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Structures Project (“Gorgon Contract”) for Chevron Australia
Pty Ltd (“Chevron”). Initial acceptance of the jetty and marine
structures took place on 15 August 2014.
During the project, changes to scope and conditions led to the
Consortium submitting Change Order Requests (“CORs”) as
entitled under the contract. The Consortium, Chevron and
Chevron’s agent KBR Inc. remain in negotiations in relation to
the validity and valuation of some of the CORs.
As at 31 December 2016, contract debtors includes an amount
of $1.15 billion in relation to the Gorgon Contract.
CIMIC’s share of the total amount under negotiation is
approximately $1.9 billion. CIMIC is of the view that it remains
entitled to that amount plus interest (being an amount
exceeding $0.5 billion that will continue to accrue until paid)
and costs (“Total Entitlement”). CIMIC has only recognised
revenue equal to the costs incurred in respect of the Gorgon
Contract in accordance with the relevant accounting standards
resulting in an amount of approximately 50% of the Total
Entitlement ($1.15 billion) being recognised in contract debtors
at 31 December 2016.
Although negotiations continue, the Consortium formally issued
a Notice of Dispute to Chevron pursuant to the relevant
provisions of the Gorgon Contract on 9 February 2016. That
Notice required the Consortium to enter into a further
prescribed negotiation process which, if unsuccessful, may lead
to a private arbitration. The parties have moved into an
arbitration prescribed by the contract.
As the Gorgon Contract does not specify a time limit within
which the process must be determined, there can be no
certainty as to when the matter will be finalised.
In addition, and in order to further pursue its entitlement under
the Gorgon Contract, on 20 August 2016 CIMIC announced that
it had commenced proceedings in the United States against
Chevron Corporation Inc., KBR Inc. and related companies.
We focused on recognition of revenue and recovery of contract
debtors including recovery of Gorgon Contract contract debtors
as key audit matters due to the number and type of estimation
events over the course of a contract life, the unique nature of
individual contract terms leading to complex and judgemental
revenue recognition from contracts and the judgement involved
in evaluating the probability of recovery of contract debtors.
•
For the sample of contracts selected the following
procedures were performed, amongst others:
-
we obtained an understanding of the contract
terms and conditions to evaluate whether these
were reflected in management’s estimate of
forecast costs and revenue;
-
we tested a sample of costs incurred to date and
agreed these to supporting documentation;
-
we assessed the forecast costs to complete
through discussion and challenge of project
managers and finance personnel;
-
we tested contractual entitlement for changes,
variations and claims recognised within contract
revenue to supporting documentation and by
reference to the underlying contract;
-
we evaluated significant exposures to liquidated
damages for late delivery of contract works;
-
we evaluated contract performance in the period
since year end to audit opinion date to confirm
management’s year end revenue recognition
judgements; and
-
we evaluated the probability of recovery of
outstanding amounts by reference to the status
of contract negotiations, historical recoveries
and other supporting documentation.
•
In respect of the Gorgon Contract, the following
procedures were performed:
-
we evaluated the probability and timing of
recovery of outstanding amounts by reference to
historical recoveries, the status of contract
negotiations, Notice of Dispute, legal
proceedings
and
other
supporting
documentation;
-
we made enquiries of internal legal counsel and
management appointed external legal counsel in
respect of the current status of negotiations;
-
we read documents lodged with United States
courts commencing legal proceedings against
Chevron Corporation and KBR Inc.; and
-
we assessed the appropriateness of the relevant
disclosures in the financial statements.
Recoverability of carrying value of investment in and loans
receivable from HLG Contracting LLC
Refer to Note 26 ‘Joint Venture Entities – HLG Contracting LLC
(“HLG”)’ and Note 8 ‘Trade and other receivables’.
Included in the Group’s consolidated statement of financial
position at 31 December 2016 is the equity accounted
investment in HLG at a carrying value of $366.5 million and
loans (including interest) receivable from HLG totalling $1.04
billion.
The assessment of the recoverable amount of the Group’s
investment in and loans receivable from HLG involves
significant judgement in respect of assumptions such as
discount rates, current work in hand, future contract wins and
the recoverability of certain legacy contract receivables, as well
as economic assumptions such as growth rate and foreign
currency exchange rates.
The recoverable amount of the Group’s investment in and loans
receivable from HLG was a key audit matter due to the
significant judgement involved in forecasting future cash flows
and the selection of assumptions.
In conjunction with valuation experts, our procedures
included, amongst others:
•
Evaluating the ‘value in use’ discounted cash flow model
developed by management to assess the recoverable
amount of the investment and the loans receivable,
including critically assessing the following assumptions:
-
discount rate;
-
forecast cash flows and capital expenditure;
-
forecast recoverability of certain legacy contract
receivables;
-
terminal growth rate; and
-
foreign currency exchange rates.
Where possible we corroborated market related
assumptions by reference to external data.
•
Testing on a sample basis the mathematical accuracy of
the cash flow models.
•
Assessing the historical accuracy of forecasting of the
Group in relation to HLG.
•
Performing sensitivity analysis on a number of
assumptions, including the deferral of cash receipts on
certain legacy contract receivables and on revenue
assumptions.
•
Assessing the appropriateness of the relevant disclosures
in the financial statements.
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