NOTES TO THE FINANCIAL STATEMENTS
4. SIGNIFICANT ACCOUNTING ESTIMATES AND JUDGEMENTS
The preparation of the Group’s and of the Company’s financial statements requires management to make judgements, estimates and assumptions that affect the reported amounts of revenues, expenses, assets and liabilities. However, uncertainty about these assumptions and estimates could result in outcomes that could require a material adjustment to the carrying amount of the asset or liability affected in the future.
4.1 Critical judgements made in applying accounting policies
In the process of applying the Group’s and the Company’s accounting policies, management has made the following critical judgements, apart from those involving estimations, which have the most significant effect on the amounts recognised in the financial statements:
(a) Continuing operations assumption upon loss of control of KUB Sepadu Sdn Bhd (‘KUBS’)
As disclosed in Note 40, pending the conclusion of the stay of execution of the winding up order, the liquidators have given undertaking to the High Court (‘the Court’) not to dispose of any assets of KUBS and to stay the operational handover. Following this, KUBS is still carrying on its business operations as usual.
4. SIGNIFICANT ACCOUNTING ESTIMATES AND JUDGEMENTS (cont’d) 4.1 Critical judgements made in applying accounting policies (cont’d)
(a) Continuing operations assumption upon loss of control of KUB Sepadu Sdn Bhd (‘KUBS’) (cont’d) The Group considered investment in KUBS does not meet the criteria to be classified as held for sale or discontinued operation as per MFRS 5 Non-current Assets Held for Sale and Discontinued Operations (‘MFRS 5’) for the following reasons:
• The assets of KUBS are not available for immediate sale in the present condition and circumstances
• No active programme or committed plan to sell the assets of KUBS have been initiated
The Group has therefore determined continuing operations assumption as carrying amounts of the assets of KUBS will be expected to be recovered principally through continuing use in the business rather than through a sale transaction.
(b) Classification between investment in an associate and other investment upon loss of control of KUBS The Group has lost control over KUBS upon the winding up order by the Court on 15 June 2022, as the Group no longer met the elements of control as per MFRS 10 Consolidated Financial Statements (‘MFRS 10’).
The Group subsequently determines that it has significant influence over KUBS at that date by virtue of the following:
• 60% investment in KUBS is still retained;
• Power to participate in the financial and operating decision making of KUBS including provision of essential technical information through the key management personnel from the Group; and
• KUBS is dependent on the Group for the continued existence of business through its manpower sharing arrangements.
The Group has therefore classified KUBS as its associate and the financial results subsequent to 15 June 2022 are incorporated in these financial statements using the equity method of accounting. At the initial recognition, the Group has determined the fair value of investment in KUBS at RM45,715,000 using a discounted cash flow model as disclosed in Note 19.
4.2 Key sources of estimation uncertainty
The key assumptions concerning the future and other key sources of estimation uncertainty at the end of the reporting period that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below.
(a) Impairment of investments in subsidiaries (Note 18) and associates (Note 19)
The Company assesses whether there is any indication that investments in subsidiaries and associates may be impaired at the end of each reporting period. If indicators are present, these assets are subject to an impairment review. The impairment review comprises a comparison of the carrying amount of the assets and the assets’ estimated recoverable amount.
The Company determines whether investments are impaired following certain indications of impairment such as, amongst others, significant changes with adverse effects on the investment and deteriorating financial performance of the investment due to observed changes and fundamentals. Depending on their nature and the industries in which the investments relate to, judgements are made by management to select suitable methods of valuation such as the discounted cash flow method.
Once a suitable method of valuation is selected, management makes certain assumptions concerning the future to estimate the recoverable amount of the investment. These assumptions and other key sources of estimation uncertainty at the end of the reporting period, may have a significant risk of causing a material adjustment to the carrying amounts of the investments within the next financial year.
NOTES TO THE FINANCIAL STATEMENTS
4. SIGNIFICANT ACCOUNTING ESTIMATES AND JUDGEMENTS (cont’d) 4.2 Key sources of estimation uncertainty (cont’d)
(a) Impairment of investments in subsidiaries (Note 18) and associates (Note 19) (cont’d)
Depending on the specific individual investment, assumptions made by management may include, amongst others, assumptions on expected future cash flows, revenue growth, discount rate used for purposes of discounting future cash flows which incorporates the relevant risks, and expected future outcome of certain past events.
During the financial year, the Company has recognised an impairment loss in investment in subsidiaries of RM8,123,000 (2021: RM27,360,000) (Note 18(b)).
(b) Construction contracts
ICT and power related business recognise construction contracts revenue and expenses in profit or loss using the stage of completion method. The stage of completion is determined by the proportion that construction contract costs incurred for work performed to date over the total construction contract costs i.e input method.
Significant judgement is required in determining the stage of completion, the extent of the construction costs incurred, the estimated total construction contract revenue and costs, as well as the recoverability of the construction project. In making the judgement, the Group evaluates based on past experience, external economic factor and by relying on the work of specialists.
The construction contracts revenue and expenses recognised in profit or loss are disclosed in Note 5 and Note 6, respectively.
(c) Impairment for expected credit losses (ECLs) of trade receivables, contract assets (Note 24) and finance lease receivables (Note 17)
The Group uses a provision matrix to calculate ECLs for trade receivables, contract assets and finance lease receivables. The provision rates are based on days past due for groupings of various customer segments that have similar loss patterns (i.e., nature of project undertaking, product type, customer type and rating, and coverage by bank guarantee or other forms of credit insurance).
The provision matrix is initially based on the Group’s historical observed default rates. The Group will calibrate the matrix to adjust the historical credit loss experience with forward-looking information.
The assessment of the correlation between historical observed default rates, forecast economic conditions and ECLs is a significant estimate. The information about the ECLs on the Group’s trade receivables and contract assets is disclosed in Note 24, and finance lease receivables in Note 17.
(d) Fair value of investment retained in KUBS
In determining the fair value of investment retained in KUBS, the Group uses discounted cash flow method with the following assumptions:-
(i) The annual projected revenue is derived from FFB harvested of adjusted oil palm site yield potential after taking into considerations the size of matured area, oil palm age, area, oil palm planting density, average FFB price and several other risk factors.
(ii) Annual growth rates of CPO prices at 1% from five (5) years average historical data.
(iii) The discount rate is based on observed rate of return for comparable assets that are traded in the market and is derived from its weighted average cost of capital, determined using a Capital Asset Pricing Model at 11.7%.
(iv) The expected future cash flow includes the effect of replanting costs and the timing of the exercise.
Based on the above, the Group has determined the fair value of investment in KUBS at initial recognition of RM45,715,000.