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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 13 to 111, which comprise the Consolidated and Separate Statements of Financial Position as at 29 December 2019, 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 29 December 2019, 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 and company in accordance with the sections 290 and 291 of the Independent Regulatory Board for Auditors’ Code of Professional Conduct for Registered Auditors (Revised January 2018), parts 1 and 3 of the Independent Regulatory Board for Auditors’ Code of Professional Conduct for Registered Auditors (Revised November 2018) (together the IRBA Codes) and other independence requirements applicable to performing audits of financial statements of the group and company and in South Africa. We have fulfilled our other ethical responsibilities, as applicable, in accordance with the IRBA Codes and in accordance with other ethical requirements applicable to performing audits of the group and company and in South Africa. The IRBA Codes are consistent with the corresponding sections of the International Ethics Standards Board for Accountants’ Code of Ethics for Professional Accountants (IESBA code) and the International Ethics Standards Board for Accountants’ International Code of Ethics for Professional Accountants (including International Independence Standards) respectively 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.

The Key Audit Matters apply only to the audit of the Consolidated Financial Statements.

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

Goodwill for the Group is unchanged from 2018 and amounts to R2.6 billion comprising 6.4% (2018: 7.5%) of total assets in the statement of financial position at year end. 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 applied to sales and costs, target trading margins and the discount rate used.

Accordingly, the impairment tests of goodwill are considered to be a key audit matter. Goodwill is disclosed in both note 2 and note 12 to the financial statements.

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

  • We considered the methodology applied by management to assess the impairment of the Goodwill value and evaluated the reasonableness thereof by comparing to prior year methodology and our understanding of the business;
  • We recalculated the arithmetical accuracy of the calculations in managements discounted cash flow models to determine that all formulas contained therein were applied accurately;
  • We evaluated the determination of the cash generating units with reference to the requirements of the accounting standard;
  • We evaluated the assumptions and judgements applied by management in their discounted cash flow models used in determining the value in use of the cash generating units, by assessing the reasonableness of key assumptions against historic achievements and market information. Key assumptions included revenue growth rates, trading margins, cost assumptions and the weighted average cost of capital used to discount the cash flows;
  • Our EY valuation specialists assessed the discount rates against external market references;
  • We performed sensitivity analyses on the key assumptions applied by management in their respective discounted cash flow models to determine the impact that a reasonable expected change could have on the recoverable amount of the cash generating unit. The impact of the tough trading and economic environment was specifically considered on the sales and cost growth, target trading margins and discount rates; and
  • We evaluated the completeness and accuracy of disclosure relating to the impairment assessments to determine compliance with the requirements of IAS 36: Impairment of Assets.
Deferred taxation assets related to assessed losses  

The Group has recognised deferred tax assets amounting to R885.7 million (2018: R743.1 million), R386.5 million related to the recognition of assessed losses (2018: R385.2 million).

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 the 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 amongst others included:

  • We 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;
  • We recalculated the arithmetical accuracy of the calculations in managements cash flow forecasts to determine that all formulas contained therein were applied accurately;
  • We performed sensitivity analyses around the key assumptions applied by management in their cash flow forecasts to determine the impact that a reasonable expected change could have on the entities ability to utilise future taxable profits. The key assumptions considered included revenue growth, trading margins and cost assumptions;
  • We inspected minutes, managements’ taxation planning strategies and the restructuring of the group to assess the completeness and accuracy of the assumptions made by management concerning the utilisation of assessed losses on which deferred tax assets have been recognised;
  • We reviewed the conclusions on all taxation and legal opinions obtained to support managements taxation planning strategies with reference to the relevant tax legislation;
  • We evaluated the completeness and accuracy of disclosure relating to deferred taxation to determine compliance with the requirements of IAS 12: Income taxes
Impairment of assets  

The Group owns property, plant and equipment to the value of R8.6 billion (2018: R9.1 billion) and comprises 21.3% (2018: 26.2%) of total assets in the statement of financial position. Management assess annually whether there is any indication that an asset may be impaired. For assets where such indication exists, management estimate the recoverable amount of the respective asset.

We focussed on this area due to various indicators of impairment being identified, both from external and internal sources of information, as well as the judgemental nature of the assumptions and projections that are used in determining the recoverable amount of the cash generating units that the respective assets belong to. Specific focus was placed on the growth rates applied to sales, costs, target trading margins, discount rate used and relating asset fair values less cost of disposal.

Accordingly, the audit of asset impairments which impact asset valuation, is a key audit matter. Impairments are disclosed in note 2, note 6 and note 11.

Our procedures amongst others included:

  • We assessed the presence of indicators of impairment, through enquiry and inspection of external and internal sources of information;
  • We considered the methodology applied by management to assess the impairment of the assets and evaluated the reasonableness thereof by comparing to our understanding of the business;
  • We recalculated the arithmetical accuracy of the calculations in managements respective models to determine that all formulas contained therein were applied accurately;
  • We agreed the inputs in managements respective models to approved budgets and forecasts to determine the accuracy of the amounts used as inputs into the models;
  • We evaluated the assumptions in managements cash flow forecasts, including forecasted sales, target trading margins along with growth rates in respect of key costs and expected future cost savings, discount rates, terminal growth rates and capital expenditure inputs used in managements model, against historical data and other external market information;
  • We assessed the objectivity, competence and capabilities of management valuation experts with reference to their qualifications and professional experience in the relevant industry, and the scope of work as agreed with management;
  • Our EY valuation specialists assessed the appropriateness of the principles and methodology applied by management valuation experts in the calculation of the fair value less cost of disposal; We performed sensitivity analyses around key inputs used in the respective models to determine the impact that a reasonable expected change could have on the recoverable amount of assets;
  • We evaluated the completeness and accuracy of disclosure relating to the impairment assessments and impairment of goodwill and indefinite useful life intangible assets, to confirm compliance with the requirements of IAS 36: Impairment of Assets.
Adoption of IFRS 16 – Leases  

IFRS 16, the accounting standard on leases became effective during the 2019 financial year. As part of the adoption of the new leases standard the Group recognised a right-of-use (ROU) asset of R8,530.0 million and a lease liability of R 10,060.6 million at the beginning of the financial year.

We focused on this area due to the number of real estate leases, values associated to the respective rentals and the relating outcome when applying the principles of the standard and the various contract considerations applicable within the Group at the date of adoption. The standard required management to assess each contract to identify whether they are or contains a lease. Once identified the lease and non-lease components are separated and the lease term, including the commencement date of the lease, initial recognition of the lease and subsequently measurement of the lease is determined in terms of the requirements of the standard. Management are also required to evaluate lease modifications and determine the appropriate presentation and disclosures for the leases.

Accordingly, the adoption of IFRS 16 Leases was a key audit matter. Disclosure is included in note 3, note 11, note 22 and note 30.

Our procedures amongst others included:

  • We evaluated management’s prospective policies, processes and controls put in place to capture and process the respective active leases across the group in light of the requirements of the accounting standard.
  • We obtained a list of recurring vendor payments at adoption and during the audit period and for a sample of the payments, evaluated the underlying contract to determine whether the contract was a lease or contained a lease and was consequently captured and processed as part of the adoption of the accounting standard;
  • We assessed the completeness of managements capturing and processing of active leases through the inspection of minutes of the meetings of relevant committees for evidence of new contracts or modifications to existing contracts that might be leases or contain leases or modifications of existing leases;
  • For a sample of leases:
    • We reviewed the terms and conditions of the underlying contract and evaluated management’s identification of relevant lease to determine whether the leases were correctly considered for adoption as required by the standard;
    • We recalculated and agreed the contract consideration (e.g., fixed payments, variable payments based on an index or rate where applicable) in light of the underlying contract to determine whether management has appropriately identified and applied the respective contract considerations;
    • We obtained management’s calculation of the lease liability and ROU asset, and perform the following procedures to assess the inputs into the lease application used:
      • We determined the completeness and accuracy of the lease payments and discount rate used to calculate the lease liability by agreeing them to the underlying contractual terms;
      • We agreed the amounts calculated by management and assessed by us to the respective general ledger accounts; and
  • We evaluated the completeness and accuracy of disclosure to confirm compliance with the requirements IFRS 16: Leases

 

Other Information

The Directors are responsible for the other information. The other information comprises 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. 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 and 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 group and company 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 and 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 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 and 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 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 and/or the company 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 eight years.

earnst

ERNST & YOUNG INC.

Roger Hillen
Director
Chartered Accountant (SA)
Registered Auditor

Date: 02 April 2020