ICI Pakistan Limited and its Subsidiary Companies Consolidated Financial Statements F 72 ICI Pakistan Limited Annual Report 2018 -19 Report of the Directors for the year Ended June 30, 2019 The Directors are pleased to present their report together with the audited Group results of ICI Pakistan Limited for the year ended June 30, 2019. The ICI Pakistan Group comprises of ICI Pakistan Limited, ICI Pakistan PowerGen Limited (PowerGen), Cirin Pharmaceuticals (Private) Limited (Cirin) and NutriCo Morinaga (Private) Limited as its subsidiaries. The Directors’ Report, which provides a commentary on the performance of ICI Pakistan Limited for the year ended June 30, 2019, has been presented separately. The net turnover of PowerGen for the year ended stood at PKR 751 million, being 37% higher as compared to the last year due to a rise in furnace oil price by 37%. The sale of electricity units was 10% higher vs the SPLY despite the Polyester plant shutdown as the Company started to sell electricity to its associate concern, Nutrico Morinaga (Pvt) Limited. Overall, the operating profit rose by 24% against the SPLY. Cirin posted a net turnover of PKR 1,057 million, 20% higher as compared to the SPLY, and an operating loss of PKR 106 million as compared to an operating profit of 117 million in the SPLY. The operating loss was mainly due to 35% devaluation of rupee against the US dollar, which negatively impacted the cost of all imported raw and packing materials and, thus, led to a marked increase in product manufacturing costs. The local costs also continued to increase throughout the year on account of rising inflation. The overall increased costs of running the business were only partially compensated by a price increase allowed by the DRAP in January 2019, which led to a significant erosion of margins and profitability. NutriCo Morinaga (Private) Limited is expected to commission the plant in Q1 of FY 2019. Contingent on the result of trial production, commercial operations are expected to commence during the second half of FY 2019. During the period, the Company generated income of PKR 37,149 million on its bank deposits, which translated into a Profit After Tax (PAT) of PKR 23,283 million and an EPS of PKR 0.81. On a consolidated basis, including the results of the Company’s subsidiaries, ICI Pakistan PowerGen Limited, Cirin Pharmaceuticals (Private) Limited and NutriCo Morinaga (Private) Limited, the Profit After Tax (PAT) for the year was PKR 2,549 million of which PKR 11 million is attributable to non-controlling interests. This translates into an EPS of PKR 27.47, which is 23% lower than the SPLY. During the year, the Company recognised PKR 526 million as a share of profit from NutriCo Pakistan (Private) Limited as compared to PKR 586 million recognised during the SPLY. Muhammad Sohail Tabba Asif Jooma Chairman / Director Chief Executive Dated: July 25, 2019 Karachi ICI Pakistan Limited Annual Report 2018 -19 F 73 EY Ford Rhodes UAN: + 9221 111 11 39 37 (EYFR) Chartered Accountants Tel: + 9221 3565 0007-11 Progressive Plaza, Beaumont Road Fax: + 9221 3568 1965 P.O. Box 15541, Karachi 75530 [email protected] Pakistan ey.com/pk Independent Auditors’ Report To the members of ICI Pakistan Limited Report on the Audit of Consolidated Financial Statements Opinion We have audited the annexed consolidated financial statements of ICI Pakistan Limited and its subsidiaries (the Group), which comprise the consolidated statement of financial position as at 30 June 2019, the consolidated statement of profit or loss and other comprehensive income, the consolidated statement of changes in equity and the consolidated statement of cash flows for the year then ended, and notes to the consolidated financial statements, including a summary of significant accounting policies and other explanatory information. In our opinion, consolidated financial statements give a true and fair view of the consolidated financial position of the Group as at 30 June 2019, and of its consolidated financial performance and its consolidated cash flows for the year then ended in accordance with the accounting and reporting standards as applicable in Pakistan. Basis for Opinion We conducted our audit in accordance with International Standards on Auditing (ISAs) as applicable in Pakistan. Our responsibilities under those standards are further described in the Auditor’s Responsibilities for the Audit of the Consolidated Financial Statements section of our report. We are independent of the Group in accordance with the International Ethics Standards Board for Accountants’ Code of Ethics for Professional Accountants as adopted by the Institute of the Chartered Accountants of Pakistan (the Code), and we have fulfilled our other ethical responsibilities in accordance with the Code. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Key Audit Matters Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the consolidated financial statements of the current period. These matters were addressed in the context of our audit of the consolidated financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. Following are the key audit matters: Key audit matter How our audit addressed the key audit matter 1. First time adoption of IFRS 9 – Financial Instruments As referred to in note 48.1 to the consolidated financial Our key procedures to review the application of IFRS 9 included, statements, the Group has adopted IFRS 9 with effect from 1 amongst others, review of the methodology developed and July 2018. The new standard requires the Group to make applied by the Group to estimate the ECL in relation to trade provision for financial assets (trade debts) using Expected Credit debts. We also considered and evaluated the assumptions used Loss (ECL) approach as against the Incurred Loss Model in applying the ECL methodology based on historical information previously applied by the Group. and qualitative factors as relevant for such estimates. Determination of ECL provision for trade debts requires significant Further, we assessed the integrity and quality of the data used judgement and assumptions including consideration of factors for ECL computation based on the accounting records and such as historical credit loss experience and forward-looking information system of the Group as well as the related external macro-economic information. sources as used for this purpose. We have considered the first time application of IFRS 9 We checked the mathematical accuracy of the ECL model by requirements as a key audit matter due to significance of the performing recalculation on test basis. change in accounting methodology and involvement of estimates and judgments in this regard. In addition to above, we assessed the adequacy of disclosures in the consolidated financial statements of the Group regarding application of IFRS 9 as per the requirements of the above standard. A member firm of Ernst & Young Global Limited F 74 ICI Pakistan Limited Annual Report 2018 -19 Independent Auditors’ Report Key audit matter How our audit addressed the key audit matter 2. Net Realisable Value (NRV) of inventories and provision for obsolescence As at the year end, the Group held inventories amounting to Our audit procedures included, amongst others, reviewing the PKR 10,105 million, after considering allowance for inventories management procedures for evaluating the NRV of inventories, obsolescence amounting to PKR 196.4 million, as disclosed in observing physical inventory counts at major locations to note 12 of the accompanying consolidated financial statements. ascertain the condition and existence of inventories, confirming The inventories obsolescence is calculated by taking into account inventories held by others and performing testing on a sample of the NRV of related inventories while mainly keeping in view the items to assess the NRV of the inventories held and evaluating estimated selling price, forecasted inventories usage, forecasted the adequacy of provision for slow moving and obsolete sale volumes and product expiry dates. inventories as at the year end. We have considered this area to be a key audit matter due to Further, our audit procedures included, amongst others, reviewing its materiality and significance in terms of judgements involved inventories turnover ratios; understanding and evaluating the in estimating the NRV of underlying inventories. appropriateness of the basis of identification of the obsolete inventories; evaluating the historical accuracy of allowance of inventories assessed by management by comparing the actual loss to historical allowance recognized, on a sample basis; testing the accuracy of the aging analysis of inventories, on a sample basis; testing cost of goods with underlying invoices and expenses incurred in accordance with inventory valuation method and reviewing the minutes of the relevant meetings at the management and Board level to identify any indicators of obsolesce. We further tested the NRV of the inventories held by preforming a review of sales close to and subsequent to the year-end and compared with the cost for a sample of products. We also reviewed the inventories’ expiry date report to identify slow moving or obsolete inventories and tested its accuracy on sample basis to check the provision for slow moving and obsolete inventories was reasonable. Information Other than