Annual financial statements

Report of the independent auditor

To the shareholders of Tiger Brands Limited

Report on the audit of the consolidated and separate financial statements

Opinion

We have audited the consolidated and separate financial statements of Tiger Brands Limited set out here, which comprise the consolidated and separate statements of financial position as at 30 September 2018, and the consolidated and separate income statements, statementsof 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 financial statements, including a summary of significant accounting policies.

In our opinion, the accompanying consolidated and separate financial statements present fairly, in all material respects, the consolidated and separate financial position of the group as at 30 September 2018, and its consolidated and separate financial performance and its consolidated and separate cash flows for the year then ended in accordance with International Financial Reporting Standards (IFRSs) 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 in accordance with the Independent Regulatory Board for Auditors Code of Professional Conduct for Registered Auditors (IRBA Code), the International Ethics Standards Board for Accountants Code of Ethics for Professional Accountants (IESBA Code) and other independence requirements applicable to performing audits of Tiger Brands Limited. We have fulfilled our other ethical responsibilities in accordance with the IRBA Code, IESBA Code, and in accordance with other ethical requirements applicable to performing the audit of Tiger Brands Limited. 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 financial statements of the current period. These matters were addressed in the context of our audit of the 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.

Key audit matter and audit consideration Audit scope and procedures
Revenue recognition - Rebates and discounts

As described in the accounting policy notes and reflected in notes 2 and 23 to the group financial statements, Revenue is measured at the fair value of the consideration received/receivable excluding normal discounts, rebates, settlement discounts and promotional allowances, which are earned by customers on the group's sales.

Rebates and discounts are a key audit matter as the final amount due to each customer that is eligible for a rebate and incentive is considered to be complex and requires significant judgement and estimation by management each year in establishing an appropriate accrual for rebates earned at the year end due to the number of rebate agreements in place. This is due to a number of operational, supply and market share metrics which vary annually and are used in the final estimation of the rebates and incentive due to the each customer.

The majority of these rebates and incentives tend to be low in unit value but based on high volume. The agreements include those which span the financial year end of the group, but also and to a lesser extent the customer's financial year end whose timing does not coincide with the group's year end.

There are therefore a number of agreements which are in progress at the financial year end and for which final settlement will only occur at the end of the agreement or at a future point.

Our audit procedures included considering the appropriateness of the group's revenue recognition accounting policies including those relating to incentives and rebates. We tested the effectiveness of the group's controls over the calculation of incentives and rebates and the correct timing of revenue recognition and measurement.

Our audit procedures in respect of the payable recognised and the revenue deductions made, included the following, based on our materiality:

  • On a sample basis, based on the high value rebates and incentives paid, we inspected the terms in the agreement and agreed them to inputs used in the calculation;
  • Using data extraction tools, we agreed the sales volumes used in the calculation to those per the accounting records and considered whether the amounts being used related to the correct period per the agreement and recalculated the rebates and incentives due to each customer based on their contractual terms;
  • We developed an independent expectation of the estimated rebates and incentives due to each customer based on actual sales year to date and operational, supply and customer market share metrics. We then compared this expectation to actual results. Where our recalculation based on the contractual terms and estimation based on sales year to date and operational, supply and customer market share metrics differed to management's final provision, we obtained support for the differences to vouch their validity;
  • We tested the arithmetical accuracy of the management calculation and agreed the amount calculated to the amount recognised in the financial statements;
  • We tested the prior period accrual to actual payments made to customers to assess the historical accuracy of management's estimation process for incentives and rebates, and
  • In addition we tested the validity of the amounts payable at the year end by agreeing the amounts to subsequent payment to customers where these had being completed by the date of our audit report.
Goodwill and intangible assets

Goodwill and other intangibles represents 14% of total assets total and 20% of total equity. Intangible assets arise from acquisition of standalone businesses and/or individual brands and trademarks. Procedures over management's annual impairment test were significant to our audit because the assessment process is complex and the calculation of the recoverable amount requires the use of estimates and assumptions concerning the future cash flows and discount rate, which are inherently uncertain and could change over time.

In performing the yearly assessment of impairment as required by IAS 36 it was noted that the HPCB cash generating unit was either possibly impaired or were sensitive to changes in volume and discount rates applied to the valuation model. This CGU makes up 11% of the total goodwill and other intangibles balances at the year end.

The Personal Care category within HPCB was negatively affected by price inflation, reduced promotional activity and constrained consumer spending in the prior year and was therefore reassessed again this period. These factors required significant auditor attention in assessing how they are accounted for in the cash flow forecasts and the assumptions used by management to make those assessments.

Refer to notes 12 and 13.

We focused our testing on the key assumptions made by management and our procedures included:

  • evaluating the determination of the cash-generating units to distinguish between stand-alone business valuations and brand valuations that have different valuation methodologies applied to them;
  • we evaluated the model used by management in determining the value in use of the identified cash-generating units, as well as independently by using our internal transaction support experts, to reassess the discount rate and valuation methodology used;
  • we compared the cash flow forecasts used in the impairment model to approved budgets and other relevant market and economic information;
  • we identified different risk dependent cash flows used in the valuation models so as to assess whether different specific risk premiums needed to be added to the discount rate when discounting those cash flows;
  • we evaluated and challenged management's future cash flow forecasts and the process by which they were drawn up, and tested the underlying value in use calculations by comparing future cash flows to prior period actual results to assess management's forecast accuracy rate; and
  • calculated a range of possible impairment by performing a sensitivity analysis around the key assumptions of volume growth, margins and the discount rate used in the models.
Contingent Liabilities - Institution of Class Action relating to the presence of Listeria monocytogenes ST6 ("LST6")

The company was served with an application for an order declaring the constitution of a class action suit from claimants who will seek compensation from the Company and Enterprise Foods as a consequence of the involvement of the Company and Enterprise Foods in the Listeria outbreak.

This area is significant to our audit, since the accounting and disclosure for (contingent) legal liabilities is complex and judgmental (due to the difficulty in predicting the outcome of the matter and estimating the potential impact if the outcome is unfavorable), and the amounts involved are, or can be, material to the financial statements as a whole.

Refer to note 30.

We assessed the group's process for identifying and monitoring significant adverse developments arising from contingencies and, where appropriate, legal, regulatory and political developments. We have reviewed the terms of reference of Committees of the Board formed for dealing with this
Class action.

We evaluated management's assessment of the likely outcome and potential exposures arising from this significant contingency and allegations subject to ongoing investigations; and considered the requirements for any provision and related disclosures. Our work included:

  • Assessment of the progress of all significant contingencies, including reviewing the group's public announcements and the underlying basis for the announcements made.
  • Holding discussions with management, the group's in-house legal counsel, ad-hoc Committees, insurance consultants and reviewing pertinent correspondence between the parties involved and relevant reports issued by third parties.
  • Obtaining independent legal confirmation letters from and discussing with the group's external lawyers handling these issues to confirm the fact patterns which we have been advised.
  • We considered the accounting treatment of the liabilities, contingent liabilities and disclosures under IFRS criteria to determine the appropriateness thereof.
  • We assessed the adequacy of the disclosure of the contingency in the financial statements.

Other information

The directors are responsible for the other information. The other information comprises the Directors' Report, the Audit Committee's Report, the Company Secretary's Certificate as required by the Companies Act of South Africa, and the integrated annual report, which we obtained prior to the date of this report. 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 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.

When we read the integrated annual report, if we conclude that there is a material misstatement therein, we are required to communicate the matter to those charged with governance. 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 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 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 the Government Gazette Number 39475 dated 4 December 2015, we report that Ernst & Young Inc. has been the auditor of Tiger Brands Limited for 15 years.

Ernst & Young Inc.
Director - Warren Kenneth Kinnear
Registered Auditor
Chartered Accountant (SA)

102 Rivonia Road
Sandton
Johannesburg

21 November 2018