Independent auditor's report

TO THE SHAREHOLDERS OF BARLOWORLD LIMITED

REPORT ON THE AUDIT OF THE CONSOLIDATED AND SEPARATE ANNUAL FINANCIAL STATEMENTS

OPINION

We have audited the consolidated and separate financial statements of Barloworld Limited and its subsidiaries ("the Group") and Company set out here, which comprise of the consolidated and separate statements of financial position as at 30 September 2020, and the consolidated and separate statements of profit or loss and other comprehensive income, the consolidated and separate statements of changes in equity and the consolidated and separate statements of cash flows for the year then ended, and notes to the consolidated and separate 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 and Company as at 30 September 2020, 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 and the requirements of the Companies Act of South Africa.

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 are independent of the Group and Company 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 of the Group and Company and 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 of the Group and Company and in South Africa. The IRBA Code is consistent with the corresponding sections of the International Ethics Standards Board for Accountants' International Code of Ethics for Professional Accountants (including International Independence Standards). We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.

OTHER MATTER

The financial statements of Barloworld Limited for the year ended 30 September 2019, were audited by another auditor who expressed an unmodified opinion on those statements on 15 November 2019.

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. For each matter below, our description of how our audit addressed the matter is provided in that context.

We have fulfilled the responsibilities described in the Auditor's Responsibilities for the Audit of the consolidated and separate financial statements section of our report, including in relation to these matters. Accordingly, our audit included the performance of procedures designed to respond to our assessment of the risks of material misstatement of the consolidated and separate financial statements. The results of our audit procedures, including the procedures performed to address the matters below, provide the basis for our audit opinion on the accompanying consolidated and separate financial statements.

The Key Audit Matters applies to the audit of the consolidated statements:

KEY AUDIT MATTER HOW THIS MATTER WAS ADDRESSED IN OUR AUDIT
IMPAIRMENT OF GOODWILL (CONSOLIDATED)
As at 30 September 2020, the Group has goodwill of R1,3 billion, which is shown as non-current asset in the statement of financial position. The applicable disclosures can be found in note 12 to the consolidated financial statements.

As required by IAS 36 Impairment of Assets, the Group tests goodwill for impairment on an annual basis and an impairment loss of R702 million has been recognised in the current year. In order to determine the impairment loss for the year, management calculates the recoverable amount of each cash-generating unit (CGU) using a discounted cash flow (DCF) model.

The Group has diverse business interests in the Automotive Retail, Rental & Leasing, Logistics, and Industrial Heavy Equipment sales which are subject to sector specific macro-economic and business performance assumptions. As a result, each DCF model includes different judgements about significant inputs such as the discount rates and assumptions impacting the forecast cash flows, including the movements in working capital, the revenue growth rates, and the forecast costs. Management involves external specialists to assist in the determination of the discount rates used in each DCF.

Further to the above, the COVID-19 pandemic which resulted in lockdown and decline in economic activity, has changed the Group's operating environment. The resultant decline in profitability together with the continued uncertainty of the effect of COVID-19 on the Group's future financial performance, increased the effort required to audit forecast performance as historical measures are no longer indicative of future performance.

As a result of the above, significant auditor attention was required to audit the DCF models, including the use of specialists, and as such this has been considered as a Key Audit matter in the current year.

Our procedures for each CGU included, amongst others, the following:

  • We obtained an understanding of the process followed by management in assessing goodwill for impairment.
  • With the assistance of our specialists we assessed the reasonability of the inputs used to calculate the discount rate by comparing them to available market data.
  • We assessed the competence and objectivity of the expert engaged by management to calculate the discount rate used in the DCF model.
  • We assessed the reasonability of the forecast cash flows by:
    • Performing an assessment of managements historical forecasts against actual performance;
    • Compared actual results achieved after year end to the forecast performance for the same period;
    • Assessing the external inputs used by management to determine the revenue growth rates and forecast costs for reasonability against available market data and our specialists' assessments over comparable data;
    • Comparing growth in revenue and costs to actual growth rates achieved in previous years and considering sector-specific adjustments made to account for the impact of the COVID-19 pandemic and macro-economic indicators which, with the assistance of our specialists, we tested for reasonability through comparison to available market data;
    • Assessing forecast working capital movements against historic performance. We considered the impact of the national lockdown as a result of COVID-19, by placing more emphasis on recent performance both during and after the current financial year to provide an indication of future working capital movements;
  • We performed a scenario analysis by considering the impact on the recoverable amount for changes in the inputs in the models to determine our own estimation of the recoverable amount and the reasonability of managements calculation of the recoverable amount.
  • We reviewed and vouched the disclosures in the consolidated financial statements to the results of our assessments and audit procedures over the Group's recoverable amount calculations.
KEY AUDIT MATTER HOW THIS MATTER WAS ADDRESSED IN OUR AUDIT
MAINTENANCE AND REPAIR CONTRACTS (MARC) - EQUIPMENT DIVISION (CONSOLIDATED)
As at 30 September 2020, the Group's current and non-current contract liabilities (of R1 272 million and R436 million respectively), include MARC deferred revenue of R586 million (2019: R469 million). The Group's revenue of R49 683 million includes MARC revenue of R1 325 million (2019: R1 327 million). The applicable disclosures can be found in note 2 and 29 to the consolidated financial statements.

The Group, through its Barloworld Equipment division, is a distributor of Heavy Industrial Equipment. In addition to the sale and rental of this equipment, the Barloworld Equipment division provides maintenance and repair services to its customers over varying contractual periods - these are referred to as MARC for the machines.

As required by IFRS 15 Revenue from Contracts with Customers - guaranteed MARC revenue is recognised over time using a cost-based output method and is calculated based on multiple inputs being; actual costs incurred to date, billings to date, full life revenue, and full life costs. The "full life cost" and "full life revenue" are calculated at contract inception date and are adjusted as costs are incurred and price adjustments/variations are agreed with the customer.

The guaranteed MARC revenue is recognised in the statement of profit or loss and other comprehensive income at the percentage to which actual cost incurred relates to total full life cost expected to be incurred over the duration of the contract. Deferred revenue, which is the portion of revenue invoiced but not yet earned (in terms of the cost-based output method), is recognised as a liability in the statement of financial position.

In addition to the significance of the MARC revenue (both deferred and recognised) to the financial statements, it is determined at the individual contract level for each piece of equipment.

This means that the calculation relies on multiple inputs to be audited (both deferred and recognised) resulting in significant effort in the current year as extensive time was spent testing these inputs to supporting documentation.

Furthermore, because this was our first year auditing the Group, significant time was spent in discussion with management to understand the process and the accounting policies in order to design our audit strategy which evolved over the course of the audit.

 Our procedures included, amongst others, the following:

  • We have obtained an understanding of the process followed to account for the Maintenance and Repair contracts (MARC).
  • We read the revenue recognition policy relevant to MARC and assessed the principles applied against the requirements of IFRS 15.
  • We recalculated deferred revenue taking into account the following inputs: full life revenue, full life cost, costs incurred to date at sell, and billings to date for each piece of equipment (machine) under a MARC. We agreed the inputs used in management's deferred revenue calculation to Barloworld Equipment division's asset management system.
  • For a sample of transactions relating to new and existing MARC, we tested the inputs into the calculation as follows:
  • For a sample of MARC equipment (machines) contracts entered into during the current financial year we:
    • Tested the full life cost at inception of the contract through recalculation in reference to the expected effort to maintain/repair the equipment per the third-party dealer guidelines.
    • Tested the inputs into these calculations to the third-party dealer guidelines (for quantities of parts/components), to Barloworld Equipment price lists, and to other supporting documentation for third party labour costs.
    • Agreed the full life cost and the total machine hours to the signed contract with the customer and to the Barloworld Equipment asset management system.
  • For a sample of MARC equipment (machines) contracts entered into during the current financial year and those existing in the prior year we:
    • Compared the full life cost as at 30 September 2020 to the prior year and agreed significant movements to escalation letters signed by the customer.
    • Recalculated the billed revenue to date as at 30 September by adding invoices issued to the customer for machines during the current financial year and the accumulated billing of prior financial years.
    • Recalculated the full life revenue as at 30 September 2020 in reference to the billed revenue to date and the future expected billings which were determined by multiplying the rates agreed with the customer by the remaining machine hours. Remaining machine hours were recalculated in reference to the signed contract with the customer and total hours the machine had operated to date (which we tested to supporting documentation).
    • Agreed these inputs to the Barloworld Equipment asset management system.
  • We agreed a sample of costs incurred to date and recorded in the Group's accounting system during the current financial year to supporting documentation and to the posting into the asset management system and tested that the cost were allocated to the correct MARC equipment (machine).
  • We tested the reconciliation of the costs recorded in the AMT system during the current financial year to the clients accounting records.

OTHER INFORMATION

The directors are responsible for the other information. The other information comprises the information included in the document titled "Barloworld Limited consolidated and Company annual financial statements for the year ended 30 September 2020", which includes 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 report, and the "Barloworld Limited Integrated Report", 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 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 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 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 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 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 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 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 the 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 and separate 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, actions taken to eliminate threats or safeguards applied.

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 Ernst & Young Inc. has been the auditor of Barloworld Limited for one year.

Ernst & Young Inc.
Director: Sifiso Sithebe

Registered Auditor
Chartered Accountants (SA)

30 November 2020