MISC Integrated Annual Report 2020

2. SIGNIFICANT ACCOUNTING POLICIES (CONT’D. ) 2.4 Pronouncements not yet in effect (cont’d.) Effective for annual periods beginning on or after 1 January 2022 • Amendments to MFRS 1: First-time Adoption of Malaysian Financial Reporting Standards (Annual Improvements to MFRS Standards 2018 - 2020) • Amendments to MFRS 9: Financial Instruments (Annual Improvements to MFRS Standards 2018 - 2020) • Amendments to Illustrative Examples accompanying MFRS 16: Leases (Annual Improvements to MFRS Standards 2018 - 2020) • Amendments to MFRS 3: Business Combinations (Reference to the Conceptual Framework) • Amendments to MFRS 116: Property, Plant and Equipment (Property, Plant and Equipment−Proceeds before Intended Use) • Amendments to MFRS 137: Provisions, Contingent Liabilities and Contingent Assets (Onerous Contracts−Cost of Fulfilling a Contract) Effective for annual periods beginning on or after 1 January 2023 • Amendments to MFRS 101: Presentation of Financial Statements (Classification of Liabilities as Current or Non current) 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 except for the following: Interest Rate Benchmark Reform - Phase 2 (Amendments to MFRS 9, MFRS 139, MFRS 7 and MFRS 16) At 31 December 2020, the Group has cash flow hedges of USD LIBOR risk. The Group expects that indexation of the hedged items and hedging instruments to USD LIBOR will be replaced with a risk free rate. Whenever the replacement occurs, the Group expects to apply the amendments related to hedge accounting. However, there is uncertainty about when and how replacement may occur. When the change occurs to the hedged item or the hedging instrument, the Group will remeasure the cumulative change in fair value of the hedged item or the fair value of the interest rate swap, respectively based on the risk free rate. Hedging relationships may experience hedge ineffectiveness if there is a timing or other mismatch between the transition of the hedge item and that of the hedging instrument to the risk free rate. The Group does not expect that amounts accumulated in the cash flow hedge reserve will be immediately reclassified to profit or loss because of IBOR transition. 2. SIGNIFICANT ACCOUNTING POLICIES (CONT’D. ) 2.5 Significant accounting estimates and judgements (a) Critical judgements made in applying accounting policies (i) Fair value of financial instruments Where the fair value of financial assets and financial liabilities recorded in the statements of financial position cannot be derived from active markets, they are determined using valuation techniques, including the discounted cash flow method. Where possible, the inputs to these valuation models are taken from observable markets. However, when this is considered unfeasible, a degree of judgement is made in establishing fair values. The judgements made include having considered a host of factors including liquidity risk, credit risk and volatility. Changes in assumptions about these factors could affect the reported fair value of financial instruments. Further disclosure of fair value of financial instruments is provided in Note 37. (ii) Lease classification as lessor When the Group and the Corporation enter into a new lease arrangement, the terms and conditions of the contract are analysed in order to assess whether the lease transfers substantially all of the risks and rewards incidental to ownership of the underlying asset. To identify whether risks and rewards are transferred, the Group and the Corporation systematically consider, among others, all the examples and indicators listed in MFRS 16: Leases on a contract-by-contract basis. By performing such analysis, the Group and the Corporation make significant judgement 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 and the Corporation are: (i) determination of the asset’s fair value; (ii) determination of the economic life of the asset; (iii) the probability of the lessee exercising the purchase option (if relevant) at a price that is significantly lower than the fair value at the inception date; and (iv) determination of whether the asset is of such a specialised nature that only the lessee can use it without major modifications. (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) Construction contracts 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 (output method) or cost incurred for work performed up to the reporting period relative to the total expected cost to the satisfaction of those order (input method). 31 December 2020 NOTES TO THE FINANCIAL STATEMENTS 31 December 2020 NOTES TO THE FINANCIAL STATEMENTS 10 360 10 361 /// Leadership / Governance / Financial Statements / Additional Information / Annual General Meeting ////// /// Leadership / Governance / Financial Statements / Additional Information / Annual General Meeting ////// Section Section MISC Berhad / Integrated Annual Report 2020 MISC Berhad / Integrated Annual Report 2020