197 INTEGRATED ANNUAL REPORT 2025 ACCOUNTABILITY | NOTES TO THE FINANCIAL STATEMENTS 5. CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS (CONTINUED) (a) Critical judgement in determining the lease classification Finance leases – Group as a lessor The Group has determined, based on the analysis of the terms and conditions of the contract on assessing whether the Group retains the significant risks and rewards of ownership of the FPSO subject of the lease contract. To identify whether risks and rewards are retained, the Group systematically considers, amongst others, the indicators listed by MFRS 16 Leases on a contract-by-contract basis. The Group makes significant judgements to determine whether the arrangement results in a finance lease or an operating lease. This judgement can have a significant effect on the amounts recognised in the financial statements and its recognition of profits in the future. The most important judgement areas assessed by the Group in respect of finance leases are as follows: • Revenue recognition in the construction phase for leased FPSOs For manufacture lease contracts classified as finance leases, construction revenue based on the fair value of the leased FPSO is recognised throughout the construction period, as stated in Note 5(b). Significant judgements are also used to estimate the fair value of the leased FPSO upon commencement of the lease, determined based on the relative stand-alone selling price as described below. The determination of fair value of the leased FPSO takes into account among others: time value of money, financing structure, country risk and risk profile of a client and project. Therefore, the fair value requires estimation, particularly when no observable rates are available or when they need to be adjusted to reflect the terms and conditions of the lease. • Allocation of transaction price to multiple arrangement elements for lease contracts The Group provides design, supply, installation, operation, life extension and demobilisation of FPSO vessels. The vessels are constructed and leased to customers on a finance lease arrangement, and operated by the Group under a separate operating and maintenance agreement after the vessels are handed over to the customers. Therefore, the construction of the vessels, leasing and operations are each identified as a separate revenue element. The transaction price is allocated to each performance obligation based on the relative stand-alone selling prices. The relative stand-alone selling prices are estimated based on the expected costs to be incurred and expected profit margin applicable to each revenue element at the inception of the lease contract. Significant judgement is used to estimate the costs and profit margins applied in the allocation of the transaction price. Please refer to Notes 2.6(i) and Note 2.12(b) for the Group’s accounting policies on revenue recognition for the construction of FPSO vessels and finance lease arrangements respectively. • Determination of lease term The Group determines the lease term based on the period for which the Group has contracted to lease the asset together with any further terms for which the lessee has the option to continue to lease the asset. In determining the lease term, the Group considers all facts and circumstances that create an economic incentive for the lessor to exercise an extension option, including the indicators set out in paragraphs B37 to B40 of MFRS 16 Leases. Extension options are only included in the lease term if the lease is reasonably certain to be extended by the lessees. The evaluation of the term “reasonably certain” involves judgement. Extension options are included in certain leases of FPSOs across the Group in order to determine the net investment in these leases (Note 34(a)). The extension options are exercisable only by the respective lessees. The lease term is reassessed if an option is actually exercised (or not exercised). The assessment of reasonable certainty is only revised if a significant event or a significant change in circumstances occurs, which affects this assessment.
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