Integrated Reports Senwes Financial Review 2018 - Page 7

FINANCIAL REVIEW Key Audit Matter How the matter was addressed in the audit PROVISION FOR IMPAIRMENT OF TRADE RECEIVABLES AND MORTGAGE LOANS | continued Our audit procedures involved, amongst others, the following | continued : Crop estimates and yields specific to the customers’ region and commodity; The number of hectares planted; The expected realisation price, which is the SAFEX price adjusted by grade differences and transport differentials which is determined by customer region and commodity; The input costs specific to the customers’ region and commodity; and The quality and expected realisation of securities held for customers; 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 portfolio impairment recognised against the trade debtors and mortgage loan amounts. Customers that have been handed over to legal or are on the “watch list” are specifically pro- vided for based on the exposure and the estimation of the quality and expected realisation of securities held for the specific customers. The record harvest in 2017 and the decrease in commodity prices in the current year impacted the estimates and judgements required for this calculation which therefore again required significant auditor attention, PROVISION FOR OBSOLETE STOCK AND NET REALISABLE VALUE (Consolidated and separate financial statements) Inventory is carried at the lower of cost and net realisable value. As a result the group provides for mechanisation inventory (which includes whole goods and spares) based on a consistent policy driven by age. This combined with the aging of inventory resulted in an increase in the provision for obsolete stock from R33 million to R89 million and R29 million to R85 million for the group and company respectively as disclosed on Note 7. 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; We assessed the process and competence of Senwes Agricultural Services who deter- mined the input costs specific to the customers’ region and commodity; We tested controls over the credit application process which includes the verification of securities obtained for finance provided; We recalculated management’s factors, used to calculate the provisions, and also the total portfolio provision; We selected a sample of customers that were handed over to legal or are on the “watch list” and evaluated both the existence and sufficiency of the securities and the methodology used by management to determine the expected realisation of the securities held; We also assessed the adequacy of the disclosures made on judgements and estimates made on the provision. Our audit procedures involved, amongst others, the following: We attended a sample of inventory counts performed by management and assessed the physical condition of the inventory; We tested the ageing of inventory for a sample of items; We recalculated management’s aged based impairments; We compared the exchange rates at which the existing inventory were purchased to the exchange rates new inventory could be imported for using publicly available information. We independently recalculated the total provision as follows: • Competitor prices of comparable products were obtained using publicly available infor- mation; • Compared the inventory items included in the provision to the total inventory listing; • Considered management’s plans to realise this excess inventory in order to retain market share and to retain the after sales revenue flow; We assessed the adequacy of the disclosures made on judgements and estimates made on the provision. The provision is based on various judgements and estimates on expected future market and economic conditions that might have an impact on the sales projections and selling prices of the various products. FINANCIAL REVIEW In the current year management considered additional specific factors which impacted on the net realisable values of inventory, these included: Strengthening of the Rand against the United States Dollar; Competitor prices; Market share; Large volume of inventory on hand. 7