 807 187 (3 814493) - Disposals - (3 066) - - (3 066) At 31 December 2016 289905 1095826 11594105 7573932 20553768 Additions 4 270 41 246 - 3 876 937 3922453 Transfers from Capital work in progress 202 277 576 045 4 358 719 (5 137 041) - Disposals - (23 673) - - (23 673) Revaluation of assets 10 632 005 2 182 595 9 056 025 - 21 870 625 At 31 December 2017 11 128457 3872039 25008849 6313828 46323 173 Cost 290 819 1 319 817 14 671 213 6 313 828 22 595 677 Valuation (1996) 51 779 177 987 1 281 611 - 1 511 377 Valuation (2001) 153 854 191 640 - - 345 494 Valuation (2017) 10 632 005 2 182 595 9 056 025 - 21 870 625 At 31 December 2017 11 128 457 3 872 039 25 008 849 6 313 828 46 323 173 DEPRECIATION At 1 January 2016 65 240 629026 2235 109 - 2929 375 Charge for period 5 302 88 677 363 281 - 457 260 Eliminated on disposal - (2 819)- - (2 819) At 31 December 2016 70542 714884 2598390 - 3383816 Charge for year 128 013 104 141 540 985 - 773 139 Reclassification to intangibles (note 15) - (7989) - - (7989) Eliminated on disposal - (22 569) - - (22 569) Eliminated on revaluation (198 555) (571 450) (3 076 369) - (3 846 374) At 31 December 2017 - 217017 63006 - 280023 CARRYING AMOUNT At 31 December 2017 11 128457 3655022 24945843 6313828 46043150 At 31 December 2016 219 363 380 942 8 995 715 7 573 932 17 169 952 29 ZESCO LIMITED NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) for the year ended 31 December 2017 14. PROPERTY, PLANT AND EQUIPMENT (CONTINUED) The Company's Civil engineering works, generation plants and transmission and distribution systems and leasehold buildings are stated at their revalued amounts, being their fair value at the date of revaluation, less any subsequent accumulated depreciation. The fair value measurement of the Company's civil engineering works and buildings and generation plants and transmission and distribution systems as at 31 December 2017 were performed by Messrs Multiconsult United Kingdom and UPmarket Property Consultants respectively, independent valuers not related to the Company. The information below shows the valuation techniques used as well as the significant inputs used. Property, Valuation Description of valuation techinique Observable plant and technique inputs equipment Freehold Market based Direct Comparable method renders an estimate of Not applicable land and approach - Direct value through comparison with other similar buildings Comparable Method available properties which have recently transacted (DCM) and in the vicinity in an attempt to discern the actions of Depreciated buyers and sellers active in the market place. The Replacement Cost current market value is built up from the Land and (DRC) improvement values of the buildings derived from comparable transactions. Considerations were made with reference to; Location factor, time of sale, accessibility, quality, prevailing economic property trends. The Depreciated Replacement Cost method determines the present market value of the subject property by estimating the present cost of replacing the building(s) by estimating the total amount of accrued depreciation from all causes, namely physical deterioration, functional obsolescence and external obsolescence, subtracting the accrued depreciation from the present replacement costs, estimating the value of minor improvements and adding the site value to the depreciated cost of the building(s).This method was used where there was no market-based evidence of fair value because of the specialised nature of the item of property, plant and equipment and the item is rarely sold, except as part of a continuing business. Civil Depreciated The Depreciated Current Replacement Cost (DRCV) Market prices, engineering Current method requires that, for each asset under exchange works and Replacement Value consideration, a value be obtained for a modern rates, generation (DCRV) equivalent asset (MEA), that being an asset that can discounted plants reasonably provide like-for-like benefits of the asset rate (Hydro under consideration. The current replacement value stations, (CRV) of electrical and mechanical equipment was diesel established using ZESCO data for recent projects. stations and For the civil work structures, a bill of quantities was HV stations) prepared covering the major work items for each hydro scheme section (e.g. embankments, power intakes, canals, fore bays, power tunnels, pressure shafts, powerhouses etc.). The DCRV has been calculated in the Asset Register on a linear basis, a minimum value of 10% CRV was allocated if the asset is still in service. A scrap value has also been allocated where it is ZESCO's current practice to sell scrap materials. 30 ZESCO LIMITED NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) for the year ended 31 December 2017 Transmission Depreciated The DRC method requires that, for each asset under Market prices, and Current consideration, a value be obtained for a modern exchange distribution Replacement Value equivalent asset (MEA), that being an asset that can rates, systems (DCRV) reasonably provide like-for-like benefits of the asset discounted under consideration, rate Transmission line asset prices were obtained from recent ZESCO transmission line projects pricing schedules. An additional 3% on-costs was added to account for the Owner's costs. Line costs were priced per unit length and according to terrain type (flat, hilly and swampy). Distribution equipment pricing data was obtained from recent ZESCO in-house pricing data. Unit installed prices (material and labour) per length of overhead line and underground cable was calculated from these data and a further 100% on-costs were added. Details of the Company's civil engineering works and buildings, generation plants and transmission and distribution systems and information about the fair value hierarchy as at the end of the reporting period are as follows: Level 1 Level 2 Level 3 Fairvalue as at 31 December 2017 K'000 K'000 K'000 K'000 Civil Engineering works and buildin - - 11 128 457 11 128 457 Generation plants - 3 655 022 - 3 655 022 Transmission and distribution syste - 24 945 843 - 24 945 843 The fair value measurements for the civil engineering works and buildings, generation plants and transmission and distribution systems have been categorised as Level 3 fair values based on the inputs to the valuation techniques used. There were no transfers between fair value levels during the year. Had the Company's civil engineering works and buildings, generation plants and transmission and distribution systems been measured on a historical cost basis, their carrying amounts wold have been as follows: 2017 2016 K'000 K'000 Civil Engineering works and buildings 297 897 219 363 Generation plants 374024 380942 Transmission and distribution systems 12 813 449 8 995 715 The significant inputs include the estimated construction costs and other ancillary expenditure. A slight increase in the depreciated factor would result in a significant decrease in the fair value of the buildings and civil engineering works, and a slight increase in the estimated construction costs would result in a significant increase in the fair value of the buildings, and vice versa. In the opinion of the Directors there are no major components of Property, Plant and Equipment which have different useful lives that would require to be depreciated separately and allocated separate residual values. In accordance with Section 193 of the Companies Act, 1994, the register of Land and Buildings is available for inspection by members and their duly authorised agents at the Registered records office of the Company. 31 ZESCO LIMITED NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) for the year ended 31 December 2017 15. INTANGIBLE ASSET 2017 2016 K'000 K'000 Cost At beginning of year 143 448 143 448 Loss on revaluation (74 708) - At end of year 68 740 143 448 Accumulated amortisation At beginning of year (57 363) (48 305) Amortisation expense (13 013) (9 058) Reclassification from property, plant and equipment (note 14) (7 989) Elimination of accumulated amortisation 78 365_ - Balance at 31 December - (57 363) Carrying amounts: At end of year 68 740 86 085 The following useful lives are used in the calculation of amortisation: Software 5 years Significant intangible assets The intangible assets consists of oracle software and the business information systems. The Company's intangible assets are stated at their revalued amounts, being their fair value at the date of revaluation, less any subsequent accumulated amortisation. The fair value measurement of the Company's intangible assets as at 31 December 2017 were performed by Messrs Multiconsult United Kingdom, independent valuers not related to the Company. The information below shows the valuation techniques used as well as the significant inputs used. Intangible Valuation Description of valuation techinique Observable assets technique inputs Oracle Current The method determines the amount that ZESCO Not applicable software and Replacement cost Limited would have to pay to replace an asset at the other related present time, according to its current worth of the software software on the market. Details of the Company's intangible assets and information about the fair value hierarchy as at the end of the reporting period are as follows: Level 1 Level 2 Level 3 Fairvalue as at 31 December 2017 K'000 K000 K'000 K'000 Intangible assets 68 740 68740 The fair value measurements for intangible asset have been categorised as Level 3 fair values based on the inputs to the valuation technique used. There were no transfers between fair value levels during the year. 32 ZESCO LIMITED NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) for the year ended 31 December 2017 16. INVESTMENTS 2017 2016 K'000 K'000 These represent the investment interest in the following companies at cost: Kafue Gorge Lower Power Development Corporation Limited 1 403 135 1 348 384 Itezhi tezhi Power Corporation Limited (ITTPC) 164 255 163 132 Elsewedy Electric Zambia Limited 11351 11 351 Zambia Electrometer Limited 6350 6 350 ERB Strategic Reserve Fund 13 596 8 804 Kariba North Bank Extension Power Corporation Limited 10 10 1 598 697 1 538 032 The movement in the investment during the year was as follows: Balance at beginning of year 1 538 032 459 659 Additions during the year 60 665 1 078 373 Balance at end of the year 1 598 697 1 538 032 Kafue Gorge Lower Power Development Corporation Zesco Limited holds 100% shares in Kafue Gorge Lower Power Development. The investment is carried at cost. The entity acquired 1,000,000 shares. This is therefore a subsidiary. Kariba North Bank Extension Power Corporation Zesco Limited holds 100% shares in Kariba North Bank Extension Power Corporation. The investment is carried at cost. The entity's shareholding remained unchanged at 10,000,000 shares. This is therefore a subsidiary. Itezhi tezhi Power Corporation Limited (ITTPC) ZESCO Limited holds 50% shares in Itezhi tezhi Power Corporation Limited, co-owned with Tata Africa Holdings of India which owns 50% shareholding representing 2,500,000 shares. Zesco Limited is therefore in a joint venture with Tata Africa Holdings. The investment is carried at cost. Elsewedy Electric Zambia Limited ZESCO Limited holds 40% shares in Elsewedy Electric Zambia Limited. The investment is carried at cost. The entity's shareholding remained unchanged at 2,000,000 shares. This is an associate of Zesco Limited. Zambia Electrometer Limited ZESCO Limited holds 40% shares in Zambia Electrometer Limited. The investment is carried at cost. The entity's shareholding remained unchanged at 1,000,000 shares. This is an associate of Zesco Limited. ERB Strategic Reserve Fund In accordance with section 20(2)(c) of the Energy Regulation Act, chapter 436 of the laws of Zambia, ZESCO Limited is required to make contributions based on 1% of the additional gross revenue on the tariff increment awarded to it by Energy Regulation Board on the 1 July 2014. The Fund is planned to be used for developmental projects in the energy sector. ZESCO Limited is currently the sole contributor to the fund of which contributions began in the period under review. The Statutory Instrument to guide the strategic reserve fund management is yet to be finalised. 33 ZESCO LIMITED NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) for the year ended 31 December 2017 16. INVESTMENTS (CONTINUED) These financial statements are for the parent company only and are prepared in accordance with IAS 27 Separate financial statements. The subsidiaries, associates and joint ventures will be consolidated in the group financial statements. 17. INVENTORY 2017 2016 K'000 K'000 Materials 838 337 811 583 Goods in transit 145 599 138 422 Fuel and lubricants 13 244 10 243 Spares 8095 7008 1 005 275 967 255 Allowance for obsolescence (2 512) (2 276) 1 002 763 964 979 The cost of inventories recognised as an expense during the year was K256 million (2016: K214 million). Inventories are disclosed net of provision for obsolete stock amounting to K2.5 million (2016: K2.3 million). 18. TRADE AND OTHER RECEIVABLES 2017 2016 K'000 K'000 The balance comprises: Gross trade receivables 4 841 523 6 463 624 Allowance for doubtful debts (3 524 635) (5 048 851) 1316888 1414773 Other receivables Other receivables 1 535 532 722 638 Staff receivables 53 998 97 704 Allowance for doubtful debts (478 871) (465 338) 1 110 659 355 004 Total trade and other receivables 2 427 547 1 769 777 The movement in allowance for doubtful trade receivables is as follows: Balance at beginning of year 5048851 2620 575 Charge for the year 158 670 2 428 276 Reversal of impairment losses recognised on trade receivables (1 687953) - At end of the year 3 519 568 5 048 851 The movement in allowance for doubtful debts for other receivables is as follows: Balance at beginning of year 465 339 446 895 Charge for the year 20 840 18 444 Reversal of impairment losses recognised on other receivables (2 240) - At end of the year 483 939 465 339 34 ZESCO LIMITED NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) for the year ended 31 December 2017 18. TRADE AND OTHER RECEIVABLES (CONTINUED) 2017 2016 K'000 K'000 The average credit period on sales of services is 30 days. Trade receivables over 90 days are provided for based on estimated irrecoverable amounts from the sale of services, determined by reference to past default experience. Ageing of past due but not impaired trade receivables 30 - 60 days 67 419 65 827 60 - 90 days 61 762 349 972 Over 90 days 90 484 820 709 219 665 1 236 508 Trade receivables disclosed above include amounts that are past due at the end of the reporting period for which the Company has not recognised an allowance for doubtful debts because there has been no significant change in credit quality and are still considered recoverable. In determining the recoverability of trade receivables, the Company considers any change in the credit quality of the trade receivable from the date credit was initially granted up to the reporting date. The Directors believe that there is no further credit provision required for doubtful debts. Penalties are charged for late payment on mining customers. Performance of trade debtors are reviewed by management on an on going basis. Age of impaired trade receivables 30-60 days - 565 176 60-90 days - 956521 Over 90 days 3 464 606 3 527 154 3 464 606 5 048 851 19. SHARE CAPITAL Authorised 200,000,000 ordinary shares of KO.002 each 400 400 Issued and fully paid 96,894,542 ordinary shares of KO.002 each 194 194 20. AMOUNTS PENDING ALLOTMENT OF SHARES Shares pending allotment (a) 21 21 Shares pending allotment (b) 1 654 785 1 654 785 Shares pending allotment (c) 1 170 118 1 170 118 2824924 2824924 (a) The amount was received from Zambia Industrial and Mining Corporation Limited (In Liquidation) in 2003. 35 ZESCO LIMITED NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) for the year ended 31 December 2017 20. AMOUNTS PENDING ALLOTMENT OF SHARES (CONTINUED) 2017 2016 K'000 K'000 (b) The amount was received 4 February 2013 from the Ministry of Finance as a recapitalisation to fund the development of Kafue Gorge Lower Hydro Power Station (US$186 million) and Distribution development projects (US$69 million) and K276 million for the development of small hydro power stations and the Zambia power rehabilitation project. The Government as shareholder, has confirmed that no repayment will be required for these amounts. However, the requirement is for the funds to be utilised on the intended projects as set out above. In accordance with IAS 32 paragraph 16, the funds fall to be treated as share capital. (c) The Government as shareholder, on the 28 December 2015 approved the conversion of on-lent loans in ZESCO Limited to equity amounting to US$156 million or K1.1 billion. (d) Subsequent to the reporting date on 5 April 2018 authorised share capital was increased to K5 billion divided into 2.5 billion shares at K2 per share from K400,000. 21. RELATED PARTY TRANSACTIONS The Company is a wholly owned subsidiary of Industrial Development Corporation Zambia Limited, a company incorporated in Zambia and owned and controlled by the Government of Zambia. During the year the Company carried out transactions with related parties as detailed below: (i) Trading transactions The effect on the results for the year of these transactions is as follows: Gross revenue 194 616 527 179 Cost of sales (259 281) (258 661) Trading impact on Company (64 665) 268 518 (ii) Year end balances a) Amounts due from related parties Government of the Republic of Zambia 1 905 781 1 192 762 Itezhi tezhi Power Corporation Limited (ITTPC) incorporated in Zambia 298995 282 274 Kariba North Bank Extension Power Corporation incorporated in Zambia 155426 128 714 Zambia Electrometer Limited, incorporated in Zambia 2 209 2 209 Rural Electrification Authority 3 821 - 2 366 232 1 605 959 The amounts outstanding are unsecured and will be settled in cash. No guarantees have been given or received. No expense has been recognised in the year for bad or doubtful debts in respect of the amounts due from related parties. 36 ZESCO LIMITED NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) for the year ended 31 December 2017 21. RELATED PARTY TRANSACTIONS (CONTINUED) 2017 2016 (b) Amounts due to related parties K'000 K'000 Itezhi tezhi Power Corporation Limited (ITTPC) incorporated in Zambia 1 133 828 479 878 Kariba North Bank Extension Power Corporation Limited 149 584 129 821 Elsewedy Electric Zambia Limited 100 065 92 677 Zambia Electrometer Limited - 36 164 1 383 477 738 540 Kariba North Bank Extension Power Corporation Limited and Kafue Gorge Lower Corporation are subsidiary companies, while Itezhi Tezhi Power Corporation is a joint venture investment with 50% shareholding. Elsewedy Electric Zambia Limited and Zambia Electrometer Limited are associates. (c) Loan due from a related party At beginning of year 2769565 3 090 111 Net exchange (loss) gain 28 136 (320 546) At end of the year 2 797 701 2 769 565 The borrowing is a term loan facility of USD315.6 million to Kariba North Bank Extension, the subsidiary. The loan does not bear any interest and is repayable on demand. The loan amount is secured on property, plant and machinery of the project and is denominated in United States Dollars. (d) Key management personnel remuneration Key management remuneration 12 135 11 966 Directors fees 1504 3 097 13 639 15 063 22. OPERATING LEASE COMMITMENTS Rental expense on leasehold building Operating lease payments represent rentals payable by the Company for the building used as the Company's customer service centres and office space. Minimum lease payments paid under operating leases recognised as an expenses in the year. 8785 7880 At the reporting date, the Company had no outstanding commitments under non-cancellable operating leases. 23. BORROWINGS The movement on loan is as follows: At beginning of year 12592444 11 057 335 Borrowings arising during the year 1 133 770 4 104 239 Net exchange (losses) (459) (1 301 448) Repayments made during the year (925 300) (1 267 682) 12800455 12 592444 37 ZESCO LIMITED NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) for the year ended 31 December 2017 23. BORROWINGS (CONTINUED) 2017 2016 K'000 K'000 Balance at end of the year The borrowings are repayable as follows: On demand or within one year 1 508 901 1 442 126 Loans payable within 2 years 2 187 965 3 436 771 Loans payable within 3-5 years 3 281 947 2 901 267 Loans payable after 5 years 5821 642 4 812 280 11 291 554 11 150 318 12 800 455 12 592 444 The borrowings are due to the following: 1 i Industrial Commercial Bank of China 2 834 097 2 805 594 2 ii China Exim Bank 2 131 582 2 373 913 3 iii Standard Chartered Bank 1 214303 1 202 090 4 iv Nordea Stanbic Bank 1 324283 1 053 631 5 v DBSA - Loan Kafue Gorge Hydro Power Station 995 330 985 320 6 vi India Exim Bank 471 104 466 366 7 vii China Exim 448 542 444 031 8 viii European Investment Bank 411 612 407 473 9 ix GRZ/International Development Association - - Kafue Muzuma 407 204 375 202 10 x GRZ/Agence Francaise De Development 342 394 338 950 11 xi African Development Bank 305 684 291 762 12 xii Industrial Commercial Bank of China Facility Loan - Musonda 298 053 - Falls 13 xiii Standard Bank 206 010 262 207 14 xiv GRZ/International Development Agency 164 989 37 766 15 xv Stanbic Bank 151 469 216 589 16 xvi European Investment Bank 140319 96 256 17 xvii Bank of China 120 665 199 086 18 xviii ZANACO - Short Term Facility 113 827 - 19 xix Stanbic Bank 97 722 161 232 20 xx Development Bank of Southern Africa Bank 1 88 006 90 993 21 xxi Industrial Commercial Bank of China Facility-Chipata-Lundazi 73 625 22 xxii Nigeria Trust Fund 59 693 58 698 23 xxiii Industrial Commercial Bank of China Facility-Mpika Transmission 57 550 - 24 xxiv GRZ/Japan International Cooperation Agency 46 645 42 675 25 xxv CNMC Industrial Zone Development 44 272 51 131 26 xxvi GRZ/World Bank 43 921 43 479 27 xxvii European Investment Bank 2 38 710 39 949 28 xxviii Agency Francaise de Development 35 681 - 29 xxix GRZ/World Bank Facility 2 32226 31 902 30 xxx Sinohydro Bridging Loan II-Musonda Falls 28 841 166 541 31 xxxi Barclays Bank Zambia Plc 25 549 57 527 32 xxxii EIB - LTDRP LOAN FACILITY 22 578 33 xxxiii Zambia National Commercial Bank Plc 13 318 151 366 34 xxxiv Standard Chartered Bank 10 652 42 183 35 xxxv Sinohydro Corporation Limited - 98 532 12 800 455 12 592 444 38 ZESCO LIMITED NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) Net cash generated from financing activities 23. BORROWINGS (CONTINUED) Summary of the arrangements: i. Industrial Commercial Bank of China This is a US$285 million loan facility obtained from Industrial Commercial Bank of China on 30 May 2011 to finance the Pensulo-Msoro-Chipata West 330 KV and Pensulo-Kasama 330 kV Transmission lines. Interest is 2.5% Margin plus LIBOR (Screen Rate), the Loan will be repaid over 10 years. The loan is denominated in United States Dollar and the balance at the reporting date was US$284.7 million or K2.8 billion. ii. China Exim Bank This is a US$315.6 million loan facility was obtained from China Exim Bank in October 2008 with tenure of 15 years. Interest is computed at LIBOR plus 2% per annum. The facility is secured by receivables from Copperbelt Energy Corporation and Chambeshi Mining Company. The loan is denominated in United States Dollar and as at reporting date, the loan balance was US$214.2 million or K2.1 billion. iii. Standard Chartered Bank This is a US$122 million loan facility obtained from Standard Chartered Bank in February 2016 to refinance the $40 million bridge facility and other general corporate purposes relating to capital projects but not limited to the upgrading of Musonda falls power station, new Lusiwasi Upper 15 MW plant, construction of Chama Lundazi Transmission Line. Interest is charged at an average of 5.75% plus 6 month Libor, semi-annum and the loan (principal plus interest) will be repaid over 7 years including 2 years grace period. The loan is denominated in United States Dollar. The loan balance at the reporting date was US$122 million or K1.2 billion. iv. Nordea Stanbic Bank This is a US$133 million loan facility obtained from Nordea bank on 14 August 2014. The loan was obtained to finance the connection of North western Province to the National Grid. The loan shall be repaid over a 14 year period including a grace period of 2 years. The interest rate is 3.69% per annum payable semi-annual. The loan facility is in United States Dollar and the balance at the reporting date was US$133.1 million or K1.3 billion. v. Development Bank of South Africa (DBSA) (KGL) This is a US$100 million loan facility obtained from Development Bank of South Africa (DBSA) on 4 May 2016 to finance the Kafue Gorge Lower Hydro Power Project. Interest is charged at 9.4% plus 6 month Libor, semi-annum and the loan (principal plus interest) will be repaid over 15 years including 2 years grace period. The loan is denominated in United States Dollar. The loan balance at the reporting date was US$100 million or K995.3 million. vi. India Exim Bank This is a US$63.39 million facility obtained from India Exim bank on 9 June 2012. The loan was obtained to finance the connection of Luangwa to the national grid. The loan will be repaid in seven equal installments. The interest rate is LIBOR plus 5.5%. The facility is in United States Dollar and the balance as at the reporting was US$47.3 million or K471 million. vii. China Exim Bank This is a US$45 million facility obtained from China Exim bank through the Ministry of Finance on 13 October 2014. The loan was obtained to Finance the Kariba North Bank- Kafue west 330KV transmission project. The interest rate is 2%. The facility is in United States Dollar and the balance as at the reporting was US$45 million or K448.5 million. viii. European Investment Bank This is a EUR 50 million loan facility from the European Investment Bank (EIB) by the Government of the Republic of Zambia on the 10 December 2012. The facility was obtained for the purpose of financing the Itezhi-Tezhi Hydro Power plant, Mumbwa Substation and Lusaka West - Mumbwa Transmission Line Project. The facility shall be settled over a period of twenty five (25) years including a grace period of five (5) years. The interest is charged at 1.2% per cent per annum. The balance at the reporting date was US$41.6 million or K411.6 million. 39 ZESCO LIMITED NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) for the year ended 31 December 2017 23. BORROWINGS (CONTINUED) ix. GRZ/International Development Association-Kafue Muzuma This is a US$60 million loan facility obtained from the International Development Association on 6 December 2012 by the Government of the Republic of Zambia and on lent to ZESCO to finance the Kafue Muzuma Transmission Project. Interest shall be computed at 2% per annum and the loan (principal plus interest) will be repaid over 20 years including 5 years grace period. The loan is denominated in United States Dollar. The loan balance at the reporting date was US$40.9 million or K407.2 million. x. GRZ/Agence Francaise De Development This is a US$34.4 million loan facility obtained from the International Development Association on 18 December,2012 by the Government of the Republic of Zambia and on lent to ZESCO to finance the construction of Itezhi Tezhi Power Station. Interest is computed at 1.5% semi annum and the loan (principal plus interest ) will be repaid over 25 years including 5 years of grace period. The loan is denominated in United States Dollar. The balance at reporting date was US$34.4 million or K342.4 million. xi. African Development Bank This is a US$30 million loan facility obtained from the African Development Bank (ADB) by the Government of the Republic of Zambia on 19 December 2012. The loan was obtained to finance the transmission line for the Itezhi-Tezhi Hydro Power and Transmission Line Project. The loan facility is in United Srates Dollars and the balance at the reporting date was US$30.7 million or K305.7 million. xii. Industrial and Commercial Bank of China This is a US$35.25 million loan facility obtained from Industrial and Commercial Bank of China by ZESCO Limited on the 26 January 2017. The loan facility was obtained to finance the rehabilitation and upgrading of Musonda Falls Hydro Power Plant. The loan shall be repaid over a 15 year period including a grace period of 3 years. The interest is LIBOR plus 3.35% per annum.The loan facility is in United States Dollar and the balance at the reporting date was US$29.9 million or K298 million. xiii. Standard Bank of South Africa This is a US$29.5 million facility obtained from Standard Bank of South Africa. The loan was obtained to finance the connection of Northwestern Province to the National grid. The interest rate is LIBOR plus 5% per annum. The loan is to be repaid over a period of 7 years with a 2 years grace period. The facility is in United States Dollar and the amount as at the reporting date was US$20.7 million or K206.2 million. xiv. GRZ/International Development Association This is a US$105 million loan facility obtained from the International Development Association on 3 October 2013 by the Government of Republic of Zambia and on lent to ZESCO to finance the Lusaka Transmission and Distribution Rehabilitation Project. Interest is charged at 1.5% semi-annum and the loan (principal plus interest) will be repaid over 30 years including 10 years grace period. The loan is denominated in United States Dollar. The loan balance at the reporting date was US$16.6 million or K165 million. xv. Stanbic Bank This is a US$31 million Letter of Credit facility obtained from Stanbic Bank (Z) Limited meant to finance importation, mobilisation and installation of equipment by Elsewedy of Egypt. The Letter of Credit agreement was finalised on the 17 February 2014 for a period of 70 months, with a grace period of 15 (Fifteen) months. The repayment will be US$563,636 in equal installments of 55 months. The Letter of Credit was secured against the Company's receivables. The facility is in nited States Dollar and the balance at reporting date was US$15.2 million or K151.5 million. 40 ZESCO LIMITED NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) for the year ended 31 December 2017 23. BORROWINGS (CONTINUED) xvi. European Investment Bank This is a EUR 22 million loan facility obtained from the European Investment Bank (EIB) by the Government of the Republic of Zambia on the 4 of December 2012. The Government agreed to on-lend to ZESCO Limited on the terms and conditions set forth in the finance contract. The purpose of the facility was to finance the Kafue-Livingstone transmission Line project. The loan facility shall be repaid to the Government in equal semi-annual installments beginning five (5) years after the signature date of the on-lending loan and ending ten (10) years after the date of such agreement. The interest is charged at one and half percent (1.5%). The loan facility is in US$14.1 million or K141.3 million. xvii. Bank of China This is a US$48.4 million loan facility obtained from Bank of China on 20 May 2011. The loan was obtained to finance the extension of fibre network to other parts of the country. The facility is for duration of 8 years with the grace period of 2 years. The interest rate is LIBOR plus 3% per annum. The loan facility is in United States Dollar and the balance at the reporting date was US$12.1 million or K120.7 million. xviii. ZANACO Shortterm Facility This is a US$14.21 million loan facility obtained from Zambia National Commercial Bank by ZESCO Limited on the 18 July 2017. The loan facility was obtained to finance 15% advance payments to ZTE Corporation, KEC International, Howell and Sinohydro Corporation for delivery, supply and construction of Metropolitan Area Networks and transmission assets. The interest is at 8% and is paid monthly together with the principal. The loan facility is denominated in United States Dollars and will be rapaid within 24 months. The balance at the reporting date was US$11.4 million or K113.8 million. xix. Stanbic Bank This is a US$30 million letter of credit facility obtained from Stanbic Bank (Z) Limited meant to finance importation, mobilisation and installation of equipment by Elsewedy of Egypt. The Letter of Credit agreement was finalised on the 1 August 2013 for a period of 70 months, with a grace period of 15 months. The repayment will be US$545,455 in equal installments of 55 months. The Letter of Credit was secured against the Company's receivables. The facility is in nited States Dollar and the balance at reporting date was US$9.8 million or K97.8 million. xx. Development Bank of Southern Africa This is a ZAR210.4 million loan facility obtained from Development Bank of South Africa Bank on 22 July 1998. The loan was obtained to finance the Power Rehabilitation Projects. The duration of the loan is 20 years including a grace period of 5 years. The loan facility has a fixed interest rate of 15.25% per annum. The balance as at the reporting date was ZAR109.6 million or K88 million. xxi. Industrial and Commercial Bank of China This is a US$36.84 million loan facility obtained from Industrial and Commercial Bank of China by ZESCO Limited on the 10 August 2017. The loan facility was obtained to finance the Connection of Lundazi and Chama to the National Grid. The loan shall be repaid over a 15 year period including a grace period of 3 years. The interest is LIBOR plus 3.35% per annum.The loan facility is in United States Dollar and the balance at the reporting date was US$7.4 million or K73.6 million. xxii. Nigeria Trust Fund This is a US$6.4 million loan facility obtained from the Nagerian Trust Fund by the Government of the Republic of Zambia on the 19 December 2012. The loan was lent to ZESCO Limited for the purpose of financing the Itezhi-Tezhi Hydro Power and Transmisssion Line project. The loan shall be repaid over a period of twenty five (25) years including a grace period of five (5) years. The interest is charged at zero point seventy five (0.75%) per annum fixed interest rate. The loan facility is in United States Dollars and the balance at the reporting date was US$5.9 million or K59.7 million. 41 ZESCO LIMITED NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) for the year ended 31 December 2017 23. BORROWINGS (CONTINUED) xxiii. Industrial and Commercial Bank of China This is a US$29.6 million loan facility obtained from Industrial and Commercial Bank of CHina by ZESCO Limited on the 13 July 2016. The loan facility was obtained to finance the improvement of power supply in Mpika. The loan shall be repaid over a 15 year period including a grace period of 3 years. The interest is LIBOR plus 3.35% per annum.The loan facility is in United States Dollar and the balance at the reporting date was US$5.8 million or K57.6 million. xxiv. GRZ/3apan International Cooperation Agency (JICA) This is a Yens 5 billion loan facility obtained from JICA by Government of Republic of Zambia on 1 November 2010. The loan was lent to ZESCO to finance the Increased Access to Electricity Project. The loan shall be repaid over a 15 year period including a grace period of 5 years. The interest is charged at 0.05% per annum. The loan facility is in Japanese Yen and the balance at the reporting date was Yens 508 million or K46.6 million. xxv. CNMC Industrial Zone Development The facility was obtained as capital contribution in 2009 on the Chambishi line from CNMC Industrial Zone Development who contributed 40% of the total project costs of US$27.8 million (i.e. US$11.1 million). It is to be paid in 180 equal instalments of US$61,778 per month. There is no interest on this amount and there is no security attached to the agreement. The balance at the reporting date was US$4.4 million or K44.3 million. xxvi. GRZ/World Bank This is a US$16 million loan facility obtained from World Bank by Government of Republic of Zambia on 9 February 2009. The loan was lent to ZESCO to finance the Increased Access to Electricity Project. The loan shall be repaid over a 20 year period including a grace period of 5 years. The loan will have a 2% interest charge per annum. The loan facility is in United States Dollar and the balance at the reporting date was US$4.4 million or K43.4 million. xxvii. European Investment Bank 2 This is a EUR7.6 million loan facility obtained from European Investment Bank by ZESCO Limited on 12 July 2005 to finance the Kariba North Bank Power Station Rehabilitation and Uprating Works under Power Rehabilitation Projects. The interest rate is 3.3% per annum. The loan facility is in Euro and the balance at the reporting date was EUR3.3 million or K38.1 million. xxviii. Agence Francaise de Development This is a C40 million loan facility obtained from Agency Francaise de Development by GRZ and on lent to ZESCO Limited on the 23 June 2016 to finance the improvement of power supply in Soutthern Division. The loan shall be repaid over a 20 year period including a grace period of 5 years. The interest rate 5.00% per annum Fixed.The loan facility is in Euros and the balance at the reporting date was C3.0 million or K35.7 million. xxix. GRZ/World Bank Facility 2 This is a US$10 million loan facility obtained from World Bank by Government of Republic of Zambia on 21 March 2010. The loan was lent to ZESCO to finance the Increased Access to Electricity Project. The loan shall be repaid over a 20 year period including a grace period of 5 years. The loan will have a 2% interest charge per annum. The loan facility is in United States Dollar and the balance at the reporting date was US$3.2 million or K32.2 million. 42 ZESCO LIMITED NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) for the year ended 31 December 2017 23. BORROWINGS (CONTINUED) xxx. Sinohydro Corporation Limited This was a US$ 29 million loan facility (Bridging finance) obtained from Sinohydro Corporation Limited by ZESCO Limited on the 17 October 2016. The facility was obtained for the purpose of rehabilitation and upgrading works at the Musonda Falls Hydropower Station. The tenure of the facility is from the date when the agreement came into effect to the date when the funds are available to the employer from the financial institution. Funds and Interest shall be repaid at once after the employer obtains financing. The interest is charged at 7% per annum. The balance at the reporting date was US $2.9 million or K28.8 million. xxxi. Barclays Bank Zambia Plc This is a letter of credit facility of US$15 million from Barclays Bank Plc Limited obtained on 7 November 2012, with tenure of 70 months and is repayable over 55 months. The facility is secured by company's receivables deposited in Barclays Bank Accounts. The facility is in United States Dollar and the balance at reporting date was US$2.6 million or K25.5 million. xxxii. European Investment Bank This is a US$106 million loan facility obtained from the European Investment Bank on 3 October 2013 by the Government of Republic of Zambia and on lent to ZESCO to finance the Lusaka Transmission and Distribution Rehabilitation Project. Interest is charged at 1.2% semi-annum and the loan (principal plus interest) will be repaid over 30 years including 10 years grace period. The loan is denominated in United States Dollar. The loan balance at the reporting date was US$2.3 million or K22.6 million. xxxiii. Zambia National Commercial Bank Plc This is a letter of credit facility of US$80 million from Zambia National Commercial Bank Zambia Limited, incorporated in Zambia with tenure of 70 months, and is repayable in 55 monthly instalments. The loan is denominated in United States Dollar and as at reporting date the loan balance was US$1.34 million or K13.3 million. The facility is secured by company's collections and guarantee from the Government of the Republic of Zambia. xxxiv. Standard Chartered Bank This is a letter of credit facility of US$15 million from Standard Chartered Bank PLC, incorporated in Zambia with tenure of 84 months or 7 years, is repayable in equal instalments of US$267,570.15 over 55 monthly instalments. The letter of credit is in United States Dollar and the balance at the reporting date was US$1.1 million or K10.7 million. xxxv. Sinohydro Corporation Limited This is a US$10 million facility (Bridging finance) obtained from Sinohydro Corporation Limited by ZESCO Limited on the 17 September 2015. The facility was obtained for the purpose of rehabilitation and upgrading works at the Musonda Falls Hydropower Station. The tenure of the facility is from the date when the agreement came into effect to the date when the funds are available to the employer from the financial institutions. Funds and Interest shall be repaid at once after the employer obtains financing. The interest is charged at 7% per annum. The Bridging Loan was fully paid on 11 August 2017 by ICBC Bank financing the Musonda Falls Project. 43 ZESCO LIMITED NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) for the year ended 31 December 2017 23. BORROWINGS (CONTINUED) Breach of loan agreements During the current year, the Company was not compliant with the following covenants: (i) European Investment Bank The Company was not in compliance with some covenants because the current ratio was less than 1, the Debt Service Cover ratio was less than 2 and; ratio of long term debt to equity was more than 1 (i) Barclays Bank Zambia Plc The Company was non-compliant with the Barclays Bank letter of credit as the interest cover was below 1.5 times and the current ratio was less than 1. (iii) Development Bank of South Africa The Company was non-compliant with the DBSA loan in which the capital expenditure plan and budget were not submitted within 20 days before the start of each of its financial years. We also noted that the Company was in breach with the leverage and the Debt Service Cover ratios. (iv) Standard Chartered Bank Debt to equity ratio was 2.2:1 which is higher than the covenant of 1.5:1, the Gross Debt to EBITDA was more than 6:1; and the Debt Service Cover Ratio was less than 1.25. (v) Stanbic Bank The Company was non-compliant with the Letter of Credit agreement in which the annual budget were not submitted within 60 days after the reporting date. We also noted that the Debt to Equity percentage exceeded 140%, the Available Cash Flow Before Debt Service to all Principal and Interest Debt Service fell below 1.25:1 and the ratio of Gross Debt to EBITDA was more than 6. (vi) Bank of China The Company was non-compliant as the EBITDA to Total Interest Cost was less than 2 and; the ratio of Total Liabilities to Total Assets was more than 70%. (vii) Zanaco Bank The Company was non-compliant as the gearing ratio was more than 1; and the current ratio was less than 1. 24. RETIREMENT BENEFIT OBLIGATION (i) Defined contribution plan Defined contribution plans are a pension plan under which the Company pays fixed contributions into the National Pension Scheme Authority, which is a defined contribution plan. The Company has no legal or constructive obligations to pay further contributions if the fund does not hold sufficient assets to pay all employees the benefits relating to employee service in the current and prior periods. The Company's contributions to the defined contribution schemes are charged to profit or loss in the year to which they relate. The Company has no further obligation once contributions have been paid. The total expense recognised in the profit or loss of K60.9 million (2016 - K54 million) represents contributions payable to these plans by ZESCO. (ii) LASF defined benefit plan In accordance with IAS 19 Employee Benefits paragraph 62 an entity is required to recognise the net defined benefit liability in the statement of financial position. However when sufficient information is not available to use defined benefit accounting for a multi-employer defined benefit plan, an entity shall account for the plan as if it were a defined contribution plan. 44 ZESCO LIMITED NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) for the year ended 31 December 2017 24. RETIREMENT BENEFIT OBLIGATION (CONTINUED) (ii) LASF defined benefit plan (continued) The Company operates a defined benefits pension scheme which is funded by the payment of contributions to a separately administered fund called the Local Authorities' Superannuation Fund ("LASF"). This fund administers the pension schemes of a number of organisations, including all local authorities. The last actuarial valuation of the entire fund for the five years period to 31 December 2012 was carried out and showed a deficit of K723 million. These deficits are not the latest actual valuation attributed to individual member organizations as the valuation was performed three years ago. Accordingly updated information on the actuarial deficit is not available to enable the entity to account for the plan as a defined benefit plan. On this basis the Company has opted to account for the plan as if it were a defined contribution plan. In addition no provision has been made in these financial statements for any unfunded liability of the company as the directors are of the opinion that any liability will be met by the Government of the Republic of Zambia. The total cost of pension contributions during the year was K25 million (2016: K26 million). (iii) Long service retirement benefit Employee benefits obligation comprises liabilities for retirement benefits. The movements on the account during the year were as follows: 2017 2016 K'000 K'000 At beginning of the year 2 032 522 1 984 622 Current service cost 413 149 264 745 Benefits paid during the year (256 906) (216 845) At 31 December 2 188 765 2 032 522 Disclosed in the financial statements as: Non-current 2063280 1 937610 Current 125485 94912 2 188 765 2 032 522 25. CAPITAL GRANTS AND CAPITAL CONTRIBUTIONS Capital Capital Grants Contributions Total K'000 K'000 K'000 At 1 January 2016 290 533 1097 329 1387 862 Additions during the year - 177 881 177 881 Adjustment 54 552 - 54 552 Amortisation of capital grants and contributions (19 806) (70 950) (90 756) At 31 December 2016 325 279 1 204 260 1 529 539 Additions during the year - 991466 991466 Amortisation of capital grants and contributions (21 780) (80 607) (102 387) At31 December2017 303 499 2115119 2418 618 Maturity analysis: Non current 2 308 755 1 312 188 Current 109 863 217 351 Total 2 418 618 1 529 539 45 ZESCO LIMITED NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) for the year ended 31 December 2017 26. TRADE AND OTHER PAYABLES Trade payables 6 404 275 3 084 250 Sundry payables and accrued expenses 581 181 680 690 Employee related accruals 352 940 326 247 7 338 396 4 091 187 Trade and other payables principally comprise amounts outstanding to Independent Power Producers and other supply of goods and services incurred during normal business activities as well as amounts acrued in respect of operating costs. The average credit period on purchases of certain goods is 30 days. The Company ensures that all payables are paid within the credit time frame. The Directors consider that the carrying amount of trade and other payables approximates their fair value. 27. BANK OVERDRAFT Barclays Bank Zambia Plc 52 948 50 350 Zambia National Commercial Bank Plc 41 876 14 778 Standard Chartered Bank Zambia Plc - 5 265 94 824 70 393 Barclays Bank Zambia Plc An overdraft banking facility amounting to K50 million. The overdraft was agreed in January 2017 with a 12 month tenor with interest payable monthly at three month LIBOR plus 15.5%. The facilities are repayable strictly on demand. The amount drawn as on 31 December 2017 under this facility is K52 million (2016: K50 million). Zambia National Commercial Bank Zambia Plc An overdraft banking facility amounting to K50 million. The overdraft was initially agreed in November 2014 of K25 million, and in September 2017 the facility was increased to K50 million with a 12 month tenor with interest payable monthly at three month LIBOR plus 3.75%. The facilities are repayable strictly on demand. The amount drawn as on 31 December 2017 under this facility was K41 million (2016: K14.8 million). The facility is secured against unlimited collections held in the bank accounts from time to time. Standard Chartered Bank Zambia Plc An overdraft banking facility amounting to K10 million. The overdraft was agreed in April 2017 with a 12 month tenor with interest payable monthly at three month LIBOR plus 10.5%. The facilities are repayable strictly on demand. The amount drawn as at 31 December 2017 under this facility was Nil (2016:K5.3 million). 28. FINANCIAL INSTRUMENTS Capital risk management The Company manages its capital to ensure that it will be able to continue as a going concern while maximising the return to stakeholders through the optimisation of debt and equity balance. The Company's overall strategy remains unchanged from prior year. The capital structure of the Company consists of cash and cash equivalents, interest bearing liabilities and equity attributable to equity holders of the Company, comprising issued capital, reserves and retained earnings. Debt includes both long term and short term interest bearing liabities. 46 ZESCO LIMITED NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) for the year ended 31 December 2017 28. FINANCIAL INSTRUMENTS (CONTINUED) Capital risk management (continued) Gearing ratio The Company reviews the capital structure on an ongoing basis. As part of this review, the management considers the cost of capital and the risks associated with each class of capital. The Company has a gearing ratio of 28% (2016: 62%). The gearing ratio at the year end was computed as follows: 2017 2016 K'000 K'000 Debt (i) 12 800 455 12 662 837 Equity (ii) 24 701 611 7 616 059 Total debt and equity 340/ 62% (ii) Equity includes all capital and reserves of the Company. Significant accounting policies Details of the significant accounting policies and methods adopted, including the criteria for recognition, the basis of measurement and the basis on which income and expenses are recognised, in respect of each class of financial asset, financial liability and equity instrument are disclosed in the accounting policies to the financial statements. The Directors consider that the carrying amounts of financial assets and financial liabilities recognised in the financial statements approximate their fair values. Categories of financial instruments 2017 2016 K000 K'000 Financial assets: - Amounts due from related parties 2 366 232 1 605 959 - Trade and other receivables 2 427 547 1 228 274 - Bank and cash 1 831 727 1 788 518 6 625 506 4 622 751 Financial liabilities: - Amounts due to related parties 1 383 477 738 540 - Trade and other payables 7 338 396 3 898 200 - Bank overdraft 94 824 70 393 8 816 697 4 707 133 Financial risk management objectives The Company's executive directors and management co-ordinates access to domestic markets and borrowings from related parties, monitors and manages the financial risks relating to the operations of the Company. These risks include market risk (including currency risk, fair value interest rate risk and price risk), credit risk, liquidity risk and cash flow interest rate risk. The Company does not enter into or trade financial instruments, including derivative financial instruments, for speculative purposes. Market risk The Company's activities expose it primarily to the financial risks of changes in foreign currency exchange rates and interest rates. The Company does not enter into any derivative financial instruments to manage its exposure to interest rate and foreign currency risk, including forward foreign exchange contracts to hedge the exchange rate risk. There has been no change to the Company's exposure to market risks or the manner in which it manages and measures the risk. 47 ZESCO LIMITED NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) for the year ended 31 December 2017 28. FINANCIAL INSTRUMENTS (CONTINUED) Foreign currency risk management The Company undertakes certain transactions denominated in foreign currencies. Hence, exposures to exchange rate fluctuations arise. Exchange rate exposures are managed within approved policy parameters as approved by the Board of Directors. The carrying amounts of the Company's foreign currency denominated monetary assets and monetary liabilities at the end of the reporting period are as follows. Financial assets Financial liabilities 2017 2016 2017 2016 K'000 K'000 K'000 K'000 United states dollar ($) 9 154 085 3 727 062 19 269 015 19 981 226 Japanese yen (3PY) - - 46 645 42 675 South africa rand (ZAR) 35 673 1 936 88 006 90 993 Euro 50826 - 56832 39949 GBP - 6240 2 798 Interest rate sensitivity analysisO The interest rate risks sensitivity analysis is based on the assumption that changes in the market interest rates affect the interest income or expenses of variable interest financial instruments: The tables below sets out the impact on current profit before taxation of an incremental 5% parallel fall or rise in all yield curves during the year: Scenario 1 Scenario 2 5% decrease 50/ increase in variable in variable interest interest rates rates At 31 December 2017 Profit before tax (270 359) (283 877) (256 841) At 31 December 2016 Profit before tax (136 571) (143 399) (129 742) Interest rate risk management The Company is exposed to interest rate risk arising on shareholders loans and loans from the banks for its working capital requirements. The exposure to interest rate risk is evaluated regularly by management to align with interest rate views and defined risk appetite, by either positioning the statement of financial position or protecting interest expense through different interest rate cycles. Interest rate sensitivity analysis The sensitivity has been determined based on the exposure to interest rates for non-derivative instruments at the end of the reporting period. For floating rate liabilities, the analysis is prepared assuming the amount of the liability outstanding at the end of the reporting period was outstanding for the whole year. A 5% increase or decrease is used when reporting interest rate risk internally to key management personnel and represents management's assessment of the reasonably possible change in interest rates. The Company's sensitivity to interest rates has increased during the current period mainly due to the increase in variable rate debt instruments. 48 ZESCO LIMITED NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) for the year ended 31 December 2017 28. FINANCIAL INSTRUMENTS (CONTINUED) Credit risk management Credit risk management refers to the risk that a counterparty will default on its contractual obligations resulting in financial loss to the Company. The Company is exposed to credit risk in respect of trade and other receivables. As at the financial period end the Company had trade receivables which were due from the Company's customers. The Company's maximum exposure to credit risk is analysed below: 2017 2016 K'000 K'000 Amounts due from related parties 2 366 232 1 605 959 Bank and cash balances 1 831 727 1 788 518 Trade and other receivables 2 427 547 1 228 274 6 625 506 4 622 751 The maximum exposure to credit risk for trade receivables at the reporting date by key customer sector was: Mining 3 916 140 5 595 447 Government and relented entities 132 744 245 432 Domestic customers 213 596 250 959 Exports 364 767 597 838 The local authorities and water utilities 195 308 157 929 Industrial and related sectors 13 817 14 787 Agriculture and related sectors 5 151 4 774 4 841 523 6 867 166 Liquidity risk management The Company manages liquidity risk by maintaining adequate reserves and banking facilities and by continuously monitoring forecast and actual cash flows and matching the maturity profile of financial assets and liabilities. The following table below details the Company's remaining contractual maturity for its non-derivate financial assets and liabilities. The table has been drawn up based on the undiscounted contractual maturities of the financial assets and liabilities. Year ended 31 December 2017 Payable on 1 - 3 3 months Above demand months to 1 year 1 year Total Financial liabilities K'000 K'000 K'000 K'000 K'000 - Trade and other payables - - 7 338 396 - 7 338 396 - Bank overdraft - 94 824 - - 94 824 - Amounts due to re la te d p a rtie s - - 1 3 8 3 4 77- 1 3 8 3 4 7 7 - 94824 8721873 - 8816697 Financial assets - Amounts due from related parties - - 2 366 232 - 2 366 232 - Loan due from related parties - - - 2 797 701 2 797 701 - Trade and other receivables - - 2427547 - 2427547 - Bank and cash balances 1 831 727 - - - 1 831 727 1831727 - 4793779 2797701 9423207 49 ZESCO LIMITED NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) for the year ended 31 December 2017 28. FINANCIAL INSTRUMENTS (CONTINUED) Payable on 1 - 3 3 months Above demand months to 1 year 1 year Total K'000 K'000 K'000 K'000 K'000 Period ended 31 December 2016 Financial liabilities - Trade and other payables - - 4 091 187 - 4 091 187 - Bank overdraft - 70 393 - - 70 393 - Amounts due to due related parties - - 738 540 738 540 - 70 393 4 091 187 738 540 4 900 120 Financial assets - Amounts due from related parties - 1 605 959 - 1 605 959 - Loan due from related parties - - - 2 769 565 2 769 565 - Trade and other receivables - - 1 769 777 - 1 769 777 - Bank and cash balances 1 788 518 -- - 1 788 518 1 788 518 - 3 375 736 2 769 565 7 933 819 28. FAIR VALUE MEASUREMENTS The information set out below provides information about how the Company determines fair values of various financial assets and financial liabilities. The following table provides an analysis of financial instruments that are measured subsequent to initial recognition at fair value, grouped into Levels 1 to 3 based on the degree to which the fair value is observable: * Level 1 - Quoted prices (unadjusted) in active markets for identical assets or liabilities. This level includes listed equity securities and debt instruments on exchanges (for example, Lusaka Stock Exchange). * Level 2 - Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (that is, as prices) or indirectly (that is, derived from prices). * Level 3 - inputs for the asset or liability that are not based on observable market data (unobservable inputs). This level includes equity investments and debt instruments with significant unobservable components. This hierarchy requires the use of observable market data when available. The Company considers relevant and observable market prices in its valuations where possible. Fair value of the Company's financial assets and financial liabilities that are measured at fair value on a recurring basis There were no financial assets and liabilities that are measured at fair value on a recurring basis during the period. Fair value of financial assets and financial liabilities that are not measured at fair value on a recurring basis (but fair value disclosures are required) Except as detailed in the following table, the directors consider that the carrying amounts of financial assets and financial liabilities recognised in the financial statements approximate their fair values. 50 ZESCO LIMITED NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) for the year ended 31 December 2017 28. FAIR VALUE MEASUREMENTS (CONTINUED) 2017 2016 Carrying Carrying amount Fair value amount Fair value K'000 K'000 K'000 K'000 Financial assets Loans and receivables: - Amounts due from related parties 2 366 232 2 366 232 1 605 959 1 605 959 -Trade and other receivables 2 427 547 2 427 547 1 228 274 1 228 274 Total 4 793 779 4 793 779 2 834 233 2 834 233 Financial liabilities - Borrowings 12 800 455 12 800 455 12 592 444 12 592 444 - Trade and other payables 7 338 396 7 338 396 3 898 200 3 898 200 - Bank overdraft 94824 94824 70 393 70 393 Total 20 233 675 20 233 675 16 561 037 16 561 037 Fair value hierarchy as at 31 December 2017 Level 1 Level 2 Level 3 Total K'000 K'000 K'000 K'000 Financial assets Loans and receivables: - Amounts due from related parties - - 2 366 232 2 366 232 -Trade and other receivables - - 2 427 547 2 427 547 Total - - 4 793 779 4 793 779 Financial liabilities: at amortised cost: - Amounts due to related parties - - 1 383 477 1 383 477 - Trade and other payables - - 7 338 396 7 338 396 -Bank overdraft -94824 94824 Total - - 8816697 8816697 Fair value hierarchy as at 31 December 2016 Level 1 Level 2 Level 3 Total K'000 K000 KO00 K000 Financial assets Loans and receivables: - Amounts due from related parties - - 1 605 959 1 605 959 -Trade and other receivables - - 1 769 777 1 769 777 Total - - 3 375 736 3 375 736 Financial liabilities: at amortised cost: - Amounts due to related parties - 738 540 738 540 - Trade and other payables - - 3 898 200 3 898 200 - Bank overdraft - 70 393 70 393 Total - - 4 707 133 4 707 133 The fair values of the financial assets and financial liabilities included in the level 3 category above have been determined in accordance with generally accepted pricing models based on a discounted cash flow analysis, with the most significant inputs being the discount rate that reflects the credit risk of counterparties. 51 ZESCO LIMITED NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) for the year ended 31 December 2017 29. CAPITAL COMMITMENTS 2017 2016 K'000 K'000 Authorised by the directors but not contracted for 8 450 607 6 530 505 The funds required to meet the capital commitments will be generated from borrowings and trading activities of the company. 30. CONTINGENT LIABILITIES There were no known material contingent liabilities at 31 December 2017 and 31 December 2016. 31. EVENTS AFTER THE REPORTING DATE There have been no other material facts or circumstances that have occurred between the reporting date and the date of these financial statements that require disclosure in or adjustment to the financial statements. 52 ZESCO LIMITED FIVE YEAR FINANCIAL RECORD for the year ended 31 December 2017 Income statement Year ended Year ended Year ended Year ended Period ended 31 December 31 December 31 December 31 December 31 December 2017 2016 2015 2014 2013 Restated Revenue 7424850 8 237 828 6425 737 4 317698 2 362 386 (Loss) profit before taxation (270 359) (136 571) 19 595 572 636 259 581 Current taxation (credit) 615 927 1 445 211 868 882 (249 367) 188 471 Profit for the year 345 568 1 308 640 888 477 323 269 448 052 Statement of financial position Non current assets 50 508 288 23 893 065 18 358 156 11 344 727 7 856 678 Net current assets (4 158 291) (1 876 890) 415 766 1 385 818 1 894 560 Deferred liabilities (8048 077) (1 937 610) (1 847 305) (1 743 379) (1 483 987) Borrowings (11 291 554) (11 150 318) (9 341 755) (5 502 406) (3 486 820) Capital grants and contributions (2 308 755) (1 312 188) (1 301 377) (1 263 804) (906 678) Net assets 24 701 611 7 616 059 6 283 485 4 220 956 3 873 753 Financed by: Share capital 2 825 118 2 825 118 2 825 118 1 655 000 1 655 000 Reserves 21 876 493 4 790 941 3 458 367 2 565 956 2 218 753 Shareholders' funds 24701 611 7616 059 6283 485 4 220 956 3 873 753 Ratios Net profit margin 5% 15.9% 13.5% 7% 19% Return on Capital employed (ROCE) 0% 1% 0.4% 5% 3% Current ratio 0.6 0.8 1.1 1.5 2.0 Quick ratio 0.6 0.6 0.96 1.37 1.76 Interest cover 0.32 0.58 1.39 12.54 17.05 Debt/equity ratio 78% 172% 178% 190% 150% Gearing ratio 34% 62% 64% 58% 50% Debtor days 119 78 114 122 183 Asset turnover 0.16 0.37 0.34 0.32 0.22 53 ZESCO LIMITED DETAILED OPERATING STATEMENT for the year ended 31 December 2017 2017 2016 K'000 K'000 REVENUE 7424850 8 237 828 COST OF SALES (4 569 026) (3 887 866) GROSS PROFIT 2 855 824 4 349 962 Other Income 461 901 279 644 OPERATING EXPENSES Provision for doubtful debts (4 732) (2 264 847) Depreciation and amortisation (786 147) (466 318) Remuneration - Represented (460 847) (405 156) Remuneration - Non Represented (455 072) (394 636) Pension, gratuity and GLA Provisions (457 860) (276 281) Administration (218 104) (273 644) Other operating expenses (152 697) (190 705) External services (125440) (126 650) Pension Payments (LASF, NAPSA, ZSIC) (87 761) (80 180) Transport costs (95 407) (68 338) Travel and accommodation (86 050) (59 118) Insurance costs (42 041) (42 960) Maintenance of buildings and premises (70 240) (42 784) Maintenance of tools, machinery and equipment (46 326) (34 768) Training costs (26 563) (18 773) Directors costs (1 504) (3 097) Stock adjustments (6 511) (4 972) Audit fees (2 410) (2 107) Net Exchange (losses) gains (63472) 313 588 TOTAL OPERATING EXPENSES (3 189 182) (4 441 744) EARNINGS BEFORE INTEREST AND TAX 128 544 187 862 FINANCE COSTS (398903) (324433) LOSS BEFORE TAX (270359) (136571) 54