MISC Annual Report 2019

2. SIGNIFICANT ACCOUNTING POLICIES (CONT’D.) 2.3 Summary of significant accounting policies (cont’d.) (l) Derivative financial instruments and hedge accounting (cont’d.) Cash flow hedges (cont’d.) Derivative instruments that are not designated as effective hedging instrument are classified and allocated as current or non-current based on an assessment of the facts and circumstances as follows: - Where the Group and the Corporation will continue to hold a derivative as an economic hedge (and does not apply hedge accounting) for a period beyond 12 months after the reporting date, the derivative is classified as non-current (or separated into current and non-current portions) consistent with the classification of the underlying item. - Embedded derivatives that are not closely related to the host contract are classified consistent with the cash flows of the host contract. Derivative instruments that are designated as, and are effective hedging instruments, are classified consistent with the classification of the underlying hedged item. The derivative instrument is separated into a current portion and non-current portion only if a reliable allocation can be made. (m) Leases Current Financial Year The Group and the Corporation assess at contract inception whether a contract is, or contains, a lease. That is, if the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration. Group and Corporation as a lessee The Group and the Corporation apply a single recognition and measurement approach for all leases, except for short-term leases and leases of low-value assets. The Group and the Corporation recognise lease liabilities to make lease payments and right-of-use assets representing the right to use the underlying assets. (i) Right-of-use assets The Group and the Corporation recognise right-of-use assets at the commencement date of the lease (i.e. the date the underlying asset is available for use). The cost of right-of-use assets are initially recognised as the amount of lease liabilities recognised adjusted for any lease payments made at or before the commencement date, plus any initial direct costs incurred and an estimate of costs to dismantle and remove the underlying asset or to restore the underlying asset or the site on which it is located, less any lease incentives received. Right-of-use assets are subsequently stated at cost, less any accumulated depreciation and impairment losses, and adjusted for any remeasurement of lease liabilities. Right-of-use assets are depreciated on a straight-line basis over the shorter of the lease term and the estimated useful lives of the assets. If ownership of the leased asset transfers to the Group and the Corporation at the end of the lease term or the cost reflect the exercise of a purchase option, depreciation is calculated using the estimated useful life of the asset. The right-of-use assets are also subject to impairment as disclosed in Note 2.3(f). (ii) Lease liabilities At the commencement date of the lease, the Group and the Corporation recognise lease liabilities measured at the present value of lease payments to be made over the lease term discounted using the interest rate implicit in the lease or, if that rate cannot be readily determined, the respective entities’ incremental borrowing rate is used. The basis to determine the incremental borrowing rate is further explained in Note 2.5(b)(vii). The lease payments include fixed payments (including in-substance fixed payments) less any lease incentives receivable, variable lease payments that depend on an index or a rate, and amounts expected to be paid under residual value guarantees. 2. SIGNIFICANT ACCOUNTING POLICIES (CONT’D.) 2.3 Summary of significant accounting policies (cont’d.) (m) Leases (cont’d.) Current Financial Year (cont’d.) Group and Corporation as a lessee (cont’d.) (ii) Lease liabilities (cont’d.) The lease payments also include the exercise price of a purchase option reasonably certain to be exercised by the Group and the Corporation and payments of penalties for terminating the lease, if the lease term reflects the Group and the Corporation exercising the option to terminate. Variable lease payments that do not depend on an index or a rate are recognised as expenses (unless they are incurred to produce inventories) in the period in which the event or condition that triggers the payment occurs. After the commencement date, the amount of lease liabilities is increased to reflect the accretion of interest and reduced for the lease payments made. In addition, the carrying amount of lease liabilities is remeasured if there is a modification, a change in the lease term, a change in the lease payments or a change in the assessment of an option to purchase the underlying asset. The Group’s and the Corporation’s lease liabilities are included in interest-bearing loans and borrowings as disclosed in Note 19(c). (iii) Short-term leases and leases of low-value assets The Group and the Corporation have elected not to recognise right-of-use assets and lease liabilities for short-term leases that have a lease term of 12 months or less and leases of low-value assets. The Group and the Corporation recognise the lease payments associated with these leases as an expense on a straight-line basis over the lease term. Group and Corporation as a lessor When the Group and the Corporation act as a lessor, it determines at lease inception whether each lease is a finance lease or an operating lease. To classify each lease, the Group and the Corporation make an overall assessment of whether the lease transfers substantially all of the risks and rewards incidental to ownership of the underlying asset. If this is the case, then the lease is a finance lease; if not, then it is an operating lease. If an arrangement contains lease and non-lease components, the Group and the Corporation apply MFRS 15 Revenue from Contracts with Customers to allocate the consideration in the contract based on the stand-alone selling price. The Group and the Corporation recognise assets held under a finance lease in its statement of financial position and presents them as a receivables at an amount equal to the net investment in the lease. The Group and the Corporation use the interest rate implicit in the lease to measure the net investment in the lease. The Group and the Corporation recognise lease payments received under operating leases as income on a straight-line basis over the lease term and is included in revenue in the profit or loss due to its operating nature. The Group and the Corporation recognise finance income over the lease term, based on a pattern reflecting a constant periodic rate of return on the Group’s and the Corporation’s net investment in the lease. The Group and the Corporation apply the lease payments relating to the period against the gross investment in the lease to reduce both the principal and the unearned finance income. The net investment in the lease is subject to impairment requirements in MFRS 9 Financial Instruments as disclosed in Note 2.3(k). NOTES TO THE FINANCIAL STATEMENTS 31 December 2019 NOTES TO THE FINANCIAL STATEMENTS 31 December 2019 FINANCIAL STATEMENTS MISC BERHAD PEOPLE. PASSION. POSSIBILITIES ANNUAL REPORT 2019 268 269