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Independent auditors' report

To the Shareholders of Telkom SA SOC Limited
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 Telkom SA SOC Limited (the Company) and its subsidiaries (together the Group) as at 31 March 2024, and its consolidated and separate financial performance and its consolidated and separate cash flows for the year then ended in accordance with IFRS Accounting Standards and the requirements of the Companies Act of South Africa.

What we have audited

Telkom SA SOC Limited's consolidated and separate financial statements set out on Statements of profit or loss and other comprehensive income to Notes to the financial statements comprise:

  • the consolidated and separate statements of financial position as at 31 March 2024;
  • 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, including material accounting policy information.
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

  • R339.7 million, which represents 0.8% of consolidated revenue from continuing operations for the year ended 31 March 2024.
 

Group audit scope

  • We performed full-scope audits on four components.
  • Analytical procedures were performed over the remaining components that were considered to be insignificant.
 

Key audit matters

  • Impairment assessment of the Telkom Consumer and Openserve cash generating units (“CGUs”); and
  • Assessment of whether the Group is the principal or agent when recognising revenue from information technology services and information technology hardware and 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

  R339.7 million

How we determined it

  0.8% of consolidated revenue from continuing operations.

Rationale for the materiality benchmark applied

 

We chose consolidated revenue from continuing operations, because in our view, it is the benchmark against which the performance of the Group is most commonly measured by users where year on year profits are volatile.

Consolidated revenue from continuing operations is considered to be a key objective and focus of the Group's businesses and a key performance indicator for management and investors. Revenue from discontinued operations was excluded as it does not reflect a consistent measurement of the Group's performance into the future.

We chose 0.8% as the benchmark threshold, based on our professional judgement, which is lower than the quantitative materiality threshold that we would typically apply when using consolidated revenue to compute materiality. We took into account various factors, including the intended users and distribution of the financial statements, and the financial covenants over the Group's debt.

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 in.

Our scoping assessment included consideration of the Group's financially significant components and the sufficiency of work performed over the material financial statement line items within the consolidated financial statements. Components were considered to be financially significant based on their contribution to consolidated revenue, consolidated EBITDA, consolidated assets and consolidated liabilities.

We performed full-scope audits on four components. In respect of the components that were not considered to be significant, we performed analytical review procedures to assess whether any risks exist that would require additional audit procedures.

In establishing the overall approach to the group audit, we determined the type of work that was needed to be performed by us, as the group engagement team, and by the component auditors, in order to issue our audit opinion on the consolidated financial statements of the Group. 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.

We issued group audit instructions to the component audit teams, outlining key aspects such as risk assessment, materiality, and scope. We held meetings with the auditors from the significant components. During these meetings we discussed our group instructions, developments relevant to the component, audit execution, significant risks, findings of their procedures and other matters that could be of relevance to the consolidated financial statements.

We assessed the competence, knowledge and experience of the component auditors and evaluated the procedures performed on the significant audit areas to assess the adequacy thereof in pursuit of our audit opinion on the consolidated financial statements.

Further audit procedures were also performed by the group audit engagement team, including substantive procedures over the consolidation process. The work performed at a component level, and the procedures performed at the group level, provided us with sufficient evidence to express an opinion on the consolidated financial statements as a whole.

Key audit matters

Key audit matters are those matters that, in our professional judgement, 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.

Key audit matters
 
How our audit addressed the key audit matters
Impairment assessment of the Telkom Consumer and Openserve cash generating units (“CGUs”)

This key audit matter relates to the consolidated and separate financial statements.

Refer to the following notes to the financial statements for the disclosures as it relates to this key audit matter:

  • Note 5.1: Property, plant and equipment;
  • Note 5.2: Intangible assets;
  • Note 5.3: Impairment of goodwill and cash-generating units;
  • Note 5.4: Investment property; and
  • Note 6.3: Right-of-use assets and lease liabilities.

The Group regularly reviews its non-financial assets and CGUs for any indication of impairment. An impairment test is performed when indicators, including changes in technology, market, economic, legal and operating environments, availability of funding or discontinuance of services could result in changes to an asset's or CGUs estimated recoverable amount.

For both CGUs, the Group has identified impairment indicators relating to the economic climate in South Africa being under strain. Further to this, both CGUs are dependent on technology, and for some of its operations the old technology (legacy assets) was still being utilised.

Based on the Group's assessment of the recoverable amounts of these CGUs, the recoverable amount of the CGUs exceeded the carrying value as at 31 March 2024, resulting in no impairment being recognised.

In determining the recoverable amount of the CGUs, the Group determines the value in use of each CGU using the discounted cash flow (DCF) method.

For both CGUs, management applied judgement and estimation in determining the following key assumptions and inputs applied in the determination of the recoverable amounts of the CGUs:

  • Revenue growth;
  • EBITDA margins;
  • Discount rates; and
  • Terminal growth rates.

We considered the impairment assessment of the Telkom Consumer and Openserve CGUs to be a matter of most significance to our current year audit due to the judgement and estimation applied by management in determining the recoverable amounts of these CGUs.

 

Our audit addressed this key audit matter as follows:

We tested the mathematical accuracy of the value-in-use models used by management and found no material differences. We assessed the appropriateness of the valuation model applied by management, with reference to market practice and the requirements of International Accounting Standard 36 – Impairment of Assets ("IAS 36").

We assessed the reasonability of the Telkom Consumer and Openserve CGUs' board approved budgets included in the business plans (which forms the basis of the DCF) as follows:

  • Obtained an understanding of the process followed in developing the approved budgets and the assumptions applied.
  • Assessed the reasonableness of management's budgeting techniques by comparing the prior year approved budgets to the current year actual results. Where differences were noted, this was followed up through discussions with management and inspection of underlying supporting documentation.

We assessed the reasonableness of the EBITDA margins, revenue growth rate, terminal growth rates and discount rates applied by management in their value in use calculations by performing the following audit procedures:

  • Agreed the revenue growth rates and EBITDA margins used to calculate the cash flow forecasts to the latest board approved budgets, both of which cover a period of five years. We benchmarked the revenue growth rate assumptions to industry data and history to assess their reasonability. We found the forecast assumptions to be comparable with these benchmarks;
  • Compared the terminal growth rates to forecast industry trends and independently sourced terminal growth rates for similar operations. No significant deviations were noted; and
  • With the assistance of our valuation expertise, we independently sourced data such as the long-term growth rates, cost of debt, risk-free rates in the applicable market, market risk premiums, debt/equity ratios, and the beta of comparable companies. We then independently calculated a discount rate for both CGUs using our independently sourced data. We applied this independently calculated discount rate to our independent valuation scenarios, it was determined that management's overall recoverable amount was within an acceptable range and therefore we accepted management's recoverable amount as being reasonable.

With respect to the Telkom Consumer and Openserve CGUs, we compared the recoverable amount as assessed by way of the procedures above to the carrying amounts of both CGUs. It was noted that the recoverable amount of the Telkom Consumer and Openserve CGUs exceeded the carrying amount of each respective CGU and therefore no impairment was recorded by management in the current year.

We reperformed management's sensitivity analysis to assess whether the recoverable amount of both CGUs are sensitive to any changes in discount rates and terminal growth rates that would result in the available headroom being depleted. We compared the results of our sensitivity analysis to management's impairment results to identify those CGUs considered sensitive to a change in assumptions for disclosure purposes. We did not note any aspects requiring further consideration.

We assessed the appropriateness of the disclosures in the financial statements against the requirements of IAS 36. We did not note any aspects requiring further consideration.

Assessment of whether the Group is the principal or agent when recognising revenue from information technology services and information technology hardware and software

This key audit matter relates to the consolidated financial statements only.

Refer to the following notes to the financial statements for the disclosures as it relates to this key audit matter:

  • Note 2.3.1: IFRS 15 restatement of revenue, cost of handsets, equipment, software and directories and other expenses;
  • Note 2.7: Restatement of the statement of profit or loss and other comprehensive income;
  • Note 3.1: Segment information; and
  • Note 3.2: Revenue.

For the year ended 31 March 2024, the Group, through the Business Connexion Group Limited (BCX) segment, recognised revenue from information technology services and information technology hardware and software amounting to R3.8 billion and R2.2 billion respectively.

The Group applies the principles of IFRS 15 – Revenue from contracts with customers ("IFRS 15") to account for its revenue in relation to information technology services and information technology hardware and software.

When deciding on the most appropriate basis for presenting revenue or related costs, both the legal form and the substance of the agreement between the Group and the counterparty are reviewed to determine each party's respective role in the transaction. In achieving this, consideration is given to which party controls the goods or services before it is transferred to the customer. If that is not clear, the Group then applies judgement in evaluating the following control indicators, amongst others, when determining whether it is acting as principal or agent in transactions with customers and the recording of revenue on a gross, or net, basis:

  • the Group is primarily responsible for fulfilling the promise to provide the specified goods or service;
  • the Group has inventory risk before the specified good or service has been transferred to a customer or after transfer of control to the customer; and
  • the Group has discretion in establishing the price for the specified good or service.

In addition, the Group enters into contracts with customers to provide integrated solutions. The nature of the promised goods or services are inputs into a working solution and the customer does not derive value from the standalone goods and services. The Group has applied its judgement and determined that it acts as principal in these integrated solution arrangements.

We considered the assessment of whether the Group is acting as a principal or an agent when recognising revenue from information technology services and information technology hardware and software, to be a matter of most significance to our current year audit due to the judgement applied in evaluating whether the Group acts as a principal or an agent.

 

Our audit addressed this key audit matter as follows:

Through discussions with management and the related operational staff we obtained an understanding of the end-to-end business process regarding the recognition of revenue from information technology services and information technology hardware and software.

With the assistance of our internal accounting specialists, for a sample of certain revenue contracts, we assessed the appropriateness of management's assessment of whether they act as a principal or agent against the requirements of IFRS 15. This assessment was performed on certain relevant revenue contracts, and the IFRS 15 principles were replicated across our sample testing performed on revenue transactions.

For our sample of revenue transactions, we assessed the reasonableness of management's determination of whether the Group is the principal or agent, in accordance with IFRS 15, by performing the following procedures:

  • inspecting the underlying contractual agreements and/or purchase orders between the Group and the end-customers to identify;
    • the performance obligations associated with the contract with the customer and assessing if the Group obtains control of the goods before providing them to the end customer, with reference to the terms of the contractual agreements; and
    • whether the sale of the software and licences are part of an integrated solution provided by the Group.

We did not identify any material matters in this regard requiring further consideration.

We tested the adjustment made by management to account for revenue on a net basis where they acted as an agent in accordance with IFRS 15 for the current and prior year. We did not identify any material matters in this regard requiring further consideration.

We assessed the adequacy of the disclosures made in the financial statements pertaining to the principal or agent considerations, with reference to the requirements of IFRS 15 and International Accounting Standard 8 Accounting Policies, Changes in Accounting Estimates and Errors. We did not note any aspects requiring further consideration.

Other information

The directors are responsible for the other information. The other information comprises the information included in the document titled "Telkom SA SOC Ltd Annual Financial Statements for the year ended 31 March 2024”, which includes the Directors' report, the Audit Committee report and the Certificate from the 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 document titled “Telkom SA SOC Ltd Integrated Report for the year ended 31 March 2024", 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 IFRS Accounting 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 sole auditor of Telkom SA SOC Limited for 1 year.

Prior to the commencement of the current year audit PricewaterhouseCoopers Inc. and SizweNtsalubaGobodo Grant Thornton Inc. were the joint auditors of Telkom SA SOC Limited for five years.

PricewaterhouseCoopers Inc.
Director: SN Madikane
Registered Auditor
Johannesburg, South Africa
17 June 2024

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