B Communications : Restatement Annual Report 2019

Restatement

At the beginning of November 2020, as part of the preparation of the quarterly report and as part of the process of preparing and closing the financial statements for the period ended September 30, 2020, Bezeq International Ltd. (hereinafter: "Bezeq International") discovered that there are discrepancies between the assets and liabilities listed in its books and the actual assets and liabilities, resulting, inter alia, from non-imputation of costs from previous years in respect of payment of advances to suppliers to the income statement, as well as from improper capitalization of prepaid expenses.

Following the discovery of the discrepancies, Bezeq International's management began an immediate examination of the issue, and Bezeq International carried out tests, procedures and compensatory actions, while investing much effort and many resources, in order to prepare the financial statements in accordance with International Financial Reporting Standards and in accordance with Disclosure Provisions in Chapter IV of Securities Regulations, 5730-1970, in all material respects.

In this context, the following actions were taken, among others:

1. Bezeq International recalculated certain balances in the statements on its financial position for the years 2016-2019 and for interim periods for the years 2019 and 2020 without relying on past records and existing processes in accounting in relation to the balance sheet items where errors were discovered.
2. In light of the change in forecasts resulting from the discrepancies described above, the Company re-examined its valuation as of December 31, 2018 and 2019 through an external valuator.
3. Bezeq International carried out controls and inspections on the recalculation of balances with the assistance of an independent external specialist for the purpose of monitoring. In addition, the existing team was supported by additional accounting employees from Bezeq's subsidiaries, for the purpose of carrying out the work of correcting the statements.
4. Bezeq International's internal auditor conducted an examination of the matter in cooperation with Bezeq International's Security Division, while in some of the inspections he was assisted by an independent external specialist as stated in section 3 above.
5. Bezeq's Board of Directors has appointed an independent external examiner for the purpose of an in-depth investigation of the events and circumstances. The examination is underway as of the date of approval of the financial statements.

In light of the fact that Bezeq International's accounting system included many manual entries and poor documentation in a way that does not allow the effect of the transactions on its financial results to be fully traced, Bezeq International reconstructed the balance sheets in which errors were discovered without relying on the manual entries, with the assistance of an external specialist, reasonable controls and additional reports constructed during the process. The described complexity and method of preparing the reports, under tight schedules, did not allow for a full investigation of the discrepancies. Bezeq International is still examining the source of the discrepancies, and it is possible that additional discrepancies will be discovered following the work of the external examiner. The Company anticipates that in light of the manner in which the statements are constructed, such discrepancies, insofar as they exist, will not have a material effect on the Group's consolidated financial statements.

As of the date of approval of these financial statements, the total impact of the discrepancies discovered in Bezeq International as part of the examinations as of December 31, 2019 was a reduction in the Group's equity according to the following:

1. Errors that occurred until 2010 affected the balance of goodwill recognized at the time of gaining control of Bezeq. The correction of the goodwill balance affected subsequent impairments of cash-generating units recognized by the Group. For more information regarding the impairment of the Internet Services and International Communications segment, see Note 9 below.
2. Reduction of the Group's equity as of January 1, 2018 in the amount of approximately NIS 100 in respect of past balances from the years 2002-2017, with most of the amount (approximately NIS 80) originating in the years 2002-2003.
3. Reduction of the Group's net profits in a cumulative amount of approximately NIS 136 for the period between January 1, 2018 and December 31, 2019.
4. Following the findings of the examination, Bezeq International updated its forecasts for the coming years and performed an updated valuation as of December 31, 2019, following which an additional impairment loss of NIS 66 (NIS 44 net of tax) was recognized as a result of updating the value of operations and the value of Bezeq International's book value as of December 31, 2019 (see Note 9).

In addition, the Company performed an updated valuation as of December 31, 2018, following which an additional impairment loss of NIS 30 was recognized as a result of updating the value of operations and the value of Bezeq International's book value as of December 31, 2018 (see Note 9).

It should be noted that as of the date of the examination, no effect was found on the cash balance of Bezeq International and the Group.

In light of the findings of the examinations as stated above, the Company made an adjustment by way of restatement of its financial statements as of December 31, 2019 and for the year ended on the same date, in order to retrospectively reflect the effect of the above, in addition to comparative restated results as of December 31, 2018 and for the year then ended and as of January 1, 2018 and for the year ended December 31, 2017, in which there were adjustments as a result of the above.

The following is a breakdown of the effect of the restatement:

Impact on the financial statements as of December 31, 2019 and for the year ended on that date

	Effect on the statement on the financial position as of December
	31, 2019
	As previously	Impact of	As reported in these
	reported	restatement	financial statements
	(audited)	(audited)	(audited)
	NIS	NIS	NIS
Trade receivables, net	1,689	(12)	1,677
Other receivables	313	29	342
Inventory	93	3	96
Right of use assets	1,182	35	1,217
Property, plant and equipment	6,032	(68)	5,964
Intangible assets	3,180	(17)	3,163
Deferred expenses and non-current
investments	366	(26)	340
Deferred tax assets	59	22	81
Trade and other payables	1,425	191	1,616
Deficit attributable to shareholders of the
company	(187)	(54)	(241)
Deficit attributable to Non-Controlling
interests	(15)	(182)	(197)
Total equity deficit	(202)	(236)	(438)
	Effect on the statement of income for the year ended December
	31, 2019
	As previously	Impact of	As reported in these
	reported	restatement	financial statements
	(audited)	(audited)	(audited)
	NIS	NIS	NIS
General and operating expenses	3,276	45	3,321
Impairment losses	1,274	66	1,340
Operating profit	566	(111)	455
Income tax expenses	1,473	(32)	1,441
Net loss for the year	(1,381)	(79)	(1,460)
Loss attributable to Non-controlling interest	(528)	(79)	(607)
Loss per share (in NIS)	(19.76)	0.06	(19.70)

	Effect on the comprehensive income for the year ended December
	31, 2019
	As previously	Impact of	As reported in these
	reported	restatement	financial statements
	(audited)	(audited)	(audited)
	NIS millions	NIS millions	NIS millions
Net loss for the year	(1,381)	(79)	(1,460)
Total comprehensive loss for the period	(1,413)	(79)	(1,492)
Loss attributable to Non-controlling interest	(551)	(79)	(630)

Impact on the financial statements as of December 31, 2018 and for the year ended on that date:

	Effect on the statement on the financial position as of December
	31, 2018
	As previously	Impact of		As reported in these
	reported	restatement		financial statements
	(audited)	(audited)		(audited)
	NIS millions	NIS millions		NIS millions
Trade receivables, net	1,773	2		1,775
Other receivables	269	17	286
Intangible assets	4,227	(17)	4,210
Deferred expenses and non-current
investments	509	6		515
Trade and other payables	1,702	165	1,867
Equity attributable to shareholders	228	(54)	174
Equity attributable to Non-Controlling
interests	536	(103)	433
Total equity deficit	764	(157)	607