Step 5: Revenue recognition
32. FINANCIAL INSTRUMENTS - RISK MANAGEMENT The Group is exposed through its operations to the following financial risks
- Credit risk
- Foreign exchange risk - Other market price risk - Liquidity risk
In common with all other businesses, the Group is exposed to risks that arise from its use of financial instruments. This note describes the Group's objectives, policies and processes for managing those risks and the methods used to measure them. Further quantitative information in respect of these risks is presented throughout these consolidated financial statements.
There have been no substantive changes in the Group's exposure to financial instrument risks, its objectives, policies and processes for managing those risks or the methods used to measure them from previous periods unless otherwise stated in this note.
Principal financial instruments
The principal financial instruments used by the Group, from which financial instrument risk arises, are as follows:
- Trade receivables
- Cash and cash equivalents - Investments at FVTPL - Trade and other payables - Related party balances
Fair value and fair value hierarchy
The Group measures financial instruments, such as equity accounted investees at fair value at each statement of financial position date.
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value measurement is based on the presumption that the transaction to sell the asset or transfer the liability takes place either:
• In the principal market for the asset or liability, or
• In the absence of a principal market, in the most advantageous market for the asset or liability.
The principal or the most advantageous market must be accessible by the Group. The fair value of an asset or a liability is measured using the assumptions that market participants would use when pricing the asset or liability, assuming that market participants act in their economic best interest.
A fair value measurement of a non-financial asset considers a market participant's ability to generate economic benefits from the asset’s highest and best use or by selling it to another market participant that would utilize the asset in its highest and best use. The Group uses valuation techniques that are appropriate in the circumstances and for which sufficient data are available to measure fair value, maximizing the use of relevant observable inputs and minimizing the use of unobservable inputs.
All assets and liabilities for which fair value is measured or disclosed in the financial statements are categorized within the fair value hierarchy.
38
For the purpose of fair value disclosures, the Group has determined classes of assets and liabilities on the basis of the nature, characteristics and risks of the asset or liability and the level of the fair value hierarchy, as explained above.
Financial instruments by category
Carrying amount
31 December 2022
Financial instruments -
FVTPL
Financial instruments at
amortized cost Total Financial assets at fair value through profit or loss -
271,278 Current:
Due from related parties - 545,875
683,088
Trade receivables - 92,095,453
79,490,554
Contract assets - 55,029,187
21,775,084
Prepayments and other assets - 12,456,402
7,337,951 Cash and cash equivalents - 29,003,737
43,354,802 Total financial assets 189,130,654 189,130,654 Financial liabilities
Current:
Trade payables - 23,118,298
23,118,298
15,107,487
Accrual and other liabilities - 13,172,595
5,663,296 Total financial liabilities - 36,290,893 36,290,893
Carrying amount
31 December 2021
Financial instruments -
FVTPL
Financial instruments at
amortized cost Total Financial assets measured at fair value
Financial assets at fair value through profit or loss 272,133 - 272,133 Current:
Due from related parties - 683,088 747,883
Trade receivables - 79,490,554 87,049,354
Contract assets - 22,355,635 4,905,539
Prepayments and other assets - 12,489,759 8,106,513
Cash and cash equivalents - 43,354,778 57,696,203
Total financial assets 272,133 158,373,814 158,645,947 Financial liabilities
Current:
Trade payables - 15,107,487 16,133,622
Accrual and other liabilities - 9,808,156 8,195,319
Total financial liabilities - 24,915,643 24,915,643 Financial instruments not measured at fair value
Financial instruments not measured at fair value includes cash and cash equivalents, trade and other receivables, trade and other payables, lease liabilities and related party balances. Due to the short-term nature, the carrying value of these financial instruments approximates their fair value.
There were no transfers between levels during the period.
FOR THE YEAR ENDED DECEMBER 31,2022
(ALL AMOUNTS ARE IN SAUDI RIYALS UNLESS OTHERWISE STATED)
39 General objectives, policies and processes
The Board has overall responsibility for the determination of the Group's risk management objectives and policies. The Board receives quarterly reports from the Group’s finance department through which it reviews the effectiveness of the processes put in place and the appropriateness of the objectives and policies it sets.
The overall objective of the Board is to set policies that seek to reduce risk as far as possible without unduly affecting the Group's competitiveness and flexibility. Further details regarding these policies are set out below:
Credit risk
Credit risk is the risk of financial loss to the Group if a customer or counterparty to a financial instrument fails to meet its contractual obligations. The Group is mainly exposed to credit risk from credit sales. It is Group’s policy, implemented locally, to assess the credit risk of new customers before entering contracts.
Credit risk also arises from cash and cash equivalents held with banks, financial investments and related parties.
For banks and financial institutions, only independently rated parties with minimum rating "A" are accepted.
The Group's maximum exposure to credit risk is limited to the carrying amount of financial assets recognized at the reporting date, as summarized below:
2022 2021
Financial assets at fair value through profit or loss - 271,278
Due from related parties 545,875 683,088
Trade receivables 90,365,749 79,490,554
Contract assets 55,029,187 21,775,084
Prepayments and other assets 12,456,402 7,337,951
Cash and cash equivalents 29,003,737 43,354,802
187,400,950 152,912,757 Other price risk
The risk that the value of a financial instrument will fluctuate as a result of changes in market prices, whether those changes are caused by factors specific to the individual instrument or its issuer or factors affecting all instruments traded in the market.
Excessive risk concentration
Concentrations arise when a number of counterparties are engaged in similar business activities, or activities in the same geographical region, or have economic features that would cause their ability to meet contractual obligations to be similarly affected by changes in economic, political or other conditions. Concentrations indicate the relative sensitivity of the Group’s performance to developments affecting a particular industry.
In order to avoid excessive concentrations of risk, the Group’s policies and procedures include specific guidelines to focus on the maintenance of a diversified portfolio. Identified concentrations of credit risks are controlled and managed accordingly.
40 Liquidity risk
- Liquidity risk is the risk that the Group will encounter difficulty in meeting the obligations associated with its financial liabilities that are settled by delivering cash or another financial asset, The Group's approach to managing liquidity by monitoring on a regular basis that sufficient funds and banking and other credit facilities are available to ensure, as far as possible, that it will have sufficient liquidity to meet its liabilities when they are due, under both normal and stressed conditions, without incurring unacceptable losses or risking damage to the Group's reputation. The Group seeks continuously to comply with its legal obligations, including any, relating to its financing agreements.
- Liquidity risk is managed by monitoring on a regular basis that sufficient funds and banking and other credit facilities are available to meet the Group's future commitments.
- The management monitors the rolling forecasts of liquidity and expected cash flows at the Group level. In addition, the liquidity management policy of the Group includes forecasting cash flows and considering the level of liquid assets necessary to meet them, monitoring liquidity rates in the financial position and debt financing plans.
The following are the contractual maturities of the financial liabilities at the end of the reporting period.
Amounts are shown in total and not discounted:
Less than 3 months
More than 3 months – less than year
1-2 years 2-5 years Total As of 31 December 2022
Lease liability 304,831 318,956 397,522 24,150 1,045,459
Loans 2,941,886 3,078,211 3,836,443 233,070 10,089,610
Trade payables 6,740,736 7,053,097 8,790,432 534,033 23,118,298 Accrued Expenses and other credit balances 3,840,809 4,018,790 5,008,708 304,288 13,172,595 13,828,262 14,469,054 18,033,105 1,095,541 47,425,962 As of 31 December 2021
Lease liability 447,198 467,879 583,128 35,426 1,533,631 Trade payables 4,404,977 4,609,101 5,744,425 348,984 15,107,487 Accrued Expenses and other credit
balances 2,859,821 2,992,343 3,729,424 226,568 9,808,156 7,711,996 8,069,323 10,056,977 610,978 26,449,274
FOR THE YEAR ENDED DECEMBER 31,2022
(ALL AMOUNTS ARE IN SAUDI RIYALS UNLESS OTHERWISE STATED)
41 Current versus non-current classification
The Group presents assets and liabilities in the statement of financial position based on current/non-current classification.
An asset is current when it is:
• Expected to be realised or intended to sold or consumed in the normal operating cycle.
• Held primarily for the purpose of trading.
• Expected to be realised within twelve months after the reporting period; or
• Cash or cash equivalent unless restricted from being exchanged or used to settle a liability for at least twelve months after the reporting period.
• All other assets are classified as non-current.
A liability is current when:
• It is expected to be settled in the normal operating cycle.
• It is held primarily for the purpose of trading.
• It is due to be settled within twelve months after the reporting period; or
• There is no unconditional right to defer the settlement of the liability for at least twelve months after the reporting period.