KUB Malaysia Berhad Annual Report 2021

4. SIGNIFICANT ACCOUNTING ESTIMATES AND JUDGEMENTS (cont’d) 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. 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 period, the Company has recognised an impairment loss in investment in a subsidiary of RM27,360,000 (Note 18). (b) Construction contracts ICT division 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. NOTES TO THE FINANCIAL STATEMENTS 82 KUB MALAYSIA BERHAD