Key Audit Matters

Assessment of impairment of goodwill The carrying amount of goodwill recognised at Group level amounted to Rs 1.64 billion as at 30 June 2020 and an impairment loss of Rs 850.7 million was recognised during the year under review. A cash generating unit (“CGU”) to which goodwill has been allocated must be tested for impairment at least annually in accordance with IAS 36 Impairment of Assets, by comparing the carrying amount of the CGU, including the goodwill, with the recoverable amount of the unit. The determination of recoverable amount, being the higher of value-in-use and fair value less costs to sell, requires judgement on the part of management in both identifying and then valuing the relevant CGUs. The value-in-use calculations use discounted cash flow (DCF) projections based on financial budgets approved by the Board which involve judgement by management, such as determining the appropriate weighted average cost of capital (WACC), revenue growth rates, gross margins and operating margins. The Covid-19 global pandemic arrived in Mauritius and brought with it a significant negative impact on the Mauritian economy. The pandemic has created new uncertainties around the projections of future income and growth rate assumptions and discount rates. More specifically, there is uncertainty around the duration of the pandemic and timing of the recovery of the economy. These factors have made the timing and amount of future cash flows more uncertain, when they are already inherently uncertain. Management has disclosed the accounting judgments and estimates relating to goodwill impairment review in note 3 to the financial statements. The disclosures relating to the assumptions used to determine the recoverable amount of the goodwill has been provided in note 6. These assumptions and estimates can have a material impact on the impairment figure reflected in the consolidated financial statements of the Group. Accordingly, the impairment test of goodwill was considered as a key audit matter.

How the matter was addressed in the audit

For amounts reclassified from amount due from related parties and capitalised as part of investment in subsidiaries, we obtained relevant board resolutions and ensure that the criteria for reclassification was appropriate. We reviewed the appropriateness of the disclosures provided in accordance with IFRS 9 Financial Instruments.

Our procedures in relation to assessing the impairment of goodwill included the following:

We evaluated the appropriateness of management’s identification of the Group’s CGUs and tested the operation of the Group’s controls over the impairment assessment process. Our audit procedures included challenging management on the appropriateness of the impairment model and reasonableness of the assumptions used through performing the following: - Reviewing the Group’s controls relating to the preparation and approval of cash flow forecasts; - Verifying the mathematical accuracy of the cash flow model used and checking the internal inconsistency of the models; - Assessed the reliability of cash flow forecasts through a review of actual past performance compared to previous forecasts; - Assessed the reasonableness of the significant inputs and assumptions used in the discounted cash-flow such as growth rates and discount rates, also considering illiquidity and size of holdings; - Compared the assumptions used in previous forecasts against actual realised amounts, thereby testing management’s ability to make forecasts; - Challenged the key judgments by management with reference to historical trends, our own expectations based on our industry knowledge and management’s strategic plans following the circumstances being imposed by the Covid-19 effect in the economy. We reviewed the working papers of the component auditors relating to the impairment of goodwill in certain material subsidiaries and discussed with them the rationale for the impairment methodology used, main assumptions, sensitivities of the impairment workings to these assumptions, their audit findings and their conclusions on the impairment in goodwill charged in these subsidiaries. We also assessed the appropriateness and completeness of the related disclosures in note 6 of the consolidated financial statements

Question :

Review the Key Audit Matter and critically assess if the item meets the requirements of ISA 701 Communication Key Audit matters In Independent Auditor's Report in terms of Determining Key Audit Matters and Communicating Key Audit Matters.

Answer rating: 100% (QA)

The ISA 7 International Standard for Auditing deals with the responsibility of the auditor to communicate the key audit matters in the auditors report This communication of audit matters basically pro... View the full answer