MISC Integrated Annual Report 2020

Key audit matters How we addressed the key audit matters Impairment of non-current assets – (Refer to Note 14 - Ships, offshore floating assets and other property, plant and equipment, to the financial statements) The Group is required to perform impairment test of CGU whenever there is an indication that the CGU may be impaired by comparing the carrying amount with its recoverable amount. (i) Other property, plant and equipment Malaysia Marine and Heavy Engineering Holdings Berhad (“MHB”) Group is in a loss-making position and the carrying amount of MHB Group’s net assets exceeds its market capitalisation, thereby indicating potential impairment of MHB Group’s non-current assets. Accordingly, the Group estimated the recoverable amount of the property, plant and equipment and right- of-use assets of MHB Group using VIU based on cash flow projections derived from budgets approved by management covering a five year period including terminal value. Estimating the VIU involves estimating the future cash inflows and outflows and discounting them at an appropriate discount rate. MHB Group recorded a total impairment loss of RM300 million during the current financial year. This impairment review was significant to our audit because the assessment process is complex and is based on assumptions that are highly judgemental. Our audit procedures included, among others evaluating the assumptions and methodologies used by the Group, in particular those relating to the discount rate and projected cash flows for the CGU. The areas that involved significant audit effort and judgement were the assessment of the probability of securing the future revenue contracts, possible variations in the amount and timing of cash flows and the determination of an appropriate discount rate. Our procedures to assess management’s impairment testing included the following: (a) obtained an understanding of the relevant internal controls over estimating the recoverable amount of the CGUs; (b) enquired with business development teams to obtain an understanding of the status of negotiations and the likelihood of securing the revenue contracts for contracts above our testing threshold, including timing of commencement and expected value of revenue contracts; (c) evaluated the reasonableness of the estimated profits to be derived from those revenue contracts above our testing threshold by comparing the estimated margins with the actual margins achieved by MHB Group in previous years; and (d) assessed, with the involvement of our internal valuation specialist the appropriateness of the methodology and approach applied and 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. Key audit matters How we addressed the key audit matters Impairment of non-current assets – (Refer to Note 14 - Ships, offshore floating assets and other property, plant and equipment, to the financial statements) (cont’d.) ii) Ships and right-of-use assets of in-chartered ships In addition, continued volatility of charter hire rates and certain ships’ contracts which have expired or are approaching expiry were also identified by management as indicators that the carrying amount of certain ships and right of use assets 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 RM21.2 million and RM10.4 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) obtained an understanding of the relevant internal controls over estimating the VIU of the CGUs or groups of CGUs; (b) 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; (c) assessed whether the assumptions on the operating costs are supportable when compared to the past trends; and (d) evaluated, with the involvement of our internal valuation specialist the appropriateness of the methodology and approach applied and 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 on its cash flow projections and to which the CGU’s recoverable amount is most sensitive, as disclosed in Note 14 to the financial statements. Key audit matters (cont’d.) Key audit matters (cont’d.) INDEPENDENT AUDITORS’ REPORT INDEPENDENT AUDITORS’ REPORT to the members of MISC Berhad (Incorporated in Malaysia) to the members of MISC Berhad (Incorporated in Malaysia) 10 468 10 469 /// 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