1. BASIS OF PREPARATION (CONTINUED) (d) Use of estimates and judgements (continued) (v) Impairment review of oil and gas assets The recoverable amount of the Group’s oil and gas assets is determined by post-tax cash flows expected to be generated by the assets over their lives considering those assumptions that market participants would take into account when assessing fair value. The Group assesses its tangible and intangible oil and gas assets for impairment indicators in accordance with MFRS 136 through use of a valuation model. Key assumptions in the valuation model relate to prices and costs that are based on long-term assumptions. The calculation of the valuation requires the use of estimates of key assumptions. In testing for impairment indicators, the Group uses the oil price forecast based on the oil price forward curve from independent parties initially, overlaid with management’s views, future cost inflation factor and discount rate to calculate post-tax cash flows. These assumptions and judgements are subject to change as new information becomes available. Changes in economic conditions can also affect the rate used to discount future cash flow estimates and the discount rate applied is reviewed on an annual basis. The Group has considered reasonable possible movements in key assumptions such as forecast oil prices, production profiles and discount rates. The carrying amounts of oil and gas assets as at the reporting date are disclosed in Notes 3 and 6 to the financial statements respectively. (vi) Asset retirement obligations The Group incurs retirement obligations for certain assets. The present values of these obligations are recorded as liabilities on a discounted basis, which is typically at the time the assets are installed. In the estimation of present value, the Group uses assumptions and judgements regarding such factors as the existence of a legal obligation for an asset retirement obligation, technical assessments of the assets, estimated amounts and timing of settlements, drilling rig rates, discount rates and inflation rates. Asset retirement obligations is disclosed in Note 21 to the financial statements. (vii) Write-down of inventories Reviews are made periodically by management on damaged, obsolete and slow–moving inventories. These reviews require judgement and estimates. Possible changes in these estimates could result in revisions to the valuation of inventories. The carrying amount of inventories as at the reporting date is disclosed in Note 11 to the financial statements. (viii)Impairment of contract assets and trade receivables The Group uses the simplified approach to estimate a lifetime expected credit loss allowance for all contract assets and trade receivables. The contract assets are grouped with trade receivables for impairment assessment because they have substantially the same risk characteristics as the trade receivables for the same types of contracts. The Group develops the expected loss rates based on the payment profiles of past sales and the corresponding historical credit losses and adjusts for qualitative and quantitative reasonable and supportable forward–looking information. If the expectation is different from the estimation, such difference will impact the carrying values of contract assets and trade receivables. The carrying amounts of contract assets and trade receivables as at the reporting date are disclosed in Notes 12 and 13 to the financial statements respectively. Financial Statements DAGANG NeXCHANGE BERHAD 202 NOTES TO THE FINANCIAL STATEMENTS
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