Annual Financial Statements

celebrating 20 years Independent auditor’s report to the shareholders of Aspen Pharmacare Holdings 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 Aspen Pharmacare Holdings Limited (“the Company”) and its subsidiaries (together “the Group”) as at 30 June 2018, 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 (“IFRS”) and the requirements of the Companies Act of South Africa.

What we have audited

Aspen Pharmacare Holdings Limited’s consolidated and separate financial statements, set out on pages 18 to 119, comprise:

  • the Group and Company statements of financial position as at 30 June 2018;
  • the Group and Company statements of comprehensive income for the year then ended;
  • the Group and Company statements of changes in equity for the year then ended;
  • the Group and Company statements of cash flows for the year then ended; and
  • the notes to the Group and Company financial statements, which include a summary of significant accounting policies.

Basis for opinion

We conducted our audit in accordance with International Standards on Auditing (“ISA”). 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 International Ethics Standards Board for Accountants Code of Ethics for Professional Accountants (Parts A and B).

Our audit approach

Overview

Overall Group materiality
  • Overall Group materiality: R369.8 million which represents 5% of consolidated profit before tax.
Group audit scope
Our audit included full scope audits of Aspen’s financially significant components. Review and analytical procedures were performed over the remaining components.
Key audit matters
  • Measurement of goodwill and indefinite life intangible assets and useful life of intangible assets
  • Uncertain tax positions
  • Accounting for the purchase of the residual rights to the AstraZeneca Anaesthetics Portfolio

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 Group 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 consolidated financial statements as a whole.

  Overall Group materiality: R369.8 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 and our areas of focus

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.

Our Group audit scoping assessment included consideration of financially significant components, based on indicators such as the contribution to consolidated assets, consolidated revenue and consolidated profit before tax. Based on this assessment we identified 15 financially significant components, which in aggregate account for a majority of the consolidated revenue, consolidated profit before tax and consolidated total assets of the Group. These financially significant components of the Group were subject to full scope audits of their financial reporting information submitted to the Company.

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, or component auditors from other PwC network firms or other audit 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 Group financial statements as a whole.

The Group engagement team met with the component auditors of the most significant audit components and engaged with the remaining component auditors by means of discussing pertinent matters and reviewing reporting documents submitted to us as the Group engagement team. In order to obtain sufficient audit evidence in respect of non-significant components, the Group engagement team performed analytical review procedures on their financial information. These components have been assessed to be financially inconsequential to the Group.

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. 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

Measurement of goodwill and indefinite life intangible assets

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

Refer to note 1: Intangible assets and note 3: Goodwill.

We determined this area to be a matter of most significance to the audit due to the size of the goodwill (R6 126 million) and indefinite life intangible assets balance (R64 497 million) as at 30 June 2018, and the risk of impairment of the goodwill and intangible assets included in the cash-generating units (“CGUs”) of the Group. The assignment of useful lives is judgemental and this judgement has a material impact on the financial statements.

Management has determined that R64 056 million of the carrying value of intangible assets as at 30 June 2018 relates to intangible assets with indefinite useful lives, which require annual impairment assessments in terms of IFRS.

Management's assessment of the “value-in-use” of the Group’s CGUs is determined using estimated future cash flows. The impairment reviews performed by the Group contain a number of significant judgements and estimates including turnover growth, profit margins and pre-tax discount rates across multiple territories. Changes in these assumptions could lead to an impairment to the carrying value of goodwill and intangible assets.

In respect to goodwill, management determined that there is sufficient headroom between the value-in-use of the CGUs and their carrying values. However, it remains an area of significant judgement because of the assumptions used for calculating the recoverable amount.

The assignment of useful lives to intangible assets is subjective and is based on a number of management judgements. Changes in circumstances may necessitate management to reassess the useful life of assets. Management base their assumptions in this regard on past experience, detailed assessments, business plans for individual intangible assets and the nature of the individual asset. The factors taken into account by management when making this classification is set out in note 1: Intangible assets – Significant judgements and estimates.

During the current year, impairment charges of R750 million were recognised. Management attributed a finite useful life to brands with a value of R400 million that were previously considered to be indefinite, as part of the annual assessment of useful lives.

We obtained the Group’s impairment analyses and tested the reasonableness of key assumptions, including revenue growth, profit margins, cash conversion, terminal values and discount rates.

Our audit procedures included comparing key assumptions to business plans and economic forecasts. We found management’s key assumptions to be in line with these.

We utilised our valuation expertise to assess the reasonability of the discount rates used by testing the assumptions against market data and widely applied foreign risk premiums. In addition, we performed calculations with more conservative assumptions to evaluate the impact of the particular assumption on the impairment calculations as a whole. We found the discount rate applied by management to be reasonable.

We evaluated whether management had identified the relevant CGUs with reference to goodwill and individual intangible assets, and found this to be the lowest level at which management monitors goodwill and intangible assets.

We compared the future cash flow forecasts to the approved budgets and found them to be consistent and reasonable in relation to the current year financial results. We compared the current year actual financial results with the forecasts utilised in the prior year impairment calculations and did not identify material unexplained variances.

We focused our audit effort on the indefinite life intangible assets that were partially impaired and those with an excess of less than 10% when comparing the net present value of discounted cash flows to net book value of the CGU. These assets had a heightened risk of additional impairment of the total indefinite life intangible assets.

We obtained and assessed management’s classification and useful life assessment for intangible assets by obtaining business plans evidencing the future growth forecasts, barriers to entry for the asset, brand awareness, customer base and the historic gross margins achieved on the product. We challenged management’s assumptions with regards to the indefinite useful life classification of certain intangible assets by considering the individual brand plans, historical performance, evidence of competitor entry into the market and future growth forecasts to identify whether any indicators of declining growth rate exists. Where such trends were identified, we investigated the reason for this trend and considered the impact on the useful life assumption. We also considered the implication of these trends on the impairment testing performed. Based on our work performed, we concurred with management’s assertion that no additional brands were required to be assigned a finite useful life and no additional impairment was required.

Uncertain tax positions

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

Refer to note: 27 – Taxation.

The Group operates in a complex multinational tax environment and the increased disclosure of transfer pricing reporting as recommended by the OECD has provided greater transparency to tax authorities internationally and increased scrutiny is expected as a result. Management judgement is required in assessing the carrying amount of provisions required in respect of uncertain tax positions, and as a result we determined this to be a matter of most significance to the audit.

Using our specialist international tax and transfer pricing knowledge, we evaluated and challenged management’s judgements in respect of estimates of tax exposures and contingencies in order to assess the adequacy of the Group’s tax provisions. This included obtaining and inspecting third-party tax opinions that the Group used to assess the appropriateness of any assumptions made and the legal basis of the claims. In understanding and evaluating management’s judgements, we considered the status of recent and current tax authority audits and enquiries, the outcome of previous claims, judgemental positions taken in tax returns and developments in the tax environment.

Based on our review of management’s assessment of uncertain tax positions, we found the level of provisioning to be reasonable.

Accounting for the purchase of the residual rights to the AstraZeneca Anaesthetics Portfolio

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

Refer to note E to the Group statement of cash flows:

In the previous financial year, the Group acquired the commercialisation rights to products in specified territories from AstraZeneca. This transaction was accounted for as a business combination in terms of IFRS 3.

In the current financial year, the Group acquired the remaining rights to products from AstraZeneca. These rights include the trademarks, patents, domain names, manufacturing know-how and regulatory information.

We determined that this was a matter of most significance to the audit due to the value of the transaction and the judgement that was applied by management to determine whether the transaction is a business combination in applying the guidance in IFRS 3 or an asset acquisition. Management determined that the purchase of the residual rights was an asset acquisition.

We inspected the underlying acquisition agreements for the transaction to assess whether the transaction resulted in the inputs, processes and outputs necessary to qualify as a purchase of a business in terms of IFRS 3 or an asset acquisition in terms of IAS 38.

We focused our testing on the substance of the purchase agreement to assess whether the residual rights consist of inputs and processes which, if applied to those inputs, have the ability to create outputs in addition to the outputs already acquired as part of the distribution rights in the previous financial year.

Based on our testing of management’s assessment we have come to the same conclusion that no additional outputs were acquired in addition to the outputs acquired in the previous financial year. As a result, we agreed with management’s accounting treatment for the purchase of the residual rights to the AstraZeneca Portfolio as an asset acquisition in terms of IAS 38.

Other information

The directors are responsible for the other information. The other information comprises the information included in the Aspen Pharmacare Holdings Limited Annual Financial Statements 2018, which includes the Directors’ Report, the Audit & Risk Committee Report and the Certificate of the Company Secretary as required by the Companies Act of South Africa, and the Aspen Pharmacare Holdings Limited Integrated Report 2018. Other information does not include the consolidated and 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 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, 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’s 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 or to cease operations, or has 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 ISA 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 ISA, 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 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 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 the 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, related safeguards.

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 Aspen Pharmacare Holdings Limited for 21 years.

PricewaterhouseCoopers Inc.
Director: Craig West
Registered Auditor

4 Lisbon Road, Waterfall City

26 October 2018