225 NOTES TO THE FINANCIAL STATEMENTS (CONT’D) For the financial year ended 31 January 2023 ACCOUNTABILITY (FINANCIAL STATEMENTS) 5. Critical accounting estimates and judgements (continued) (a) Critical judgement in determining the lease classification (continued) Finance leases - Group as lessor (continued) The most important judgement areas assessed by the Group in respect of finance leases are as follows: (continued) • Determination of lease term The Group determines the lease term based on the period for which the Group has contracted to lease the asset together with any further terms for which the lessee has the option to continue to lease the asset. In determining the lease term, the Group considers all facts and circumstances that create an economic incentive for the lessor to exercise an extension option, including the indicators set out in paragraphs B37 to B40 of MFRS 16 Leases. Extension options are only included in the lease term if the lease is reasonably certain to be extended by the lessees. The evaluation of the term “reasonably certain” involves judgement. Extension options are included in certain leases of FPSOs across the Group in order to determine the net investment in these leases (Note 33(a)). The extension options are exercisable only by the respective lessees. The lease term is reassessed if an option is actually exercised (or not exercised). The assessment of reasonable certainty is only revised if a significant event or a significant change in circumstances occurs, which affects this assessment. (b) The measurement and recognition of revenues on EPCIC contracts based on the input method The Group has ongoing EPCIC contracts to construct FPSO vessels for customers. For these contracts, 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. (c) Income taxes Judgement is involved in determining the Group’s provision for income taxes as there are certain transactions and computations for which the ultimate tax determination is uncertain during the ordinary course of business. The Group recognises liabilities for expected tax issues based on estimates of whether additional taxes will be due. Where the final tax outcome of these matters is different from the amounts that were initially recognised, such differences will impact the income tax and deferred tax provisions in the period in which such determination is made.
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