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To the Shareholders of Massmart Holdings Limited

Report on the Audit of the Consolidated and Separate Financial Statements

Opinion

We have audited the consolidated and separate annual financial statements of Massmart Holdings Limited (the Group) set out from pages 04 – 110, which comprise the Statements of Financial Position as at 31 December 2017, the Income Statements, the 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 31 December 2017, 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), International Ethics Standards Board for Accountants Code of Ethics for Professional Accountants (IESBA Code Parts A and B) and other independence requirements applicable to performing the audit of the consolidated and separate annual financial statements of Massmart Holdings Limited. 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 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 we do not provide a separate opinion on these matters. For each matter below, our description of how our audit addressed the matter is provided in that context.

We have fulfilled the responsibilities described in the Auditor’s responsibilities for the audit of the consolidated and separate annual financial statements section of our report, including in relation to these matters. Accordingly, our audit included the performance of procedures designed to respond to our assessment of the risks of material misstatement of the consolidated and separate annual financial statements. The results of our audit procedures, including the procedures performed to address the matters below, provide the basis for our audit opinion on the accompanying consolidated and separate annual financial statements. We have determined that there are no key audit matters relating to the separate financial statements and the identified key matters relate only to the consolidated financial statements.

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

Goodwill for the Group amounts to R2.6 billion, and comprises 8% of total assets in the statement of financial position. Goodwill arises from separate acquisitions that have been made by the Group. Management performs an annual impairment test on the recoverability of the goodwill as required by International Financial Reporting Standards.

We focused on this area due to the significance of the Goodwill value as well as the judgemental nature of the assumptions and projections that are used in the discounted cash flow models to determine the value in use of the cash generating units that the Goodwill relates to. Specific focus was placed on the growth rates and the discount rate applied due to the tough trading and economic environment.

Accordingly, the impairment tests of goodwill are considered to be a key audit matter. Goodwill is 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; and
  • Evaluating the discounted cash flow models used in determining the value in use of the cash generating units, by performing sensitivity analyses around the key assumptions including weighted average cost of capital and growth rates used in the models. The impact of the tough trading and economic environment was specifically considered on the sales growth and discount rates.
Deferred taxation assets related to assessed losses  

The Group has recognised deferred tax assets amounting to R281.4 million, part of which relates to the recognition of deferred taxation on assessed losses.

In order to recognise the deferred tax assets, management has made certain estimates in relation to the future taxable income of the entities, including appropriate taxation planning strategies, thereby concluding on supporting the recoverability of those individual assets.

We focused on this area due to the judgemental nature of certain of the assumptions made, that are used to support the recognition of the deferred taxation asset.

Accordingly, the deferred taxation assets are considered to be a key audit matter, as disclosed in note 18.

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 cash flow forecasts and business plans;
  • Performing sensitivity analyses around the key assumptions used including growth assumptions in respect of revenue forecasts of new stores; tax optimisation restructuring and trading margins; and
  • Reviewing managements’ taxation planning strategies to assess the utilisation of assessed losses on which deferred tax assets have been recognised.
Inventory valuation  

Gross inventory and related provisions across the Group are disclosed in note 19.

Management has made assumptions based on certain estimates relating to shrinkage and obsolescence, as well as unearned rebate provisions.

Shrinkage and obsolescence provision considerations include historic shrinkage rates, outcomes of inventory counts, inventory ageing 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.

The Group receives significant amounts of supplier incentives, discounts, and rebates, and recognises these as a reduction in the cost of inventory. Assessing the timing of recognition of the deferred supplier rebates against cost of sales, including adherence to contractual terms, is an area of complexity requiring a detailed understanding of the contractual arrangements themselves.

In addition, the Group restated its inventory valuation and related rebate deferrals in the current year. Detail relating to this point is included in Note 43.

As a result we focussed on inventory provisions and related valuation in the current year.

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 and obsolescence provision 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 provision levels and write down rates.

With respect to the rebate provisions, our procedures included the following:

  • Review of supplier agreements to determine the rebate terms and whether the rebates are specific and genuine in nature; and
  • Audit of the systems used to calculate rebates as well as the controls implemented to ensure the accurate calculation of rebates and the rebate provision deferrals with the assistance of our Information Technology (IT) specialists.

We further ensured the following:

  • A complete list of supplier rebates earned were included in the unearned rebates calculation;
  • The assumptions used in calculating the unearned rebate provisions were reasonable and consistently applied;
  • That the rebate amounts recognised were accurate and recorded in the correct period. This was based on the review of contractual performance obligations on a sample of contracts with suppliers to assess the conditions required for supplier rebate income to be recognised and whether or not these had been met;
  • That rebate related income and costs were appropriately classified; and
  • That appropriate costs, as required by IAS 2, were capitalised to inventory.

With respect to the prior year restatement impacting the inventory valuation, we performed the following additional procedures, apart from those noted above:

  • Audited the calculations prepared by management that reflect the restatement required to the value of inventory and related deferrals.

 

Other Information

The Directors are responsible for the other information. The other information comprises the Chief Financial Officer’s Review, the Directors’ Report and the Audit Committee Report as required by the Companies Act of South Africa, which we obtained prior to the date of this report, and the other sections of the Integrated Annual Report, which we obtained prior to the date of this report. Other information does not include the consolidated and separate annual financial statements and our auditor’s opinion thereon.

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 and Company 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 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

In terms of the IRBA Rule published in Government Gazette Number 39475 dated 4 December 2015, we report that Ernst & Young Inc. has been the auditor of Massmart Holdings Limited for six years.

earnst

ERNST & YOUNG INC.

Roger Hillen
Director
Chartered Accountant (SA)
Registered Auditor

Date: 29 March 2018