68 MSC BERHAD Notes to the Financial Statements (cont’d) 2. Basis of Preparation (cont’d) (c) Significant accounting judgements, estimates and assumptions (cont’d) Key sources of estimation uncertainty The key assumptions concerning the future and other key sources of estimation uncertainty at the end of the reporting period, that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next reporting period are set out below: Useful lives of property, plant and equipment, right-of-use (“ROU”) assets and product development costs (“PDC”) The Group and the Company regularly review the estimated useful lives of property, plant and equipment, ROU assets and PDC based on factors such as business plan and strategies, expected level of usage and future technological developments. Future results of operations could be materially affected by changes in these estimates brought about by changes in the factors mentioned above. A reduction in the estimated useful lives of property, plant and equipment, ROU assets and PDC would increase the recorded depreciation and decrease the value of property, plant and equipment, ROU assets and PDC. The carrying amount at the reporting date for property, plant and equipment, ROU assets and PDC are disclosed in Notes 3, 4 and 5 respectively. Impairment of goodwill on consolidation Goodwill is tested for impairment annually and at other times when such indicators exist. This requires an estimation of the value in use of the cash-generating units to which goodwill is allocated. When value in use calculations are undertaken, the Group uses its judgement to decide the discount rates to be applied in the value in use amount calculation. The key assumptions used to determine the value in use is disclosed in Note 10. Product development costs The Group and the Company capitalise product development costs for a project in accordance with the accounting policy. Initial capitalisation of product development costs is based on management’s judgement that technological and economic feasibility is confirmed, usually when a product development project has reached a defined milestone according to an established project management model. In determining the amounts to be capitalised, management makes assumptions regarding the expected future cash generations of the project, discount rates to be applied and the expected period of benefits. The carrying amount at the reporting date for product development costs is disclosed in Note 5. Impairment of product development costs The Group and the Company review the carrying amounts of product development costs at the end of each reporting period to determine whether there is any indication of impairment. If any such indication exists, the recoverable amount or value in use is estimated. Determining the value in use of product development costs requires the determination of future cash flows expected to be generated from the continued use, and ultimate disposition of such assets. Any resulting impairment loss could have a material adverse impact on the Group’s and the Company’s financial position and results of operations. Significant judgement is made in the estimation of the present value of future cash flows generated by product development costs, which involves uncertainties and is significantly affected by assumptions used and judgement made regarding estimates of future cash flows and discount rates. Changes in assumptions could significantly affect the results of the Group’s and the Company’s assessment for impairment of product development costs. Further details on the assessment for impairment of product development costs are disclosed in Note 5. Inventories valuation Inventories are measured at the lower of cost and net realisable value. The Group and the Company estimate the net realisable value of inventories based on an assessment of expected selling prices. Demand levels and pricing competition could change from time to time. If such factors result in an adverse effect on the Group’s and the Company’s products, the Group and the Company might be required to reduce the value of its inventories. Details of the inventories are disclosed in Note 11.
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