Independent auditor’s report

TO THE SHAREHOLDERS OF CLOVER INDUSTRIES LIMITED

Report on the audit of the consolidated and separate
annual financial statements

Opinion

We have audited the consolidated and separate financial statements of Clover Industries Limited and its subsidiaries (the Group), which comprise the consolidated and separate statements of financial position as at 30 June 2018, and the consolidated and separate statements of comprehensive income, consolidated and separate statements of changes in equity and consolidated and separate statements of cash flows for the year then ended, and notes to the consolidated and separate 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 June 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 (IFRS) and the requirements of the Companies Act, 2008 and JSE Listing Requirements.

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 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) that is consistent with the International Ethics Standards Board for Accountants Code of Ethics for Professional Accountants (Part A and B) together with other ethical requirements that are relevant to our audit of the consolidated financial statements in South Africa, and we have fulfilled our other ethical responsibilities in accordance with these requirements and the IRBA Code. 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 judgment, 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.

Key audit matter

How this matter was addressed in our audit

Growth hurdle rebate The recognition of growth hurdle reduction in revenue and provision, depends on retailers achieving growth incentive targets (such as growth in sales values and/or growth in volumes). The period to assess whether retailers have achieved their growth incentive targets does not align with the Company’s financial 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. Judgment is required in assessing whether retailers will achieve their growth incentive targets when settlement of the rebate occurs at the end of the calendar year, based on sales achieved as at the year end of the company in combination with evidence from prior year trends and forecasted sales.

Growth hurdle rebate Our audit procedures in respect of the payable recognised and the revenue deductions relating to growth hurdle, included the following: Our audit procedures included considering the appropriateness of the Group’s revenue recognition accounting policies including those relating to growth hurdle rebates and right of returns. On a sample basis we inspected the rebate terms in the agreement and agreed them to inputs used in the calculation; We agreed the sales volumes recorded in the stand-alone trade terms system to the sales data warehouse; We agreed the sales volumes in the sales data warehouse to the sales volumes recorded in the general ledger; We independently recalculated the estimated rebates due to each retailer based on actual sales year to date. We then compared this expectation to actual results. Where our recalculation based on the contractual terms and estimation based on sales year to date differed to management’s final provision, we obtained support for the differences to vouch their validity; We designed an analytic to match rates that materially changed from last year at an SKU level and investigated any deviations; and On a sample basis we vouched payments and deductions to supporting documentation.

 

Key audit matter	How this matter was addressed in our audit
Right of returns provision There are provisions for returns recorded on the balance sheet as at year-end 30 June 2018. Management estimate the expected right of return trends based on historic actual returns, and actual right of returns as a percent of revenue. This requires significant judgement based on experience.	Right of returns provision Our audit procedures in respect of the payable recognised and the revenue deductions relating to right of returns, included the following: We tested the arithmetical accuracy of the calculation and agreed the amount calculated to the amount recognised in the accounting records; We assessed management’s estimates to accrue for credit notes at year end; We independently recalculated the calculation by taking into account historic data and return trends as well as returns in July 2018 compared to the provisions raised; We compared the assumptions to historical credit notes issued and to current trends; and We assessed sales transactions taking place at and before year end date as well as credit notes issued after the year-end date to assess whether revenue was recognised in the correct period.
Accounting of Diary Farmers of SA “DFSA” As described in note 3.2 within the annual financial statements, with effect from 1 July 2017 Clover holds 26% of the shares in DFSA and as a consequence the results from DFSA are no longer consolidated into the Group’s results. We identified the accounting treatment of the reduction in shares and protective rights held by Clover as representing a key audit matter due to the complexity of the judgement required to determine if the protective rights held by Clover constitutes control in accordance with IFRS 10 – Consolidated Financial Statements.	Accounting of Dairy Farmers of SA “DFSA” Our audit procedures to test the accounting for the transaction included: We assessed whether the 26% shareholding held by Clover would grant Clover:     power over DFSA; or exposure, or rights to variable returns from its involvement with DFSA; or the ability to use its power over DFSA to affect the amount of Clover’s returns We reviewed all the transactional agreements between DFSA and CSA to assess if any conditions would trigger control; We considered whether Clover has existing rights to participate and control in the direction of DFSA’s operating activities; Considered whether Clover’s representation on the board of directors and the service contracts concluded contributes to Clover having significant influence over DFSA.

 

Key audit matter

How this matter was addressed in our audit

Events after the reporting period There was a significant event that took place after the reporting period. The recoverability of the revolving credit facility (RCF) extended to DFSA is dependent on its Board of Directors to execute their business strategy to create long term sustainability. The Chairman of the Board of Directors and the Chief Executive Officer of DFSA resigned after the reporting period. The unforeseen resignation of the key leadership team is an indicator of impairment as it impacts directly on the implementation of critical strategic initiatives and is considered to be an adjusting post balance sheet event. This event led to the impairment of the RCF balance as at 30 June 2018. The significance of the balance, the judgement required to determine that an impairment is required, and the impact on the financial statements as a whole have resulted in us considering this event to be a key audit matter.

Events after the reporting period Our audit procedures included, amongst others: We reviewed the notice of resignation of the Chairman of the Board and the Chief Executive Officer of DFSA. We understood the process management have followed to make their assessment as to whether the significant event that took place after the reporting period are adjusting or non-adjusting events; We challenged management’s judgment by reviewing the critical assumptions with reference to the cyclical nature of the DFSA business; We reviewed the operational performance of DFSA in the period subsequent to the reporting date leading up to the date of the approval of the financial statements; We challenged the practical implementation of the critical strategic initiatives to restore the profitability and sustainability of DFSA against the backdrop of material changes in the DFSA leadership and management team; We evaluated the adequacy of the Group’s disclosures regarding the impairment of the RCF, which is disclosed in note 13.1 of the consolidated financial statements as well as the other information disclosed within the Integrated Annual Report.

Other information

The Group’s directors are responsible for the other information. The other information comprises the information included in Group’s integrated report for the year ended 30 June 2018 that includes the Directors’ Report, the Audit Committee Report and the Company Secretary’s Certificate as required by the Companies Act, but does not include the consolidated and separate annual 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 any form of assurance conclusion thereon.

In connection with our audit of the accompanying 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, 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 company directors are responsible for the preparation and fair presentation of the consolidated and separate financial statements in accordance with IFRSs and the requirements of the Companies Act, 2008, 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 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 Company or to cease operations, or have no realistic alternative but to do so.

The directors are responsible for overseeing the Group’s financial reporting process.

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 judgment 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 internal control;
• Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by management;
• 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 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 or 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; and
• 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 and separate 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 to 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 04 December 2015, we report that Ernst & Young Inc. has been the auditor of Clover Industries Limited for 24 years.

Ernst & Young Inc.
Director – Derek Engelbrecht
Registered Auditor
Chartered Accountant (SA)

26 September 2018