KUALA LUMPUR (July 15): Zelan Bhd’s external auditor has flagged the existence of material uncertainty in the group’s accounts for the financial year ended Dec 31, 2019 (FY19) that may cast significant doubt on its ability to continue as a going concern.

In a filing with Bursa Malaysia today, the construction firm said its auditor, Al Jafree Salihin Kuzaimi PLT, had drawn attention that the group’s and company’s current liabilities as of FY19 exceeded the current assets by RM145.6 million and RM18.8 million respectively.

As a result, the auditor also expressed its unmodified opinion on the financial statements for FY19.

Key audit matters raised by the auditor include recoverability of the receivable balance from Meena Holdings LLC, arising from the termination of a construction contract in Abu Dhabi awarded to Zelan’s subsidiary, Zelan Holdings (M) Sdn Bhd.

On July 31, 2019, Zelan said it was to receive 264.6 million dirhams (RM297.6 million) from Meena after the International Court of Arbitration, International Chamber of Commerce (ICC) ruled that the termination of the construction contract was valid.

However, Meena, in response, has filed a grievance application against the ratification and execution of the arbitration award to the Abu Dhabi Commercial Court of Appeal and the matter is fixed for hearing on July 23.

“The directors are of the view that the group is able to enforce and recover the awarded sum in the arbitration award,” said Zelan. “The directors made an assessment of the carrying value of the total receivable balance by taking into consideration the timing and duration of the arbitration award enforcement process and the outcome of the grievance application from the project owner based on advice from the external solicitor.”

Another key audit matter raised by Al Jafree Salihin Kuzaimi is revenue and costs recognition relating to Zelan’s construction contracts.

In response, Zelan said: “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 RM55.5 million and RM13.6 million respectively for FY19.

“In order to ensure that the group and the company would have sufficient cash inflows within the next 12 months from the reporting date to repay the existing borrowings, complete the projects in progress and meet working capital, the directors will continue to undertake measures to manage and strengthen the group’s cash flow position,” it added.

These measures include engaging Meena on potential extension of time for the on-going project which may be delayed, re-evaluating current contracts to optimise potential revenue and progressively reduce costs on the job scopes and services provided, and negotiating with subcontractors on the terms and timing of settlement payments for ongoing and completed projects.

Zelan also noted that it has secured buyers for 11 units and one whole floor of office lots at Wisma Zelan in Cheras.

“These transactions are expected to be completed by the third quarter of this year. The group will continue to identify potential buyers for certain properties and inventories of the group,” it said.