Yinson Annual Report 2020

239 Annual Report 2020 5. Critical accounting estimates and judgements (CONTINUED) (a) Operating lease commitments – Group as lessor (continued) Chartering of FPSOs, OSVs and tankers to customers are recognised as revenue based on whether the charter contracts are determined to be an operating lease or a finance lease in accordance with MFRS 16 “Leases”. The classifications of the charter contracts are assessed at the inception of the lease. The lessee’s purchase option is considered in classifying the lease contract. At lease inception, if it is not reasonably certain that the option will be exercised, the option will not be part of the basis for classification. If the lessee has an option to purchase the asset at a price that is expected to be sufficiently lower than fair value at the date of the option becomes exercisable, the exercise of the purchase option is regarded to be reasonably certain. The evaluation of the term “reasonably certain” involves judgement. If the terms and conditions of the lease contracts change subsequently, the management will reassess whether the new arrangements would be classified as a new lease based on the prevailing market conditions. (b) Finance lease commitments - Group as lessor The Group has determined, based on the analysis of the terms and conditions of the contract on assessing whether the Group retains the significant risks and rewards of ownership of the FPSO subject of the lease contract. To identify whether risks and rewards are retained, the Group systematically considers, amongst others, the indicators listed by MFRS 16 on a contract-by-contract basis. The Group makes significant judgements to determine whether the arrangement results in a finance lease or an operating lease. This judgement can have a significant effect on the amounts recognised in the financial statements and its recognition of profits in the future. The most important judgement areas assessed by the Group are as follows: (i) Determination of fair value of the leased FPSOs For the Group’s awarded lease contracts that were systematically classified under MFRS 16 as finance leases for accounting purposes, the fair value of the leased FPSO is recorded as an outright sale at the commencement of the lease. Significant judgments are used to estimate the charter rates and discount rates applied in computing the fair value of the leased FPSO. The discount rate used is based on the interest rate implicit to the lease. Where the interest rate implicit in the lease cannot be readily determined, the Group uses the lessee’s borrowing rate to measure the net investment in the finance lease. The lessee’s borrowing rate is the interest rate which matches the term of the lease agreement and credit profile of the lessee. Therefore, the borrowing rate requires estimation, particularly when no observable rates are available or when they need to be adjusted to reflect the terms and conditions of the lease. In the current financial year, the Group recognised revenue and net profit on outright sale of an FPSO upon commencement of the finance lease of RM1,551,481,000 (Note 6) and RM7,467,000 respectively.