Independent auditor's report

To the Shareholders of The Bidvest Group Limited

Report on the audit of the financial statements

Our opinion

In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of The Bidvest Group Limited and its subsidiaries (together the Group) as at 30 June 2020, and its consolidated financial performance and its consolidated cash flows for the year then ended in accordance with IFRS and the requirements of the Companies Act of South Africa.

What we have audited

The Bidvest Group Limited's consolidated financial statements comprise:

  • the consolidated statement of financial position at 30 June 2020;
  • the consolidated income statement for the year then ended;
  • the consolidated statement of other comprehensive income for the year then ended;
  • the consolidated statement of changes in equity for the year then ended;
  • the consolidated statement of cash flows for the year then ended;
  • the accounting policies;
  • the notes to the consolidated financial statements; and
  • Annexure A – Interests in subsidiaries and associates
  • Annexure B – Directors' remuneration

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 financial statements section of our report.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.

Independence

We are independent of the Group in accordance with the Independent Regulatory Board for Auditors' Code of Professional Conduct for Registered Auditors (IRBA Code) and other independence requirements applicable to performing audits of financial statements in South Africa. We have fulfilled our other ethical responsibilities in accordance with the IRBA Code and in accordance with other ethical requirements applicable to performing audits in South Africa. The IRBA Code is consistent with the corresponding sections of the International Ethics Standards Board for Accountants' International Code of Ethics for Professional Accountants (including International Independence Standards).

Our audit approach

Overview

Overall group materiality

  • Overall group materiality: R205 000 000, which represents 5% of the adjusted consolidated profit before tax.

Group audit scope

  • We have performed full scope audits over 25 components.
  • The group engagement team performed analytical review procedures on components not in audit scope.

Key audit matters

  • Acquisition of Adcock Ingram Holdings Limited and identification and valuation of intangible assets; and
  • Impairment assessment of indefinite useful life intangible assets and goodwill.

As part of designing our audit, we determined materiality and assessed the risks of material misstatement in the consolidated financial statements. In particular, we considered where the directors made subjective judgements; for example, in respect of significant accounting estimates that involved making assumptions and considering future events that are inherently uncertain. As in all of our audits, we also addressed the risk of management override of internal controls, including among other matters, consideration of whether there was evidence of bias that represented a risk of material misstatement due to fraud.

Materiality

The scope of our audit was influenced by our application of materiality. An audit is designed to obtain reasonable assurance whether the financial statements are free from material misstatement. Misstatements may arise due to fraud or error. They are considered material if individually or in aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of the consolidated financial statements.

Based on our professional judgement, we determined certain quantitative thresholds for materiality, including the overall group materiality for the consolidated financial statements as a whole as set out in the table below. These, together with qualitative considerations, helped us to determine the scope of our audit and the nature, timing and extent of our audit procedures and to evaluate the effect of misstatements, both individually and in aggregate on the financial statements as a whole.

Overall group materiality R205 000 000.
How we determined it 5% of adjusted consolidated profit before tax.

Rationale for the materiality benchmark applied

We chose consolidated profit before tax as the benchmark because, in our view, it is the benchmark against which the performance of the Group is most commonly measured by users, and is a generally accepted benchmark. The adjustments made to consolidated profit before tax relate to Covid-19 expenses and impairments, impairments of goodwill and intangible assets, and the impairment of the investment in the associates Adcock Ingram Holdings Limited and Comair Limited. These adjustments are once-off, non-recurring expenses that are added back to obtain a benchmark more reflective of the performance of the Group. We chose 5% which is consistent with quantitative materiality thresholds used for profit-oriented companies in this sector.
How we tailored our group audit scope

We tailored the scope of our audit in order to perform sufficient work to enable us to provide an opinion on the consolidated financial statements as a whole, taking into account the structure of the Group, the accounting processes and controls, and the industry in which the Group operates.

Every component that contributed significantly to the consolidated revenue, consolidated operating profit, consolidated total assets or consolidated total liabilities of the Group was subject to a full scope audit. We performed full scope audits over 25 components based on their financial significance and to obtain coverage across the Group. In order to obtain audit evidence in respect of other components not subject to Group reporting, the Group engagement team performed analytical review procedures of these components.

Detailed Group audit instructions were communicated to all components in scope for Group reporting. These components were audited by component audit teams, who reported the results of procedures performed to the Group engagement team. We had various interactions with our component audit teams in which we discussed and evaluated recent developments, the scope of audits, audit risks, materiality and audit approaches and also reviewed selected component working papers. We discussed the reports of the component teams, the findings of their procedures and other matters which could be of relevance for the consolidated financial statements.

Key audit matters

Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the consolidated financial statements of the current period. These matters were addressed in the context of our audit of the consolidated financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters.

Key audit matter   How our audit addressed the key audit matter

Acquisition of Adcock Ingram Holdings Limited and the identification and valuation of Intangible Assets

Refer to the accounting policies for business combinations and to notes 28 to the consolidated financial statements

During the current year, the Group obtained a controlling stake in Adcock Ingram Holdings Limited ("Adcock Ingram"), due to the increase in the Group's equity stake to 51.4% with effect from 1 August 2019 as a result of the termination of the Adcock Ingram Broad-based Black Economic Empowerment (B-BBEE) scheme.

With the assistance of an independent expert appointed by the Board of Directors, the Group recognised separately from goodwill, the identifiable assets acquired, the liabilities assumed and any non-controlling interest in Adcock Ingram in accordance with IFRS 3: Business Combinations ("IFRS 3").

This resulted in the Group recognising indefinite useful life intangible assets in the form of brands and licensing agreements and goodwill amounting to R4 146 million and R1 653 million, respectively, and non-controlling interest amounting to R3 388 million.

No consideration was transferred as part of the acquisition.

The identification and valuation of the indefinite useful life intangible assets acquired are considered to be complex in nature and involved a significant level of management judgement and estimation uncertainty.

The identification and valuation of intangible assets is considered to be a matter of most significance in our audit of the current year as it is based on significant estimates and judgements and has a direct bearing on the amount of goodwill and indefinite and definite useful life intangible assets recognised at acquisition date by the Group.

 

We assessed whether the effective date of the acquisition was in compliance with IFRS 3: Business Combinations ("IFRS 3") per inspection of the salient terms and conditions of the purchase agreement.

Making use of our valuations expertise, we performed an independent assessment of the fair values of the identifiable assets acquired and liabilities assumed on the acquisition date, specifically relating to the valuation and identification of intangible assets and the resultant goodwill recognised.

This independent assessment was evaluated against the directors' expert's assessment by performing the following procedures:

  • We assessed the competence, capabilities and objectivity of the directors' independent expert by evaluating their qualifications, experience and independence through inspection of their qualifications and memberships. We noted no aspects in this regard requiring further consideration.
  • We discussed the scope of work with the directors' experts to determine that there were no matters affecting their independence and objectivity and that no scope limitations were imposed upon them in performing their work. We noted no aspects in this regard requiring further consideration.
  • We evaluated the valuation techniques used against industry norms, and based on our assessment, accepted the valuation techniques used.
  • We tested that identifiable assets acquired and liabilities assumed were appropriately valued, in all material respects, by applying an appropriate independent valuation method. Independent assumptions were determined, including the discount rate and attrition rate. Our results did not identify material exceptions. We assessed the directors' judgement that there is no foreseeable limit to the period over which the identified indefinite useful life intangibles will generate cash flows, by considering the intangible assets individually, taking into account agreements, existing licenses and evolution indices. We also assessed the useful lives and residual values assigned to definite lived intangible assets by considering the agreements in place relating to these intangible assets.
  • We assessed the Weighted Average Cost of Capital ("WACC")/discount rate utilised in the valuation technique by re-performing the WACC calculation for Adcock Ingram using PwC's standard calculation methodologies. No material differences noted.
  • We assessed the forecasts used by the directors' experts by comparing forecasts to historical results and applying appropriate industry growth and terminal rates.
  • We assessed whether the goodwill and intangible assets recognised as a result of the allocation were appropriate in accordance with the requirements of IFRS 3 by inspecting customer and license agreements, considering exclusivity rights and information available in the industry.
  • We assessed the disclosures included in note 28 against the relevant IFRS disclosure requirements.

Impairment assessment of indefinite useful life intangible assets and goodwill.

Refer to the accounting policies for Goodwill, Intangibles and Impairments of non-financial assets and to notes 17 and 18 to the consolidated financial statements.

As at 30 June 2020, the Group's consolidated statement of financial position included goodwill with a closing carrying value of R17.96 billion, and brands with a closing carrying value of R6.5 billion, which have been classified as indefinite useful life intangible assets. The Automotive segment's operations in particular were the most exposed to economic uncertainty as a result of the COVID-19 pandemic which commenced during the 2020 financial year, and significant judgement was required in assessing the goodwill impairment calculation.

Assets that are not subject to amortisation, such as goodwill and indefinite life intangible assets, are required to be assessed for impairment annually, or more frequently if there is an indicator of impairment in accordance with IAS 36: Impairment of assets ("IAS 36").

Management performed their annual impairment assessment for goodwill and indefinite useful life intangible assets. The recoverable amount, as determined for the purpose of the impairment calculation, is calculated as the higher of the fair value less costs of disposal and the value-in-use.

Management estimated the recoverable amount of the indefinite useful life intangible assets, as well as the recoverable amount of goodwill, using the value-in-use method. Management's assessment of the Automotive segment indicated that goodwill may be impaired.

The Group's impairment assessment of the indefinite useful life intangible assets and goodwill as it relates to the Automotive segment is considered to be a matter of most significance to the current year audit due to:

  • the significant judgements and estimates made by management with regards to projected annualised earnings, given the current economic environment; and
  • the significant judgments and estimates made by management in determining the values which have been assigned to the key assumptions used in the value-in-use calculation i.e. the discount rate, the perpetual growth rate and projected future cash flow forecasts.
 

We evaluated management's allocation of assets to cash-generating units (CGU's) for testing goodwill and indefinite useful life intangible assets against the requirements of IAS 36. Based on our assessment, we accepted management's allocation.

Making use of our valuations expertise, we assessed the valuation methodology applied by management against generally accepted valuation methods and IAS 36, noting no exceptions.

We independently calculated a WACC discount rate, taking into account independently obtained data such as the cost of debt after taking into account the contribution of IFRS 16 discount rates to the cost of debt, the risk free rate, market risk premiums, debt/equity ratios as well as the beta of comparable companies. The calculated WACC was then compared to the discount rate applied by management.

The discount rate adopted by management was marginally lower. This difference in rates was included in our stress testing to assess the impact on the valuation results. The use of our independently calculated discount rates in management's assessment would not have resulted in a material additional impairment charge.

In testing for impairment of goodwill, we performed an independent discounted cash flow calculation using our own assumptions as applicable to the relevant CGU. Whilst our range of cash flows for the CGU differed from those applied by management, due to use of our own assumptions, we accepted the outcome that no further impairments were required.

For the value-in-use calculations performed, we obtained management's cash flow forecasts and:

  • Agreed these forecasts to approved budgets.
  • Assessed the reliability of the forecasts by comparing current year actual results with the prior year budgeted results.
  • Compared the growth projections applied by management to historically achieved growth rates.
  • Compared the perpetual growth rates used by management to long-term consensus inflation rates obtained from independent sources.

Based on our assessment, we accepted the cash flows to be within a reasonable range. In addition, for the Automotive Segment where the value-in-use ("VIU") calculation indicated impairment, we performed a fair value less cost to sell ("FVLCTS") assessment. When we compared the results of the FVLCTS assessment to the results of the VIU calculation, no material differences were noted.

We performed sensitivity analyses on the key assumptions included in management's value-in-use calculations to determine the degree by which the key assumptions needed to change in order to trigger an impairment and considering the likelihood of the assumptions changing to such a degree. In addition, where impairment indicators were noted based on the sensitivities performed, we performed a FVLCTS calculation to determine if any impairment may be required. Based on this assessment, we accepted management's assessment that no further impairments were required.

Other information

The directors are responsible for the other information. The other information comprises the information included in the documents titled "The Bidvest Group Limited Audited Consolidated Annual Financial Statements 2020", which includes the Declaration by company secretary, directors' report and the audit committee's report, as required by the Companies Act of South Africa and "The Bidvest Group Limited Audited Annual Financial Statements" which we obtained prior to the date of this auditor's report, and the other sections of the document titled "The Bidvest Group Limited Integrated Report 2020", which is expected to be made available to us after that date. The other information does not include the consolidated and separate financial statements and our auditor's reports thereon.

Our opinion on the consolidated financial statements does not cover the other information and we do not and will not express an audit opinion or any form of assurance conclusion thereon.

In connection with our audit of the consolidated financial statements, our responsibility is to read the other information identified above and, in doing so, consider whether the other information is materially inconsistent with the consolidated financial statements or our knowledge obtained in 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 consolidated financial statements

The directors are responsible for the preparation and fair presentation of the consolidated 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 financial statements that are free from material misstatement, whether due to fraud or error.

In preparing the consolidated 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 financial statements

Our objectives are to obtain reasonable assurance about whether the consolidated 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 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 consolidated 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 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 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 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 financial statements, including the disclosures, and whether the consolidated 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 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 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, actions taken to eliminate threats or safeguards applied.

From the matters communicated with the directors, we determine those matters that were of most significance in the audit of the consolidated 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 PricewaterhouseCoopers Inc. has been the auditor of The Bidvest Group Limited for two years.




PricewaterhouseCoopers Inc.
Director: Craig West
Registered Auditor
4 Lisbon Road
Waterfall City

11 September 2020