Wah Seong Corporation Berhad Annual Report 2020

125 ANNUAL REPORT 2020 NOTES TO THE FINANCIAL STATEMENTS FOR THE FINANCIAL YEAR ENDED 31 DECEMBER 2020 7 GOODWILL AND OTHER INTANGIBLE ASSETS (CONTINUED) Impairment testing of goodwill Goodwill arising from business combination has been allocated to the Group’s cash-generating units (“CGU”) identified according to operating divisions. The carrying amounts of goodwill allocated to the respective CGUs are as follows: Group 2020 2019 RM’000 RM’000 Cash-generating units Specialised Pipe Coating and Corrosion Protection Services (CGU A) 76,659 77,483 EPC, Fabrication and Rental of Gas Compressors and Process Equipment (CGU B) 65,469 66,320 142,128 143,803 The recoverable amounts of the CGUs are determined based on value-in-use calculations. These calculations use pre-tax cash flow projections based on financial budgets approved by management covering a period of 5 years (2019: 5 years) based on past performance and their expectations of the market development. Terminal value is estimated at the end of the 5-year period. Value-in-use was determined by discounting the future cash flows generated from the CGUs based on the following key assumptions on the premise that there will be no material changes in the Group’s principal activities. The discount rates used reflect the weighted average cost of capital adjusted for specific risks associated with the CGUs of the Group. Due to the uncertainty of the impact from Covid-19 pandemic, management developed the base case and worst case scenario of cash flow projections. Probabilities of occurrence were assigned to each scenario to arrive at a single set of cash flow projection. The assumptions used in both scenarios and the probabilities of occurrence assigned required management’s judgement. The key assumptions used in the cash flow projections for CGU A and CGU B under the base case and worst case scenarios are as follows: CGU A (a) The revenue forecast for CGU A is supported by management’s expected projects, which is in line with past performance records, future market outlook and management’s expectation of market developments. A reduction to the revenue forecast was applied for the worst case scenario; (b) Pre-tax discount rate of 14.3% was applied for both scenarios, benchmarked against comparable companies at the date of assessment (2019: 12.5%); and (c) A terminal growth rate of 1.5% was applied to the base case scenario while no terminal growth was applied to the worst case scenario (2019: 1.5%). CGU B (a) The revenue forecast for CGU B is supported by management’s expected projects, which is in line with past performance records, future market outlook and management’s expectation of market developments. A reduction to the revenue forecast was applied for the worst case scenario; (b) Pre-tax discount rate of 17.0% was applied for both scenarios, benchmarked against comparable companies at the date of assessment (2019: 19.1%); and (c) No terminal growth rate was applied to both scenarios (2019: 1.5%).