KEY AUDIT MATTERS (CONT’D.) Revenue and cost of sales in respect of property development activities (Refer to Note 4 and Note 5 to the financial statements) A significant proportion of the Group’s revenues and profits are derived from property development contracts which span more than one accounting period. For the financial year ended 31 December 2021, property development revenue from ongoing projects of RM535,269,000 and cost of sales of RM360,693,000 accounted for approximately 61% and 70% of the Group’s revenue and cost of sales respectively. For these property development contracts where revenue is recognised over time, the Group uses the input method in determining the percentage of completion, which is based on the actual cost incurred to date on the property development project over the total budgeted cost for the respective development projects in accounting for the progress towards complete satisfaction of the Group’s performance obligation. We identified revenue and cost of sales in respect of property development activities as areas requiring audit focus as significant management’s judgement and estimates are involved in estimating the total property development costs to complete the project, which include the common infrastructure costs (which is used to determine progress towards complete satisfaction of the Group’s performance obligation and gross profit margin of the property development activities undertaken by the Group). How have our audit addressed this matter To address these areas of audit focus, we performed, amongst others, the following procedures: • Obtained an understanding of the internal controls over the accuracy and timing of revenue recognised in the financial statements, including controls performed by management in estimating the total property development cost; • Obtained an understanding of the internal control over the timeliness of updating the gross development value of each property development project by the management by reference to the latest selling price; • Read the sale and purchase agreements entered into with the customers on a sampling basis to obtain an understanding of the specific terms and conditions; • Evaluated the assumptions applied in estimating the total property development costs on a sampling basis by examining documentary evidence such as letters of award issued to contractors to support the total budgeted costs. We also considered the historical accuracy of management’s budgets for the similar property development projects in evaluating the estimated total property development costs; • Evaluated the determination of the progress towards complete satisfaction of the Group’s performance obligation by examining supporting evidence such as contractors’ progress claims and suppliers’ invoices; • Evaluated the mathematical accuracy of the revenue and profit based on the percentage of completion calculations and considered the implications of identified errors and changes in estimates; and • Observed the progress of the property developments on a sampling basis by performing site visit. KEY AUDIT MATTERS (CONT’D.) Valuation of investment properties (Refer to Note 17 to the financial statements) The carrying value of the Group’s investment properties as at 31 December 2021 was RM1,411,198,000, representing 14% and 11% of the Group’s total non-current assets and total assets respectively. The Group adopts fair value model for its investment properties. When estimating the fair value of a property, the objective is to estimate the price that would be received from the sale of the investment property in an orderly transaction between market participants at the reporting date under current market conditions. In addition, the fair value should reflect, among other things, the property related data used as input to the valuation model and other assumptions that market participants would use when pricing the investment property under current market conditions, which are highly judgmental. Accordingly, we consider this to be an area of audit focus. How have our audit addressed the matter Our audit procedures focused on the valuations performed by firms of independent valuers, which included amongst others the following procedures: • Considered the objectivity, competence and capabilities of the firms of independent valuers; • Obtained an understanding of the methodology adopted by the independent valuers in estimating the fair values of the investment properties and assessed whether such methodology is consistent with those used in the industry; • As part of our evaluations of the fair values of investment properties, we had discussions with the independent valuers to obtain an understanding of their valuation process which included assessment of the comparability of historical transactions used and property related data used as input to the valuation models; • Obtained an understanding of the adjustments factors made by the valuers to account for differences in, amongst others, the occupancy rate, property’s location, property’s size and tenure between the subject property and the comparable properties; and • Assessed whether the capitalisation rate used in the valuation models reflects the return that investors would require if they were to choose an investment that would generate cash flows of amounts, timing and risk profile equivalent to those that the entity expects to derive. To the members of Tropicana Corporation Berhad (Incorporated in Malaysia) AUDITORS’ REPORT INDEPENDENT Annual Report 2021 TROPICANA CORPORATION BERHAD FINANCIAL STATEMENTS AND OTHER INFORMATION 208 209
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