In respect of adjustments relating to the determination of fully absorbed manufacturing cost our audit procedures included: challenging the Group’s assessment of the normal levels of production for absorption costing purposes by comparing actual and budgeted levels of production over the past two years; critically assessing the impact of manufacturing variances relating to production output.

In critically assessing provisions for slow moving and obsolete inventories our audit procedures included:

• testing the design and effectiveness of the Group’s controls to identify slow moving and obsolete inventories;
• comparison, by product grade, of inventory levels to sales data in the year for a sample of stock lines;
• assessment of historical accuracy of provisioning by comparing the Group’s expected recoveries of slow moving inventories at the previous year-end date to the actual realisations during the year (for a sample of stock lines); and
• attending the year-end stock take, at the main manufacturing site at Hillhouse, to gain further comfort over the level of slow moving and obsolete inventories, where we also gained an understanding of the process for the identification of slow moving and obsolete inventories through enquiry and observation.

We also considered the adequacy of the Group’s disclosures in respect of inventory.

A valuation of the scheme liabilities is provided by an external actuary on behalf of the Group based on various assumptions. With the support of our own actuarial specialists we challenged the key assumptions applied by the Group to determine the net defined benefit obligations, being inflation rate and discount rate. This included comparison against internally developed benchmarks and externally derived data.

In addition, we considered the adequacy of the Group’s disclosures in relation to the defined benefit pension schemes.

Sustained losses incurred in the Explosives segment in South Africa, and difficult market conditions, particularly in the mining sector, required the Directors to perform a detailed impairment assessment in respect of PPE in this segment, amounting to R1,2 billion, in accordance with IAS 36: Impairment of Assets. This was performed using discounted cash flow models to determine the value-in-use for each cash generating unit (“CGU”).

There are a number of key sensitive judgements made in determining the inputs into these models, including:

› the identification of CGUs in the Explosives segment in South Africa, and the allocation of PPE to these CGUs;

› revenue growth (including volume and price);

› the forecast period; and

› the discount rates applied to the projected future cash flows.

In addition, where appropriate, fair value less costs of disposal was determined in respect of these CGUs. Given the level of judgement involved in this impairment calculation, the impairment of PPE in the Explosives segment in South Africa was considered to be a key audit matter in our audit of the consolidated financial statements. In the current year this led to an impairment of R52 million.

› assessing whether the PPE allocated to the CGUs was appropriate in terms of the relevant accounting standards;

› an assessment, by KPMG’s valuation specialists on the audit team, of the appropriateness of the discount rate;

› challenging the reasonableness of the key assumptions used by the Directors with reference to external data in respect of sales volumes and prices, forecast periods and fair value less costs of disposal;

› critically assessing the future projected cash flows used in the models to determine whether they are reasonable and supportable, given the current macroeconomic climate and expected future performance of the individual CGUs based on our knowledge of the business;

› subjecting the key assumptions to sensitivity analyses; and

› assessing the appropriateness of the disclosures in consolidated financial statements as set out in note 1.

AECI Ltd continued to de-risk its defined-benefit obligations and continued to settle its PRMA obligations during the current financial year.

In addition, the ESA from the AECI Pension Fund (“APF”), amounting to R362 million, has been transferred to the AECI Defined Contribution Pension Fund (“ACDPF”) and to the AECI Employees Provident Fund (“AEPrF”). These surpluses in the ACDPF and AEPrf have, in part, been used to settle the PRMA obligations in respect of active employees, amounting to R239 million, and used to take a contribution holiday, amounting to R101 million. The ESAs in respect of the ACDPF and AEPrF are classified as financial assets at fair value through profit or loss.

Actuarial valuations for both the ESAs and the PRMA obligations are based on key assumptions, which include:

› discount rates;
› expected rates of return on retirement assets; and
› healthcare inflation.

These transactions and their accounting implications are, by their nature, considered significant and complex and have thus been considered to be a key audit matter in our audit of both the consolidated and separate financial statements.

› assessing whether all regulatory matters had been adequately considered and the appropriateness of the accounting treatment adopted in respect of the APF employer surplus, PRMA obligations and the surpluses carried in respect of the ACDPF and AEPrF. KPMG’s technical accounting specialists were part of the audit team that considered the appropriateness of the accounting treatment in accordance with the relevant accounting standards;

› obtaining third party actuarial reports prepared by AECI’s actuaries, in respect of the ESAs and PRMA obligations, and using KPMG’s actuarial specialists to determine the reasonableness of the assumptions applied within the valuations; and

› assessing the appropriateness of the disclosures in the consolidated and separate financial statements with reference to both IAS 19: Employee Benefits and IAS 39: Financial Instruments: Recognition and Measurement.

Included in the deferred tax asset of R527 million in the consolidated financial statements is a deferred tax asset of R451 million in respect of AMS, a subsidiary of AECI Ltd.

The sustained losses incurred by AMS, combined with difficult market conditions, gives rise to a risk of impairment in respect of the deferred tax asset. Furthermore, there is inherent uncertainty involved in forecasting future taxable profits and the probability of utilising the estimated tax losses. Therefore, the recoverability of the AMS deferred tax asset was considered a key audit matter in our audit of the consolidated financial statements.

Our audit procedures included:

› evaluating the Directors’ determination of the estimated manner in which the deferred tax asset would be utilised by comparing the Directors’ assessment to business plans and profit forecasts based on our knowledge of the business and the industry in which AMS operates; and

› critically assessing whether profit forecasts are reasonable in relation to historical trends, current year performance and future plans.