Blue Label Telecoms Integrated Annual Report 2019

12 Blue Label annual financial statements 2019 Independent auditor’s report to the shareholders of Blue Label Telecoms Limited continued Key audit matter How our audit addressed the key audit matter Impairment assessment of goodwill arising from business combinations and impairment assessment of associate investments in Blue Label Mexico and OSI The Group has entered into various business combinations over the last couple of years which resulted in significant goodwill being recognised. The goodwill recognised in these business combinations relates mainly to expected synergies and the ability to introduce new service offerings. Goodwill is tested annually for impairment or whenever there is an impairment indicator identified by management. Management’s annual goodwill impairment assessments were identified as a matter of most significance to our audit because of the quantum of goodwill as at 31 May 2019, the significant judgement and estimates involved in determining the terminal growth rate, discount rate and forecast cash flows as well as the future market or economic conditions faced by the various businesses within the Group. Management performed an impairment assessment of the goodwill balance as at 31 May 2019 by performing the following: u u assessing the recoverable amount through determination of a value-in-use amount and comparing this to the carrying amount, and if an impairment was identified, performing a fair value less costs to sell calculation to determine the highest recoverable amount; u u the value-in-use for each cash-generating unit (CGU) was calculated using a discounted cash flow model; and u u performing a sensitivity analysis over the value-in- use calculations, by varying the assumptions used (growth rates, terminal growth rate and the weighted average cost of capital i.e. discount rate) to assess the impact on the value-in-use. Refer to note 4.1 for details of management’s impairment tests and assumptions. Under IFRS, the Group is required to test the recoverable amount of investments for impairment if there is an indicator of impairment. Management identified an impairment indicator regarding the material investments in OSI and Blue Label Mexico and performed impairment tests as a result. For material goodwill balances and investment balances, for which the recoverable amounts were determined through value-in-use estimation, our audit procedures included the following: u u we evaluated management’s assessment of the identification of the Group’s CGUs and obtained the relevant impairment assessments performed by management for these CGUs (including the CGUs within Blue Label Mexico); u u we assessed the reasonability of management’s cash flow forecasts through discussions with management regarding the process followed to develop the budgets, forecasts and the assumptions utilised. We also compared the prior year budgets to the current year actual results to understand the efficacy of management’s budgeting process and found that the budgeting inputs were reasonable; u u we evaluated whether the assumptions used, such as working capital and capital expenditure, had been determined and applied consistently across the CGUs; u u we agreed the budgets to the latest Board- approved budgets. The Board-approved budgets cover a period of five years and the forecasts for the purpose of the value-in-use calculations also covered a period of five years; u u we assessed the mathematical accuracy of the valuations performed by management as well as the appropriateness of the methods used for the valuations and found no exceptions; u u we made use of our internal valuations experts to independently calculate discount rates 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 rates used by management. Where differences were noted, we discussed these with management and evaluated whether in those instances the different rates would have resulted in an impairment. We found the discount rates used by management to be within acceptable ranges of our independent calculations; u u the terminal growth rates were compared to forecast industry trends and to independent sources for similar operations; u u we further made use of our internal valuations experts to assess the approaches adopted by management in the valuation models for both goodwill and the investments in Blue Label Mexico and found that the approaches were in line with market practice and the applicable requirements of IAS 36 – Impairment of Assets ; and