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Delay in Finalising Transnet's 31 March 2021 Yean End Audit - BITRA
Transnet SOC Limited
(Incorporated in the Republic of South Africa)
(Registration Number: 1990/000900/30)
Issuer Bond Code: BITRA
(“Transnet”, “the Company” or the “Issuer”)
DELAYS IN FINALISING TRANSNET’S 31 MARCH 2021 YEAR END AUDIT
Transnet Noteholders are hereby advised that the external audit of Transnet for the 2020/21
financial year is substantially complete, despite a number of challenges in the current year.
These included the change in audit methodology as a result of the appointment of the
Auditor General South Africa (AGSA) as sole auditors of Transnet for the first time. In
addition to the extended audit process, it has resulted in a much lower materiality level
applied in the execution of the audit, and the audit of take-on balances, which would not
have been necessary had there been a continuation of auditors.
The impact of the change in auditors on the audit process was further exacerbated by:
- The third wave of COVID-19 and the impact on key role players, which was more severe
than expected;
- The community unrest in two provinces during the week of 12 July 2021; and
- The cyber-attack experienced by Transnet from 22 July 2021, which resulted in the need
for the Company’s systems to be completely shut down to manage the risk. During this
period, business continuity processes were activated.
The matters above resulted in a delay in providing audit evidence to the AGSA, and thus
delayed the audit process at different points in time.
The following two major matters, which are of a technical accounting and interpretation
nature, remain unresolved with the AGSA, and have further delayed the release of the
31 March 2021 Annual Financial Statements (AFS), which was intended to occur during the
month of September 2021:
1. A significant difference of opinion in the initial accounting treatment of the 1064
locomotive supply agreements (LSAs).
a. Acquisition of locomotives covers a period from 2006 and Transnet has utilised
the same accounting policies to date on such acquisitions. During this period
Transnet utilised the services of many major accounting firms and was
subjected to two regulatory file checks. It is therefore important to engage at
an accounting industry/profession level as to the correct application of the
applicable International Financial Reporting Standards (IFRS) in accounting for
the LSAs;
b. Subsequent to the conclusion of the LSAs in 2014, Transnet accounted for the
transaction based on the applicable IFRS and the interpretation of the LSAs at
the time, which was consistent with the treatment on similar LSAs entered into
in the past.
c. The fundamental issue is whether Transnet acquired a finished product
(locomotive) from the original equipment manufacturer (OEM) or if the OEM
sold a construction service (to construct the locomotive) to Transnet.
d. Transnet has applied the principle of “economic substance over legal form” and
demonstrated active involvement and control over the locomotive build
programme.
e. The accounting principles determined at inception of the LSAs were premised
on the fact that Transnet was fully committed to the locomotive build
programme and that the OEM constructed these locomotives on behalf of
Transnet, and Transnet obtains effective control of these assets as they are
constructed, and not at the end of the construction as a finished product.
f. Transnet is seeking an independent technical opinion and is working closely with
the AGSA to ensure satisfactory resolution of this matter.
2. Engagement with the National Treasury and the AGSA on ring-fencing of irregular
expenditure relating to legacy procurement events and allowing Transnet to deal with
these matters separately, as they do not impact the fair presentation of the AFS in terms
of IFRS, and are impractical to disclose in Transnet’s AFS.
a. Due to a lack of document management systems over the years a number of
procurement files dating as far back as Financial Year (FY) 2017 could not be
located.
b. Transnet enters into thousands of procurement events below R2 million on an
annual basis, which it is required to review against the PFMA requirements for
any transgressions. This exercise may take more than two years with a
dedicated and skilled team, as it involves a review of procurement events dating
back to FY2017.
c. Consistent with the past, Transnet will continue to report and disclose all
matters of PFMA non-compliance. This matter has the attention of a dedicated
team of officials dealing with supply chain matters and significant strides have
been made, with Transnet’s remedial plan bearing positive results.
d. Deliberations are underway with the National Treasury on how this aspect
should be resolved.
Transnet and the AGSA remain committed to resolving these matters, and Transnet will issue
a further update by no later than 8 October 2021 should the AFS not be issued by that date.
Johannesburg
29 September 2021
JSE Debt Sponsor
Absa Corporate and Investment Bank (a division of Absa Bank Limited)
Date: 29-09-2021 05:45:00
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