Notes to the Financial Statements
3. SIGNIFICANT ACCOUNTING JUDGEMENTS AND ESTIMATES (CONT’D)
3.1 Judgements made in applying accounting policies
The significant judgements made by management in the process of applying the Group’s and the Company’s accounting policies that have a significant effect on the amounts recognised in the financial statements are as follows:
(a) Revenue from environmental engineering, landscaping, infrastructure and construction contracts
The Group and the Company recognise revenue from environmental engineering, landscaping, infrastructure and construction contracts based on input method. The stage of completion is measured by reference to the contract costs incurred for work performed to date bear to the estimated total contract costs. The contract costs incurred for work performed including claims submitted to or certified by customers. However, there are circumstances where contract cost is recognised based on work performed but yet to be certified by customers, which are commonly encountered in the final claim submitted upon the completion of the entire project.
In such circumstances, significant judgement is required in determining the stage of completion, the extent of the contract costs incurred, the estimated total contract revenue (for contracts other than fixed price contracts) and contract costs, as well as the recoverability of the contracts. Total contract revenue also includes an estimation of the recoverable variation works that are recoverable from customers. In making the judgement, the Group and the Company evaluate based on past experience and/or by relying on the work of other specialists. It is also the policy of the Group and of the Company to have informal discussion with the customers on the amount to be claimed before the formal claims are submitted.
The directors are of the opinion that all claims submitted based on work performed will not differ materially from the eventual certification by the customers.
The determination of transaction price involves judgement where a contract contains a significant financing component. Management consider all relevant facts and circumstances in assessing whether a contract contains a financing component and whether that financing component is significant to the contract.
When the period between the satisfaction of performance obligation and payment from the customer exceeds a year, the Group adjusts the transaction price with the customer and recognises a financing component. In adjusting for the financing component, the Group uses a discount rate that would reflect that of a separate financing transaction between the Group and its customer at contract inception.
Management regularly reviews the construction costs, taking into account the costs to date and costs to complete for each project including technical and other requirements in order to estimate project cost accrual. Management also closely monitoring the status of each project and where necessary, submitted revised completion dates to customers due to temporary closure of project sites during the period of Movement Control Order in the country and concluded no liquidated damages to be recognised in the financial statements, as the revised completion dates are mutually agreed and in accordance with the relevant clause of the contracts with customers.
(b) Revenue and cost recognition for intangible assets model
The Group adopts the intangible asset model as defined in IC 12, and has recognised a reasonable construction margin for the construction of its concession assets. Income and expenses associated with the said construction are recognised based on input method. The estimated margin is based on estimated fair value and/or promised compensation of services less estimated cost of construction of the concession assets.
Notes to the Financial Statements
for the year ended 31 October 2020
3. SIGNIFICANT ACCOUNTING JUDGEMENTS AND ESTIMATES (CONT’D)
3.2 Key sources of estimation uncertainty
The key assumptions concerning the future and other key sources associated with estimation uncertainty at the reporting date that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities are as follows:
(a) Impairment of intangible assets
The Group and the Company determine whether concession asset under construction, development expenditure in progress and goodwill are impaired at least on an annual basis. This requires an estimation of the value in use of the CGU to which these assets are allocated. Estimating the value in use 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 future cash flows. The future cash flows are most sensitive to budgeted gross margins, growth rates and discount rate used. If the expectation is different from the estimation, such difference will impact the carrying amounts of the intangible assets.
(b) Impairment of investments in subsidiaries
Investments in subsidiaries are assessed at the end of each reporting period to determine whether there is any indication of impairment. If such an indication exists, an estimation of the recoverable amount is required. Estimating the recoverable amount requires management to make an estimate of the expected future cash flows from the Company’s investments in subsidiaries and also choose a suitable discount rate in order to calculate the present value of those cash flows.
(c) Depreciation and impairment of plant and equipment
The Group and the Company review the estimated useful lives of plant and equipment at the end of each reporting period. Changes in the expected useful lives of plant and equipment could impact future depreciation charges.
Plant and equipment are assessed at the end of each reporting period to determine whether there is any indication of impairment. If such an indication exists, an estimation of the recoverable amount is required. Estimating the recoverable amount requires management to make an estimate of the expected future cash flows from the plant and equipment or the related cash generating unit.
(d) Amortisation and useful lives of development expenditure
Development expenditure of the Group and the Company that is ready for sale or use is amortised over its estimated useful life. The determination of the estimated useful life of the development expenditure requires management’s judgement which includes analysing the circumstances, the industry and market practice.
(e) Determining the loss allowance for trade receivables and contract assets
Management assesses the ECL for trade receivables and contract assets at each reporting date. Credit losses are the difference between the contractual cash flows that are due to the entity and the cash flows that it actually expects to receive. Management applies simplified approach of MFRS 9 Financial Instruments in assessing the impairment of trade receivables and contract assets.
In determining the ECL, management uses historical credit loss experience for trade receivables and contract assets to estimate the ECL. Management is not only required to consider historical information that is adjusted to reflect the effects of current conditions and information that provides objective evidence that trade receivables and contract assets are impaired in relation to incurred losses, but management is also considering, when applicable, reasonable and supportable information that may include forecasts of future economic conditions when estimating the ECL, on an individual and collective basis. The need to consider forward-looking information means that management exercises considerable judgement as to how changes in economy outlook will affect the ECL on trade receivables and contract assets.
The ECL assessment on trade receivables and contract assets as at current reporting date is primarily based upon the historical credit loss experience and current status of the debtors.
for the year ended 31 October 2020
I CORPORATE GOVERNANCE I FINANCIAL STATEMENTS I ADDITIONAL INFORMATION
113
ANNUAL REPORT 2020
3. SIGNIFICANT ACCOUNTING JUDGEMENTS AND ESTIMATES (CONT’D)
3.2 Key sources of estimation uncertainty (cont’d)
The key assumptions concerning the future and other key sources associated with estimation uncertainty at the reporting date that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities are as follows: (cont’d)
(f) Determining the loss allowance for non-trade receivables
Management assesses the ECL of receivables (other than trade receivables) at each reporting date. Credit losses are the difference between the contractual cash flows that are due to the entity and the cash flows that it actually expects to receive.
In determining the ECL, management assesses whether there has been any significant increase in credit risk since initial recognition of a receivable. Where there has not been a significant increase in credit risk since initial recognition, management determines the loss allowance by estimating an amount equal to 12-month ECL of that receivable. For those credit exposures for which there has been a significant increase in the likelihood or risk of a default occurring since initial recognition (instead of on evidence of a financial asset being credit-impaired at the reporting date or an actual default occurring), management measures a loss allowance for credit losses expected over the remaining life of that receivable. Management exercise considerable judgement in these estimations, using historical credit loss experience as well as reasonable and supportable information that may include financial position of receivable and economy outlook when estimating the ECL.
(g) Lease liabilities
Management estimates the lease term as the non-cancellable period of a lease together with both periods covered by an option to extend the lease and an option to terminate the lease. In assessing whether it is reasonably certain to exercise an option to extend a lease, or not to exercise an option to terminate a lease, management exercises judgement by considering all relevant facts and circumstances that create an economic incentive to exercise the option to extend the lease, or not to exercise the option to terminate the lease.
Management measures the lease liability as the present value of the lease payments that are not paid at commencement date. The lease payments are discounted using the incremental borrowing rate.
The lease terms and discount rate are determined using certain assumptions and they represents management’s best estimation. The assumptions on which it is based relate to the future. Actual outcome may be different from the estimation and the variation could be material.
(h) Income taxes
Significant judgement is involved in determining the capital allowances and deductibility of expenses during the estimation of the provision for income tax. There are certain transactions and computations for which the ultimate tax determination is uncertain during the ordinary course of business.
The Group and the Company recognise liabilities for expected tax issues based on estimates of whether additional taxes will be due. Where the final tax outcome of these matters is different from the amounts that were initially recognised, such differences will impact the income tax and deferred tax provisions in the period in which such determination is made.
(i) Deferred tax assets
Deferred tax assets are recognised for deductible temporary differences and unutilised tax credits and tax losses to the extent that it is probable that taxable profits will be available in future against which the deductible temporary differences and unutilised tax losses can be utilised.
Significant judgement is required to determine the amount of deferred tax assets that can be recognised, based on the likely timing and level of future taxable profit together with future tax planning strategies.