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Hyprop Investments Limited
Integrated annual report and consolidated financial statements
2017
93
Other information
The directors are responsible for the other information. The other
information comprises the directors’ report, the report of the audit
committee and the declaration by the company secretary as required by
the Companies Act of South Africa, and the approval of the consolidated
financial statements, which we obtained prior to the date of this report,
and the integrated annual report, which is expected to be made available
to us after this date. The other information does not include the
consolidated financial statements and our auditor’s report thereon.
Our opinion on the consolidated 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 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 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 the directors for the consolidated
financial statements
The directors are responsible for the preparation and fair presentation of
the consolidated 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 financial statements
that are free from material misstatement, whether due to fraud or error.
In preparing the consolidated financial statements, the directors are
responsible for assessing the group’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 or to cease operations, or have no realistic alternative
but to do so.
Auditor’s responsibilities for the audit of the consolidated
financial statements
Our objectives are to obtain reasonable assurance about whether the
consolidated 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 financial statements.
Classification and valuation of investment in Hystead Limited (Hystead)
Refer to the accounting policies in notes 1.8, 1.12.5 and 1.12.8, the key estimations and uncertainties in note 1.24, and to note 6.3 and 7 to the consolidated
financial statements.
Key audit matter
How this matter was addressed in our audit
The group continues to grow its portfolio of investment properties in
South-Eastern Europe, held through Hystead, a joint venture, and funded
in Euro with credit enhancement provided mainly by Hyprop (referred to
as the Hystead structure). During the year, there were changes to the
Hystead structure, including the acquisition of Balfin MK and changes in
the underlying funding structure that resulted in recognition of revised
financial guarantees at fair value and a corresponding charge to profit and
loss.
The Hystead structure and the rights and obligations in the contracts
underlying that structure are complex. The correct classification of the
group’s investment in Hystead as either an equity-accounted investment
or a financial asset, and recognition of the credit enhancement guarantee
as a financial guarantee, involves significant judgements made by
management. Due to the changes in the structure, management re-
evaluated whether the accounting treatment was still appropriate in the
current year.
The valuation of the right to receive dividends and deferral of that right, as
well as the valuation of the financial guarantees, relies on the selection of
the appropriate valuation models and management judgements about the
inputs to those models.
Due to the complexity of the Hystead structure and the significance of the
judgements made in the continued applicability of the accounting policy
selection and the related valuations, this matter was considered to be a
key audit matter.
Our response to the key audit matter included the following audit procedures,
among others:
■■
Through inspection of the shareholders’ agreement, funding agreements
and other documents, as well as discussion with management, we gained
an understanding of the transactions entered into in the current year
■■
We challenged management, with assistance from our technical
accounting specialists, on the continued application of selected
accounting policies in accordance with International Financial Reporting
Standards, including classification of the investment as a financial asset,
recognition of the right to receive dividends from that financial asset,
recognition of the financial guarantees, deferral of unrealised gains and
disclosure of the encumbered investment properties supporting the
credit enhancement provided
■■
We challenged management’s selection of the valuation model for the
right to receive dividends and the financial guarantee, and the significant
assumptions and judgements used in the valuation process, with
assistance from our valuation specialists and their knowledge of the
industry
■■
For a selection of key inputs to the valuation models, we compared the
inputs used by management to available internal and external sources
■■
We assessed the adequacy of the disclosures about judgements made by
management in accounting for and valuing the investment in Hystead and
the financial guarantee.