Independent Auditor’s Report - Keppel Corporation

1 108 Keppel Corporation Limited Report to Shareholders 2016 Financial ReportIndependent Auditor s Reportto the Shareholders of Keppel Corporation LimitedFor the financial year ended 31 December 2016 Our OpinionIn our opinion, the accompanying consolidated financial statements of Keppel Corporation Limited ( the Company ) and its subsidiaries ( the Group ) and the balance sheet and statement of changes in equity of the Company are properly drawn up in accordance with the provisions of the Companies Act, Chapter 50 ( the Act ) and Financial Reporting Standards in Singapore ( FRSs ) so as to give a true and fair view of the consolidated financial position of the Group and the financial position of the Company as at 31 December 2016, and of the consolidated financial performance, consolidated changes in equity and consolidated cash flows of the Group, and changes in equity of the Company for the financial year ended on that we have auditedThe financial statements of the Group and of the Company, comprise: the balance sheets of the Group and of the Company as at 31 December 2016; the consolidated profit and loss account of the Group for the year then ended.

2 The consolidated statement of comprehensive income of the Group for the year then ended; the statements of changes in equity of the Group and of the Company for the year then ended; the consolidated statement of cash flows of the Group for the year then ended; and the notes to the financial statements, including a summary of significant accounting for OpinionWe conducted our audit in accordance with Singapore Standards on Auditing ( SSAs ). Our responsibilities under those standards are further described in the Auditor s 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 are Independent of the Group in accordance with the Accounting and Corporate Regulatory Authority ( ACRA ) Code of Professional Conduct and Ethics for Public Accountants and Accounting Entities ( ACRA Code )

3 Together with the ethical requirements that are relevant to our audit of financial statements in Singapore, and we have fulfilled our other ethical responsibilities in accordance with these requirements and the ACRA Audit MattersKey audit matters are those matters that, in our professional judgment, were of most significance in our audit of the financial statements for the financial year ended 31 December 2016. These matters were addressed in the context of our audit of the financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these of key audit matterHow our audit addressed the key audit matterDownturn in the Oil and Gas industryThe downturn in the Oil and Gas industry has had a significant impact on the financial statements of the Group, in particular over the following areas.

4 I) Appropriateness of revenue recognition and recoverability of work-in progress balances in relation to Offshore and Marine construction contracts(Refer to Note 13(a) to the financial statements)As at 31 December 2016, the Group s work-in-progress balances of $4,043 million, comprised rigs/vessels under construction contracts with customers, as well as stocks for the downturn in the industry, some customers had requested for amendments to contract terms or deferral of delivery dates of the rigs/vessels. This would impact the appropriateness of revenue and margin recognised, as well as the recoverability of work-in-progress balances relating to construction balances relating to construction contracts where delivery dates had been deferred and the revised delivery dates are more than 12 months from 31 December 2016 amounted to $869 addition, the estimated net realisable values of stocks have also declined, impacting the recoverability of work-in-progress balances relating to reviewed management s assessment of the risk of customers defaulting on the contracts.

5 And corroborated management s assessment against our understanding of the industry. We read public announcements and other externally available information that would be relevant to understanding the financial position of the major there were requests by customers for amendments to contract terms or deferral of delivery dates, we discussed with management to understand their assessment of the impact of these modifications. We reviewed the terms of each contract as well as the terms of the modifications to assess if management s judgment on the continued recognition of revenue and associated margin was appropriate. We also reviewed management s assessment of the external valuation of each rig/vessel, to assess if the related work-in-progress balances of construction contracts and stocks would be recoverable through sale, in the event that any of the Group s customers are unable to take delivery of the rigs/vessels at the contracted or revised delivery of key audit matterHow our audit addressed the key audit matterWe focused on this area because of the significant judgment required in.

6 Assessing whether the Group s customers will be able to fulfill their contractual obligations and take delivery of the rigs/vessels at the contracted or revised delivery dates; and estimating the net realisable values of stocks for from management s assessments relating to the above, a write-down of $54 million was made on work-in-progress on our procedures, we found that management s judgment around the recognition of revenue, including associated margin on the Group s Offshore and Marine projects for the financial year was appropriate. We also found that the work-in-progress balances on construction contracts and stocks were appropriately assessed to be ) Assessment of impairment of fixed assets in relation to the Group s Offshore and Marine business(Refer to Note 6 to the financial statements)

7 The Group has significant fixed assets relating to its Offshore and Marine business, which include various rigbuilding, shipbuilding and repair operations around the downturn has impacted these operations and indicated that the related items of fixed assets may be had performed an impairment review to assess the recoverable amount of these fixed assets, with each rigbuilding, shipbuilding and repair facility identified as an individual cash-generating unit (CGU). Arising from the review, the Group recognised an impairment charge of $148 million relating to these fixed assets. We focused on this area as the assessment of the recoverable amount using value-in-use (VIU) models required management to exercise significant judgment over the estimation of forecasted cash flows and discount reviewed management s identification of the rigbuilding, shipbuilding and repair operations which contained indicators of impairment at 31 December respect of the CGUs where indicators of impairment were present, we obtained the VIU calculations and evaluated the reasonableness of the key inputs to these calculations considering our knowledge of the business and our understanding of the Offshore and Marine industry.

8 As appropriate, we involved our internal valuation also considered the adequacy of the Group s disclosures in relation to impairment of these fixed assets. Based on our procedures, we found management s assessment of the recoverable amounts of the fixed assets relating to the Group s rigbuilding, shipbuilding and repair operations to be appropriate. We also found the disclosures in the financial statements in respect of the impairment to be ) Assessment of impairment of investment in KrisEnergy(Refer to Note 9 to the financial statements)The Group has a 40% equity interest in KrisEnergy Ltd ( KrisEnergy ), a company listed on the Singapore Stock Exchange and engaged in the Oil and Gas industry.

9 At 31 December 2016, the carrying value of the Group s investment in KrisEnergy as a CGU was higher than the fair value of the investment of $111 million, based on KrisEnergy s share price on that existence of the above impairment indicator required management to estimate the recoverable amount of the Group s investment in KrisEnergy. This assessment was done on a VIU basis using a discounted cash flow model. The Group recognised an impairment charge of $46 million arising from the assessment, bringing the carrying value of the Group s investment in KrisEnergy to $347 million. We focused on this area as the assessment of the recoverable amount required management to make cash flow projections from 2017 to 2032 and to apply key estimates and assumptions such as oil prices, discount rates, production volume, lifting costs, reserves and operating read recent public announcements made by KrisEnergy to obtain an understanding of the financial position of evaluated the reasonableness of the estimates and assumptions in the discounted cash flow model with the key focus on the estimated future oil prices of US$59 to US$76 per barrel, which was the most sensitive input to the model.

10 We also involved our internal valuation specialists in the evaluation of the discounted cash flow model. We considered the adequacy of the Group s disclosures in the financial statements in respect of the on our procedures, we found the estimates and assumptions within the discounted cash flow model to be reasonable. We also found the disclosures in the financial statements in respect of the impairment to be Keppel Corporation Limited Report to Shareholders 2016 Financial ReportIndependent A