2020 Integrated Annual Report

and Consolidated & Separate
Financial Statements

Report of the Audit and Risk committee

THABO MOKGATLHA
Chair Audit and Risk committee

Introduction

The Audit and Risk committee (the ARC) is pleased to submit its report, as required by section 94(7)(f) of the Companies Act of South Africa, for the year ended 30 June 2020.

In 2020, the ARC, faced with the unprecedented circumstances caused by the Covid-19 pandemic, focused on monitoring the risks arising from the volatile and unprecedented economic and social impact of Covid-19 in all jurisdictions where the Group operates. This was in addition to the ARC’s traditional responsibilities, which include, monitoring and management of risk in the Group and monitoring the integrity of financial reporting systems, internal controls and financial disclosures.

Focus areas in 2020

Areas of special focus that the ARC provided oversight on included:

  • Covid-19:
    Assessing the Group’s response and risk management strategies to address the impact of the Covid-19 pandemic.
  • Tenant rental relief:
    Monitoring the Group’s response to tenants’ requests for financial assistance (rental discounts) due to mall closures across the portfolio.
  • Cashflow and funding:
    Assessing and monitoring the Group’s cash resources, funding needs and compliance with borrowing covenants in the dynamic economic environment.
  • Going concern:
    Assessing management’s conclusion regarding the going concern assumption, including financial liquidity risks.

Statutory duties

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

Functions

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

Composition and meetings

All members of the ARC 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 ARC. Details of the ARC members’ attendance at meetings held during the year are set out in the Governance section of the integrated report.

Significant financial statement reporting issues

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

The ARC 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
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 ARC considered the independence and qualifications of the independent valuers appointed to carry out the investment property valuations, as well as the rotation of properties between the two appointed valuers.

The ARC reviewed the external valuations which supported the accounting entries, including the discount rates and reversionary capitalisation rates applied by the independent valuers, and the manner in which the independent valuers took the prevailing Covid-19 circumstances into account in performing the valuations.

The ARC also reviewed the adequacy of the disclosures relating to investment properties included in the financial statements, including specifically the disclosure of the uncertainty around the valuations as a result of Covid-19 expressed by the independent valuers in their reports.

 

   

The ARC endorsed the independent valuation of the investment properties and the relevant disclosures on the valuations included in the financial statements.

 

  2 Determining
the
recoverable
amounts for
the shares held
in, and loans
advanced
to, the sub-
Saharan
African
(excluding
South Africa)
investments
 

Judgements and assumptions were applied by management in calculating the recoverable amount of the ordinary and preference shares held in AttAfrica as well as the loan advanced to AttAfrica, particularly with respect to:

  • Determining the cash-generating unit (CGU) and the ongoing appropriateness of the CGU 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 ARC assessed the appropriateness of the CGU and reviewed the impairment triggers.

In considering the fair value of the ordinary and preference shares and the need to impair the loan, the ARC 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
  • Terms of the preference shares
  • 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 ARC endorsed management's final assessment of the fair value of the ordinary and preference shares in AttAfrica and the impairment of the loan advanced to AttAfrica.
  3 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 determining the 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 determine the portion of the valuation which should be deferred as a day-one gain.

    The ARC reviewed the accounting treatment of Hystead and assessed the appropriateness of the accounting classification.     Having considered both management's and the external auditor's views on the classification and measurement of the investment in Hystead, the ARC concluded that the classification as a financial asset remained appropriate and the valuation was reasonable.
  4 Allowances for expected credit losses: Trade receivables  

Judgements were applied in determining the allowance for expected credit losses in respect of trade and other receivables.

Assessments were made on a tenant-by-tenant basis, considering the circumstances of each tenant, including factors such as defaults on payment terms, known insolvency, the legal status of the accounts, rental discounts granted to tenants and payments received after the year end.

The impact of Covid-19 on the economies in which the Group operates has had a negative effect on many of the Group's tenants' businesses and resulted in a significant increase in the expected credit losses.

Security deposits held on behalf of tenants are not taken into account for purposes of calculating expected credit losses as these are retained to cover reinstatement and other obligations at the end of the lease.

   

The ARC reviewed the methodology applied by management to determine the allowance for expected credit losses, as well as the overall allowance for expected credit losses relative to the increase in the trade receivables at 30 June 2020.

Cognisance was also taken of the rental discounts granted to tenants during the Covid‑19 lockdown periods and the accrual for discounts which were agreed with tenants and processed after the year end reporting date.

The ARC also considered the anticipated increase in business failures as a result of Covid‑19, those tenants who had filed for business rescue, the slow pace at which tenants' businesses are recovering post the Covid‑19 lockdowns and cash collections from tenants post the year end.

    The ARC endorsed management's final allowance for expected credit losses, noting the increase over the prior year.
  5 Adoption of the going concern basis in preparing the financial statements   Judgement was applied by management in preparing the financial statements on the going concern basis.     See detailed comments in the report below.     The ARC confirmed that it is appropriate to adopt the going concern basis in preparing the Company and Group financial statements.

Although not significant to the current year's financial results, the ARC also considered the accounting treatment of the co-owned assets and joint operations (Canal Walk and The Glen), classification of the investment in AttAfrica as a joint venture following the change in the Group's shareholding in AttAfrica during the year, and the valuation and accounting treatment of the financial guarantees provided by the Company for borrowings of other Group companies.

Where appropriate, the ARC 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, solvency and liquidity

The ARC 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.

In assessing whether it is appropriate to adopt the going concern basis in preparing the Group financial statements, the ARC reviewed the solvency and liquidity tests undertaken by the Company at the time of declaring the interim distribution for the six-month period ended 31 December 2019, when contemplating the declaration of a final dividend for the year ended 30 June 2020 and the manner in which the distributions will be settled.

The solvency and liquidity tests include reviews of the Company's budget and cashflow forecasts, available cash balances, existing unutilised and new term loans and revolving credit facilities, and the Group's debt maturity profile at the time of performing the test. Cognisance was also taken of the current level of economic uncertainty as a result of Covid-19 and the board's deferral of its decision on the payment of the interim dividend and the declaration of the final dividend for the year ended 30 June 2020 until December 2020 (as set out in the directors' report).

The ARC has reported on going concern to the board.

External auditor

The ARC has considered a report from KPMG motivating its independence and is satisfied with the independence of the external auditor. The ARC is also satisfied with the terms, nature, scope and proposed fee of the external auditor for the year ended 30 June 2020.

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

The ARC monitors the Group's policy on the provision of non-audit services by the Group's auditors. In this regard, the ARC approved:

Risk management, combined assurance framework and interal controls

The ARC reviewed the Group's policies on risk assessment and regularly monitors the combined assurance dashboard and risk matrix covering both operational and financial reporting risks and matters. Feedback and recommendations on actions to mitigate the identified risks are provided by the ARC.

The ARC further took note of the macro-economic risks emerging in South Africa and sub-Saharan Africa, which were compounded by the advent of Covid-19 globally. This required the ARC to devote additional attention to monitoring specific risks arising from these circumstances, particularly:

Management's responses to these risks were noted and monitored on an ongoing basis.

The ARC 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 ARC 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 ARC 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 ARC and dealt with as appropriate.

Recommendation of financial statements

The consolidated and separate financial statements are prepared by management, reviewed by the ARC and the board, and are audited by the external auditor. The ARC 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

21 September 2020