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BLUE LABEL
INTEGRATED ANNUAL REPORT 2017
Key audit matter
How our audit addressed the key audit matter
Fair value assessment of Investments in OSI
The exemption available in IAS 28 –
Investments in
Associate and Joint Ventures
has been applied to the
investment in OSI from 30 November 2016 and the
investment is accounted for in accordance with IAS 39 –
Financial Instruments: Recognition and Measurement
at fair
value with changes in fair value recognised in profit or loss.
The difference between the carrying value of the
investment as previously determined using the equity
accounting method and its fair value is reflected as a fair
value gain on a financial instrument through profit and loss
for the year ended 31 May 2017.
This remeasurement to fair value is considered to be a
matter of most significance to the current year audit due to
the significant judgements made by management regarding
the change in intention in relation to the operations of OSI,
terminal growth rate, discount rate and forecast cash flows
included in the analyses used to perform the valuation, as
well as the fact that this is the first such remeasurement.
Management has used an independent third party with the
requisite expertise in assisting them with the determination
of the fair value of the investment.
Refer to note 2.2 for details of fair value assumptions.
We made use of our PwC India Component team’s
valuation expertise, as well as that of our own, to assist in
our procedures performed over the fair value assessment.
We assessed whether the approach adopted by the
independent valuations expert in the valuation models is in
line with market practice and the applicable requirements
of IFRS 13 –
Fair Value Measurement
. We also tested the
mathematical accuracy of the valuation model by
performing a recalculation.
We assessed management’s cash flow forecasts and the
process by which these were developed. We compared
these to the latest Board approved budgets. We found
that the budgets used in the value-in-use calculations were
consistent with the Board approved budgets and noted
that the key assumptions were subject to oversight by the
Directors. The approved budgets cover a period of 10
years and the forecasts for the purpose of the value-in-use
calculations extend out to 10 years. We assessed whether
assumptions, such as working capital and capital
expenditure, had been determined and applied
consistently.
We independently calculated a discount rate taking into
account independently obtained data such as the cost of
debt, risk free rates in the market, market risk premiums,
country risk premium, specific risk premium, debt/equity
ratios as well as the beta of comparable companies; and
this was compared to the discount rate used by
management.
We found the discount rate used by management to be
within an acceptable range of our independent
calculations.
The terminal growth rate was compared to forecast
industry trends and to management’s past forecast history
for similar operations and was considered to be within an
acceptable range of our independent calculations.
We then performed a sensitivity analysis over the
assumptions, to analyse the possible impact on the
value-in-use by using other growth rates and discount rates
which were within a reasonably foreseeable range. We
discussed these with management and based on the
evidence obtained we accepted management’s conclusion
that the key assumptions applied in the models were
reasonable.
Independent auditor’s
report to the
shareholders of Blue Label Telecoms Limited
continued