To the Shareholders of Massmart Holdings Limited

Report on the Audit of the Consolidated and Separate Annual Financial Statements

Opinion

We have audited the consolidated and separate Annual Financial Statements of Massmart Holdings Limited (the Group) set out from Group Income Statement to note 44 and the Company Income Statement to note 17, which comprise the Statements of Financial Position as at 27 December 2015, and the Income Statements, Statements of Comprehensive Income, the Statements of Changes in Equity and Statements of Cash Flows for the year then ended, and notes to the consolidated and separate Annual Financial Statements, including a summary of significant accounting policies and other explanatory information.

In our opinion, the accompanying consolidated and separate Annual Financial Statements present fairly, in all material respects, the consolidated and separate financial position of Massmart Holdings Limited as at 27 December 2015, and its consolidated and separate financial performance and its consolidated and separate cash flows for the year then ended in accordance with International Financial Reporting Standards (IFRSs) and the requirements of the Companies Act of South Africa.

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 Consolidated and Separate Financial Statements section of our report. We are independent in accordance with the Independent Regulatory Board for Auditors Code of Professional Conduct for Registered Auditors (IRBA Code), the International Federation of Accountants’ Code of Ethics for Professional Accountants (IFAC code) and other independence requirements applicable to performing the audit of the consolidated and separate Annual Financial Statements of Massmart Holdings Limited. We have fulfilled our other ethical responsibilities in accordance with the IRBA code, IFAC code and in accordance with other ethical requirements applicable to performing an audit of Massmart Holdings Limited.

Key Audit Matters

Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the consolidated and separate Annual Financial Statements of the current period. These matters were addressed in the context of our audit of the consolidated and separate Annual Financial Statements as a whole, and in forming our opinion thereon, and our response to each matter below does not represent a separate opinion on each of these matters.

Key audit matter How our audit addressed the key audit matter
Goodwill assessment

Goodwill comprises 8% of total assets in the statement of financial position and arises from separate acquisitions made by the Group. Management performs an annual impairment test on the recoverability of the goodwill as required by International Financial Reporting Standards which is subjective in nature due to judgements having to be made of future performance.

As disclosed in note 14, the Group uses a discounted cash flow model to determine value in use for each appropriate cash generating unit, on the basis of the following key assumptions:

  • Sales growth rate;
  • Trading margin; and
  • Discount rate applied to the projected cash flows.

The sales growth rates used have differing degrees of predictability. The current economic climate also increases the complexity of forecasting. Scrutiny is placed on forecast assumptions and discount rates, with a greater focus on more recent trends, less reliance on historical trends, and cognisance of movements in market interest rates.

Accordingly, the impairment tests of goodwill are considered to be a key audit matter due to the impact of the above assumptions, as disclosed in note 14.

We focused our testing on the key assumptions made by management and our procedures included:

  • Evaluating the determination of the cash generating units;
  • Evaluating the model used in determining the value in use of the cash generating units, as well as assessing the discount rate used;
  • Comparing the cash flow forecasts to approved budgets and other relevant market and economic information, as well as testing the underlying calculations; and
  • Performing sensitivity analyses around the key assumptions used in the models.
Deferred taxation assets related to assessed losses

The Group has recognised deferred tax assets related to estimated and assessed losses within certain statutory entities, as disclosed in note 18. In order to recognise the deferred tax assets, management has made estimates based on certain assumptions in relation to the future taxable income of the entities, including appropriate taxation planning strategies, thereby concluding on the recoverability of those individual assets.

These judgements and assumptions include growth in respect of new stores, the acceptability of tax planning strategies, and the entity’s ability to execute on those plans.

Accordingly, the assessments of the recoverability of deferred tax assets are considered to be a key audit matter.

Our procedures included:

  • Evaluating the assessments performed by management with regard to future taxable income, and the realisation of the deferred taxation, by comparing their assessment to evidence obtained, such as approved cash flow forecasts and business plans;
  • Performing sensitivity analyses around the key assumptions used including growth assumptions in respect of new stores; and
  • Reviewing managements’ taxation planning strategies and understanding specific local taxation issues.
Inventory provisions

Inventory provisions across the Group are disclosed in note 19. Management has made estimates based on certain assumptions relating to shrinkage and obsolescence, as well as unearned rebates.

Obsolescence provision considerations included inventory aging profiles, as well as different market factors impacting the sale of these product lines. In addition, the determination of the method and period to use to determine percentages to apply to aged inventory as a result of changing trends, requires significant judgement based on experience.

Accordingly, the provisions carried against inventory are considered to be a key audit matter, and disclosure is included in Note 19.

Our procedures included:

  • Evaluating the assumptions and estimates applied to the shrinkage, obsolescence and unearned rebate calculations by testing the accuracy of historical information and data trends, changing trends applied against the current balances, as well as by performing analytical procedures on obsolescence levels and write down rates; and
  • Performing a recalculation of the unearned rebate deduction using the profile of year-end inventory and the trend of rebate income historically received.
Net investment in foreign operations

In the current year, management re-designated certain of their loans with their foreign investments as ‘not repayable in the foreseeable future’ from a Group perspective. This resulted in the foreign exchange differences on the portion of the loan that is viewed as ‘capital contributed’ being recorded in equity under the Foreign Currency Translation Reserve as required per IAS 21, The Effects of Changes in Foreign Exchange Rates.

As disclosed in the accounting policies, this is a new approach adopted by the Group with foreign exchange differences on designated loans being shown in Other Comprehensive Income in the Consolidated Income Statement, instead of in profit and loss.

In assessing this new approach, audit evidence was required to confirm the permanent change in intention, and also to support when the change was effective, and which liabilities were designated as capital.

Accordingly, this re-designation of loans with foreign investments is considered to be a key audit matter.

Our procedures included:

  • Evaluating this re-designation methodology approach through obtaining evidence of various internal communications, strategy sessions, and executive considerations and compliance with IAS 21;
  • Assessing the portion of the loans to be designated as ‘not repayable in the foreseeable future’ or capital from the balance of the total loans to foreign operations; and
  • Performing a recalculation of the Foreign Currency Translation Reserve.

Other Information

The Directors are responsible for the other information. The other information comprises the Directors’ Report, the Audit Committee’s Report and the Company Secretary’s Certificate as required by the Companies Act of South Africa, which we obtained prior to the date of this report, and the Integrated Annual Report, which is expected to be made available to us after that date.

Our opinion on the consolidated and separate Annual Financial Statements does not cover the other information and we do not express an audit opinion or any form of assurance conclusion thereon.

In connection with our audit of the consolidated and separate Annual Financial Statements, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the consolidated and separate Annual Financial Statements or our knowledge obtained in the audit, or otherwise appears to be materially misstated. If, based on our work we have performed on the other information 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 Directors for the Consolidated and Separate Annual Financial Statements

The Directors are responsible for the preparation and fair presentation of the consolidated and separate Annual Financial Statements in accordance with International Financial Reporting Standards and the requirements of the Companies Act of South Africa, and for such internal control as the Directors determine is necessary to enable the preparation of consolidated and separate Annual Financial Statements that are free from material misstatement, whether due to fraud or error.

In preparing the consolidated and separate Annual Financial Statements, the Directors are responsible for assessing the Group’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 Group or to cease operations, or have no realistic alternative but to do so.

Auditor’s Responsibilities for the Audit of the Consolidated and Separate Annual Financial Statements

Our objectives are to obtain reasonable assurance about whether the consolidated and separate Annual 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 consolidated and separate Annual Financial Statements.

As part of an audit in accordance with ISAs, we exercise professional judgment and maintain professional scepticism throughout the audit. We also:

  • Identify and assess the risks of material misstatement of the consolidated and separate Annual 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.
  • 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 Group’s internal control.
  • Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by management.
  • Conclude on the appropriateness of management’s 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 Group’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 consolidated and separate Annual 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 auditor’s report. However, future events or conditions may cause the Group to cease to continue as a going concern.
  • Evaluate the overall presentation, structure and content of the consolidated and separate Annual Financial Statements, including the disclosures, and whether the consolidated and separate Annual 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 Group to express an opinion on the consolidated and separate Annual Financial Statements. We are responsible for the direction, supervision and performance of the Group audit. We remain solely responsible for our audit opinion.

We communicate with the Directors, 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.

From the matters communicated with the Directors, we determine those matters that were of most significance in the audit of the consolidated and separate Annual Financial Statements of the current period and are therefore the key audit matters. We describe these matters in our auditor’s report unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we determine that a matter should not be communicated in our report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication.

Report on Other Legal and Regulatory Requirements

The engagement partner on the audit resulting in this independent auditor’s report is Allister Jon Carshagen (Director and Registered Auditor).

In terms of the IRBA Rule published in Government Gazette Number 39475 dated 04 December 2015, we report that Ernst & Young Inc. has been the auditor of Massmart Holdings Limited for four years.

earnst
ERNST & YOUNG INC.
Director: Allister Jon Carshagen

102 Rivonia Road
Johannesburg
Gauteng
South Africa
2146

Date: 1 April 2016