To the Shareholders of Peregrine Holdings Limited
Report on the Audit of the Consolidated and Separate Financial Statements
We have audited the consolidated and separate financial statements of Peregrine Holdings Limited (the Group), which comprise the statements of financial position as at 31 March 2018, and the statements of comprehensive income, the statements of changes in equity and the statements of cash flows for the year then ended, and 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 31 March 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 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 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 financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters.
The key audit matters as described below pertains to the audit of the consolidated financial statements. There were no key audit matters identified in relation to the audit of the separate financial statements.
Key Audit Matter
How the matter was addressed in the audit
Reorganisation and unbundling of Sandown Capital Limited (“Sandown Capital”)
The Group reorganised a number of proprietary investments into a separate listed entity – Sandown Capital. This entailed the sale of a number of proprietary assets and a number of legacy hedge fund holdings to Sandown Capital.
The reorganisation and unbundling of Sandown Capital has been recognised as a key audit matter due to the following:
The reorganisation and unbundling process represents a material transaction to the Group. This represents a significant event and results in significant transactions that will have a significant effect on the consolidated financial statements of Peregrine Holdings Limited.
The process of moving the proprietary assets and the hedge funds to Sandown Capital is a complex transactions with complex entries that needed to be considered in arriving at the values to be transferred over to the new entity. Further, there are complexities in ensuring that Johannesburg Stock exchange (“JSE”) listing requirements are met. This process has resulted in significant interactions between the auditors and management in understanding the transactions to be undertaken to effect the reorganisation and unbundling and the work that needs to be undertaken form an audit perspective. Further, there has been extensive interaction with the JSE with regards to understanding their requirements. The process has resulted in significant audit effort to date, in obtaining the understanding of the transactions involved to effect the unbundling and reorganisation.
Our audit approach responded to the key audit matter by:
Evaluating the design and testing the implementation of relevant controls in respect of the reorganisation and unbundling.
Obtaining an understanding of the unbundling process through a review of the paper prepared by the Directors on the transaction steps to be undertaken to effect the reorganisation and unbundling.
Inspecting the legal agreements for the transfer of assets and unbundling.
Testing the fair value of the assets transferred by tracing to supporting documentation and the legal agreements.
Reviewing the journal entries to verify that the journal entries are in accordance with the paper prepared by the Directors, the legal agreements and the supporting documentation.
Performing an assessment of the impact of IFRIC 17 Distribution of non-cash assets to owners (“IFRIC 17”) which requires an entity to recognise the difference between the previous carrying amount, and the fair value of the asset distributed, as a gain or loss in the statement of comprehensive income. Based on our assessment, we concluded that no profit or loss should be recognised on the unbundling transaction.
Our accounting and tax specialists evaluated the accounting and tax impact arising from the reorganisation and unbundling.
Evaluating the disclosure for the reorganisation in terms of IAS 24 Related party disclosures (“IAS 24”).
Based on the procedures performed, we found that the reorganisation and unbundling of Sandown Capital has been appropriately accounted for.
The disclosure in note 12.2 of the consolidated financial statements was found to be appropriate.
Impairment of goodwill and other intangible assets
As at 31 March 2018, the Group had goodwill of R474 million (2017: R461 million) and intangible assets of R184 million (2017: R201 million). Of this value R143 million (2017: R145 million) is attributable to the goodwill in Stenham Limited and R83 million (2017: R96 million) is attributable to the intangible assets in Stenham Limited.
Under IFRSs, goodwill is required to be reviewed for impairment annually and intangibles are required to be reviewed where there are any indications that impairment may have occurred.
There is a risk that the intangible assets and goodwill are valued incorrectly due to the judgement involved in the impairment assessment. The Directors needed to properly support its assumptions over inputs to the impairment model. Key assumptions are:
The discount rate applied;
The assumed growth of assets under management (“AUM”) in Asset Management and Wealth Management as the growth of the AUM drives the growth of the revenue; and
Earnings before interest, tax, depreciation and amortisation (“EBITDA”) percentage/ revenue realisation rate which depicts the percentage applied to forecast revenues in order to produce forecast EBITDA (used as a proxy for cash flows).
This key audit matter has been isolated to Stenham Limited due to the fact that in the prior year we identified sufficient headroom between the net carrying value of the goodwill and other intangible assets in Citadel Holdings (Pty) Ltd (“Citadel”) and the goodwill in Peregrine Securities (Pty) Ltd (“Peregrine Securities”) and the recoverable amount. In order for the above mentioned headroom to be significantly reduced to levels that would affect the value of the goodwill and other intangible assets and adversely impact the value of the goodwill and result in an impairment would require a significant adjustment in the business model of both entities with significant loss in customer relationships. This has not occurred in the current financial year and therefore the headroom, as assessed in the prior year, is not expected to be affected.
The valuation of goodwill and intangible assets of Stenham Limited has been identified as a key audit matter due to its significance to the Group’s overall net asset value. The assessment of whether there is an impairment of goodwill and other intangible assets, within the Stenham cash generating unit, is a judgemental process. This requires estimates concerning the recoverable amount of the cash generating unit using a discounted cash flow approach.
As detailed in notes 13 and 40.1 of the consolidated financial statements, the determination of an impairment is highly subjective as significant judgement is required by the Directors in determining the recoverable amount. Accordingly, due to the high estimation uncertainty, the impairment assessment of these assets is considered to be a key audit matter.
We focused our testing of the impairment of goodwill and other intangible assets on the key assumptions made by the Directors.
Our audit procedures included:
Evaluating the design and assessing the implementation of relevant key controls in respect of the impairment assessment performed by the Directors.
Evaluating whether the model used to calculate the value-in-use of the individual cash generating units within Stenham complies with the requirements of IAS 36: Impairment of Assets.
Validating the cash flow assumptions applied and the inputs to historical information and approved budgets.
Critically challenging the discount rate and growth rate assumptions applied by the Directors. This included the utilisation of experts from the valuation team to review the reasonableness of management’s discount rate applied and the inputs used in arriving at the discount rate. The discount rate applied is a key input to the value in use calculations for goodwill and intangible assets.
We have assessed the disclosures for goodwill and other intangible assets and and we considered the disclosures made for the goodwill and other intangible assets in notes 13 and 40.1 of the consolidated financial statements to be appropriate.
The Group operates various long term incentive (“LTI”) schemes. These LTI schemes are accounted for in accordance with the requirements of IFRS 2 Share-based payments (“IFRS 2”) or IAS 19 Employee benefits (“IAS 19”) .
A portion of the total bonus pool is allocated to selected employees as part of the LTI scheme.
LTI scheme 2 was rolled out during the year ended 31 March 2016 within Citadel. During the current financial period, Citadel decided to early vest the LTI Scheme 2 as at 30 September 2017.
Accounting for remuneration schemes is complex and requires extensive disclosure. Under IFRS 2 and IAS 19, the benefit attributable to employees must be quantified and allocated to periods of service. There is a risk that the judgements applied in recognising the impact of the remuneration schemes in the financial statements is incorrect. In the current year, one of the schemes has vested early resulting in additional accounting complexities.
This is considered a key audit matter due to the audit effort involved in obtaining assurance over the judgements involved in the valuations, including the inputs used in the measurement of the fair values of the benefit granted.
The contractual terms and accounting treatment of the LTI schemes are disclosed in note 29.2 of the consolidated financial statements.
We have performed the following audit procedures:
Evaluated the design and tested the implementation of relevant controls to address the key audit matter.
Utilised our technical accounting and tax specialists to review the accounting and tax treatment of the share scheme.
Obtained the share-based payment reserve calculation and challenge the assumptions applied.
Verified that all vested schemes have been accounted for correctly in accordance with IFRS.
Considered the IFRS accounting measurement implications of the “residual” amounts remaining in the Scheme 2, following its early vesting. Verified that these amounts are correctly amortized over the remainder of the vesting period, in line with IFRS 2 early vesting provisions for residual amounts.
Evaluated the accuracy and completeness of disclosures in the Financial Statements.
We considered the accounting treatment adopted in note 29.2 and the disclosures in the consolidated financial statements to be appropriate with no material issues identified.
The Directors are responsible for the other information. The other information comprises the Directors’ Report, the Audit Committee Report and the Declaration by the Company Secretary as required by the Companies Act of South Africa, as well as the additional information contained in the Integrated Annual Report, which we obtained prior to the date of this report. 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 the 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 the 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’s and the 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 the 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 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, related safeguards.
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 Deloitte has been the auditor of Peregrine Holdings Limited for two years.
Per: Lito Nunes
Date: 31 July 2018
Deloitte Place, Building 8
20 Woodlands Drive,