AGRIBEL HOLDINGS LTD FINANCIAL REVIEW 2021
AUDITOR ’ S REPORT
Key Audit Matter
Provision for expected losses against mortgage loans , production loans and other receivables
( Consolidated financial statements )
As disclosed in Note 11.5 and 24.1.2 to the financial statements , the gross mortgage bonds , production loans and other receivables amounted to R4,2bn ( 2020 : R3,7bn ) for the group . The Group have recorded a R132m ( 2020 : R104m ) provision for expected credit losses against mortgage loans , production loans and other receivables .
The determination as to whether mortgage loans and production loans are collectable involves management determinable inputs , the most significant of which include :
• Crop estimates and yields specific to the customers ’ region and commodity , which has changed in the current year as a result of the Suidwes Holdings Group acquisition which extends to an additional geographical area ;
• The number of hectares planted ;
• The expected realisation price , which is the SAFEX price adjusted by transport differentials that is determined by customer region and commodity ;
• The input costs which comprise seed , diesel and fertilizer are specific to the customers ’ region and commodity and are determined by management ’ s internal specialists and ;
• The estimation of the quality and expected realisation of securities held for the customers that have been handed over to legal .
The majority of inputs are determinable at the time of the audit , but need to be reconsidered and determined each year . Most cannot be referenced to historical trends as the significant inputs are inextricably linked to conducive growing and harvesting conditions which is different from year to year , and varies significantly between the different geographical regions ( North West , Free State , and Northern Cape ). Crop yields are impacted by rainfall in the various regions which by its nature is only determined by actuals once it has occurred .
Management uses this information to determine a probability of default of the portfolio ( PD ) and loss given default ( LGD ), both of which have a significant impact on the determination of the provision for expected credit losses recognised against the mortgage and production loans and other receivable amounts .
Obtaining evidence for the key inputs , taking into account the number of locations that the Group operates in as well as the increased geographical regions arising from the Suidwes acquisition , required a significant amount of audit effort in the current year , as it relates to multiple production regions for two different commodities ( maize and sunflower ). Within the production regions , there are disaggregation ’ s which further increase the volume of work required to assess the inputs .
How the matter was addressed in the audit
Our audit procedures involved , amongst others , the following :
• We assessed the methodology used by management to :
• Calculate the expected credit loss provision against the requirements of IFRS 9 : Financial Instruments .
• Determine the expected realisation of the securities held , by comparing securities realised at default against the recorded security value .
• We assessed the process and competence of management internal specialists who determined the input costs specific to the customers ’ region and commodity by performing sensitivity analysis over the schedules provided . We also specifically considered their consideration of the harvesting conditions taking into account the increased geographical regions as a result of the Suidwes acquisition which would affect the average yield per hectare through its inclusion .
• We independently performed a sensitivity analysis and calculated an allowance for expected credit loss by recalculating the probability of default ( PD ) and the loss given default ( LGD ) factors using inputs and assumptions tested during the audit , and compared the ranges calculated in our sensitivity analysis to management ’ s calculation .
• We compared the crop estimates and yields for the specific regions and commodities used by management to the information released by the National Crop Estimation Committee .
• We evaluated the hectares planted in comparison to the hectares for which finance was applied for .
• We assessed the expected realisation price by customer region and commodity taking into account the SAFEX price , average grade differences and average transport differential as realised during the year and compared that to management ’ s valuation .
• We recalculated management ’ s PD and LGD factors , used to calculate the provisions , as well as the provision for expected credit losses ;
• We tested controls over the credit application process which includes the verification of securities obtained for finance provided .
• We selected a sample of customers that were handed over to legal and evaluated the valuation , existence and sufficiency of the securities by obtaining relevant sales prices and valuation documentation of the security provided .
• Applying our judgement and taking into account the above mentioned inputs we determine the acceptable range of the provision for expected losses against mortgage loans , production loans and other receivables .
Agribel Holdings Limited Reg nr : 1996 / 017629 / 06 AGRIBEL ANNUAL FINANCIAL REVIEW 2021
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