Key audit matters How we addressed the key audit matters Impairment of non-current assets – (Refer to Note 12 - Ships, offshore floating assets and other property, plant and equipment, to the financial statements) (cont’d.) ii) Ships The significant drop in charter hire rates was identified by the management as an indication that the carrying amount of certain ships may be impaired. Accordingly, the Group estimated the recoverable amount of the ships using VIU and recorded an impairment loss of RM195.7 million in respect of certain ships. This impairment review was significant to our audit because the assessment process is based on assumptions that are highly judgemental. Our audit procedures to assess management’s impairment testing included the following: a) assessed the assumptions of future charter hire rates by comparing to the terms and conditions stipulated in the time charter party agreements entered into with the lessee, in particular the daily charter hire rates; b) assessed whether the assumptions on the future refurbishment costs and operating costs are supportable when compared to the past trends; and c) evaluated the appropriateness of the discount rate used to determine the present value of the cash flows and whether the rate used reflects the current market assessments of the time value of money and the risks specific to the asset. We also evaluated the adequacy of the disclosures of the key assumptions to which the Group has based its cash flow projections, as disclosed in Note 12 to the financial statements. Recognition of revenue and cost of construction and marine projects – (Refer to Note 3 - Revenue and Note 22 - Due from/(to) customers on contracts, to the financial statements) A significant proportion of the Group’s revenues and profits are derived from long-term construction and marine projects which span more than one accounting period. The Group uses the percentage-of-completion method in accounting for these long-term contracts. The stage of completion is measured by reference to the physical completion of the contracts. We focused on this area because management applies significant judgement and estimation uncertainties in determining the stage of physical completion in respect of marine projects and in estimating total estimated project costs. In addressing this area of audit focus, we obtained an understanding of the relevant internal controls over the accuracy and timing of revenue and cost recognised in the financial statements, including controls performed by the management in estimating total project costs, profit margin and percentage-of-completion of projects. In addition, we also performed the following: (a) read all key contracts to obtain an understanding of the specific terms and conditions; (b) agreed contract revenue to the original signed customer contracts and/or approved change orders; (c) reviewed management meeting minutes to obtain an understanding of the performance and status of the key projects; (d) assessed the reasonableness of assumptions applied in the determination of percentage-of-completion in light of supporting evidence such as engineers’ reports in relation to marine projects; and (e) considered the historical accuracy of management’s budgeted project margins in assessing the reasonableness of estimated margins of similar projects. Key audit matters (cont’d.) MISC BERHAD • Annual Report 2016 338 independent auditors’ report to the members of MISC Berhad (Incorporated in Malaysia)
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