GOVERNANCE

Audit, Risk and Compliance Committee's report

The Audit, Risk and Compliance Committee (ARCC) is pleased to present its report for the financial year ended 31 May 2020.

The Committee is an independent statutory committee appointed by the shareholders of the Company. In addition to its statutory duties, the Board has delegated further duties to the Committee. This report covers both these sets of duties and responsibilities.

Mandate and terms of reference

The Committee has adopted comprehensive and formal terms of reference which have been approved by the Board and which are reviewed on an annual basis. The responsibilities of the ARCC include:

Membership and meetings held

In accordance with the requirements of the Companies Act, No 71 of 2008 (the Act), Messrs JS Mthimunye, GD Harlow and SJ Vilakazi were appointed to the Committee by shareholders at the AGM held on 28 November 2019 in the following positions:

The members of the Committee collectively have experience in audit, accounting, commerce, economics, law, corporate governance and general industry. All of the members of the ARCC are Independent Non-Executive Directors.

The Committee meets quarterly and the quorum for each meeting is three members present throughout the meeting. Mandatory attendees at the meetings are the Joint Chief Executive Officers and the Financial Director of Blue Label. The external audit partner from PwC and a director from KPMG, to whom Blue Label outsources its internal audit function, are also attendees. Both internal and external auditors are afforded the opportunity to address the meeting and have unlimited access to the Committee. During the year, the Committee met with the external and internal auditors respectively without the presence of management. The internal audit function reports directly to the ARCC and is also responsible to the Financial Director on day-to-day administrative matters.

Statutory duties discharged

In execution of its statutory duties during the year under review, the Committee:

Other duties to discharge

Financial statements and reporting

The Committee:

External audit and non-audit services

The ARCC has satisfied itself as to the independence of the external auditor, PwC, as set out in section 94(7) of the Act, which includes consideration of compliance with criteria relating to independence or conflicts of interest as prescribed by the Independent Regulatory Board for Auditors, including tenure of the audit firm and rotation of the designated individual partner. Requisite assurance was sought from and provided by PwC that internal governance processes within the firm support and demonstrate its claim to independence. The designated individual partner, Mr Pietro Calicchio took over from Mr Deon Storm at the end of the preceding financial year as a result of rotation requirements. PwC has been the auditor of the Company for 16 years.

To assess the effectiveness of the external auditors, the Committee considered the quality, delivery and execution of the agreed audit plan and variations from the plan, and the robustness and perceptiveness of PwC in its handling of key accounting treatments and disclosures. The ARCC has been informed of the most recent results of PwC's regulatory and firm inspection results and is satisfied with the results thereof.

The Committee, in consultation with Executive Management, agreed to the engagement letter, terms, audit plan and budgeted audit fees for the 2020 financial year.

Any non-audit services to be provided by the external auditors are governed by a formal written policy which incorporates a monetary delegation of authority in terms of non-audit services to be provided. The non-audit services rendered by the external auditors during the year ended 31 May 2020 comprised tax advisory services, tax compliance services and general advisory services. The fees applicable to the aforementioned services totalled R6.6 million (2019: R1.56 million).

The ARCC has nominated, for approval at the AGM, the reappointment of PwC as registered auditors for the 2021 financial year. The Committee also satisfied itself in terms of paragraph 3.84(g)(iii) of the JSE Listings Requirements that PwC and the designated individual partner are suitable for appointment having requested and considered the information detailed in paragraph 22.15(h) of the JSE Listings Requirements.

Internal audit and internal controls

Blue Label's internal audit function is outsourced to KPMG and the role of the Chief Audit Executive is fulfilled by the Engagement Director. The ARCC concludes that the Chief Audit Executive and internal audit arrangements are effective and independent.

The Committee:

The ARCC concludes that the design and implementation of internal controls, including financial controls and risk management, are effective.

The ARCC concludes that the combined assurance arrangement is effective and will continue to evolve as the Group grows.

Risk management and compliance

In relation to the governance of risk, the Committee:

The ARCC is satisfied that it has dedicated sufficient time to its responsibility towards the governance of risk.

The Committee is satisfied that it has exercised sufficient, ongoing oversight of compliance through:

Expertise and experience of the Financial Director and finance function

The Committee considered the appropriateness of the expertise and experience of the Financial Director and finance function in accordance with the JSE Listings Requirements and governance best practice. The ARCC concluded that the finance function is adequately resourced with technically competent individuals and is effective. The Committee confirms that it is satisfied that Dean Suntup possesses the appropriate expertise and experience to discharge his responsibilities as Financial Director. The Committee is also satisfied that appropriate financial reporting procedures have been established and that those procedures are operating effectively.

Annual financial statements

The Committee has reviewed the accounting policies and financial statements of the Company and the Group and is satisfied that they are appropriate and comply with International Financial Reporting Standards, the JSE Listings Requirements and the requirements of the Companies Act of South Africa.

The Committee has evaluated the Group annual financial statements of Blue Label Telecoms Limited for the year ended 31 May 2020 and based on the information provided to the Committee, the Committee recommends the adoption of the annual financial statements by the Board.

The significant audit matters considered by the Committee were the impairment assessment of goodwill arising from business combinations were addressed as follows:

The impairment assessment of goodwill arising from business combinations

For the year ended 31 May 2020, management performed an impairment assessment over the goodwill balance as follows:

Based on the above impairment assessments, as well as management judgement, the following impairments were applied:

Blue Label Connect Proprietary Limited

Blue Label Connect is engaged in the supply of post-paid mobile communications products, with focused marketing to end-consumers. The Company's performance has been negatively impacted as a result of challenging economic conditions due in part to COVID-19. Furthermore, margin compression resulting from reduced incentives from the networks as well as an increase in product costs, has resulted in the decision to impair their goodwill of R156.5 million in full (2019: R49.2 million). The recoverable amount of Blue Label Connect is calculated to be R291 million.

GloCell Distribution Proprietary Limited

GloCell Distribution's core strategy is the distribution of starter packs for the various mobile network operators through its established channels. In the current year, the Company experienced unfavourable trading conditions, with specific reference to starter packs, exacerbated by the impact of COVID-19, which resulted in a goodwill impairment of R57 million. The recoverable amount of GloCell Distribution attributable to The Prepaid Company's 48% shareholding is calculated to be R152 million.

WiConnect Proprietary Limited

WiConnect provided customers with the full suite of cellular and Blu Approved products through its retail stores. Despite the implementation of a turnaround strategy, the severe impact of COVID-19 on WiConnect's performance resulted in the decision to cease operations in their entirety. As such, the recoverable amount of WiConnect equates to its net asset value of Rnil and the goodwill of R45.6 million attributable to the entity was impaired in full.

Management concluded there was no need for any further impairment.

Integrated annual report

The Committee considered the integrated annual report, incorporating the annual financial statements for the year ended 31 May 2020. The Committee considered the sustainability information as disclosed in the integrated annual report and assessed its consistency with operational and other information known to its members. The Committee recommended the approval of the integrated annual report to the Board.

The ARCC is satisfied that it has complied with its legal, regulatory and other responsibilities as per its terms of reference and that it has executed its responsibilities in terms of paragraph 3.84(g)(iii) of the JSE Listings Requirements in its assessment of the suitability of the auditor. The contents of the ARCC report was discussed at the Committee meeting and were approved by the Committee members on 21 September 2020.

The ARCC is satisfied that it has complied with its legal, regulatory and other responsibilities as per its terms of reference.

On behalf of the Audit, Risk and Compliance Committee

JS Mthimunye

Chairman

23 September 2020