DENEL SOC LIMITED - Further update regarding disclaimer of audit opinion - BIDEN

Further update regarding disclaimer of audit opinion - BIDEN

DENEL SOC LIMITED
Registration number: 1992/001337/30
JSE Alpha Code: BIDEN
(“Denel” or the “Company”)

FURTHER UPDATE REGARDING DISCLAIMER OF AUDIT OPINION

1.   Background

     Noteholders are referred to announcement released on SENS on 27 November 2018 (the
     “Initial Announcement”) setting out details relating to the disclaimer of opinion (the
     “Disclaimer”) contained in the audit report for the year ended 31 March 18 (the “2017/18
     Audit”). As undertaken in the Initial Announcement, the board of directors of Denel (the
     “Board”) sets out below an update regarding progress made in relation to the Disclaimer.

2.   Status update

       2.1    Address the lapses in governance within the organisation

              Further to various appointments to the Board as contained in the Initial
              Announcement, Denel has appointed Mr Danie du Toit as chief executive officer of
              Denel with the support of the Department of Public Enterprises, effective from 14
              January 2019. In order to strengthen governance within the organisation, Denel has
              implemented divisional Audit committees for quarterly business reviews.

       2.2    Improve IFRS reporting

              A process to review and update of financial policies is under way and an update of
              the procedures is expected to improve internal controls.

              A training schedule has been formulated and incorporated in the Denel finance cycle
              in order to ensure compliance and to improve the skills gap identified.

       2.3    Quantify prior period impact

              Subsequent to the appointment of Deloitte to assist with the quantification of the
              prior period errors, the following progress has been made:

              Revaluation Reserve

              Prior to 2007, Denel transferred some of the assets that were previously recognised
              as Owner Occupied Property, Plant and Equipment (held under the cost model) to
              Investment Properties (held under the fair value model). This transfer was effected
              as the intention for holding these assets was no longer to owner occupy but rather
              to earn rental income from the rental of the property. At the date of transfer, the
              properties were revalued with the corresponding adjustment being posted to a
              “Revaluation Reserve” in Equity. All subsequent fair value adjustments, after the
              transfer to Investment Property, have been correctly recognised in Profit or Loss.

              Post-Retirement benefit fund

              The medical trust was established in order to enable Denel to make post-retirement
              medical aid subsidy contributions to the medical scheme as an employer on behalf of
              employee beneficiaries. Denel enjoys the benefits of the trust, in order to fulfil its
              obligation to employee beneficiaries, and is furthermore deemed to exercise control
              over the trust. Denel will recognise a net defined benefit asset as the plan is over
              funded as per IAS 19.

              Property Plant and Equipment

              The assessment of useful lives and residual values of assets is under way with results
              expected to be announced once completed in March 2019.

              Revenue
              A process to review the revenue contracts and the measurement impact is
              underway.

              The final figures are currently being finalised and further details will be released by
              the end of March 2019.

       2.4    Compliance with Public Finance Management Act (“PFMA”)

              The review of internal processes to ensure compliance to the PFMA, the detection
              and prevention of irregular, fruitless and wasteful expenditure is under way.

3.   Undertakings

     As set out in the Initial Announcement, the Board will continue to update noteholders relating
     to progress/resolution in regard to the Disclaimer and any further relevant developments.

28 February 2019

Debt Sponsor: Nedbank Corporate and Investment Banking

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