Wah Seong Corporation Berhad Annual Report 2018

REPORT ON THE AUDIT OF THE FINANCIAL STATEMENTS (CONTINUED) Key audit matters Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the financial statements of the Group and of the Company for the current year. These matters were addressed in the context of our audit of the financial statements of the Group and of the Company as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. 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 2018, the Group’s goodwill totalled RM145.2 million which is allocated to the following cash generating units (“CGU”): • Specialised Pipe Coating and Corrosion Protection Services (CGU A); and • EPC, Fabrication and Rental of Gas Compressors and Process Equipment (CGU B). We focused on this area due to the size of the goodwill and because the recoverable amounts of the CGUs are determined based on value in use (“VIU”) calculations which involve estimates about the future cash flows generated and the appropriate discount and growth rates applied. The key assumptions used in VIU calculations are disclosed in Note 13 to the financial statements. We performed the following audit procedures to evaluate management’s methodology and assumptions used in the VIU for each CGU: • Compared forecasted revenues to approved budgets, past performance, current order book and potential contracts; • Compared revenue and terminal growth rates to historical track records and external market trends; • Compared costs to approved budget and historical performance; and • We involved PwC valuation specialists to evaluate the appropriateness of the methodology and the discount rates used for CGU A and CGU B. This involved consideration of inputs from comparable industries and peer companies, adjusted for business risk and marketability. We also considered the adequacy of the disclosures made in the financial statements on key assumptions and the sensitivity analysis for the respective CGUs. We considered the sensitivity of the recoverable amount of CGU A and B by varying the key assumptions within reasonably possible ranges. Impairment assessment on investments in associates and joint ventures Refer to Note 8 ‘Investment in Associates’, Note 9 ‘Investment in Joint Ventures’ and Note 3(b) ‘Critical Accounting Estimates and Judgements’. As at 31 December 2018, the Group holds investments in Petra Energy Berhad (“PEB”) and Alam-PE Holdings (L) Inc. (“Alam-PE”) which are accounted for as an associate and joint venture respectively. PEB and Alam-PE are primarily operating in the offshore oil and gas market. Management assessed the carrying amounts of the investments for impairment in view of the decreased activities in the offshore oil and gas market and lower market value in PEB. We focused on this area due to the size of the investments totalling RM186.4 million and because the recoverable amounts of the investments are determined based on VIU calculations which involve estimates about the future cash flows generated and the appropriate discount and growth rates applied. The key assumptions used in VIU calculations are disclosed in Notes 8 and 9 to the financial statements. We performed the following audit procedures to evaluate management’s methodology and assumptions used in the VIU for each investment: • Compared forecasted revenues to approved budgets, past performance, current order book and potential contracts; • Compared revenue and terminal growth rates to historical track records and external market trends; • Compared costs to approved budget and historical performance; and • We involved PwC valuation specialists to evaluate the appropriateness of the methodology and discount rates used for PEB and Alam-PE. This involved independently assessing the cost of equity using comparable companies in the same territories. We also considered the adequacy of the disclosures made in the financial statements on key assumptions and the sensitivity analysis for the respective investments. We considered the sensitivity of the recoverable amounts of PEB and Alam-PE by varying the key assumptions within reasonably possible ranges. There are no key audit matters in relation to the financial statements of the Company. INDEPENDENT AUDITORS’ REPORT TO THE MEMBERS OF WAH SEONG CORPORATION BERHAD (CONTINUED) WAH SEONG CORPORATION BERHAD 76