Pursuant to Paragraph 9.19(37) of the Main Listing Requirement of Bursa Malaysia Securities Berhad, the Board of Directors of Zelan Berhad (“Zelan” or “the Company”) wishes to announce that the Company’s External Auditor, Messrs Al Jafree Salihin Kuzaimi PLT had expressed their unqualified opinion with material uncertainty related to going concern in its Independent Auditors’ Report dated 31 May 2021 in respect of the financial statements of the Group and the Company for financial year ended 31 December 2020.
Extract of the Auditors’ Report:
Material uncertainty related to going concern
We draw attention to Note 2 in the financial statements, as of that date, the Group and the Company’s current liabilities exceeded the current assets by RM 175.4 million (2019: RM 145.6 million) and RM 18.6 million (2019: RM 18.8 million) respectively. These events and conditions, along with the other matters as set forth in Note 2 to the financial statements, indicate that a material uncertainty exists that may cast significant doubt on the ability of the Group and the Company to continue as going concerns. Our opinion is not modified in respect of this matter.
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 Code of Ethics for Professional Accountants (including International Independence Standards) (“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 for the current financial year. These matters were addressed in the context of our audit of the financial statements of the Group as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. In addition to the matter describe in the Material Uncertainty Related to Going Concern section, we have determined the matters described below to be the key audit matters to be communicated in our report.
Recoverability of the receivable balance from a project owner of the Group's project in Abu Dhabi
The Group terminated its project in Abu Dhabi, United Arab Emirates, on 1 October 2015 and entered into an arbitration with the project owner. The evidentiary hearings took place from 6 January 2019 to 16 January 2019 in Abu Dhabi, UAE and the International Chamber of Commerce (“ICC”) arbitral tribunal on 27 July 2019 awarded the Group the final award of AED256.1 million and further interest of 9% per annum until full payment (“Arbitration Award”).
The Group then registered the enforcement of the award in the Abu Dhabi Commercial Court of Appeal (“ADCCA”) on 7 May 2020. Next, the project owner has filed a Grievance Application to the ADCCA on 10 June 2020. The ADDCA dismissed the project owner’s Grievance Application on 14 July 2020. On 3 August 2020, the project owner filed an appeal on its Grievance Application to the Cassation Court and was dismissed on 25 October 2020. Accordingly, the Execution Court in Abu Dhabi proceeded with the execution process of the Arbitration Award.
The Directors are of the view that the Group is able to recover the Arbitration Award. The Directors made an assessment of the carrying value of the total receivable balance by taking into consideration the timing and duration of the legal enforcement process against the project owner based on advice from the external solicitor.
Following from the Directors’ assessment, the Group has since recognised the Arbitration Award as an receivable amounting to AED 222.5 million as at financial year ended 31 December 2020.
There is a risk of irrecoverability of the Group's significant receivables arising from the Arbitration Award due to lacking financials information of the project owner and the premature status of the legal proceedings taken by the Group.
Due to the inherent uncertainty involved in determining the credit worthiness of the project owner which is the basis of the assessment of recoverability, this is one of the key judgmental areas that our audit is concentrated on.
Revenue and costs recognition- construction contracts
The Group recognises revenue from construction contracts over time in the Consolidated Statement of Comprehensive Income. Progress of completion is measured using input method which is based on the contract costs incurred up to the end of the reporting period as a percentage of estimated total costs of the project.
The Group recognised revenue and gross profit from construction contracts of RM 25.3 million and RM 8.9 million respectively for the financial year ended 31 December 2020.
Revenue recognition of a construction contract is inherently complex and we focused on this area because there are significant management estimates and judgements involved determining the:
- Stage of completion;
- Extent of the construction costs incurred to date;
- Estimated total construction costs; and
- Need to estimated liquidated ascertained damages (“LAD”) on projects where the estimated completion dates are beyond the contractual completion dates.
Steps taken or proposed to be taken to address the key audit matters that relate to the material uncertainty related to going concern as mentioned in the Auditor’s Report with the proposed timeline are as below.
The validity of the going concern assumption is dependent upon the following:
i. Ability of the Group to generate sufficient cash from its operations;
ii. Monitor and manage the progress of its existing construction projects. The Group will engage the project owners on potential extension of time for the on-going projects which may be delayed;
iii. Re-evaluate current contracts to optimise potential revenue and progressively reduce costs on the job scopes and services provided;
iv. Negotiate with subcontractors on the terms and timing of settlement payments for ongoing and completed projects;
v. Receipt of retention sum from the clients within twelve (12) months after the current reporting date for completed projects, where permissible under the contract; and
vi. The Group has secured buyers for eleven (11) units and one (1) whole floor of office lots at Wisma Zelan. Four (4) units has been secured and received with full payment. Balance of seven (7) units are still under the progress of sales completion and full payment is expected to be received by the third quarter of 2021. The Group will continue to identify potential buyers for existing properties.
As at the date of this report, there is no reason for the Directors to believe that there Group will not generate sufficient cash from its operations within the next twelve (12) months from the reporting date to repay the existing borrowings, complete the projects in progress and meet working capital. Accordingly, the financial statements of the Group does not include any adjustments relating to the recoverability and classification of recorded asset amounts or to amounts and classification of liabilities that may be necessary if the Group is unable to continue as a going concern.
This Annoucement is dated 7 October 2021
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