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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 financial statements of Massmart Holdings Limited and its subsidiaries (the Group) set out on pages 04 to 108, which comprise the Consolidated and Separate Statements of Financial Position as at 30 December 2018, the Consolidated and Separate Income Statements, the Consolidated and Separate Statements of Other Comprehensive Income, the Consolidated and Separate Statements of Changes in Equity and the Consolidated and Separate Statements of Cash Flows for the year then ended, and notes to the consolidated and separate financial statements, including a summary of significant accounting policies.

In our opinion, the consolidated and separate financial statements present fairly, in all material respects, the consolidated and separate financial position of Massmart Holdings Limited as at 30 December 2018, 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 of the group in accordance with the Independent Regulatory Board for Auditors Code of Professional Conduct for Registered Auditors (IRBA Code), the International Ethics Standards Board for Accountants Code of Ethics for Professional Accountants (IESBA Code) and other independence requirements applicable to performing the audit of the group. We have fulfilled our other ethical responsibilities in accordance with the IRBA Code, IESBA Code, and in accordance with other ethical requirements applicable to performing the audit of the group. 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 financial statements of the current period. These matters were addressed in the context of our audit of the consolidated and separate 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 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 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 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 impairment assessment  

Goodwill for the Group amounts to R2.6 billion, and comprises 7.5% 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 focussed on this area due to the significance of the Goodwill value, the tough trading and economic conditions, 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.

Accordingly, the impairment tests of goodwill are considered to be a key audit matter. Goodwill is disclosed in note 12 to the financial statements.

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

  • Evaluated the determination of the cash generating units;
  • Evaluated the discounted cash flow models used in determining the value in use of the cash generating units, by assessing key assumptions including revenue growth rates, trading margins, cost assumptions and the weighted average cost of capital used to discount the cash flows;
  • Use of specialist in the determination of the discount rates and the methodology applied in the discounted cash flow models;
  • Performed sensitivity analyses around the key assumptions. The impact of the tough trading and economic environment was specifically considered on the sales growth and discount rates; and
  • Assessed the disclosure requirements in terms of the IFRS 36.
Deferred taxation assets related to assessed losses  

The Group has recognised deferred tax assets amounting to R743.1 million, R385.2 million related to the recognition of 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 relevant to restructured entities within the group in order to support the recoverability of certain deferred tax assets.

We focussed 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 audit of deferred taxation assets is considered to be a key audit matter. Deferred tax assets are disclosed in note 16 to the financial statements.

Our procedures included:

  • Evaluated 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;
  • Performed sensitivity analyses around the key assumptions used, including revenue growth assumptions, trading margins and cost assumptions; and
  • Reviewed managements’ taxation planning strategies to assess the utilisation of assessed losses on which deferred tax assets have been recognised.

Supplier incentives, discounts and rebates

 

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.

Accordingly, the audit of supplier incentives, discounts and rebates which impact the inventory valuation, is considered to be a key audit matter. Inventory is disclosed in Note 17.

Our procedures included:

  • Inspected a sample of supplier agreements to determine the rebate terms and whether the rebates are specific and genuine in nature.
  • Evaluated the systems used to calculate rebates as well as the controls implemented to ensure the calculation of rebates and the rebate provision deferrals were in line with the respective supplier agreements, with the assistance of our Information Technology (IT) specialists.

 

We further tested the following:

  • Supplier rebates earned were included in the unearned rebates calculation;
  • Reperformance of the assumptions used in calculating the unearned rebate provisions;
  • That the rebate amounts recognised were correctly calculated 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;
  • Inspection of the classification of rebate related income and costs; and
  • That inventory related costs, as required by IAS 2, were capitalised to inventory.

Classification of leases

 

As part of the lease extraction process in preparation for the implementation of the IFRS 16 – Leases, a long-term property lease was identified that was accounted for on a month-to-month basis as an operating lease. Consideration was given to the correct classification of the lease which resulted in the Group restating the values related to a 99-year lease that was previously incorrectly classified as a month-to-month lease.

Accordingly, the lease classification and the relating restatement thereof was a key audit matter. Disclosure is included in Note 41.

Our procedures included:

  • Review of the lease agreement to determine the correct lease classification in terms of IAS 17 Leases
  • Assessing evidence that might have been considered in the past when the lease was classified as an operating lease
  • Evaluated the lease terms in the lease calculation to ensure they are accurate and complete;
  • Ensured that the relating balances were correctly recorded in the financial records; and
  • Reviewed the disclosure in the annual financial statements to ensure it was accurate and complete.

 

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, 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 financial statements and our auditor’s report thereon.

Our opinion on the consolidated and separate 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 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 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 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 financial statements that are free from material misstatement, whether due to fraud or error.

In preparing the consolidated and separate 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 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 the directors.
  • Conclude on the appropriateness of 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 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 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 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 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 seven years

earnst

ERNST & YOUNG INC.

Roger Hillen
Director
Chartered Accountant (SA)
Registered Auditor

Date: 4 April 2019