Independent auditor's report

To the shareholders of Barloworld Limited

REPORT ON THE AUDIT OF THE CONSOLIDATED AND SEPARATE FINANCIAL STATEMENTS

OPINION

We have audited the consolidated and separate financial statements of Barloworld Limited and its subsidiaries (the group) set out on pages 17 to 113, which comprise the statements of financial position as at 30 September 2018, and the income statements, statements of comprehensive income, statements of changes in equity and the statements of cash flows for the year then ended, and the notes to the financial statements, including a summary of significant accounting policies.

In our opinion, the consolidated and separate financial statements present fairly, in all material respects, the consolidated and separate financial position of the group as at 30 September 2018, and its consolidated and separate financial performance and 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.

BASIS FOR OPINION

We conducted our audit in accordance with International Standards on Auditing (ISA). 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 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). We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.

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. No key audit matters were identified for the separate financial statements.

Key audit matter     How the matter was addressed in the audit
Goodwill and indefinite useful life intangible assets

As disclosed in notes 11 and 12, the group’s goodwill and indefinite useful life intangible asset balances are R3 401 million (2017: R3 534 million) in aggregate and makes up 6.9% (2017: 7.6%) of the group’s total assets.

In accordance with IAS 36 Impairment of Assets (IAS 36), annual impairment tests are conducted under the supervision of the directors to assess the recoverability of the carrying value of goodwill and indefinite useful life intangible assets.

A discounted cash flow model (DCF) is used to assess the recoverability of both the goodwill and the indefinite useful life intangible assets as disclosed in note 11.

The assumptions with the most significant impact on the cash flow forecast are:

  • the growth rate which is considered to be highly subjective as it is based on historical experience and expectations rather than observable market data; and
  • the discount rate which is a complex calculation performed by independent experts for each cash-generating unit (CGU), taking into consideration country or region-specific risk-free rates.

Furthermore, in the current year, increased pressures on current and forecast profits have resulted in reduced levels of headroom per CGU.

The number of CGUs across the group, the complexity in calculating the discount rates, the judgement applied in estimating the growth rates as well as the cumulative value of the goodwill and indefinite useful life intangible assets makes the valuation of these balances a key audit matter.

   

Our audit procedures included the following:

  • Evaluating the design and testing the implementation of key controls around the calculation of the discounted cash flow
  • Assessing the considerations made under the supervision of the directors in identifying the CGUs against the requirements set out in IAS 36
  • Engaging our corporate finance experts to assess compliance of the DCF with IAS 36, industry norms, as well as the discount rates calculated by the independent experts
  • Assessing the competence, qualifications, capabilities and objectivity of the independent experts
  • Assessing the reasonability of the projected growth rates against historical performance and terminal value assumptions applied in the DCF
  • Performing sensitivity analyses on the valuations, increasing the discount rates and decreasing the growth rates and compared these results with the carrying values of goodwill and indefinite useful life intangible asset.

We concur with the directors’ conclusion that the assumptions used in the DCF were reasonable and no impairment has been recorded.

We consider the disclosures for goodwill and indefinite useful life intangible assets to be appropriate.

Valuation of rebuilt parts inventory in Equipment

As disclosed in a note 17, the basis of estimation for the obsolescence provision for rebuilt parts inventory was changed in the current year under the supervision of the directors.

We considered the following factors in concluding that the matter is a key audit matter:

  • The judgement applied in determining whether this change represented a historic error or a change in accounting estimate per the requirements of IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors (IAS 8)
  • The level of estimation applied in determining the revised obsolescence provision for rebuilt parts inventory.

The change in the provisioning approach for rebuilt parts inventory resulted in a decrease in the provision and a release of historic provisions to the income statement of R130 million. The directors concluded that the change in provisioning approach is a change in accounting estimate as the estimate was revised due to changes in circumstances on which the estimate was based. Consequently, this has been adjusted for prospectively in the current period results.

   

Our audit procedures included the following:

  • Evaluating the directors’ assessment of the change in provisioning approach representing a change in accounting estimate in terms of IAS 8
  • Engaging our accounting experts to assess the compliance of the change in provisioning approach with the requirements of IAS 8
  • Robustly challenging the assumptions used in the new obsolescence provision for rebuilt parts inventory
  • Assessing the appropriateness of the new obsolescence provision for rebuilt parts inventory by analysing inventory turnover days and forecast demand.

We concur with the directors’ conclusion that the change in provisioning approach constitutes a change in accounting estimate in terms of IAS 8.

We consider the assumptions used in the revised obsolescence provision for rebuilt parts inventory to be appropriate.

We consider the disclosures for the change in accounting estimate to be acceptable.

OTHER INFORMATION

The directors are responsible for the other information. The other information comprises the directors’ report, the audit committee’s report and the company secretary’s Certificate, as required by the Companies Act of South Africa, which we obtained prior to the date of this auditor’s report and the integrated report, 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 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 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’s and 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 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 ISA 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 ISA, 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 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 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 audit committee 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 audit committee 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 audit committee, 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 Deloitte & Touche has been the auditor of Barloworld Limited for one hundred years.

Deloitte & Touche
Registered Auditor
Per: Bongisipho Nyembe
Partner

16 November 2018

Buildings 1 and 2
Deloitte Place
The Woodlands
Woodlands Drive
Woodmead
Sandton
2196