Review opinion

Mazars

Independent auditor’s review report on the condensed consolidated financial statements

To the Shareholders of EOH Holdings Limited

We have reviewed the condensed consolidated financial statements of EOH Holdings Limited, contained in the accompanying preliminary report, which comprise the condensed consolidated statement of financial position as at 31 July 2019 and the condensed consolidated statements of comprehensive income, changes in equity and cash flows for the year then ended, and selected explanatory notes.

Directors’ Responsibility for the Condensed Consolidated Financial Statements

The directors are responsible for the preparation and presentation of these condensed consolidated financial statements in accordance with the requirements of the JSE Limited Listings Requirements for preliminary reports, as set out in note 2 to the financial statements, 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 financial statements that are free from material misstatement, whether due to fraud or error.

Auditor’s Responsibility

Our responsibility is to express a conclusion on these condensed consolidated financial statements. We conducted our review in accordance with International Standard on Review Engagements (ISRE) 2410, which applies to a review of historical information performed by the independent auditor of the entity. ISRE 2410 requires us to conclude whether anything has come to our attention that causes us to believe that the financial statements are not prepared in all material respects in accordance with the applicable financial reporting framework. This standard also requires us to comply with relevant ethical requirements.

A review of financial statements in accordance with ISRE 2410 is a limited assurance engagement. We perform procedures, primarily consisting of making inquiries of management and others within the entity, as appropriate, and applying analytical procedures, and evaluate the evidence obtained.

The procedures performed in a review are substantially less than those performed in an audit conducted in accordance with International Standards on Auditing. Accordingly, we do not express an audit opinion on these financial statements.

Basis for Qualified Conclusion

EOH Holdings Limited’s condensed consolidated financial statements reflect a restatement of prior period balances, details of which are disclosed in note 6 to the condensed consolidated financial statements. Our evidence indicates that certain of the prior period restatements listed in the note should have been accounted for in the current year as they result mainly from the change in management and their revised considerations that were made in the current year and applying hindsight. According to paragraph 53 of IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors (IAS 8), hindsight should not be used in determining adjustments to amounts for a prior period.

The following explains our disagreement with the treatment of the adjustments:

  1. Unrecorded liabilities/recoverability of assets
    1. Tax assessments – Where a tax assessment is completed and further taxes become payable, this should be recognised in the year of the assessment and not the year that was assessed; this must be presented in accordance with paragraph 80(b) and 80(h) of IAS 12 Income Taxes (IAS 12). Paragraph 80(h) of IAS 12 states that tax expense or income relating to errors included in profit and loss “cannot be accounted for retrospectively”. The interest and penalties provided on these assessments must be recognised when the obligation for these items arise in accordance with paragraph 14 of IAS 37 Provisions, Contingent Liabilities and Contingent Assets (IAS 37). The obligation only occurred during the current period.
    2. Provision for tax on alleged fraud – A provision for tax has been raised to account for potential tax liabilities related to the alleged fraud taking place in prior periods. This would be considered a change in estimate of the group’s income tax and any change to this would be recognised prospectively in the period of the change in accordance with paragraph 36 of IAS 8. The present obligation, as required for recognition in accordance with paragraph 14 of IAS 37, for these potential taxes only arose on the discovery of the fraud, which occurred during the current period. This provision and the related tax expense cannot be raised in prior periods without applying hindsight and our audit evidence indicates that this provision should only be raised in the current period.
    3. The recoverability of the Twenty Third Century Systems (TTCS) equity-accounted investment, as discussed below, is included in this amount.
    4. The transactions in this adjustment that relate to revenue recognition and impairment of accounts receivable are discussed below.
    As result of the above taxation is overstated in the statement of profit and loss and other comprehensive income by R 20.400 million for the year ended 31 July 2018 and are understated by this amount for the year ended 31 July 2019. The tax payable balance in the statement of financial position at 1 August 2017 is understated by R 16.791 million and at 31 July 2018 by the R 20.400 million. The equity-accounted investments balance and the trade and other receivables balance in the statement of financial position are understated by R 291.343 million and R 254.559 million respectively at 31 July 2018. The trade and other payables balance is overstated in the statement of financial position at 1 August 2017 by R 83.952 million and at 31 July 2018 by R 316.491 million.
  2. Inventory – Software licenses that were previously purchased with a view to resell were derecognised by current management, with an adjustment to prior years. These inventory items were recognised in the prior years in terms of paragraph 6 of IAS 2 Inventories. The change in approach is a change in judgement that was made in the current year using information that became available after the 2018 financial year. The proposed change utilises hindsight and is therefore not in accordance with paragraph 53 of IAS 8.
    Consequently, operating expenses are overstated in the statement of profit and loss and other comprehensive income by R 54.108 million for the year ended 31 July 2018 and are understated by the same amount for the year ended 31 July 2019. The inventory balance in the statement of financial position at 31 July 2018 is understated by the above amount.
  3. Revenue – Where revenue was adjusted in prior years for information that became available in the 2019 financial year, we consider the reversal of this revenue to be in contravention of paragraph 53 of IAS 8. There are various transactions and contracts that were included in these adjustments. The revenue was recognised in the prior year in accordance with IAS 18 Revenue (IAS 18) based on evidence that supported a valid expectation that the inflow of economic benefit was probable. In a number of cases the reversal of the revenue in the prior period has been done without evidence that the economic benefits of the revenue was not probable at the time of initial recognition and consequently we do not agree with the reversal.
    Revenues are understated in the statement of profit and loss and other comprehensive income by R 159.723 million for the year ended 31 July 2018 and are overstated by this amount for the year ended 31 July 2019. The trade and other receivables balance in the statement of financial position at 31 July 2018 is understated by the above amount.
  4. Internally generated intangible asset impairments – Intangible assets were recognised in prior years where they were considered to demonstrate the recognition requirements of paragraph 57 of IAS 38 Intangible Assets (IAS 38). Management have now reconsidered whether these requirements were met using information that became available in the current year; this would be considered a contravention of paragraph 53 of IAS 8. Our evidence indicates that the assets should have been recognised initially, as they were in the prior periods, however impairment indicators exist impacting the valuation in the current year.
    Operating expenses are overstated in the statement of profit and loss and other comprehensive income by R 365.863 million and cost of sales by R 18.964 million for the year ended 31 July 2018 and are understated for the year ended 31 July 2019 by these same amounts. The intangible assets balance in the statement of financial position at 31 July 2018 is understated by R 384.828 million.
  5. Provision for impairment of financial assets – In accordance with the requirements in paragraph 58 of IAS 39 Financial Instruments: Measurement and Recognition (IAS 39), financial assets must be tested for impairment where impairment indicators exist. The provision consists of impaired amounts where management reassessed whether impairment indicators existed on certain financial assets in prior years, and on the re-assessment of the measurement of the impairments. The identification and measurement of impairments are changes that must be accounted for in the current year and not using hindsight to adjust prior periods. Our audit evidence indicates that the impairment should not be recognised prior periods. The proposed adjustment comprises the accounts receivable and other financial asset amounts included in TTCS and Grid Control Technologies (GCT) which are discussed below.
    Net financial impairment losses are overstated in the statement of profit and loss and other comprehensive income by R 375.485 million for the year ended 31 July 2018 and are understated for the year ended 31 July 2019 by the same amount. The trade and other receivables balance in the statement of financial position as at 31 July 2018 is overstated by R 208.379 million and the other financial assets balance by R 167.106 million.
  6. Impairment of loans and investment in an associated company: TTCS – The measurement of the loans and investment in TTCS was re-evaluated by management resulting in a prior year impairment of the trade receivables, loans receivable, and of the carrying value of the investment. Our audit evidence shows that the impairment indicators that management applied in determining the impairment of the associate only existed in the current period, the conditions had not worsened between the acquisition of the associate and 31 July 2018. The associate was generating profits at the time and was not tested for impairment as management believed that there were no impairment indicators that required this test (this complies with paragraph 40 of IAS 28 Investments in Associates and Joint Ventures). Our audit evidence supported this. EOH obtained control of TTCS in January 2019 (as per note 15 of the provisional report) and obtained a valuation of the group at that date. This valuation was used by management in assessing whether the associate investment should have been impaired at 31 July 2018, which is in contravention of paragraph 53 of IAS 8, referring to events other than those that existed at the time. The impact of this disagreement is included in the amounts shown above.
  7. Impairment of loan to GCT – Management impaired a receivable from the GCT group in the prior year balances. Our audit evidence provided by EOH management and corroborated by ourselves at the time shows that an impairment assessment was performed in the prior year, but the outstanding amounts were covered by the perfected inventory securitisation. Management at that time considered the remaining promissory notes to be recoverable as the subsequent notes were not due and payable even on non-payment of the first, and the share return dates could be renegotiated, this agrees to the revised sale contract. The revised impairment assessment is made applying hindsight and is therefore in contravention of paragraph 53 of IAS 8. The impact of this disagreement is included in the amounts shown above.

The result of the matters above is that the loss for the year ended 31 July 2019 is understated by R 1,856.937 million, the loss for the year ended 31 July 2018 is overstated by R 1,756.195 million. The retained earnings balance is therefore understated by R 1,856.937 million at 31 July 2018 and the opening retained earnings balance as at 1 August 2017 is understated by R 100.743 million. The evidence provided by management was insufficient, in our opinion, to support the full restatement of the balances for the prior period and their resultant effect on the financial results. The statement of financial position as at 31 July 2018 is misstated as detailed in the paragraphs above and there is no material impact on the statement of financial position at 31 July 2019.

Qualified Conclusion

Based on our review, except for the effects of the matters described in the Basis for Qualified Conclusion paragraph, nothing has come to our attention that causes us to believe that these condensed consolidated financial statements of EOH Holdings Limited for the year ended 31 July 2019 are not prepared, in all material respects, in accordance with the requirements of the JSE Limited Listings Requirements for preliminary reports, as set out in note 2 to the financial statements, and the requirements of the Companies Act of South Africa.

Report on Other Legal and Regulatory Requirements

In accordance with our responsibilities in terms of sections 44(2) and 44(3) of the Auditing Profession Act, we report that we have identified reportable irregularities in terms of the Auditing Professions Act. We have reported such matters to the Independent Regulatory Board for Auditors. The matters pertaining to the reportable irregularities have been described in note 5 to the financial statements.

Mazars
Partner: Miles Fisher
Registered Auditor
Date: 14 October 2019
Gauteng

REGISTERED AUDITOR – A FIRM OF CHARTERED ACCOUNTANTS (SA) • IRBA REGISTRATION NUMBER 900222
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PARTNERS: MV NINAN (NATIONAL CO-CEO), MC OLCKERS (NATIONAL CO-CEO), SJ ADLAM, R BUCH, JC COMBRINK, GJ DE BEER, G DEVA, JJ ELOFF, MH FISHER, GD JACKSON, D KEEVE, R MURUGAN, MV PATEL, S RANCHHOOJEE, NP SWARTZ, DM TEKIE, S TRUTER, S VORSTER,

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