Page 103 - HRC_AR2020

HENGYUAN REFINING COMPANY BERHAD I 101

3 critical accoUntinG estiMates anD JUDGeMents (continued)

(a) recoverability of the carrying amount of refinery assets (continued)
The following key assumptions were made in determination of the recoverable amount:
(i) Refining margins per barrel: Between USD3.30 to USD6.17 (2019: USD3.78 to USD5.70)
(ii) Post-tax discount rate: 10.5% (2019: 10.5%)
(iii) Production volume: Based on existing production capacity and forecast demand
Sensitivity analysis:

The key estimation uncertainty over the assumptions used by management in the FVLCTS is the refining margins
and discount rate. The sensitivity of these assumptions to the recoverable amount and impairment loss is as follows:
• 11.82% decrease over the 20-year period in refinery margin will result in the recoverable amount being equal to the
carrying amount of the refinery assets.
• 4.20% increase over the 20-year period in the discount rate will result in the recoverable amount being equal to the
carrying amount of the refinery assets.
The cash flow forecast is dependent on the achievability of the refinery margins and assumptions and the
corresponding sensitivities as indicated above.
Refinery margins are subject to cyclical fluctuations resulting from an over-supply and supply tightness in various global
and regional markets. Fluctuations in the short term may result in significant changes in monthly or quarterly profit and
loss resulting in significant loss or profits.
Despite the delay in the progress of the Euro 4 Mogas (“E4M”) project, the Company is capable of producing
E4M specification products to meet all its contractual obligations. Should there be additional demand, the Company
may either increase its production or import the E4M specification products, whichever is more commercially attractive.
Therefore, the Directors do not expect the consequential margin impact from the project delay on the recoverable
amount of the refinery assets to be material.
(b) Deferred tax assets

Deferred tax assets are recognised for all unused tax losses and unabsorbed capital allowances to the extent that
it is probable that taxable profit will be available against which the losses can be utilised. Significant management
judgement is required to determine the amount of deferred tax assets that can be recognised, based on the likely timing
and level of future taxable profits.
Assumptions about generation of future taxable profits depends on management’s estimates of future production
and sales volume, operating costs and capital expenditure. Judgement is also required about application of income
tax legislation. These judgements and assumptions are subject to risks and uncertainty hence there is a possibility that
changes in circumstances will alter expectations, which may impact the amount of deferred tax assets recognised in the
statement of financial position and the amount of unrecognised tax losses and unrecognised temporary differences.
Pursuant to the Malaysia Finance Act 2018, unused tax losses in a year of assessment can only be carried forward for
a maximum period of 7 consecutive years of assessment (“YA”). The change in the tax treatment is effective from
YA2019 and therefore all the brought forward unused tax losses will be disregarded from YA2026.
In the current financial year, the Company has recognised deferred tax assets of RM62,332,000 arising from unused
tax losses as it is probable that future taxable profits will be available to offset against the unused tax losses.