MISC Annual Report 2017

NOTES TO THE FINANCIAL STATEMENTS MISC BERHAD | Annual Report 2017 222 12. SHIPS, OFFSHORE FLOATING ASSETS AND OTHER PROPERTY, PLANT AND EQUIPMENT (CONT'D.) (a) The net carrying amounts of ships pledged as security for borrowings (Note 18(c)) are as follows: Group 2017 RM'000 2016 RM'000 Ships 3,290,183 3,560,681 (b) The significant drop in charter hire rates, expiry of existing contracts or future expiry of contracts within next five years of certain ships and offshore floating assets were identified as indications that the carrying amount of certain ships may be impaired. The Group and the Corporation have performed a review of the recoverable amount of their ships, offshore floating assets and other property, plant and equipment during the financial year. The review led to the recognition of net impairment losses of RM642,298,000 (2016: RM358,657,000) and RM227,431,000 (2016: RM9,433,000) for the Group and the Corporation respectively, as disclosed in Note 5(a). The recoverable amount was based on the higher of fair value less costs of disposal or value-in-use, and determined at the cash- generating-unit ("CGU") of each asset. Recoverable amount determined from value-in-use The Group's recoverable amount for impaired ships, offshore floating assets and other property, plant and equipment of RM119,696,000 (2016: RM2,174,531,000) was determined from the value-in-use calculations using cash flow projections discounted at rates 7.07% to 10.30% (2016: 6.50% to 10.30%). Impairment losses of RM69,997,000 (2016: RM354,564,000) and RMNil (2016: RM9,433,000) for the Group and the Corporation respectively were recognised using this basis. The key assumptions used in the value-in-use calculations are as follows: (i) Ships - The value-in-use for certain ships were calculated using cash flow projections for the remaining lease period and discounted at rates of 7.07% to 7.50% (2016: 6.80% to 7.55%). (ii) Offshore floating assets - In the previous financial year, the value-in-use for certain offshore floating assets were calculated using cash flow projections for the remaining lease period and discounted at a rate of 6.50%. (iii) Other property, plant and equipment In the previous financial year, the following are the key assumptions used in the value-in-use calculations: - Revenue are estimated based on existing order book and anticipated future projects. - Gross margins are estimated based on forecast margins for order book, management's expectation and past experience. - The discount rate reflects specific risk relating to the CGU. The discount rate used is 10.30%. - Cash flow beyond the five-year period is extrapolated using a growth rate of 2.50%. The growth rate is based on published industry research and do not exceed the long-term average growth rate for the industries relevant to the CGU.