Senwesbel Consolidated Financial Statements | Page 6

INDEPENDENT AUDITOR’S REPORT The inputs into the expected credit loss allowance are linked to growing, harvesting and market conditions, which are seasonal and constantly changing. The 2020 financial year started on the back of the highest average rainfall for April 2019 in the Senwes area of operation in the last 105 years. This meant that temperatures remained high, which kept frost at bay until early June. Planted crops therefore had more time to grow to full maturity but late plantings suffered frost damage and grade quality issues were evident. The pre-season data from 1 May to 31 October 2019 shattered the old drought records with materially lower rainfall than the long-term average. Moving into summer, above normal rainfall was received from 1 November 2019 until 30 April 2020. The total maize crop was estimated at 15,2 million tonnes, which would make the 2019/2020 harvest the second biggest ever produced in South Africa. As such, the calculation of the ECL allowance was again considered to be a key audit matter in the current year and obtaining evidence for the key inputs required a significant amount of audit effort. Our audit procedures involved, amongst others, the following: l l l l l l We obtained an understanding, evaluated the design, and tested the operating effectiveness of the controls related to the credit application process including securities offered against the finance applied for; We independently calculated an allowance for expected credit losses 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 result to management’s allowance The procedures relating to our estimation of the probability of default (PD) factor include: w 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. w We compared the hectares planted against the hectares for which finance was approved. w We assessed the expected commodity future prices, per customer region and commodity, by independently obtaining the SAFEX prices and adjusting them for the average grade differentials and average transport differentials realised during the year. w We assessed the competence of the management expert, Senwes Agricultural Services, and the process followed by the expert in determining the input costs specific to the customers’ region and commodity through recalculations. The procedures relating to our estimation of the loss given default (LGD) factor include: w We assessed the methodology used by management to determine the expected realisation value of the securities held by comparing securities realised at default against the recorded security value. w We selected a sample of customers and tested the existence of the securities held by inspecting that the security is formally registered in favour of the group. Our procedures relating to customers handed over to legal included the selection of a sample of customers and we performed the following: w Inspected the security to test that it is formally registered in favour of the group. w Tested the value of the securities against the outstanding debt by considering the expected realisation value from external inputs where available. We assessed the adequacy of the disclosures made in notes 9 and 11 to the consolidated and separate financial statements on judgements and estimates made in the allowance for expected credit losses: Accounting for business acquisitions (Consolidated financial statements) The group acquired 57,4% shareholding in KLK Landbou Limited group of companies for R187m and recognised a gain on bargain purchase of R56m. This acquisition was accounted for using the acquisition method as prescribed in IFRS 3: Business Combinations. The group performed a purchase price allocation (PPA) determination as disclosed in Note 6 to the consolidated financial statements. The offer made to KLK shareholders allowed the shareholder the choice in determining the purchase consideration, a cash settlement for a portion or full purchase consideration, as well as shares in Senwes Limited and/or Senwesbel Limited. The KLK Group has been operating in various forms in the agricultural industry since 1941, and has a significant influence on the region where it operates. This influence needed to be assessed to consider if any intangible assets existed which needed to be recognised as part of the business combination. The identification and measurement of intangible assets is a highly subjective and judgemental process, we therefore required the use of valuation specialists and many robust discussions with management to support the fact that there were no identifiable intangible assets. 5 SENWESBEL ANNUAL FINANCIAL STATEMENTS 2020 Senwesbel Limited Reg no: 1996/017629/06