1. PPE & Intangible assets (Software)

2. 1. PPE & Intangible assets (Software) • 1.1 Did not review the residual values & useful live of assets • Capex spend was low during austerity period and some assets are now used longer than expected. • This was last done in FY2005/06 at time of corporatising SABC. • Impact: • SABC depreciates assets faster than useful life of the asset. • Income statement – depreciation too high, profits too low. • Balance sheet – net book value of assets too low. • Cash flow statement – no impact = book entries.

3. 1. PPE & Intangible assets (Software) • 1.2 Did not test assets for impairment • The present value of the future cash flows that an asset will generate has to be compared with the net book value of the asset. If the present value of the future cash is less than the net book value then a provision for impairment of the asset must be raised to reduce the net book value to the level of the present value of future cash flows. • The challenge for the SABC is to link the future cash flows from advertising and TV licences back to each individual asset (85 000 assets on the register) that will be used to support the cash flow generating operations of the SABC. • This was last done in FY2005/06 – focused mainly on assets that could linked directly to revenue generation e.g OB-vans • Impact: • SABC assets (33 807) with zero net book value are still in use to generate cash flows and no adjustment is thus required. The remainder of assets with a net book value presents the SABC with the challenge as discussed above. • Cash flow statement – no impact = book entries

4. 2. Licence fee revenue • SABC recognises income from TV licences on the cash basis (when payment is made) and not on the accrual basis (when renewal notices are mailed). • This has been the SABC’s policy for many years and reflected in all prior year annual reports/accounting policies. The matter was also raised at the time of IFRS conversion and reviewed by the external audit partners. The cash basis is used in view of the high piracy level (estimated at 64%) and uncertainty that economic benefit will accrue to the SABC. This treatment is also inline with IFRS standards. • A motivation and request to remain on the cash basis has been sent to National Treasury for approval by the Minister of Finance. The motivation is based on many challenges (duplicate households, cancellations, change to concession, marriages, change in business TV sets) to keep an address base of 12-million households clean enough to pass an audit. SABC would have audit qualifications relating to the completeness of revenue if the accrual basis is used.

5. 2. Licence fee revenue • The TV Licence system was designed to process and maintain records on the cash basis as per diagram below:

6. 2. Licence fee revenue • Impact: • Income statement – revenue too low – Licence fees issued but not paid were R597m, penalties issued but not paid were R790m. On accrual basis revenue would have been R1 387m higher. In total it would have been the cash based revenue of R914m plus the R1 387m not received = R2.3bn. • Income statement – impairment for bad debt too low – historical payments show that not all licence fees are paid and a provision for bad debts would have to be raised. How much of the licence fees and penalties need to be impaired have to be determined. If the same non-payment rate of prior years is used, it would be based on the cash payments received. Impairment must also allow for duplicate households, cancellations, change to concession licences etc. Based on historical payments received, the bad debt provision would be estimated at the licences and penalties issued but not paid – R1 387m. • The net surplus after the provision for bad debts would thus be same as the surplus based on the cash recognition basis. • Balance sheet – TV Licence debtors not reflected and thus too low, accumulated provision for bas debt too low. • Cash flow statement – no impact = book entries.

7. 3. Content • Previous year’s qualification on television programme, film and sport rights could not be cleared in full. This has been a challenge since 2008. • The annual financial statements are prepared on an external transaction basis, but the cost of content includes both external and internal transactions (cost of using SABC facilities to produce content). This is done to have a true reflection of the total cost to produce content internally. When the production cost is written-off to the Income statement the internal portion is also written-off but as an internal cost item which is now not included in the AFS. • Note 7 in the AFS has to be prepared on both the external/internal basis because the production costs includes both transactions but the write-off to the Income statement only reflects the external costs. Thus the information in Note 7 will only agree with the Income statement on external costs because the movement on internal costs is not reflected in the AFS. This treatment has been used for many years and a solution to deal with internal costs and movements has to be researched. • Impact: • Income statement – none • Balance sheet – none • Cash flow statement – no impact = book entries.

8. 4. Trade and other receivables (Debtors) • The impairment of debtors was assessed using the age of debt (debt older than 120 days) and not by a review of the individual debtors ability to pay/not pay. “Good” debtors with 120 days old debt was assessed for impairment which is too conservative. • Impact: • Income statement – impairment for bad debt too high • Balance sheet – debtors too low • Cash flow statement – no impact = book entries.

9. 5. Taxation • SABC raised the non-payment of “withholding tax” with SARS some years ago (2009). SABC and SARS have been working together to assess the financial impact and raised a provision for the potential amount due. SABC is waiting for SARS to complete the review process and issue the tax assessment. Once this is received and SABC agrees, payment will be made. • The treatment of TV licences for accounting purposes and tax purposes differ, same as e.g. different depreciation periods for fixed assets for accounting and tax purposes. SARS has allowed the SABC a 100% claim for TV licences not collected since corporatisation in 2006/07. A ruling was issued in 2007, but not updated since. • SABC tax compliance certificates have been issued by SARS each year since 2007. • SABC has applied for a permanent ruling in this regard.

10. 6. Expenditure • A request was made for supporting documents relating to manual journals raised by management during the year. Manual journals are processed by all SABC business units in Jhb. and provinces. • At month-end various journals need to be processed for accruals for outstanding payments or transfers of prepaid expenses to the Income statement, etc. • The supporting documents had to be sourced from all the business units across the country and the submission of the file for auditing was too late. The AG did not audit the file after the deadline expired. • The SAP journal system has already been enhanced to force the attachment of electronic copies of the supporting documents. This will speed up the retrieval of supporting documents in future.

32. By the end of the financial year spending on new capital equipment and replacement of old technology was underspent by 80%. Only R122m of a total Capex budget of R500m was used. The cancellation of the Siemens technology implementation contract and the Henley fire resulted in some digital migration projects being delayed by eight months.

34. Government Guarantee - Nedbank Loan • During the year there was a total reduction in the balance due of R722m (R27.7m x 12 months plus R390m in advance). • An amount was paid in advance during January 2013 in view of the high cash balances and higher interest rate (8%) paid on the loan. The SABC earned an average interest of 5.25% on cash balances. • The SABC still owed R167m to Nedbank with the monthly instalments of R27.7m continuing and payments are scheduled to be completed by September 2013. • The Nedbank loan has been paid back in full!