MODEC : 2022 Audited Consolidated Financial Statements

MODEC, Inc.

Consolidated Financial Statements

Years ended December 31, 2022 and 2021

Independent auditor's report

To the Board of Directors of MODEC, Inc.:

Opinion

We have audited the accompanying consolidated financial statements of MODEC, Inc. ("the Company") and its consolidated subsidiaries (collectively referred to as "the Group"), which comprise the consolidated statement of financial position as at December 31, 2022, and the consolidated statements of profit or loss, comprehensive income, changes in net assets and cash flows for the year then ended, and notes, comprising significant accounting policies and other explanatory information.

In our opinion, the accompanying consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Group as at December 31, 2022, and its consolidated financial performance and its consolidated cash flows for the year then ended in accordance with International Financial Reporting Standards (IFRS).

Basis for Opinion

We conducted our audit in accordance with auditing standards generally accepted in Japan. Our responsibilities under those standards are further described in the Auditor's Responsibilities for the Audit of the Consolidated Financial Statements section of our report. We are independent of the Group in accordance with the ethical requirements that are relevant to our audit of the consolidated financial statements in Japan, and we have fulfilled our other ethical responsibilities in accordance with these requirements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.

Key Audit Matters

Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the consolidated financial statements of the current period. These matters were addressed in the context of our audit of the consolidated financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters.

Reasonableness of the estimated total costs used in recognizing revenue from construction contracts related to the floating production, storage and offloading system
The key audit matter	How the matter was addressed in our audit
MODEC, Inc. and its consolidated subsidiaries provide construction services related to the floating production, storage and offloading system (hereinafter referred to as "FPSO"). As described in Note 24, "Revenue" to the consolidated financial statements, the revenues related to these construction contracts amounted to US dollar 1,775,068 thousand, representing approximately 64.8% of total revenue in the consolidated financial statements. As described in Note 3, "Significant accounting policies, (14) Revenue from contracts with customers" to the consolidated financial statements, MODEC, Inc. and its consolidated subsidiaries recognize revenue from a long-term construction contract over time as the related performance obligations are satisfied by transferring control over goods promised in the contract to a customer. For performance obligations satisfied over time, the estimated progress is calculated as a percentage of accumulated costs incurred to date against the estimated total costs (input method). Contracts for construction services related to the FPSOs that MODEC, Inc. and its consolidated subsidiaries provide are individually significant in contract amounts and estimated total costs, and each project has detailed terms and conditions and specifications, in addition to a long construction period. Therefore, the preparation of the project budget, which provided the basis for estimating total costs of each construction contract related to the FPSO, involved a high degree of uncertainty. Specifically, management's determination on the following key assumptions in preparing the project budget primarily related to the work performed by the consolidated subsidiaries to which the construction work was assigned had a significant effect on the estimated total costs at the end of the fiscal year;  whether all work necessary to complete	We performed the audit procedures to assess the reasonableness of the estimated total costs used in recognizing revenue from construction contracts related to the FPSOs. These procedures included requesting the component auditors of the relevant consolidated subsidiaries, the assignees of the construction work, to perform an audit and then evaluating the reports of the component auditors to conclude on whether sufficient and appropriate audit evidence was obtained from the procedures. The primary procedures performed by us and the component auditors of the relevant consolidated subsidiaries include the following: (1) Internal control testing Test of the design and operating effectiveness of certain of MODEC, Inc.'s internal controls relevant to the process of preparing a project budget, focusing on the controls related to estimating a construction period, the controls to update the estimated construction period and the related costs in a timely manner in accordance with changes in circumstances that occurred after the start of construction, and the controls to reflect the risk that these estimates may change within the project budget. (2) Assessment of the reasonableness of the estimated total costs The procedures including the following to assess whether key assumptions adopted in preparing the project budget for the construction contract, which were used as the basis for estimating the total costs of each construction contract, were appropriate;  comparison of the work necessary to complete the construction contracts with the contents of the schedule of accumulated costs within the project budget;  assessment as to whether there were any special terms and conditions or specifications requiring consideration for proper estimation of total costs in the contracts with customers or key local subcontractors;  evaluation of the accuracy of the project budget by comparing the past project budgets for construction contracts with actual costs subsequently incurred and analyzing the variance between the two, and assessment as to whether the causes of these variances were considered in
 the construction contracts were identified and the estimated costs were included in the project budget; and whether any changes in work, such as specifications and the status of compliance with contract terms and conditions, due to changes in circumstances that occurred subsequent to the start of construction needed to be reflected within the project budget in a timely and appropriate manner. We, therefore, determined that our assessment of the reasonableness of the estimated total costs used in recognizing revenue from construction contracts related to the FPSOs was one of the most significant matters in our audit of the consolidated financial statements for the current fiscal year, and accordingly, a key audit matter.	preparation or updating of the latest project budget;  inspection of the project management materials for the construction contracts and comparison of the progress calculated based on the performance of the construction work confirmed by the customer with the progress measured by using the input method; and  inquiry of the project manager and other relevant personnel, including the head of accounting, about any changes in circumstances that occurred after the start of construction and their judgment on whether the project budget needed updating for the changes, and inspection of relevant materials supporting their responses to the inquiry, such as the contracts and the minutes of negotiations with customers, key local subcontractors or other relevant parties.
Reasonableness of the estimate of provisions for onerous contracts related to the operation services of the floating production, storage and offloading system

The key audit matter

How the matter was addressed in our audit

MODEC, Inc. and its consolidated subsidiaries provide operation services related to the floating production, storage and offloading system (hereinafter referred to as "FPSO"). As described in Note 19, "Provisions" to the consolidated financial statements, provisions for onerous contracts amounted to US dollar 30,855 thousand at the end of the current fiscal year, which were all related to the contracts for the operation services of the FSPO.

As described in Note 3, "Significant accounting policies, (12) Provisions" to the consolidated financial statements, MODEC, Inc. and its consolidated subsidiaries recognize a provision for onerous contracts when the expected benefits to be derived from a contract are less than the unavoidable costs of meeting the obligations under the contract. The provisions are measured as the excess of the expected costs over the expected benefits from continuing with the contract.

We performed the audit procedures to assess the reasonableness of the estimate of provisions for onerous contracts related to the operation services of the FSPO. These procedures included requesting the component auditors of the relevant consolidated subsidiaries, the responsible parties to the contracts, to perform an audit and then evaluating the reports of the component auditors to conclude on whether sufficient and appropriate audit evidence was obtained from the procedures. The primary procedures performed by us and the component auditors of the relevant consolidated subsidiaries include the following:

(1) Internal control testing

Test of the design and operating effectiveness of certain of MODEC, Inc.'s internal controls relevant to the process of preparing project budgets, focusing on controls related to the future forecasts of the FPSOs' operating status, which were used as the basis for estimating the future costs expected to be unavoidable and the expected benefits to be derived from the contract.

(2) Assessment of the reasonableness of the estimate of provisions for onerous contracts

The estimates of the expected benefits to be derived from the contracts for the operation services of the FSPO and the unavoidable costs of meeting the obligations under the contract, which are estimated based on the project budget prepared for each FPSO in the scope of the service contract, involved uncertainty due to the long-term nature of the contract period. In addition, especially for contracts on the FPSOs which were experiencing troubles with the operation, the estimate of future repair costs to address any troubles besides the costs of the operation services contract incurred on a constant basis involved a high degree of uncertainty. Specifically, management's determination on the following key assumptions in preparing the project budget had a significant effect on the estimate of provisions for onerous contracts at the end of the fiscal year;

•  the scope of the unavoidable costs of meeting the obligations under the operation services contract, including future repair costs; and

•  the future forecasts of the FPSOs' operating status, which affected the estimation of the expected benefits to be derived from the contract.

We, therefore, determined that our assessment of the reasonableness of the estimate of provisions for onerous contracts related to the operation services of the FPSO was one of the most significant matters in our audit of the consolidated financial statements for the current fiscal year, and accordingly, a key audit matter.

The procedures including the following to assess whether key assumptions adopted in preparing the project budgets were appropriate;

•  inquiry of the project manager and other relevant personnel, including the head of accounting, about key assumptions in preparing the project budgets related to the contracts for the operation services of the FSPO, and inspection of relevant materials supporting their responses to the inquiry, such as the contracts and the minutes of negotiations with customers or key local subcontractors;

•  comparison of the work necessary to perform the obligations under the contracts with customers for operation services of the FSPO with the contents of the schedule of accumulated costs within the project budget;

•  assessment as to whether there were any special terms and conditions or specifications requiring consideration for proper estimation of provisions in the contracts with customers or key local subcontractors;

•  evaluation of the accuracy of the project budget by comparing the past project budgets for contracts for the operation services of the FSPO with actual costs subsequently incurred and analyzing the variance between the two, and assessment as to whether the causes of these variances were considered in preparation of the latest project budget; and

•  comparison of the future forecasts of the FPSOs' operating status with the actual operating status in the past and the operating trend for the current fiscal year during which repair work was implemented, including the periods before and after the repair.

Other Information

The other information comprises the information included in the Annual Report, but does not include the consolidated financial statements, the financial statements, and our auditor's reports thereon. Management is responsible for the preparation and presentation of the other information.Corporate auditors and the board of corporate auditors are responsible for overseeing the directors' performance of their duties with regard to the design, implementation and maintenance of the reporting process for the other information.

Our opinion on the consolidated financial statements does not cover the other information and we do not express any form of assurance conclusion thereon.

In connection with our audit of the consolidated financial statements, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent