Frontken Corporation Berhad 200401012517 (651020-T) • A N N U A L R E P O R T 2 0 2 1 126 NOTES TO THE FINANCIAL STATEMENTS (CONT’D) 14. GOODWILL ON CONSOLIDATION (CONT’D) The recoverable amounts of the CGUs are determined using the value in use approach, and this is derived from the present value of the future cash flows from each CGU computed based on the projections of financial forecast covering a period of 5 years. The key assumptions used in the determination of the recoverable amounts are as follows:- 2021 2020 % % Budgeted gross margin 15 to 52 14 to 52 Growth rates - Year 1 3 to 8 3 to 11 - Year 2 to 5 3 to 8 3 to 11 Pre-tax discount rates 17 to 23 15 to 20 (i) Budgeted gross margin Management determines budgeted gross margin based on past performance and its expectations of market development. (ii) Growth rates The growth rates are based on industry growth forecasts. Changes in selling prices and direct costs are based on past practices and expectations of future changes in the market. These calculations use pre-tax cash flow projections based on financial budgets approved by management and extrapolated cash flows for a five-year period based on growth rates consistent with the long- term average growth rate for the industry. (iii) Discount rates Management estimates discount rate using pre-tax rate that reflect current market assessments of the time value of money and the risk specific to the CGU. The rate used to discount the forecasted cash flows reflects specific risks and expected returns relating to the industry. (iv) Terminal value Terminal value is based on zero growth of projected present value of particular subsidiaries from year 2026 until infinity. The management believes that there is no reasonable change in the above key assumptions which would cause the carrying amount of the goodwill to exceed its recoverable amounts.
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