MISC Annual Report 2018

NOTES TO THE FINANCIAL STATEMENTS NOTES TO THE FINANCIAL STATEMENTS HIGHLIGHTS OF THE YEAR OUR BUSINESS OUR LEADERSHIP OUR PERFORMANCE OUR COMMITMENT TO SUSTAINABILITY OUR GOVERNANCE FINANCIAL STATEMENTS OTHER INFORMATION 50 TH ANNUAL GENERAL MEETING 339 MISC BERHAD ANNUAL REPORT 2018 338 38. FINANCIAL RISK MANAGEMENT OBJECTIVES AND POLICIES (CONT'D.) (c) Liquidity risk (cont'd.) Group Hedging activities The Group entered into interest rate swaps to hedge the cash flow risk of floating interest rate on the term loans. The notional amount swapped as at 31 December 2018 was RM1,943,878,000 (2017: RM2,145,433,000). The swaps are settled quarterly, consistent with the interest payment schedule of the loan. The following table indicates the periods in which the cash flows are expected to occur for cash flow hedges as at 31 December 2018 and 31 December 2017:  Carrying   amount   RM'000   Contractual   cash flows   RM'000  Within    1 year   RM'000   More than   1 - 2 years   RM'000  More than   2 - 3 years   RM'000  More than  3 - 4 years   RM'000   More than  4 - 5 years   RM'000   More than   5 years   RM'000  At 31 December 2018 Net cash inflows 2,349 30,963 7,889 7,910 5,806 2,299 1,180 5,879 At 31 December 2017 Net cash outflows 3,328   (47,061) (2,608) (5,415) (5,430) (5,415) (4,390) (23,803) The Group's hedging activities on the interest rate swaps are tested to be effective. During the year, the Group recognised in other comprehensive income a loss of RM5,400,000 (2017: gain of RM7,697,000) on the interest rate swaps of its subsidiaries. The Group's share of its joint ventures' unrealised gain on interest rate swap during the year was RM15,000 (2017: RM444,000). 38. FINANCIAL RISK MANAGEMENT OBJECTIVES AND POLICIES (CONT'D.) (d) 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 exposure to credit risk arises primarily from its operating activities (mainly trade receivables and finance lease receivables) and from its finance activities, including deposits with banks and financial institutions, foreign exchange transactions and other financial instruments.   At the reporting date, the Group’s maximum exposure to credit risk is represented by the carrying amount of each class of financial assets mentioned in Notes 19(a) and 22, and is recognised in the statements of financial position. Receivables and contract assets The Group and the Corporation determine concentrations of credit risk by monitoring the industry sector profile of their receivables on an ongoing basis. The credit risk concentration profile of the Group's and the Corporation's trade receivables due from third parties at the reporting date are as follows:   Group    Corporation  2018   2017   2018   2017   RM'000   RM'000   RM'000   RM'000  LNG 116,687 201,568  121,577 193,826  Petroleum 449,761  367,956  - -  Offshore 1,184,075 1,017,533  133,274 2,467  Heavy Engineering 210,844 217,453  - -  Others 14,496 12,097  - -  1,975,863 1,816,607  254,851 196,293  At reporting date, approximately 3.7% (2017: 3.0%) and 85.9% (2017: 90.7%) of the Group's and the Corporation's trade and other receivables were due from related parties. The Group and the Corporation perform credit rating assessment of all its counterparties in order to measure ECLs of trade receivables for all segments using the PETRONAS Credit Risk Rating System. This credit rating assessment considers quantitative assessment using the counterparties’ financial statements or a qualitative assessment of the counterparties, which includes but is not limited to their reputation, competitive position, industry and geopolitical outlook. In determining the ECL, the probability of default assigned to each counterparty is based on their individual credit rating. This probability of default is derived by benchmarking against available third party and market information, which also incorporates forward looking information.