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 2023, 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 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 pages 18 to 136 comprise:

• the consolidated and separate statements of financial position as at 31 March 2023;
• 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, which include a summary of significant accounting policies.

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).

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 matter		How our audit addressed the key audit matter
Assessment of impairment of goodwill and property, plant and equipment (PPE) including the reassessment of the Cash Generating Units (CGUs) (applicable to the consolidated financial statements) The Group recognised goodwill with a carrying value of R1.3 billion, which largely arose from business combinations undertaken in prior years. The goodwill is attributable to two cash generating units (CGUs), the Company (Telkom) and Business Connexion Group Limited (BCX). The group has also recognised PPE amounting to R26.2 billion (after impairment) in the current financial year. International Accounting Standards (“IAS”) 36 - Impairment of Assets requires management to conduct an annual impairment test, or more frequently if there is an indication of impairment, to assess the recoverability of the carrying value of goodwill and PPE. The Group assessed internal and external indicators of impairment which included the market capitalisation being below the net asset value, the significant changes in the technological market and economic environment which have had an adverse effect and the decline in cash flow projections and the carrying value, respectively. During the current period, the Telkom Board approved the carve‑out and legal separation of the Openserve division through the sale of Telkom’s infrastructure business as a going concern to Openserve NewCo (Openserve (Pty) Ltd) effective 1 September 2022, resulting in Openserve (Pty) Ltd (Openserve) becoming a 100% subsidiary of Telkom SA SOC Ltd. Management has since monitored the performance of the Openserve assets and disposal, separate from that of the Telkom company. As a result, management was required to reassess Telkom’s CGUs at a group level. The assessment of impairment of goodwill and PPE, including the reassessment of the CGUs was a matter of most significance to our audit of the consolidated financial statements due to the magnitude of the impairment recognised as well as the significant judgements and assumptions made by management when performing the impairment assessment, and in estimating the key assumptions applied, particularly: Discount rate; Cash flow forecasts, in particular the revenue growth rates and EBITDA margin; and Terminal growth rates.		Our audit addressed this key audit matter as follows: We evaluated management's identification of the Group's CGUs based on the smallest identifiable group of assets that generates cash inflows that are largely independent of the cash inflows from other assets or groups of assets. This included assessing how management monitors the entity’s operations or how management makes decisions about continuing or disposing of the entity’s assets and operations. With respect to management’s reassessment of the CGUs in the current year, we have inspected the minutes of the board meetings for the approval of the carve-out and legal separation of the Openserve division. We have assessed the mathematical accuracy of the Openserve carved out balances as at 1 September 2022 by agreeing the balances to the audited 5 months trial balance and noted no material exceptions. Further, we have assessed the determination of the CGU against the requirements of IAS 36, noting no matters for further consideration. We tested the mathematical accuracy of the value in use model used by management and found no material differences. We also assessed the appropriateness of the valuation model applied by management, with reference to market practice and the requirements of IAS 36. We assessed the manner in which cash flows relating to the IFRS 16 leased assets were included in the value in use valuation model used by management, specifically whether the cash outflows in respect of the lease payments were excluded from the model and whether the discount rate was adjusted to include the lease liability and the cost of leasing. We did not note any aspect which required further consideration. We assessed the reasonability of the respective CGUs’ budgets included in the business plans (which forms the basis of the cash flow forecasts) through discussions with management regarding the process followed to develop the budgets, forecasts and the assumptions utilised. We also compared the prior year budgets to the current year actual results to understand management's ability to follow a robust budgeting process which results in credible budgets, and evaluated differences noted against underlying documentation and explanations obtained from management.
For the year ended 31 March 2023, management completed an impairment assessment over the goodwill and PPE balances by performing the following: Assessing the recoverable amount (being the higher of the value-in- use and fair value less costs to sell) through determination of a value- in-use amount and comparing this to the carrying amount; A five-year period was used for the discounted cash flows which included the capital expenditure and working capital assumptions; The valuation was performed taking into account the impacts of International Financial Reporting Standard (‘IFRS’) 16 - Leases; and The value in use for each CGU was calculated using a discounted cash flow model. These matters are disclosed in the following notes to the consolidated financial statements: Note 2.6: Significant changes in the current reporting period Note 5.1: Property, plant and equipment Note 5.3: Goodwill		We assessed the assumptions contained within the calculations including growth assumptions, discount rates and implications of industry changes. Our audit procedures included: 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 further 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 to independent sources for similar operations. No significant deviations were noted; and Evaluated whether the assumptions used, such as working capital and capital expenditure, had been determined and applied consistently across the CGUs. We agreed the capital expenditure to the approved budget with no exceptions noted. Utilising our valuation expertise, we independently sourced data such as the long-term growth rates and discount rate, cost of debt, risk-free rates in the applicable market, market risk premiums, debt/ equity ratios, as well as the beta of comparable companies. We then independently calculated a discount rate for each cash generating unit using our independently sourced data. This was compared to the discount rates used by management. We found the discount rates used by management to be within acceptable ranges of our independent calculations and no further material impairments were indicated by any differences in discount rates. We performed independent sensitivity analysis to assess the minimum changes in discount rates and terminal growth rates that would result in no headroom being available, and compared our results to that of management in order to evaluate how sensitive is the value in use of the CGU to possible changes in key assumptions. With respect to the Telkom and Openserve CGUs, we compared the recoverable amount as assessed by way of the procedures above to the carrying amount of the respective CGU. It is noted that the carrying amount of the Telkom and Openserve CGUs exceeded the value in use range which resulted in an impairment. We obtained management's impairment allocation schedule and noted that the impairment was allocated first to goodwill and the remaining balance was allocated on a prorata basis to the underlying assets of the group. We tested the accuracy of the allocation basis per the requirements of IAS 36 and noted no exceptions. With respect to the BCX CGU, we compared the recoverable amount as assessed by way of the procedures above to the carrying amount of the CGU and noted the recoverable amount exceeded the carrying amount of the BCX CGU and therefore no impairment was noted. We assessed the appropriateness of the disclosures in the consolidated financial statements as set out in Notes 2.6 and 5.3 against the requirements of IAS 36.
Valuation of the Investments in Openserve, BCX and property, plant and equipment (PPE) (applicable to the separate financial statements) In addition to the goodwill in the consolidated financial statements, the impairment considerations apply equally to the investment in BCX amounting to R6.6 billion, the investment in Openserve amounting to R6.6 billion (after impairment) and the company’s property plant and equipment amounting to R8.9 billion (after impairment). The Company holds a 100% interest in BCX and Openserve and accounts for these investments as subsidiaries in terms of International Accounting Standard (‘IAS’) 27 – Separate Financial Statements. Under IAS 36, the Company is required to test investments in subsidiaries carried at cost and PPE for impairment if there is an indicator of impairment. Management identified an impairment indicator regarding the material investments in BCX and Openserve and PPE due to the matters noted in the goodwill section above as well as the fact that the investment in Openserve plus the loans granted to Openserve were higher than the net asset value of Openserve, and performed impairment tests as a result. PPE consists mainly of network equipment. The network equipment within the Company does not generate cash inflows that are largely independent of those from other assets or groups of assets. This resulted in PPE having to be assessed for impairment as part of the Telkom CGU. The recoverability of PPE is largely dependent on macro-economic factors, which include cash flows to be generated through the network assets, as well as internal assumptions and estimates related to realisation levels and operating costs. The impairment test included assessing the recoverable amount of PPE, with reference to all cash flows (including the fair value contributory asset income), and comparing this to the carrying amount of the PPE. The impairment assessment of the investment in BCX, Openserve and the PPE is considered to be a matter of most significance to the current year audit of the separate financial statements due to the magnitude of the impairment recognised as well as the significant judgements and assumptions made by management when performing the impairment assessment, and in estimating the key assumptions applied, particularly: Discount rate; Cash flow forecasts, in particular the revenue growth rates and EBITDA margin; and Terminal growth rates. Specifically for BCX, cash flows generated using Telkom’s network assets These matters are disclosed in the following notes to the consolidated financial statements Note 5.1: Property, plant and equipment Note 7.2.1:Investment in subsidiaries		Our audit addressed this key audit matter as follows: We obtained an understanding of management’s process for determining the forecasted results for the Openserve and BCX Investments and assessed the reasonableness of the forecasted results. Please refer to the procedures performed in the section above for further details. With respect to the investment in BCX in the separate financial statements, we compared the recoverable amount of the BCX CGU as assessed by way of the procedures above to the carrying amount of the investment in BCX, and noted the recoverable amount exceeded the carrying amount of the BCX investment and therefore no impairment was required. With respect to the investment in Openserve in the separate financial statements, we compared the recoverable amount of the Openserve CGU as assessed by way of the procedures above to the carrying amount of the investment in Openserve, and noted the carrying amount of the Openserve investment exceeded the value in use range which resulted in an impairment. We tested the mathematical accuracy of the impairment processed by management and noted no material differences. With respect to the PPE in the separate financial statements, we compared the recoverable amount of the Telkom CGU, as assessed by way of the procedures above, to the carrying amount of Telkom which includes PPE and noted the carrying amount of the Telkom CGU exceeded the value in use range which resulted in an impairment. We obtained management's impairment allocation schedule and noted that the impairment was allocated on a prorata basis to the underlying assets of Telkom Company. We tested the accuracy of the allocation basis per the requirements of IAS 36 and noted no material exceptions. We assessed the appropriateness of the disclosures in the separate financial statements as set out in Notes 5.1 and 7.2.1 against the requirements of IAS 36.

Other information

The directors are responsible for the other information. The other information comprises the information included in the document titled “Telkom SA SOC Limited Annual Financial Statements for the year ended 31 March 2023”, which includes the Directors’ Report, the Audit Committee’s 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 2023” , 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 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 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. and SizweNtsalubaGobodo Grant Thornton Inc. have been the auditors of Telkom SA SOC Limited for 5 years.