Independent auditor's report to the
shareholders of
Blue Label Telecoms Limited
Report on the audit of the consolidated and separate financial statements
Our opinion
In our opinion, the consolidated and separate financial statements present fairly, in all material respects, the consolidated and separate financial position of Blue Label Telecoms Limited (the Company or BLT) and its subsidiaries (together the Group) as at 31 May 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 (IFRS) and the requirements of the Companies Act of South Africa.
What we have audited
Blue Label Telecoms Limited’s consolidated and separate financial statements comprise:
- the Group and Company statements of financial position as at 31 May 2017;
- the Group income statement for the year then ended;
- the Group and Company statements of comprehensive income for the year then ended;
- the Group and Company statements of changes in equity for the year then ended;
- the Group and Company statements of cash flows for the year then ended; and
- the notes to the financial statements, which include a summary of significant accounting policies.
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 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 International Ethics Standards Board for Accountants Code of Ethics for Professional Accountants (Parts A and B).
Our audit approach
Overview
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Overall Group materiality
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Group audit scope
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Key audit matters
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As part of designing our audit, we determined materiality and assessed the risks of material misstatement in the consolidated and separate 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 | R49.6 million | ||
| How we determined it | 5% of consolidated profit before tax adjusted for the significant gain on the fair value assessment of the investment in OSI. | ||
| Rationale for the materiality benchmark applied | We chose an adjusted consolidated profit before tax benchmark because, in our view, it is an appropriate measure of underlying performance and it is the benchmark against which the performance of the Group is most commonly measured by users. We chose 5% which is within the range of acceptable quantitative materiality thresholds used for profit-oriented companies in this sector. Profit before tax was adjusted downwards by excluding the gain on associate measured at fair value as this is the first fair value adjustment for this investment. |
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.
The Group financial statements are a consolidation of 25 reporting components, comprising the Group’s operating businesses and centralised functions. Of these reporting components, we selected 10 components for full scope audits due to their financial significance.
In establishing the overall approach to the Group audit, we determined the type of work that needed to be performed by us, as the Group engagement team, the component auditors from other PwC network firms and the non-PwC firms operating under our instruction. Where the work was performed by component auditors, we determined the level of involvement we needed to have in the audit work at those components to be able to conclude whether sufficient appropriate audit evidence had been obtained as a basis for our opinion on the consolidated financial statements as a whole.
We had various interactions with our significant component teams in which we discussed and evaluated recent developments, the scope of audits, audit risks, materiality and audit approaches.
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. In the current year the Group engagement leader visited the component audit team responsible for the audit of Blue Label Mexico S.A. de C.V.
By performing the procedures above, combined with additional procedures at Group level, we have obtained sufficient and appropriate audit evidence regarding the financial information of the Group as a whole to provide a basis for our opinion on the consolidated financial statements.
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.
The key audit matters below relate to the consolidated financial statements. We have determined that there are no key audit matters in respect of the separate financial statements to describe in our audit report.
| Key audit matter | How our audit addressed the key audit matter | ||
Impairment assessment of goodwill arising from business combinations and impairment assessment of investment in Blue Label Mexico S.A. de C.V. (BLM) Due to the number of business combinations that the Group enters into, the Group’s net assets include a significant amount of goodwill. Goodwill comprises 7% of the total consolidated assets in the consolidated statement of financial position. These assets have been recognised in the consolidated statement of financial position as a consequence of the acquisitive nature of the Group. Goodwill is tested annually for impairment or whenever there is an impairment indicator identified by management. This annual impairment test was a matter of most significance to our audit because management’s assessment process is complex and highly judgemental and is based on assumptions, specifically the terminal growth rate, discount rate and forecast cash flows, which are affected by expected future market or economic conditions, particularly those in South Africa. The balance of R604.6 million as at 31 May 2017 is material to the financial statements. For the year ended 31 May 2017 management performed an impairment assessment over the goodwill balance as follows:
Refer to note 2.1 for details of management’s impairment test and assumptions Under IFRS, the Group is required to test the recoverable amount of investments for impairment if there is an indicator of impairment. This impairment test was significant to our audit because BLM reported a loss of R77.8 million for the year. The BLM investment balance of R173.7 million includes a goodwill balance of R120.1 million as of 31 May 2017. Management’s assessment process is consistent with the process followed for goodwill as described above. The process is complex and highly judgemental and is based on assumptions, including the terminal growth rate, discount rate and forecast cash flows, which are affected by expected future market or economic conditions, particularly those in Mexico. Refer to note 2.1 for details of management’s impairment test and assumptions. |
We made use of our internal valuations expertise to assess whether the approach adopted by management in the valuation models for both goodwill and the investment in BLM is in line with market practice and the applicable requirements of International Accounting Standard (IAS) 36 – Impairment of Assets. We also tested the mathematical accuracy of the valuation models through performing a recalculation. We assessed management’s cash flow forecasts and agreed them to the latest BLT Group Board approved budgets which is subject to oversight by the subsidiary directors. We held discussions with management regarding the process by which the budgets were developed and to understand the basis for the assumptions used. The Board approved budgets cover a period of five years and the forecasts for the purpose of the value-in-use calculations extend out to five years. We also made year five a particular focus area for the procedures below as the terminal growth rate is applied to the free cash flows. We compared the current year actual results with the forecast tabled in 2016 to consider whether any forecasts included assumptions that, with hindsight had been optimistic. Where there were differences between the actual results achieved and the forecasts, we inquired of management and inspected supporting documentation to understand and corroborate the reasons for the differences. Based on the outcome of these procedures, we accepted the reasonability of management’s assumptions and conclusions in respect of the future cash flows applied in the impairment model. We made use of our valuations expertise to independently calculate a discount rate taking into account independently obtained data such as the cost of debt, risk free rates in the market, market risk premiums, country risk premium, specific risk premium, debt/equity ratios as well as the beta of comparable companies. This was compared to the discount rate used by management. We found the discount rate used by management to be within an acceptable range of our independent calculations. The terminal growth rate was compared to forecast industry trends and to management’s past forecast history for similar operations. We also assessed whether assumptions, such as working capital and capital expenditure, had been determined and applied consistently across the CGU’s. We performed independent sensitivity calculations on the impairment assessments, to determine the degree by which the key assumptions needed to change in order to trigger an impairment. We discussed these with management and based on the evidence obtained we accepted management’s conclusion that the key assumptions applied in the models were reasonable. As a final test we compared the Group’s net assets as at 31 May 2017 of R5 billion to its market capitalisation of R10.5 billion and noted that the R5.5 billion of implied headroom was consistent with the results of our testing. |
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Fair value assessment of Investments in OSI The exemption available in IAS 28 – Investments in Associate and Joint Ventures has been applied to the investment in OSI from 30 November 2016 and the investment is accounted for in accordance with IAS 39 – Financial Instruments: Recognition and Measurement at fair value with changes in fair value recognised in profit or loss. The difference between the carrying value of the investment as previously determined using the equity accounting method and its fair value is reflected as a fair value gain on a financial instrument through profit and loss for the year ended 31 May 2017. This remeasurement to fair value is considered to be a matter of most significance to the current year audit due to the significant judgements made by management regarding the change in intention in relation to the operations of OSI, terminal growth rate, discount rate and forecast cash flows included in the analyses used to perform the valuation, as well as the fact that this is the first such remeasurement. Management has used an independent third party with the requisite expertise in assisting them with the determination of the fair value of the investment. Refer to note 2.2 for details of fair value assumptions. |
We made use of our PwC India Component team’s valuation expertise, as well as that of our own, to assist in our procedures performed over the fair value assessment. We assessed whether the approach adopted by the independent valuations expert in the valuation models is in line with market practice and the applicable requirements of We assessed management’s cash flow forecasts and the process by which these were developed. We compared these to the latest Board approved budgets. We found that the budgets used in the value-in-use calculations were consistent with the Board approved budgets and noted that the key assumptions were subject to oversight by the Directors. The approved budgets cover a period of 10 years and the forecasts for the purpose of the value-in-use calculations extend out to 10 years. We assessed whether assumptions, such as working capital and capital expenditure, had been determined and applied consistently. We independently calculated a discount rate taking into account independently obtained data such as the cost of debt, risk free rates in the market, market risk premiums, country risk premium, specific risk premium, debt/equity ratios as well as the beta of comparable companies; and this was compared to the discount rate used by management. We found the discount rate used by management to be within an acceptable range of our independent calculations. The terminal growth rate was compared to forecast industry trends and to management’s past forecast history for similar operations and was considered to be within an acceptable range of our independent calculations. We then performed a sensitivity analysis over the assumptions, to analyse the possible impact on the value-in-use by using other growth rates and discount rates which were within a reasonably foreseeable range. We discussed these with management and based on the evidence obtained we accepted management’s conclusion that the key assumptions applied in the models were reasonable. |
Other information
The Directors are responsible for the other information. The other information comprises the Directors' report, the Audit, Risk and Compliance Committee's report and the Declaration by the Company Secretary as required by the Companies Act of South Africa, and the contents page, Prominent notice, the Statement of Directors' responsibility, the Approval of the financial statements and the Annexure to the Company financial statements – Shareholder analysis, and the other information contained in the integrated annual report 2017. 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 identified above 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 the work we have performed, 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 and separate 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 the 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/or the 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 financial statements
Our objectives are to obtain reasonable assurance about whether the consolidated and separate 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 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 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 and the 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 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 and the 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 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 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, 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 PricewaterhouseCoopers Inc. has been the auditor of Blue Label Telecoms Limited for 13 years.
PricewaterhouseCoopers Inc.
Director: D Storm
Registered Auditor
Johannesburg
23 November 2017