Wah Seong Corporation Berhad Annual Report 2021 136 NOTES TO THE FINANCIAL STATEMENTS FOR THE FINANCIAL YEAR ENDED 31 DECEMBER 2021 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 2021 2020 RM’000 RM’000 Cash-generating units Specialised Pipe Coating and Corrosion Protection Services (CGU A) 78,700 76,659 EPC, Fabrication and Rental of Gas Compressors and Process Equipment (CGU B) 67,362 65,469 146,062 142,128 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 (2020: 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 future economic condition, 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 forecasted 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 16.1% (2020: 14.3%) was applied for both scenarios, benchmarked against comparable companies at the date of assessment; and (c) A terminal growth rate of 1.5% (2020: 1.5%) was applied to the base case scenario while no (2020: Nil) terminal growth was applied to the worst case scenario. 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 16.0% (2020: 17.0%) was applied for both scenarios, benchmarked against comparable companies at the date of assessment; and (c) No (2020: Nil) terminal growth rate was applied to both scenarios. Sensitivity CGU A and CGU B As at 31 December 2021 and 31 December 2020, the recoverable amount of CGU A and CGU B is estimated to exceed the carrying amounts and is not sensitive to any reasonable change in the key assumptions. There are no reasonably possible changes in the terminal growth rate that would have changed the carrying amounts of CGU A and CGU B, respectively.
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