263 ANNUAL REPORT 2022 ACCOUNTABILITY NOTES TO THE FINANCIAL STATEMENTS (CONT’D) For the financial year ended 31 January 2022 5. Critical accounting estimates and judgements (continued) (g) The measurement and recognition of revenues on EPCIC contracts based on the input method The Group has an ongoing EPCIC contract to construct an FPSO vessel for a customer. For this contract, revenue is recognised over time by reference to the Group’s progress towards completing the EPCIC of the FPSO. The measure of progress is determined based on the proportion of contract costs incurred to date to the estimated total contract costs (“input method”). Management has to estimate the total contract costs to complete, which are used in the input method to determine the Group’s recognition of contract revenue. When it is probable that the total contract costs will exceed the total contract revenue, a provision for onerous contracts is recognised immediately. Significant judgement is used to estimate the above-mentioned total contract costs to complete. In making these estimates, management has applied its past experience of completing similar projects, as well as quotations from and contracts with suppliers and sub-contractors. These estimations are also made with due consideration of the circumstances and relevant events that were known to management at the date of these financial statements. Total contract costs may also be affected by factors such as uncertainties in contract execution, variation in scope of works and acceptance of claims by customers. Costs and revenue (and the resulting gross margin) at completion reflect, at each reporting period, management’s current best estimate of the probable future benefits and obligations associated with the contract. (h) Recoverable amounts of investment in subsidiaries The Company reviews its investment in subsidiaries for impairment indicators in accordance with the accounting policy stated in Note 2.20. If an impairment indicator exists, the recoverable amount for the investment will be ascertained based on its value-in-use (“VIU”). For VIU calculations, the future cash flows from these subsidiaries are discounted by an appropriate discount rate. Significant judgments are used to estimate the future cash flows and discount rates applied in computing the recoverable amounts of the investments. In making these estimates, management has relied on past performance and its expectations of future cash flows from these subsidiaries. The discount rates applied reflects specific risks relating to the relevant industry and geographical location of the underlying cash flows. Based on the above, the Company has recognised an impairment charge of RM3 million (2021: RM41 million) (Note 9) on its investment in subsidiaries during the financial year. As at 31 January 2022, the carrying amount of investment in subsidiaries amounted to RM2,710 million (2021: RM2,011 million) (Note 19). (i) Critical judgement over interest rate benchmark reform Following the financial crisis, the reform and replacement of benchmark interest rates such as USD LIBOR and other interbank offered rates (‘IBORs’) has become a priority for global regulators. There is currently uncertainty around the timing and precise nature of these changes. The Group’s risk exposure that is directly affected by the interest rate benchmark reform are its floating rate debt denominated in USD (Note 32). The Group has hedged certain of this debt with interest rate swaps (Note 41(a)(i)), and it has designated the swaps in cash flow hedges of the variability in cash flows of the debt, due to changes in 3 month USD LIBOR that is the current benchmark interest rate. USD LIBOR will cease publication after 30 June 2023, and it is expected to be replaced by the Secured Overnight Financing Rate (“SOFR”). The Group has variable-rate USD borrowings which references to the USD LIBOR and matures after 30 June 2023. The Group hedges the variability in cash flows using USD LIBOR-linked interest rate swaps. The Group’s communication with its swap and debt counterparties is ongoing, but specific changes required by IBOR reform have not yet been agreed. As IBOR uncertainty is still present, the Group continues to apply the Phase 1 temporary amendments for hedge accounting on cash flow hedges relating to USD LIBOR risk. The expected transition from USD LIBOR to SOFR had no effect on the amounts reported for the current and prior financial years.
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