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 2017 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 124 to 284.

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 2017, 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.

INDEPENDENT AUDITORS’ REPORT TO THE MEMBERS OF

YTL CORPORATION BERHAD - (Continued)

1. Valuation of investment properties

The risk

We refer to Note 11 to the Financial Statements.

The Group’s investment portfolio mainly comprises of properties which are retail and office assets in prime locations. The investment properties of the Group amounted to RM10,517 million which represented 14% of the Group’s total assets and is measured at fair value.

The investment properties are stated at their fair values based on independent external valuations using the income capitalisation approach, which capitalise the estimate rental income stream, net projected operating costs, using a discount rate derived from market yield. Valuation of the 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 in determining the appropriate valuation methodology to be used, and in estimating the underlying assumptions to be applied. A small change in the assumptions may have a significant impact to the valuation.

Our response:

Ours and the component auditors audit procedures include the following:

・ evaluated the qualifications and competence of the external valuers based on their membership of recognised professional body;

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

・ obtained independent confirmation from the valuers;

・ performed site visits to major properties; 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 and re-computing the sensitivity analysis disclosed.

INDEPENDENT AUDITORS’ REPORT TO THE MEMBERS OF

YTL CORPORATION BERHAD - (Continued)

2. Impairment assessment of goodwill

The risk

We refer to Note 17 to the Financial Statements.

As at 30 June 2017, goodwill arising on consolidation amounted to RM6,170.7 million after an accumulated impairment charge of RM118.9 million, which represents 8.3% of the Group’s total assets.

The annual impairment testing of goodwill is considered to be a key audit matter due to the complexity of the accounting requirements and the significant judgement required in determining the assumptions to be used to estimate the recoverable amount. The recoverable amount of the cash-generating unit (“CGU”), which is based on the higher of the fair value less costs to sell or value in use (“VIU”), has been derived from fair value models or discounted forecast cash flow models. These models use several key assumptions, including estimates of revenue growth rate, pre-tax discount rate, terminal growth rate and earnings before interest, tax, depreciation and amortisation (“EBITDA”) growth rate.

Our response:

We focused our testing of the impairment assessment of goodwill on the key assumptions made by the management. Our audit procedures included:

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

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

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

INDEPENDENT AUDITORS’ REPORT TO THE MEMBERS OF

YTL CORPORATION BERHAD - (Continued)

3. Classification of costs between operating expenditure and capital expenditure

The risk

We refer to Note 10 to the Financial Statements.

As at 30 June 2017, the net book value of the infrastructure assets of the water and sewerage segment of RM7,465.2 million represented 26% of the Group’s property, plant and equipment. This infrastructure assets comprised of capital expenditure incurred by the segment to meet the development and regulatory requirement of the business, employee and overhead costs that are directly attributable to the construction of the assets.

There is significant judgement involved in determining whether costs incurred, specifically employee and overhead costs meet the relevant criteria for capitalisation in accordance with FRS 116, Property, Plant and Equipment (“FRS 116”).

Our response:

Ours and the 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 costs through discussion with management and checked whether the costs incurred met the capitalisation criteria in accordance with FRS 116; 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. Impairment assessment of property, plant and equipment of YTL Communications Sdn. Bhd. (“YTL Comm”)

The risk

We refer to Note 10 to the Financial Statements.

YTL Comm’s property, plant and equipment accounts for 7.8% of the Group’s property, plant and equipment which relates to the mobile and broadband segment.

As at 30 June 2017, the subsidiary is loss making which is an impairment indicator. Given that there is an indication of impairment, management had performed an impairment assessment on the property, plant and equipment.

The impairment assessment was performed by management using 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.

Based on the annual impairment test performed, the Directors concluded that no impairment of property, plant and equipment is required.

Our response:

Our audit procedures include the following:

・ checked the assumptions used, in particular the average revenue growth rate and useful life of the assets and bench marked 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; and

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

INDEPENDENT AUDITORS’ REPORT TO THE MEMBERS OF

YTL CORPORATION BERHAD - (Continued)

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.

Auditor’s 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.

INDEPENDENT AUDITORS’ REPORT TO THE MEMBERS OF

YTL CORPORATION BERHAD - (Continued)

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 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 or 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 or 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 of the Group and of the Company 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 13 to the Financial Statements.

Other Reporting Responsibilities

The supplementary information set out on page 285 is disclosed to meet the requirement of Bursa Malaysia Securities Berhad and is not part of the financial statements. The Directors are responsible for the preparation of the supplementary information in accordance with Guidance on Special Matter No. 1, Determination of Realised and Unrealised Profits or Losses in the Context of Disclosure Pursuant to Bursa Malaysia Securities Berhad Listing Requirements, as issued by the Malaysian Institute of Accountants ("MIA Guidance") and the directive of Bursa Malaysia Securities Berhad. In our opinion, the supplementary information is prepared, in all material respects, in accordance with the MIA Guidance and the directive of Bursa Malaysia Securities Berhad.

INDEPENDENT AUDITORS’ REPORT TO THE MEMBERS OF

YTL CORPORATION BERHAD - (Continued)

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 : 21 September 2017 | Chartered Accountant

Kuala Lumpur

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