Wah Seong Corporation Berhad Annual Report 2017

FINANCIAL STATEMENTS WAH SEONG CORPORATION BERHAD ANNUAL REPORT 2017 71 INDEPENDENT AUDITORS’ REPORT TO THE MEMBERS OF WAH SEONG CORPORATION BERHAD REPORT ON THE AUDIT OF THE FINANCIAL STATEMENTS (CONTINUED) Key audit matters (continued) Key audit matters How our audit addressed the key audit matters Impairment assessment for goodwill of CGU A and CGU B Refer to Note 13 ‘Goodwill and Other Intangible Assets’ and Note 3(a) ‘Critical Accounting Estimates and Judgements’. As at 31 December 2017, the Group’s goodwill is allocated to CGU A, representing Specialised Pipe Coating and Corrosion Protection Services and CGU B, representing EPC, fabrication and rental of gas compressors and process equipment which totalled RM77.2 million and RM66.0 million respectively. Goodwill is required to be assessed annually for impairment. We focused on this area due to the size of the goodwill, which was RM143.2 million as at 31 December 2017, and because the directors’ assessment of the ‘value in use’ (“VIU”) of the Group’s CGUs involves estimates about the future cash flows and the discount rates applied to future cash flow forecasts. In addition, the recoverable amounts are sensitive to changes and subject to estimation uncertainty. The key assumptions of the VIU calculation and details of the management’s impairment test are disclosed in the consolidated financial statements. We performed the following audit procedures to evaluate management’s methodology and assumptions used in the VIU for each CGU: • Compared forecast revenues to approved budgets and current order books; • Compared revenue growth rate to historical track records and external market trends; and • Compared future sales and costs to approved budgets and historical performance. We engaged PwC valuation specialists to evaluate the appropriateness of the methodology and the discount rates used by management for CGU A and CGU B. This involved consideration of inputs from comparable industries and peer companies. We also considered the adequacy of the disclosures made in the financial statements on key assumptions and the sensitivity analysis for the respective CGU. We considered the sensitivity of the recoverable amount of CGU A and CGU B by varying the key assumptions within reasonably possible ranges. Impairment assessment for property, plant and equipment (“PPE”) in the Oil and Gas Industry Refer to Note 4 ‘Property, Plant and Equipment’ and Note 3(c) ‘Critical Accounting Estimates and Judgements’. The market conditions for the oil and gas sector in 2017 saw slow recovery which affected the utilisation of the Group’s property, plant and equipment. Significant judgement is required to ascertain the future utilisation levels which are dependent on market outlook, operating levels and the competitive landscape. In 2017, the Group impaired RM72.8 million of PPE as shown in the consolidated financial statements. In estimating the impairment, management considered cost of repair, scrap value and the specialised nature of the assets. We performed the following audit procedures: • Reviewed the Group’s process for identifying trigger events for potential impairment on selected assets; • Evaluated management’s assumptions such as utilisation and plans to understand the basis for the cash flow projections arising from the use of the assets which had impairment indicators; • Corroborated management’s assumptions to historical usage pattern, past customer demands, market outlook and the impact of technology obsolescence for PPE; and • Obtained the assistance of PwC valuation specialists to assess the appropriateness of discount rates used in the cash flow projections, by considering inputs from comparable industries and peer companies.