MISC Annual Report 2018

HIGHLIGHTS OF THE YEAR OUR BUSINESS OUR LEADERSHIP OUR PERFORMANCE OUR COMMITMENT TO SUSTAINABILITY OUR GOVERNANCE FINANCIAL STATEMENTS OTHER INFORMATION 50 TH ANNUAL GENERAL MEETING 361 MISC BERHAD ANNUAL REPORT 2018 360 Key audit matters (cont'd.) KEY AUDIT MATTERS HOW WE ADDRESSED THE KEY AUDIT MATTERS Impairment of goodwill – (Refer to Note 15 - Intangible assets, to the financial statements) The Group is required to perform annual impairment test of cash generating units (“CGUs”) or groups of CGUs to which goodwill has been allocated. The Group estimated the recoverable amount of its CGUs or groups of CGUs to which the goodwill is allocated based on value-in-use (“VIU”). Estimating the VIU of CGUs or groups of CGUs involves estimating the future cash inflows and outflows and discounting them at an appropriate rate. Included in the Group’s goodwill as at 31 December 2018 of RM829.5 million is goodwill relating to the Petroleum segment. We focused on the impairment review of the goodwill relating to this segment as it represents more than 99% of the Group’s goodwill as at 31 December 2018 and significant judgements were involved in the terminal value and growth rate of the expected cash flows as well as the determination of an appropriate discount rate, which may cause possible variations in the recoverable amount of the CGU to which the goodwill has been allocated. Our audit procedures included, among others evaluating the assumptions and methodologies used by the Group, in particular the assumptions to which the recoverable amount of the CGUs are most sensitive such as the terminal value of the expected cash flows, the growth rate as well as the discount rate used. We have assessed and tested the key assumptions used by management to estimate the projected cash flows for the CGUs as follows: (a) evaluated 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; (b) evaluated the terminal value and growth rate of the expected cash flows; and (c) assessed the sensitivity of the goodwill balance to changes in the discount rate, terminal value and growth rate of cash flows. In addition, we also evaluated the adequacy of the disclosures of each key assumption on which the Group has based its cash flow projections and to which the recoverable amount is most sensitive, as disclosed in Note 15 to the financial statements. INDEPENDENT AUDITORS' REPORT TO THE MEMBERS OF MISC BERHAD Key audit matters (cont'd.) KEY AUDIT MATTERS HOW WE ADDRESSED THE KEY AUDIT MATTERS Impairment of non-current assets – (Refer to Note 13 - Ships, offshore floating assets and other property, plant and equipment, to the financial statements) The Group is required to perform impairment test of CGU whenever there is an indication that the CGU may be impaired by comparing the carrying amount with its recoverable amount. (i) Other property, plant and equipment The carrying amount of the Malaysia Marine and Heavy Engineering Holdings Berhad (“MHB”) Group's net assets exceeds its market capitalisation, thereby indicating potential impairment of MHB Group's non-current assets. Accordingly, the Group estimated the recoverable amount of the property, plant and equipment and land use rights of MHB Group using VIU based on cash flow projections covering a five year period including terminal value. Estimating the VIU involves estimating the future cash inflows and outflows that will be derived from the CGU, and discounting them at an appropriate discount rate. Our audit procedures included, among others evaluating the assumptions and methodologies used by the Group, in particular those relating to the discount rate and projected cash flows for the CGU. The areas that involved significant audit effort and judgement were the assessment of the probability of securing the future revenue contracts, possible variations in the amount and timing of cash flows and the determination of an appropriate discount rate. Our procedures to assess management’s impairment testing included the following: (a) enquired with business development teams to obtain an understanding of the status of negotiations and the likelihood of securing the revenue contracts for contracts above our testing threshold, including timing of commencement and expected value of revenue contracts; (b) evaluated the reasonableness of the estimated profits to be derived from those revenue contracts above our testing threshold by comparing the estimated profits with the actual margins achieved by MHB Group in previous years; and (c) assessed 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. INDEPENDENT AUDITORS' REPORT TO THE MEMBERS OF MISC BERHAD