MISC Annual Report 2017

NOTES TO THE FINANCIAL STATEMENTS 225 Financial Statements 14. INTANGIBLE ASSETS (CONT'D.) Impairment test for goodwill (a) Goodwill has been allocated to the Group's CGUs identified according to business segment as follows: Group 2017 RM'000 2016 RM'000 Petroleum 810,689 895,563 Offshore 225 225 Others 721 720 811,635 896,508 (b) The Group performed a review on the recoverable amount of goodwill during the financial year. Generally, the recoverable amounts are based on the higher of fair value less costs to sell or value-in-use for the CGUs to which the goodwill is allocated. The recoverable amount of a CGU is determined using the value-in-use method, based on cash flow projections derived from financial projections approved by the management covering a five-year period. The discount rate used is based on the pre-tax weighted average cost of capital determined by the management. Goodwill for the Petroleum segment represents goodwill arising from acquisition of American Eagle Tanker Inc. ("AET"). An impairment review of the carrying amount of the goodwill at the reporting date was undertaken by comparing to the recoverable amount of the CGU, which was derived based on value-in-use calculations. The value-in-use is most sensitive to the following key assumptions: (i) Risk adjusted discount rate used is 7.50% (2016: 7.55%). The discount rate reflects the current market assessment of the risks specific to the Petroleum segment. This is the benchmark used by the management to assess operating performance and to evaluate future investments. In determining the discount rate for the Petroleum segment, reference has been made to the yield of a 10 years (2016: 10 years) US Treasury Bills as at reporting date. An increase of 1.18% (2016: 0.31%) or 118 (2016: 31) basis points in discount rate would result in recoverable amount that equates to the carrying amount of the CGU. (ii) Terminal value and growth rate - The terminal value is based on expected cash flows for year 2022 into perpetuity with terminal year growth rate of 2.5% (2016: 2.0%). Terminal year charter rates are based on ten-year average historical market rates. A decrease of 5.91% (2016: 1.51%) or 591 (2016: 151) basis points in the charter rates in deriving at the terminal value would result in recoverable amount that equates to the carrying amount of the CGU. A decrease to 1.5% (2016: 0.39%) or 150 (2016: 39) basis points in terminal growth rate would result in recoverable amount that equates to the carrying amount of the CGU. (iii) Expenses are estimated to increase by an annual average rate of 2.5% (2016: 2.0%). (iv) Spot charter rates are estimated based on forecasts by industry research publications.