INDEPENDENT AUDITOR'S REPORT

TO THE SHAREHOLDERS OF AFROCENTRIC INVESTMENT CORPORATION LIMITED

for the year ended 30 JUNE 2020

REPORT ON THE AUDIT OF THE CONSOLIDATED AND SEPARATE FINANCIAL STATEMENTS

Our opinion

In our opinion, the consolidated and separate financial statements present fairly, in all material respects, the consolidated and separate financial position of Afrocentric Investment Corporation Limited (the Company) and its subsidiaries (together the Group) as at 30 June 2020, 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 and the requirements of the Companies Act of South Africa.

What we have audited

Afrocentric Investment Corporation Limited's consolidated and separate financial statements comprise:

• the consolidated and separate statements of financial position as at 30 June 2020;
• the consolidated and separate statements of profit or loss and other comprehensive income for the year then ended;
• the consolidated and separate statements of changes in equity for the year then ended;
• the consolidated and separate statements of cash flows for the year then ended; and
• the notes to the financial statements, which include a summary of significant accounting policies.

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 and separate financial statements section of our report.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.

Independence

We are independent of the Group in accordance with the Independent Regulatory Board for Auditors' Code of Professional Conduct for Registered Auditors (IRBA Code) and other independence requirements applicable to performing audits of financial statements in South Africa. We have fulfilled our other ethical responsibilities in accordance with the IRBA Code and in accordance with other ethical requirements applicable to performing audits in South Africa. The IRBA Code is consistent with the corresponding sections of the International Ethics Standards Board for Accountants' International Code of Ethics for Professional Accountants (including International Independence Standards).

Our audit approach

Overview

Overall group materiality Overall group materiality: R31 million which represents 5% of consolidated profit before tax. Group audit scope Our Group audit scoping included full scope audits for eleven reporting components based on their financial significance, audit risks and statutory audit requirements. Specified procedures were performed on one reporting component. Key audit matters Impairment assessment of goodwill; and Capitalisation of development costs relating to internally generated software and impairment assessment of internally generated software.

As part of designing our audit, we determined materiality and assessed the risks of material misstatement in the consolidated and separate financial statements. In particular, we considered where the directors made subjective judgements; for example, in respect of significant accounting estimates that involved making assumptions and considering future events that are inherently uncertain. As in all of our audits, we also addressed the risk of management override of internal controls, including among other matters, consideration of whether there was evidence of bias that represented a risk of material misstatement due to fraud.

Materiality

The scope of our audit was influenced by our application of materiality. An audit is designed to obtain reasonable assurance whether the financial statements are free from material misstatement. Misstatements may arise due to fraud or error. They are considered material if individually or in aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of the consolidated financial statements.

Based on our professional judgement, we determined certain quantitative thresholds for materiality, including the overall group materiality for the consolidated financial statements as a whole as set out in the table below. These, together with qualitative considerations, helped us to determine the scope of our audit and the nature, timing and extent of our audit procedures and to evaluate the effect of misstatements, both individually and in aggregate on the financial statements as a whole.

Overall group materiality		R31 million.
How we determined it		5% of consolidated profit before tax.
Rationale for the materiality benchmark applied		We chose consolidated profit before tax as the benchmark because, in our view, it is the benchmark against which the performance of the Group is most commonly measured by users, and is a generally accepted benchmark. We chose 5% which is consistent with quantitative materiality thresholds used for profit-oriented companies in this sector.

How we tailored our group audit scope

We tailored the scope of our audit in order to perform sufficient work to enable us to provide an opinion on the consolidated financial statements as a whole, taking into account the structure of the Group, the accounting processes and controls, and the industry in which the Group operates.

The consolidated financial statements is a consolidation of forty reporting components operating across South Africa, Namibia, Eswatini, Zimbabwe and Mauritius, comprising the Group's operating businesses and centralised functions. Eleven reporting components were selected for full scope audits based on their financial significance, audit risks and statutory audit requirements. Specified audit procedures on certain balances and transactions were performed for one reporting component. The remaining reporting components were considered to be insignificant components for group scoping purposes. Analytical review procedures were performed over these insignificant reporting components.

In establishing the overall approach to the group audit, we determined the type of work that needed to be performed by us, as the group engagement team, and component auditors from other PwC network firms or other firms operating under our instruction.

Where the work was performed by component auditors, we determined the level of involvement we needed to have in the audit work at those components to be able to conclude whether sufficient appropriate audit evidence had been obtained as a basis for our opinion on the consolidated financial statements as a whole.

Key audit matters

Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the consolidated and separate financial statements of the current period. These matters were addressed in the context of our audit of the consolidated and separate financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters.

We communicate the key audit matters that relate to the audit of the consolidated financial statements of the current period in the table below. We have determined that there are no key audit matters to communicate in our report with regard to the audit of the separate financial statements of the Company for the current period.

	Key audit matter		How our audit addressed the key audit matter
	Impairment assessment of goodwill (Refer to notes 2(a)) (Critical accounting estimates and assumptions, Impairment of goodwill) and 7 (Intangible assets) to the consolidated financial statements) The Group's goodwill amounting to R1,373 million as at 30 June 2020 arose from a number of business acquisitions by the Group over the years and represents the excess of the cost of acquisitions over the fair value of the Group's share of the net identifiable assets of the acquired subsidiaries. As described in note 7 to the consolidated financial statements, management determined the recoverable amount of cash-generating units ("CGUs") based on value in use. Management determined the value in use of the CGUs by discounting their best estimate of future cash flows attributable to the CGUs. The key assumptions and significant judgements used by management in the calculation of the value in use were as follows: The estimated revenues to be earned from the CGUs; The weighted average cost of capital (WACC) which is the discount rate that takes into account the yield on government bonds, Beta, risk adjustment factors and a market risk premium; Forecast period; and An average growth rate, based on past performance and management's expectations of market development, specifically taking into account the impact that the COVID-19 pandemic is expected to have on future earnings. We considered the impairment assessment of goodwill to be a matter of most significance to the current year audit due to the following: Management's calculation of the value in use of the CGUs involved significant judgments as described above; and The magnitude of the goodwill balance in relation to consolidated total assets.		Our audit procedures focused on evaluating and challenging the key assumptions used by management in conducting the impairment assessment of goodwill. The procedures performed were as follows: We assessed the valuation model applied by management to determine the value in use per CGU against the requirements of International Accounting Standard (IAS) 36, Impairment of Assets (IAS 36); We held discussions with management and obtained an understanding of management's budgeting process, including the process of approval by the directors in determining the future cash flows; We agreed the inputs used in the projected cash flows, to the latest budgets approved by the directors; We compared the projected cash flows, including the assumptions relating to revenue growth rates, against historical actual growth rates and actual performance to assess the reasonability of management's budgeting process and projections. We noted no matters requiring further consideration; and We assessed the potential impact of COVID-19 on the earnings of each CGU, by analysing the monthly actual cash flows of each CGU during the current year to identify whether or not COVID-19 negatively impacted any of the CGU's earnings. Based on our assessment, we accepted management's conclusion that no adjustments to projected cash flows were necessary in respect of COVID-19. Utilising our valuation expertise, we assessed the reasonability of key inputs used by management in the value in use calculations as follows: For the inputs used in the determination of the discount rates/WACCs: we agreed the risk-free rate to the yields on government bonds; and we compared the market risk premium and beta used by management to those of similar listed entities. Based on the results of our comparison, we accepted the inputs used by management into their determination of the discount rates; We assessed the appropriateness of the discount rates used by management in the cash flow forecast, by comparing the discount rates against our own internally developed range of acceptable discount rates, which took into account current and COVID-19 impacted economic and market conditions. Where management's discount rates fell outside of our independently determined range of rates, we recalculated the value in use of those CGUs using a discount rate that was within our independently determined range of discount rates. We noted that the value in use for each CGU was still higher than the CGUs' respective carrying amounts; We compared the terminal growth rate applied in the terminal period to the long term consumer price inflation forecast for South Africa. We did not identify material exceptions in the rate used by management; Through discussions with management, we obtained an understanding of how risk adjustment factors are determined and compared these to industry valuation data. We noted no material differences in this regard; We assessed the reasonability of the forecast period, taking into account renewable revenue contracts and management's estimation of the timeframe during which newly acquired CGUs will gradually improve cash flow generation. Wedid not note any aspect requiring further consideration. We compared the projected growth rates to the Group's historic growth rates, based on signed agreements with clients for administration fees, managed healthcare fees, corporate wellness fees and capitation fees, in order to assess the reasonability of the projected growth rates. We noted no aspects requiring further consideration. We calculated a range of value in use for the different CGUs, using an independent range of assumptions arrived at through the procedures performed above, and applied reduced growth rates to the forecasted cash flows. We compared these to the respective CGU's carrying amounts and noted that the value in use for each CGU was higher than the CGU's respective carrying amount.

 

Key audit matter		How our audit addressed the key audit matter
Capitalisation of development costs relating to internally generated software and impairment assessment of internally generated software (Refer to note 1(f)(iv) (Summary of accounting policies, Internally generated computer software development costs), note 2(h) (Critical accounting estimates and assumptions, impairment of internally generated software) and note 7 (Intangible assets) to the consolidated financial statements) Included in the Group's intangible assets balance as at 30 June 2020 is capitalised internally generated software ("software") amounting to R203 million. During the current year, the Group capitalised development costs of R203 million relating to software, on the basis that management considers these costs to be clearly associated with an identifiable and unique product which will be controlled by the Group and have a profitable benefit exceeding the cost beyond one year. In capitalising these development costs, management considered the criteria in IAS 38, Intangible Assets (IAS 38). Development expenditure that does not meet the above criteria are recognised as an expense in consolidated profit or loss as these are incurred. The Group's policy is to perform an annual impairment assessment using a discounted cash flow forecast on all software, regardless of whether an indication of impairment exists or not. Key assumptions applied by management in the cash flow forecast included the following: the estimated revenues to be earned from the use of the assets and the period over which those revenues are projected; the WACC; and risk adjustment factors used in deriving an appropriate discount rate applied to future estimated cash flows. We considered the capitalisation of development costs relating to software and the impairment assessment of the software to be a matter of most significance to the current year audit due to the following: Significant judgment that was applied by management in assessing whether direct development costs such as employee expenses and contractor costs of the system development team met the recognition criteria in IAS 38 for capitalisation as an asset; Recoverability of these assets is based on forecasting and discounting future cash flows which involves a high degree of judgment to be applied by management; and The magnitude of capitalised development costs during the current year.		We performed the following audit procedures over the capitalisation of development costs relating to software: Through discussion with management, we obtained an understanding of the methodology applied by management in the capitalisation of development costs relating to software; On a sample basis, we assessed the development costs capitalised during the year, as well as the Group's accounting policy for capitalisation of development costs relating to software, against the requirements of IAS 38. We noted no exceptions; By considering the nature of each activity performed by a software developer against the requirements for recognition as 'development' in terms of IAS 38, we assessed the appropriateness of management's rationale for the activities considered to be 'development'. We did not note any aspect requiring further consideration; On a sample basis, we performed an independent verification of the professional qualifications of employees whose time had been capitalised during the year as development costs in terms of IAS 38, to assess whether those employees had the appropriate professional skills and competencies to develop software. No exceptions were noted; Through enquiry of management, we obtained an understanding of management's governance processes relating to the recording of time- based expenditure for capitalised development costs; For a sample of employees, we tested the accuracy of the value of employee costs used in the capitalisation rate per hour with reference to their respective signed employment contracts and increase letters. No exceptions were noted; and For a sample of employee costs capitalised, we recalculated the costs capitalised to the software by multiplying the capitalisation rate per hour by the time recorded as development hours. For a sample of consultant fees capitalised, we compared the amounts to the relevant invoices. No material differences were noted. We performed the following audit procedures over management's impairment assessment: We held discussions with management and obtained an understanding of management's budgeting process, including the process of approval by the directors in determining the future cash flows; We compared the projected cash flows, including the assumptions relating to revenue growth rates, against historical actual growth rates and actual performance, to assess the reasonability of management's budgeting process and projections. We noted no matters requiring further consideration; We agreed the inputs used in the projected cash flows of revenues to be earned from the use of the software, to the latest budgets approved by the directors; We assessed the reasonability of the cashflow forecast period, taking into account renewable revenue contracts and management's estimation of the timeframe for the renewal of such contracts. We did not note any aspect requiring further consideration; Utilising our valuation expertise, we assessed the reasonability of inputs used in the determination of the discount rates/WACCs as described in the key audit matter above; We assessed the potential impact of COVID-19 on the earnings to be derived from the use of the software, by analysing the monthly actual cash flows derived from the use of the software during the current year, to identify whether or not COVID-19 negatively impacted the earnings from the use of this software. Based on our assessment, we accepted management's conclusion that no adjustments to projected cash flows were necessary in respect of COVID-19; and We calculated a range of value in use for the software determined from the discounted cash flows, using an independent range of assumptions arrived at through the procedures performed above, and applied reduced growth rates to the forecasted cash flows. We compared these to the carrying amount of the software and noted that the value in use was higher than the carrying amount of the software.

Other information

The directors are responsible for the other information. The other information comprises the information included in the document titled "AfroCentric Group Annual Financial Statements 2020", which includes the Directors' Report, the Audit and Risk Committee Report and the Declaration by Group Company Secretary as required by the Companies Act of South Africa, which we obtained prior to the date of this auditor's report, and the other sections of the document titled "Afrocentric Integrated Report 2020", which is expected to be made available to us after that date. The other information does not include the consolidated or the separate 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 and will not express an audit opinion or any form of assurance conclusion thereon.

In connection with our audit of the consolidated and separate financial statements, our responsibility is to read the other information identified above 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 on the other information that we obtained prior to the date of this auditor's report, 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 directors are responsible for the preparation and fair presentation of the consolidated and separate financial statements in accordance with International Financial Reporting Standards 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 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 and the 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/or the Company or to cease operations, or have no realistic alternative but to do so.

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 judgement 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 and the Company's internal control.
• Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by the directors.
• 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 the 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 and/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.
• 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 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, actions taken to eliminate threats or safeguards applied.

From the matters communicated with 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 4 December 2015, we report that PricewaterhouseCoopers Inc. has been the auditor of Afrocentric Investment Corporation Limited for fifteen years.

PricewaterhouseCoopers Inc.
Director: J Basson
Registered Auditor

Johannesburg

12 September 2020