MISC Annual Report 2019

2. SIGNIFICANT ACCOUNTING POLICIES (CONT’D.) 2.3 Summary of significant accounting policies (cont’d.) (x) Fair value measurements (cont’d.) (ii) Non-financial assets For a non-financial asset, the fair value measurement takes into account a market participant’s ability to generate economic benefits by using the asset in its highest and best use or by selling it to another market participant that would use the asset in its highest and best use. When measuring the fair value of an asset or a liability, the Group and the Corporation use observable market data as far as possible. Fair value is categorised into different levels in a fair value hierarchy based on the input used in the valuation technique as follows: • Level 1 - Quoted prices (unadjusted) in active markets for identical assets and liabilities. • Level 2 - Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices). • Level 3 - Inputs for the asset or liability that are not based on observable market data (unobservable input). The fair value of an asset to be transferred between levels is determined as of the date of the event or change in circumstances that caused the transfer. 2.4 Pronouncements not yet in effect The following pronouncements that have been issued by the MASB will become effective in future financial reporting periods and have not been adopted by the Group and the Corporation: Effective for annual periods beginning on or after 1 January 2020 • Amendments to MFRS 3: Business Combinations (Definition of a Business) • Amendments to MFRS 7: Financial Instruments: Disclosure (Interest Rate Benchmark Reform) • Amendments to MFRS 9: Financial Instruments (Interest Rate Benchmark Reform) • Amendments to MFRS 101: Presentation of Financial Statements (Definition of Material) • Amendments to MFRS 108: Accounting Policies, Changes in Accounting Estimates and Errors (Definition of Material) Effective for annual periods beginning on or after 1 January 2021 • MFRS 17: Insurance Contracts Effective for a date yet to be confirmed • Amendments to MFRS 10: Consolidated Financial Statements: Sale or Contribution of Assets between an Investor and its Associate or Joint Venture • Amendments to MFRS 128: Investments in Associates and Joint Ventures: Sale or Contribution of Assets between an Investor and its Associate or Joint Venture The Group and the Corporation are expected to apply the abovementioned pronouncements beginning from the respective dates the pronouncements become effective. The initial application of the abovementioned pronouncements is not expected to have any material impact to the financial statements of the Group and of the Corporation. 2. SIGNIFICANT ACCOUNTING POLICIES (CONT’D.) 2.5 Significant accounting estimates and judgements (a) Critical judgements made in applying accounting policies Management has applied judgement in the Group’s accounting policies related to construction contracts that have the most significant effect on the amounts recognised in the financial statements. The Group recognises revenue and expenses from construction contracts in the income statement by using the stage of completion method. The stage of completion is measured by reference to the completion of physical proportion of the contract work. Significant judgement is required in determining the stage of completion, the extent of the contract costs incurred, the estimated total contract revenue and costs, as well as the recoverability of the construction costs. In making this judgement, the Group evaluates based on past experience and by relying on the work of internal specialists. (b) Key sources of estimation uncertainty The key assumptions concerning the future and other key sources of estimation uncertainty at the reporting date that have significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below: (i) Impairment of goodwill The Group determines whether goodwill is impaired on an annual basis. This requires an estimation of the value-in-use of the CGU to which goodwill is allocated. Estimating a value-in-use amount requires management to make an estimate of the expected future cash flows from the CGU and also to choose a suitable discount rate in order to calculate the present value of those cash flows. Further details of the impairment losses recognised, carrying amount, the key assumptions applied in the impairment assessment of goodwill and sensitivity analysis to changes in the assumptions are provided in Note 15. (ii) Provisions Provisions are recognised in accordance with the accounting policy in Note 2.3(p). To determine whether it is probable that an outflow of resources will be required to settle the obligation and a reliable estimate of the amount can be made, the Group and the Corporation take into consideration factors such as existence of legal/contractual agreements, past historical experience, external advisors’ assessments and other available information. (iii) Impairment of ships, offshore floating assets, other property, plant and equipment and right-of-use assets The Group and the Corporation have performed a review of the recoverable amount of their ships, offshore floating assets, other property, plant and equipment and right-of-use assets during the financial year. The review led to the recognition of impairment losses as disclosed in Note 5(a). The Group and the Corporation carried out the impairment test based on a variety of estimations, including the value-in-use of the CGU to which ships, offshore floating assets and other property, plant and equipment are allocated. Estimating the value-in-use requires the Group to make an estimate of the expected future cash flows from the CGU and also to choose a suitable discount rate to calculate the present value of those cash flows. Further details of the impairment losses recognised are disclosed in Note 13(b). 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 278 279