Audit and risk committee's report

for the year ended 30 June 2019

Introduction and statutory duties

The audit and risk committee (the committee) has pleasure in submitting its report, as required by section 94(7)(f) of the Companies Act of South Africa, for the year ended 30 June 2019.

The committee is governed by a formal charter that codifies its role and responsibilities. The primary responsibilities of the audit and risk committee are to:

Oversee integrated reporting, including consideration of significant judgements and reporting decisions made
Ensure that a combined assurance model is applied to provide a coordinated approach to all assurance activities
Review the expertise, resources and experience of the company's finance function, and satisfy itself on the suitability of the expertise and experience of the chief financial officer
Oversee internal audit, and in particular, the appointment and/or dismissal of the internal audit service provider
Monitor compliance with the risk policy
Recommend the appointment of the external auditor and oversee the external audit process, and
Make submissions to the board on any matter concerning the company's accounting policies, financial controls, records, reporting and risk management.

Functions

In addition to the primary responsibilities above, the committee also covered matters relating to compliance and litigation, budgeting and forecasting, taxation and accounting policy choices and supported the board in the following areas:

Advising the board on the accounting implications of major transactions
Approving the annual internal audit plan and reviewing the scope, work and reports of the internal audit function
Reviewing adherence to Hyprop's systems of internal controls and, where necessary, monitoring improvements
Recommending the appointment of the external auditor for approval by shareholders
Monitoring established guidelines for the use of the external auditor for non-audit services, to maintain independence
Monitoring compliance with Real Estate Investment Trust (REIT) requirements, in accordance with the JSE Listings Requirements, and confirming that the risk management policy, which prohibits the company from entering into derivative transactions not in the ordinary course of business, has been complied with in all material respects, and
Considering and improving financial reporting in line with the results of the JSE proactive monitoring process in respect of the consolidated and separate financial statements.

Composition and meetings

All members of the committee are independent non-executive directors, in compliance with the Companies Act of South Africa and as recommended by King IV. The external and internal auditors and executive management are invited to attend every meeting of the committee.

Details of committee members' attendance at meetings held during the year are set out below:

	24 August 2018	29 August 2018	8 October 2018	20 November 2018	22 February 2019	28 May 2019
Thabo Mokgatlha (Chair)	✓	✓	✕	✓	✓	✓
Stewart Shaw-Taylor	✓	✓	✓	✓	✕	✓
Gavin Tipper⁽¹⁾	✓	✓	✓	✓	✓	✓
Zuleka Jasper	✓	✓	✓	✓	✓	✕
Lindie Engelbrecht⁽²⁾	✓	✓	✕	✓	⁽²⁾	⁽²⁾

⁽¹⁾ Gavin Tipper's dual role as chairman of the board of directors and member of the audit and risk committee was specifically approved by shareholders at the annual general meeting of the company held on 30 November 2018.

⁽²⁾ Lindie Engelbrecht resigned as a director of the company and chair of the audit and risk committee effective 30 November 2018.

Significant financial statement reporting issues

A significant part of the financial reporting process includes making estimates and exercising judgement. The committee reviewed and evaluated the main judgements, estimates and assumptions made by management and the conclusions drawn from the available information and evidence.

The committee also ensured that these matters are included and covered in the plans and work of the external auditor.

The key issues involving estimates and judgements during the year are set out below:

	Key issue	Judgement in financial reporting	Audit and risk committee review	Conclusion
1	Classification and valuation of investment in Hystead	Judgements were applied by management in interpreting the IFRS implications of the suite of agreements which govern the relationship between the shareholders of Hystead to determine the appropriateness of the classification of the investment in Hystead as a financial asset. Estimations and judgements were also applied in the determination of future cash flows, appropriate discount and exit cap rates and the application of annual and terminal growth rates when determining the valuation of the investment in Hystead. Having determined the valuation of the Hystead financial asset, judgement was further applied to the determination of the portion of the valuation which would be deferred as a day-one gain.	The committee reviewed the accounting treatment of Hystead and assessed the appropriateness of the accounting classification, taking advice from the various sources. The committee received briefings on the consistency of the valuation methodology and deferral of day-one gains, and the expanded disclosure of these two elements in the 2019 financial statements.	Having considered both management’s and the external auditor’s views on the classification and measurement of the investment in Hystead, the committee concluded that the classification as a financial asset remained appropriate and the valuation was reasonable.
2	Recoverability of loans to the sub-Saharan African (excluding South Africa) investments	Judgements and assumptions were applied by management in calculating the recoverable amount of the loans extended to AttAfrica and Manda Hill, particularly with respect to: Determining the cash-generating units (CGUs) and the ongoing appropriateness of the CGUs being used for the purpose of impairment testing Assumptions on future pricing, net cash inflows and discount rates The value of underlying assets held by these entities, including specifically the investment properties of the underlying property companies Prospects for the investee companies and expected lifetime credit losses The likely time period over which these investments may be realised.	The committee assessed the appropriateness of the CGUs and reviewed the impairment triggers. In considering the need to impair the loans the committee considered the following: The group’s stated intention to exit the investments in sub-Saharan Africa (excluding South Africa) The nature of the underlying investments The remaining period of the loans and the probability of their extension upon maturity The net asset value included deferred tax liabilities on the revaluation of investment properties that Hyprop believes will not be realised on the sale of the shares in the underlying property companies Values of the underlying property assets and the net assets/liabilities of the underlying property companies The anticipated time to dispose of the sub-Saharan African (excluding South Africa) investments Expected profits/losses during the time it may take to dispose of the remaining sub-Saharan African (excluding South Africa) assets The anticipated proceeds which may be received on disposal of the sub-Saharan African (excluding South Africa) investments.	The committee endorsed management’s final impairment of the loans extended to AttAfrica and Manda Hill.
3	Classification and valuation of financial guarantees	Management applied judgement in determining the financial effect of the financial guarantees provided by Hyprop to secure the borrowings incurred in the Eastern European and sub-Saharan African (excluding South Africa) portfolios. The financial guarantees impact the value of the financial asset recognised in respect of the investment in Hystead, the investments in subsidiaries and joint ventures in respect of sub-Saharan Africa, and the financial liability relating to the guarantees. Management further obtained external valuations for the financial guarantees.	The committee reviewed the external valuations which supported the accounting entries. They also reviewed the adequacy of the disclosures relating to financial guarantees as well as the interaction of the financial guarantees on the Hystead financial asset valuation and the investment in Hyprop Mauritius.	The committee endorsed management’s classification and valuation of the financial guarantees.
4	Valuation of investment property	Investment property is the group’s most significant asset and is measured at fair value, with changes in fair value recognised in profit or loss. The group used independent valuers to value the consolidated investment properties. The valuation involves making significant judgements, especially those around the current market conditions, reversionary capitalisation rates and rental levels.	The committee reviewed the external valuations which supported the accounting entries, including the discount rates and reversionary capitalisation rates. They also reviewed the adequacy of the disclosures relating to investment properties.	The committee endorsed the independent valuation of the investment propertie

Where appropriate, the committee sought input and views from the external auditor and other experts in its efforts to continuously improve the quality of financial reporting and the integrated annual report.

Going concern

The committee reviewed the solvency and liquidity tests undertaken at the time of declaring the distributions for the six-month periods ended on 31 December 2018 and 30 June 2019 and has reported on going concern to the board. This included a review of the company's budget for the year ended 30 June 2020, available cash balances at 30 June 2019, existing and new bank facilities and the company's debt maturity profile. The committee confirmed that the company and the group have adequate resources to continue operating for the ensuing 12 months and that it is appropriate to adopt the going concern basis in preparing the company and group financial statements.

External auditor

The committee has considered a report from KPMG motivating its independence and is satisfied with the independence of the external auditor. The committee is also satisfied with the terms, nature, scope and proposed fee of the external auditor for the year ended 30 June 2019.

The committee has considered and is satisfied with the suitability of KPMG and the designated audit partner, Tracy Middlemiss, for the appointment as auditors in accordance with paragraphs 3.84(g)(iii) and 22.15(h) of the JSE Listings Requirements.

The committee approved the appointment of KPMG Services Proprietary Limited to provide limited assurance reports for selected sustainability development indicators.

The committee further approved the appointment of KPMG Nigeria to provide tax advisory services to Gruppo Investments Limited, a subsidiary of Hyprop, whose external auditor is Ernst & Young (Nigeria).

Risk management, combined assurance framework and internal controls

The committee reviewed the group's policies on risk assessment and regularly monitors the combined assurance dashboard and risk matrix covering both operational and financial reporting matters and provides feedback and recommendations on actions to mitigate the identified risks.

The committee further took note of macro-economic risks emerging in South Africa and sub-Saharan Africa as well as increasing political risk in South Africa and reviewed management's responses to these risks.

The committee relies on management, the external auditor, internal audit and the group's independent ethics reporting telephone line to highlight any concerns, complaints or allegations relating to internal financial controls, the content of the financial statements and potential violations of the law or questionable business, accounting or auditing practices. Separate meetings are also held with management, the external auditor and the internal auditor every quarter unless a greater frequency is requested.

Chief Financial Officer and financial reporting

The consolidated and separate financial statements have been audited in compliance with section 30 of the Companies Act of South Africa. Brett Till CA(SA), chief financial officer, is responsible for this set of financial statements and has supervised the preparation thereof. The committee is satisfied that the CFO has the necessary expertise and experience to carry out his duties, as required by paragraph 3.84(g)(i) of the JSE Listings Requirements.

The committee is further satisfied that the company has established appropriate financial reporting procedures and that these procedures are operating effectively, as required by paragraph 3.84(g)(ii) of the JSE Listings Requirements.

Stakeholder reporting process

Concerns and complaints received from within or outside the group relating to accounting practices and internal financial controls, and the content or auditing of the consolidated and separate financial statements, were considered by the committee and dealt with as appropriate.

Recommendation of financial statements

The consolidated and separate financial statements are reviewed by management, the committee, the board and are audited by the external auditor of the group. The committee is satisfied with the consolidated and separate financial statements and the accounting policies used in their preparation, and has recommended the consolidated and separate financial statements to the board for approval.

Thabo Mokgatlha
Audit and risk committee chair

23 October 2019

2019 Integrated annual report

and consolidated and separate financial statements