Independent auditor's report

To the Shareholders of The Bidvest Group 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 The Bidvest Group Limited (the Company) and its subsidiaries (together the Group) as at 30 June 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 and the requirements of the Companies Act of South Africa.

What we have audited

The Bidvest Group Limited’s consolidated and separate financial statements set out in Accounting policies:

  • the consolidated statement of financial position at 30 June 2019;
  • 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 notes to the consolidated financial statements;
  • the company statement of financial position at 30 June 2019;
  • the company statement of comprehensive income for the year then ended;
  • the company statement of changes in equity for the year then ended;
  • the company statement of cash flows for the year then ended;
  • the accounting policies;
  • the notes to the company financial statements; and
  • Annexure A – Interests in subsidiaries and associates.
  • Annexure B – Director’s 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 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 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 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 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 and the International Ethics Standards Board for Accountants’ International Code of Ethics for Professional Accountants (including International Independence Standards) respectively.

Our audit approach

Overview

 

Overall Group materiality

  • Overall Group materiality: R261 056 300, which represents 5% of the consolidated profit before tax.
 
 

Group audit scope

  • We have performed full scope audits over 23 components.
  • The Group engagement team performed analytical review procedures on components not in audit scope.
 
 

Key audit matters

  • Impairment assessment of indefinite useful life intangible assets and goodwill.
  • Accounting for the investment in Adcock Ingram Holdings Limited.
 

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   R261 056 300
How we determined it   5% of 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 it is a generally accepted benchmark. We chose 5% which is consistent with the 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, 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 23 components based on their financial significance and to obtain sufficient 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 on these components.

Detailed Group audit instructions were communicated to all components in scope for purposes of 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 teams in which we discussed and evaluated recent developments, the scope of audits, audit risks, materiality and our 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 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 following key audit matters relate to the consolidated financial statements. We have determined that there are no key audit matters to communicate in our report with regard to the separate financial statements.

Key audit matter   How our audit addressed the key audit matter
Impairment assessment of indefinite useful life intangible assets and goodwill
This key audit matter relates to the consolidated financial statements

Refer to the accounting policies for Goodwill, Intangibles and Impairments of non-financial assets and to notes 15, 16 and 41 to the consolidated financial statements.

As at 30 June 2019, Bidvest Group Limited’s (the Group’s) consolidated statement of financial position included intangible assets with a closing carrying value of R3,4 billion, which includes indefinite useful life intangible assets of R2,1 billion.

The consolidated statement of financial position includes goodwill with a carrying value of R 5,4 billion.

Management performed its annual impairment assessment for goodwill and indefinite useful life intangible assets. The recoverable amount determined for purposes of impairment is the higher of fair value less costs of disposal and value-in-use.

Management estimated the recoverable amount of indefinite useful life intangible assets using the value-in-use method, and the recoverable amount of goodwill using the fair value less costs of disposal method. Where there were indications that goodwill may be impaired, management further assessed its value-in-use, to ensure that the recoverable amount was the higher of value-in-use and fair value less costs of disposal.

 

We evaluated management’s allocation of assets to cash‑generating units (CGUs) for testing goodwill and indefinite useful life intangible assets and found this be in line with the requirements of International Accounting Standard 36 Impairment of Assets (IAS 36).

We used our valuation expertise to assess the valuation methodology applied by management against generally accepted valuation methods and IAS 36, noting immaterial exceptions.

We tested the mathematical accuracy of the price/earnings calculation and the value-in-use, where applicable, noting no exceptions.

We independently recalculated a range of price/earnings multiples per CGU using entities in comparable industries, adjusted for size, market maturity and diversification to consider whether management’s assessment is reasonable. While our range of price/earnings multiples differed from those applied by management, we concurred with the outcome that no further impairments were required.

The Group’s impairment assessment of indefinite useful life intangible assets and goodwill is considered to be a matter of most significance to the current year audit due to:

  • the judgements made by management with regards to projected annualised earnings and price/earnings multiple included in the fair value less costs of disposal calculation; and
  • the judgements made by management with regards to the determination of the key assumptions included in the value-in-use calculation i.e. the discount rate, the perpetual growth rate and projected future cash flow forecasts.
 

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.

We found the cash flow forecasts to be within a reasonable range.

With the assistance of our valuation experts, we recalculated a range of discount rates, considering inputs for similar entities, industry data and entity-specific data. Where differences in discount rates were noted, we included this in our sensitivity analysis to consider whether this would lead to an impairment charge being recognised.

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. Based on this assessment, we concurred with management’s assessment that no further impairments were required.

Accounting for the investment in Adcock Ingram Holdings Limited
This key audit matter relates to the consolidated financial statements
Refer to notes 12, 18 and 41 to the consolidated financial statements.    

Bidvest Group Limited (the Group) acquired an additional interest in Adcock Ingram Holdings Limited “Adcock Ingram” during the current financial year, which represents 6.1% of Adcock Ingrams’ net ordinary shares in issue. Prior to the current year transaction, the Group controlled the voting rights over 37.6% of the ordinary shares of Adcock Ingram. After the acquisition of the 6.1%, the Group’s voting percentage in Adcock Ingram was 43.7%. The Group’s purchase of the additional Adcock Ingram shares during the year resulted in the Group holding an effective 44.8% of the net ordinary shares in issue (total ordinary shares in issue less treasury shares).

Management of the Group determined that no effective or de-facto control of Adcock Ingram existed as at 30 June 2019 and therefore continues accounting for its investment in Adcock Ingram as an Investment in associates in terms of IAS 28 Investments in Associates and Joint Ventures (IAS 28).

 

We consulted with our accounting technical specialists to assist us in assessing the judgement applied by management regarding whether Bidvest controls Adcock Ingram at year-end. This assessment was conducted with reference to IFRS 10 and the applicable legal agreements, as outlined below.

We considered whether the 15% shareholding by the broad‑based empowerment vehicle represented voting rights exercisable by Bidvest Group Limited. We inspected the transfer of shares agreement and noted that voting rights to these shares did not vest in Bidvest Group Limited as at 30 June 2019. We therefore concluded that the Group should not include the voting power of the empowerment vehicle when determining its direct voting power.

We consider the accounting for the investment in Adcock Ingram to be a matter of most significance to our current year audit due to the following circumstances:

  • The judgement applied by management that the Group had no de-facto control over Adcock Ingram as at 30 June 2019 in terms of International Financial Reporting Standard 10 Consolidated Financial Statements (IFRS 10), including consideration of whether the Group had the power to unilaterally direct the relevant activities of Adcock Ingram even though it held less than a majority of the voting rights. This took into account the respective size of the Group’s holding of voting rights relative to the holdings of other vote holders and voting patterns at previous annual general meetings.
  • The existence of a historical broad-based empowerment arrangement within Adcock Ingram, which resulted in the Group having economic exposure to more than 50% of Adcock at year-end, but not having the related voting power of its 15% holding in the black empowerment arrangement while the black empowerment arrangement is in place.
  • Subsequent to year-end, the broad-based empowerment arrangement was wound up, the result of which was that the Group obtained voting power over more than 50% of Adcock Ingram’s shares.
 

We considered whether “de-facto” control, as described in International Financial Reporting Standard 10 – Consolidated Financial Statements (IFRS 10), exists by performing the following procedures:

  • We inspected the historic voting patterns at annual general meetings and the shareholders’ agreement indicating the rights of shareholders to appoint directors to the board.
  • We considered whether the Group held any currently exercisable potential voting rights and noted that they did not.
  • We evaluated the respective size of the Groups’ holding of voting rights relative to the holdings of other vote holders and noted that a reasonable number of investors could act together to outvote the Group.

As a result of this, we concurred with management’s assessment that de-facto control did not exist at year-end.

Based on our assessment of the underlying facts and circumstances, we did not note evidence inconsistent with management’s decision to account for the investment in Adcock Ingram Holdings Limited as at 30 June 2019 as an associate in terms of IAS 28.

Other information

The directors are responsible for the other information. The other information comprises the information included in the document titled “The Bidvest Group Limited Audited Consolidated and Separate Annual Financial Statements 2019”, which includes the Declaration by company secretary, directors’ report and the audit committee’s report, as required by the Companies Act of South Africa, 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 2019”, which is expected to be made available to us after that date. The other information does not include the consolidated or the 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 and will 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 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 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 The Bidvest Group Limited for one year.

PricewaterhouseCoopers Inc.

Director: Craig West

Registered Auditor

4 Lisbon Road, Waterfall City

30 August 2019