341 ACCOUNTABILITY | INDEPENDENT AUDITORS’ REPORT REPORT ON THE AUDIT OF THE FINANCIAL STATEMENTS (CONTINUED) Key audit matter How our audit addressed the key audit matter Estimates and judgements in the EPCIC contracts Refer to Note 5(a), Note 5(b), Note 6 and Note 7 to the financial statements. The accounting for revenue contracts for the Group falls under both MFRS 16 “Leases” and MFRS 15 “Revenue from contracts with customers”. These contracts are complex and dependent on specific arrangements between the Group and its customers. Given the specialised nature of each project and their respective contracts, management analysed each contract terms and conditions to determine the applicable accounting for revenue recognition. During the financial year, a substantial portion of the Group’s revenue is derived from four contracts. Revenue was recognised for three contracts from previous financial year and a new contract during the financial year. For the new contract, the Group performed a review of the accounting treatment and made the following judgements: • Determination of fair value of the leased Floating Production, Storage and Offloading ("FPSO"); • Allocation of transaction price to multiple arrangement elements; and • Determination of lease term. Revenue recognition for FPSO Agogo commenced during the year on Engineering, Procurement, Construction, Installation and Commissioning (“EPCIC”) activities. The recognition is based on the allocated transaction price. Concurrently the Group continues to recognise EPCIC revenue for the other three FPSO projects. During the financial year, EPCIC revenue totalling RM8,794 million was recognised in the consolidated income statements. Based on our risk assessment, critical judgements and significant estimates include determining allocation of transaction price between EPCIC revenue and finance lease income, ascertaining the number of multiple arrangement elements embedded in these contracts, assessing the satisfaction of performance obligations over time, completeness of estimated costs to complete the respective performance obligations and accuracy of construction progress. These include assessing the subjectivity and estimation uncertainty on determining estimated costs for the remaining obligations and contingencies that the projects will face over the contractual period. Given the magnitude and complexity of the Group’s revenue contracts and significant judgements and estimates, the accounting of these contracts were particularly subject to risk of material misstatement. Based on the above considerations, we have identified this as a key audit matter. For revenue recognised from each FPSO, audit procedures performed over this key audit matter were as follows: • For the new contracts entered during the year, evaluated management’s board assessment paper and considered the critical judgements and significant estimates made by management on the accounting treatment for each of the contracts with the customer; • For the new contracts entered during the year, read the contracts, and discussed with management the relevant terms and the resultant financial implications. Consequently identified and assessed the multiple arrangement elements and their respective performance obligations; • Gained an understanding of relevant processes, evaluated and tested the relevant key controls implemented to record, track and monitor costs and compute revenues relating to EPCIC contracts; • Performed look back procedures as part of a risk assessment by comparing estimates included in the current year with the past year as this provides insight to management’s ability to make reliable estimates; • Checked the accuracy of management’s calculations of percentage of completion by recomputing the construction costs incurred against the total estimated construction costs to completion; • Tested the reasonableness of the total estimated budgeted construction costs based on the approved budgets to corroborating documentations, including management’s evaluation of budget variances and contingencies; • Tested samples of costs incurred to date on significant cost elements to relevant documents such as sub-contractors’ reports verified by the Group’s operations team; and • Evaluated the adequacy of the Group’s disclosures included in the consolidated financial statements. Based on our procedures performed, no material exceptions were noted. We have determined that there are no key audit matters to report for the Company.
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