NOTES TO THE FINANCIAL STATEMENTS
Level 1 Level 2 Level 3 Total
37. FINANCIAL RISK MANAGEMENT OBJECTIVES AND POLICIES
The Group and the Company are exposed to financial risks arising from their operations and the use of financial instruments. The key financial risks include credit risk, liquidity risk, interest rate risk and foreign currency risk.
The Board of Directors reviews and agrees on policies and procedures for the management of these risks. The Board Risk Management Committee provides independent oversight to the effectiveness of the risk management process.
It is, and has been throughout the current year and the previous year of the Group’s policy that no derivatives shall be undertaken except for the use as hedging instruments where appropriate and cost-efficient. The Group and the Company do not apply hedge accounting.
The following sections provide details regarding the Group’s and Company’s exposure to the above-mentioned financial risks and the objectives, policies and processes for the management of these risks.
(a) Credit risk
Credit risk is the risk of loss that may arise on outstanding financial instruments should a counterparty default on its obligations. The Group’s and the Company’s exposure to credit risk arises primarily from trade and other receivables, contract assets and finance lease receivables. For other financial assets (including cash and bank balances), the Group and the Company minimise credit risk by dealing exclusively with high credit rating counterparties. Trade receivables and finance lease receivables are monitored on an ongoing basis via Group management reporting procedures.
The Group’s objective is to seek continual revenue growth while minimising losses incurred due to increased credit risk exposure. The Group trades only with recognised and creditworthy third parties. It is the Group’s policy that all customers who wish to trade on credit terms are subject to credit verification procedures.
In addition, receivable balances are monitored on an ongoing basis to minimise exposure to bad debts.
37. FINANCIAL RISK MANAGEMENT OBJECTIVES AND POLICIES (cont’d) (a) Credit risk (cont’d)
Exposure to credit risk
At the end of the reporting year, the maximum exposure to credit risk is represented by the carrying amount of each class of financial assets recognised in the statements of financial position.
The Group does not have any major concentration of credit risk related to any financial instruments except for the concentration of credit risk arising from exposures to the Government of Malaysia and Government Linked Corporations amounting to RM53,390,000 and RM1,387,000 (2021: RM14,884,000 and RM3,018,000) representing 80% and 2% (2021: 47% and 10%) of the Group’s trade and other receivables, respectively.
The Group uses a provision matrix to calculate ECLs for trade receivables, contract assets and finance lease receivables. The provision rates are based on days past due for groupings of various customer segments that have similar loss patterns (i.e., nature of project undertaking, product type, customer type and rating, and coverage by bank guarantee or other forms of credit insurance). Note 24 includes further details on the loss allowance for these assets respectively.
The Company has no default experiences on amount due from subsidiaries and corporate guarantee provided to the bank for banking facilities granted to subsidiaries. The Company monitors the cash flow position of the subsidiaries regularly.
(b) Liquidity risk
Liquidity risk is the risk that the Group or the Company will encounter difficulty in meeting financial obligations due to shortage of funds. The Group’s and the Company’s exposure to liquidity risk arises primarily from mismatches of the maturities of financial assets and liabilities. The Group’s and the Company’s objective is to maintain a balance between continuity of funding and flexibility through the use of standby credit facilities.
The Group actively manages its debt maturity profile, operating cash flows and the availability of funding so as to ensure that all refinancing, repayment and funding needs are met. As part of its overall prudent liquidity management, the Group maintains sufficient levels of cash or cash convertible investments to meet its working capital requirements. In addition, the Group strives to maintain available banking facilities of a reasonable level to its overall debt position. As far as possible, the Group raises committed funding from financial institutions and prudently balances its portfolio with some short-term funding so as to achieve overall cost effectiveness.
The table below summarises the maturity profile of the Group’s and the Company’s liabilities at the end of the reporting period based on contractual undiscounted repayment obligations.
Group Weighted
average On
effective demand
interest Carrying or within One to Over
rate amount one year five years five years Total
% RM’000 RM’000 RM’000 RM’000 RM’000
2022
Financial liabilities:
Refundable cylinder
deposits - 43,834 9,957 33,877 - 43,834
Trade and other
payables - 49,170 49,170 - - 49,170
Lease liabilities 2.50 - 5.80 2,380 1,262 1,233 - 2,495
Borrowings 3.15 - 6.40 54,037 54,024 14 - 54,038
Total undiscounted
financial liabilities 149,421 114,413 35,124 - 149,537
NOTES TO THE FINANCIAL STATEMENTS
37. FINANCIAL RISK MANAGEMENT OBJECTIVES AND POLICIES (cont’d) (b) Liquidity risk (cont’d)
The table below summarises the maturity profile of the Group’s and the Company’s liabilities at the end of the reporting period based on contractual undiscounted repayment obligations. (cont’d)
Group Weighted
average On
effective demand
interest Carrying or within One to Over
rate amount one year five years five years Total
% RM’000 RM’000 RM’000 RM’000 RM’000
2021
Financial liabilities:
Refundable cylinder
deposits - 43,361 11,724 31,637 - 43,361
Trade and other
payables - 48,640 48,640 - - 48,640
Lease liabilities 3.88 - 4.00 3,383 1,222 2,407 - 3,629
Borrowings 2.90 - 5.56 38,714 37,817 1,061 - 38,878
Total undiscounted
financial liabilities 134,098 99,403 35,105 - 134,508
Company Weighted
average On
effective demand
interest Carrying or within One to Over
rate amount one year five years five years Total
% RM’000 RM’000 RM’000 RM’000 RM’000
2022
Financial liabilities:
Trade and other
payables - 1,255 1,255 - - 1,255
Lease liabilities 4.0 820 495 354 - 849
Amount due to
subsidiaries - 13,671 13,671 - - 13,671
Total undiscounted
financial liabilities 15,746 15,421 354 - 15,775
2021
Financial liabilities:
Trade and other
payables - 1,923 1,923 - - 1,923
Lease liabilities 4.0 1,235 457 849 - 1,306
Amount due to
subsidiaries - 589 589 - - 589
Total undiscounted
financial liabilities 3,747 2,969 849 - 3,818
37. FINANCIAL RISK MANAGEMENT OBJECTIVES AND POLICIES (cont’d)
For the financial year ended 30 June 2022, the Company has assessed the existing financial guarantee in relation to guarantee provided by the Company to banks for banking facilities granted to subsidiaries amounting to RM35,096,000 (2021 RM16,427,000) and determined that the guarantees are more likely not to be called upon by the financiers. However, this estimate is subject to change depending on the probability of the financier claiming under the guarantee. The amounts for the financial guarantee are the maximum amount that the Company could be forced to settle under the arrangement for the full guaranteed amount if that amount is claimed by the financiers.
(c) Interest rate risk
Interest rate risk is the risk that the fair value or future cash flows of the Group’s financial instruments will fluctuate because of changes in market interest rates.
As the Group has no significant interest-bearing financial assets, the Group’s income and operating cash flows are substantially independent of changes in market interest rates. The Group’s interest-bearing financial assets are mainly short-term in nature and have been mostly placed in fixed deposits.
The Group’s interest rate risk arises primarily from interest-bearing borrowings. Borrowings at floating rates expose the Group to cash flow interest rate risk. The Group manages its interest rate exposure by maintaining a mix of fixed and floating rate borrowings.
The information on the weighted average effective interest rates (‘WAEIR’) as at the end of the reporting period and the maturities of the Group’s financial instruments that are exposed to interest rate risk is disclosed in Note 27.
Sensitivity analysis for interest rate risk
At the end of the reporting period, if interest rates had been 25 basis points lower/higher, with all other variables held constant, the Group’s profit for the year/period would have been RMNil (2021: RM3,000) higher/lower, arising mainly as a result of lower/higher interest expense on floating rate loans and borrowings. The assumed movement in basis points for interest rate sensitivity analysis is based on the currently observable market environment.
(d) Foreign currency risk
Foreign currency risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in foreign exchange rates.
The Group is exposed to transactional currency risk primarily through sales and purchases that are denominated in a currency other than the functional currency of the operations to which they relate. The currency giving rise to this risk is primarily United States Dollar. Foreign exchange exposures in transactional currencies other than functional currencies of the operating entities are kept at an acceptable level.
The Group has entered into forward currency contracts for certain transactions to manage the exposures in foreign currencies as disclosed in Note 29. The Board is of the opinion that the unhedged foreign currencies exposures are minimal and can be efficiently managed.
The amounts of trade payables denominated in foreign currencies as at the end of the reporting period is as follows:
Group
2022 2021
RM’000 RM’000 Trade payables hedged using forward currency contracts 34,342 18,001