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 363 MISC BERHAD ANNUAL REPORT 2018 362 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) (cont’d.) (i) Other property, plant and equipment (cont’d.) This impairment review was significant to our audit because the assessment process is complex and is based on assumptions that are highly judgemental. (ii) Ships In addition, the significant drop in charter hire rates, certain ships’ contract which have expired or approaching expiry were also identified by management as indicators that the carrying amount of certain ships may be impaired. Accordingly, the Group and the Corporation estimated the recoverable amount of the ships using the higher of fair value less costs of disposal (“FVLCS”) and VIU. For recoverable amount that is based on FVLCS, the Group engaged independent valuers to assess the fair value of the ships. The Group and the Corporation recorded a total impairment loss of RM75.2 million and RM49.8 million respectively during the current financial year. 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 based on VIU 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 operating costs are supportable when compared to the past trends; and (c) 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. Our audit procedures to assess management’s impairment testing based on FVLCS are as follows: (a) Considered the independence, competence, capabilities and objectivity of the external valuers; and (b) Obtained an understanding of the methodology adopted by the independent valuers in estimating the fair value of the ships and assessed whether such methodology is consistent with those used in the industry. In addition, we also evaluated the adequacy of the Group’s disclosures of each key assumption on which the Group has based its cash flow projections and to which the CGU’s recoverable amount is most sensitive, as disclosed in Note 13 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 Recognition of revenue and cost of construction and marine projects – (Refer to Note 3 - Revenue and Note 23 - 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 estimated margins of similar projects. INDEPENDENT AUDITORS' REPORT TO THE MEMBERS OF MISC BERHAD