INDEPENDENT AUDITORS’ REPORT

TO THE MEMBERS OF YTL CORPORATION BERHAD

Report on the Audit of the Financial Statements

Opinion

We have audited the financial statements of YTL Corporation Berhad, which comprise the Statements of Financial Position as at 30 June 2018 of the Group and of the Company, and the Income Statements, Statements of Comprehensive Income, Statements of Changes in Equity and Statements of Cash Flows of the Group and of the Company for the year then ended, and notes to the financial statements, including a summary of significant accounting policies, as set out on pages 135 to 304.

In our opinion, the accompanying financial statements give a true and fair view of the financial position of the Group and of the Company as at 30 June 2018, and of their financial performance and their cash flows for the year then ended in accordance with Financial Reporting Standards and the requirements of the Companies Act 2016 in Malaysia.

Basis for Opinion

We conducted our audit in accordance with approved standards on auditing in Malaysia and International Standards on Auditing. Our responsibilities under those standards are further described in the Auditors’ Responsibilities for the Audit of the Financial Statements section of our report. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.

Independence and Other Ethical Responsibilities

We are independent of the Group and of the Company in accordance with the By-Laws (on Professional Ethics, Conduct and Practice) of the Malaysian Institute of Accountants (“By-Laws”) and the International Ethics Standards Board for Accountants’ Code of Ethics for Professional Accountants (“IESBA Code”), and we have fulfilled our other ethical responsibilities in accordance with the By-Laws and the IESBA Code.

Key Audit Matters

Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the financial statements of the Group and of the Company for the current year. These matters were addressed in the context of our audit of the financial statements of the Group and of the Company as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters.

1. Valuation of investment properties

The risk

We refer to Note 3 and 12 to the Financial Statements respectively.

Investment properties of the Group amounting to RM10,004 million, comprises 14.0% of total assets and is measured at fair value. Most of the investment properties held by the listed real estate investment trusts comprise of 94.6% of total investment properties.

INDEPENDENT AUDITORS’ REPORT

TO THE MEMBERS OF YTL CORPORATION BERHAD - (Continued)

The investment properties held by the listed real estate investment trusts are stated at their fair values based on independent external valuations using the income capitalisation approach, which capitalise the estimated rental income stream, net projected operating costs, using a discount rate derived from market yield. Valuation of these properties was carried out once a year.

We focused on this area due to the magnitude of the balance and the complexities in determining the fair value of the investment properties, which involves significant judgement and estimation that could result in material misstatement.

Our response:

Ours and component auditors audit procedures included the following:

・ assessed the competencies, objectivity and capabilities of the external valuer;

・ checked the accuracy and relevance of the input data used in the valuations; and

・ evaluated the Group’s disclosures on those assumptions to which the outcome of the valuation is most sensitive, that is, those that have the most significant effect on the determination of the fair value of the investment properties, by comparing them to the information disclosed in the valuation reports.

2. Impairment assessment of goodwill

The risk

We refer to Note 3 and 18 to the Financial Statements respectively.

As at 30 June 2018, goodwill arising on consolidation amounted to RM5,805 million which represents 8.1% of the Group’s total assets. The goodwill is primarily allocated to the multi utilities business in Singapore and water and sewerage business in the United Kingdom. The goodwill for these businesses comprise 87.9% of total goodwill.

The recoverable amounts of the cash generating units (“CGU”) are determined based on value-in-use (“VIU”) calculation. The key assumptions and sensitivities are disclosed in Note 18(a) and 18(b) to the Financial Statements respectively.

We focused on this area as the estimation of the recoverable amount is inherently uncertain and requires significant judgement on the future cash flows, terminal growth rate and the discount rate applied to the projected cash flows.

INDEPENDENT AUDITORS’ REPORT

TO THE MEMBERS OF YTL CORPORATION BERHAD - (Continued)

Our response:

Ours and component auditors audit procedures included the following:

・ agreed the VIU cash flows of CGU to the financial budgets approved by the Directors;

・ discussed with management the key assumptions used in the respective VIU cash flows and compared the revenue growth rates for United Kingdom, and EBITDA growth rates for Singapore to the historical performance of the respective CGUs;

・ checked the reasonableness of the discount rates and terminal growth rates with the assistance of valuation expert by benchmarking to the respective industries; and

・ checked the sensitivity analysis performed by management over discount rates, terminal growth rates, and EBITDA growth rates, used in deriving the respective VIU cash flows.

3. Capitalisation policy on infrastructure assets of the water and sewerage business

The risk

We refer to Note 3 and 11 to the Financial Statements respectively.

The water and sewerage business’s net book value of infrastructure assets comprise 26.9% (RM7,566 million) of the Group’s total property, plant and equipment. The infrastructure assets comprise capital expenditure incurred to meet the development and regulatory requirement of the business, employee and overhead costs that are directly attributable to the construction of the asset.

There is a significant judgement involved in determining whether costs incurred, specifically employee and overhead costs meet the relevant criteria for capitalisation in accordance with FRS 16, Property, Plant and Equipment (“FRS 16”).

Our response:

Ours and component auditors’ audit procedures include the following:

・ tested the operating effectiveness of the controls over authorisation of selected projects’ infrastructure assets and identification of capital expenditures attributable to the infrastructure assets;

・understood the nature of costs incurred in relation to employee and overhead through discussion with management and checked whether the costs incurred met the capitalisation criteria in accordance with FRS 16; and

・ compared the level of employee and overhead costs capitalised against prior year balances and current year budget information to identify material changes in the nature or quantum of costs capitalised, with any significant variances corroborated with management.

INDEPENDENT AUDITORS’ REPORT

TO THE MEMBERS OF YTL CORPORATION BERHAD - (Continued)

4. Net realisable value of property held for sale in Singapore classified as inventories

The risk

We refer to Note 3 and 23 to the Financial Statements respectively.

As at 30 June 2018, the property held for sale in Singapore comprises 68.1% (RM1,932 million) (after the write-down) of the Group’s total inventories. The challenging property market environment was mired by the issues such as cooling measures undertaken by the authorities in Singapore have contributed to the slow sale of the completed properties during the year. The Group continues to monitor the realisable value of the inventories to ensure that these inventories are stated at the lower of cost and net realisable value (the estimated selling price less estimated costs necessary to make the sale).

The estimates of net realisable values are based on reliable evidence available at the time the estimates are made and take into consideration estimated fluctuations of future property prices. Such estimates often involve certain degree of subjectivity and accordingly, we consider this area to be an area of audit focus.

The net realisable value assessment carried out by the management resulted in a write down of inventories for the year ended 30 June 2018.

Estimating the selling price and costs necessary to make the sale for the properties often involve certain degree of objectivity and accordingly, we consider this area to be an area of audit focus.

Our response:

Ours and component auditors’ audit procedures include the following:

・ assessed the competencies, objectivity and capabilities of the external valuer;

・evaluated the management’s estimated selling price (less estimated cost necessary to make the sale) of these inventories by comparing to the recent transacted prices of similar completed property development units within the vicinity;

・discussed with the independent valuer to obtain an understanding of the related market data used as input to the valuation models;

・ evaluated the assumptions applied in estimating cost to sell taking into consideration actual cost incurred in sale of properties and management’s marketing strategies.

5. Impairment assessment of property, plant and equipment (“PPE”) of the mobile broadband network business

The risk

We refer to Note 3 and 11 to the Financial Statements respectively.

The property, plant and equipment of the mobile broadband network business accounts for 8.3% (RM2,332 million) of the Group’s property, plant and equipment as at 30 June 2018.

INDEPENDENT AUDITORS’ REPORT

TO THE MEMBERS OF YTL CORPORATION BERHAD - (Continued)

The Group performed an impairment assessment on the carrying values of the PPE due to losses recorded by the business which is an impairment indicator.

The impairment assessment was performed by management using value-in-use (“VIU”) cash flows which requires significant judgement as the timing and quantum of the cash flows is dependent on the achievement of the next five years’ business plans and financial budgets which are dependent on the use of key assumptions comprising its growth targets and sourcing contract renewals.

We focused on this area as the estimation of the recoverable amount is inherently uncertain and requires significant judgement on the future cash flows, terminal growth rate and the discount rate applied to the calculation of the VIU.

Our response:

Our audit procedures include the following:

・ agreed the VIU cash flows of the cash generating unit (“CGU”) to the financial budgets approved by the management;

・ checked the assumptions used, in particular the discount rate, average revenue per unit, increase in subscribers and benchmarked against the comparable companies within the industry;

・ discussed with management the rationale applied on the assumption of sourcing contract renewals by considering the Company’s historical experience;

・ assessed reasonableness of the discount rate which reflects the specific risk relating to the PPE based on inputs that are publicly available; and

・ checked sensitivity analysis performed by management on the discount rate used in deriving the VIU.

6. Provision for post-employment benefit obligations of the water and sewerage business

The risk

We refer to Note 3 and 35 to the Financial Statements respectively.

As at 30 June 2018, the water and sewerage business’s post-employment benefit obligations comprise 98.0% (RM672 million) of the Group’s total post-employment benefit obligations.

The present value of the funded defined benefit obligations depends on a number of assumptions determined on an actuarial basis. The key assumptions are disclosed in Note 35(b) to the financial statements.

We focused on this area as the estimation of the present value of the post-employment benefit obligations is inherently uncertain and requires significant judgement on the future cash flows and the discount rate applied to the calculation of the present value.

INDEPENDENT AUDITORS’ REPORT

TO THE MEMBERS OF YTL CORPORATION BERHAD - (Continued)

Our response:

Ours and component auditors’ audit procedures include the following:

・ assessed the competencies, objectivity and capabilities of external actuary;

・ obtained the external actuarial report and understood the key assumptions used in determining the post-employment benefit obligations;

・ compared the key assumptions used by the actuary against external market data and a range of similar scheme with assistance of their actuarial specialist;

・ compared the expected rate of salary increases used by the actuary against historical trend; and

・ checked the disclosures in respect of the sensitivity of the provision of the post-employment benefit obligations to changes in the assumptions

Information Other than the Financial Statements and Auditors’ Report Thereon

The Directors of the Company are responsible for the other information. The other information comprises the information included in the annual report, but does not include the financial statements of the Group and of the Company and our auditors’ report thereon.

Our opinion on the financial statements of the Group and of the Company does not cover the other information and we do not express any form of assurance conclusion thereon.

In connection with our audit of the financial statements of the Group and of the Company, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the financial statements of the Group and of the Company or our knowledge obtained in the audit or otherwise appears to be materially misstated.

If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard.

Responsibilities of the Directors for the Financial Statements

The Directors of the Company are responsible for the preparation of financial statements of the Group and of the Company that give a true and fair view in accordance with Financial Reporting Standards and the requirements of the Companies Act 2016 in Malaysia. The Directors are also responsible for such internal control as the Directors determine is necessary to enable the preparation of financial statements of the Group and of the Company that are free from material misstatement, whether due to fraud or error.

In preparing the financial statements of the Group and of the Company, the Directors are responsible for assessing the Group’s and the Company’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the Directors either intend to liquidate the Group or the Company or to cease operations, or have no realistic alternative but to do so.

INDEPENDENT AUDITORS’ REPORT

TO THE MEMBERS OF YTL CORPORATION BERHAD - (Continued)

Auditors’ Responsibilities for the Audit of the Financial Statements

Our objectives are to obtain reasonable assurance about whether the financial statements of the Group and of the Company as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditors’ report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with approved standards on auditing in Malaysia and International Standards on Auditing will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements.

As part of an audit in accordance with approved standards on auditing in Malaysia and International Standards on Auditing, we exercise professional judgement and maintain professional scepticism throughout the audit. We also:

・ Identify and assess the risks of material misstatement of the financial statements of the Group and of the Company, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control.

・ Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Group’s and of the Company’s internal control.

・ Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by the Directors.

・ Conclude on the appropriateness of the Directors’ use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Group’s and the Company’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditors’ report to the related disclosures in the financial statements of the Group and of the Company or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditors’ report. However, future events or conditions may cause the Group and the Company to cease to continue as a going concern.

・ Evaluate the overall presentation, structure and content of the financial statements of the Group and of the Company, including the disclosures, and whether the financial statements represent the underlying transactions and events in a manner that achieves fair presentation.

・ Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the Group to express an opinion on the financial statements of the Group. We are responsible for the direction, supervision and performance of the group audit. We remain solely responsible for our audit opinion.

INDEPENDENT AUDITORS’ REPORT

TO THE MEMBERS OF YTL CORPORATION BERHAD - (Continued)

・ We communicate with the Directors regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit.

・ We also provide the Directors with a statement that we have complied with relevant ethical requirements regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards.

From the matters communicated with the Directors, we determine those matters that were of most significance in the audit of the financial statements of the Group and of the Company for the current year and are therefore the key audit matters. We describe these matters in our auditors’ report unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we determine that a matter should not be communicated in our report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication.

Report on Other Legal and Regulatory Requirements

In accordance with the requirements of the Companies Act 2016 in Malaysia, we report that the subsidiaries of which we have not acted as auditors, are disclosed in Note 14 to the Financial Statements.

Other Matters

This report is made solely to the members of the Company, as a body, in accordance with Section 266 of the Companies Act 2016 in Malaysia and for no other purpose. We do not assume responsibility to any other person for the content of this report.

|  | HLB LER LUM
|  | AF 0276
|  | Chartered Accountants

|  | LUM TUCK CHEONG
|  | 01005/03/2019 J
Dated : 27 September 2018 |  | Chartered Accountant

Kuala Lumpur

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