MISC Annual Report 2019

37. FINANCIAL RISK MANAGEMENT OBJECTIVES AND POLICIES (CONT’D.) (d) Credit risk (cont’d.) Effective 1 July 2013, cash and bank balances were held in the In-House Account (“IHA”) managed by PETRONAS Integrated Financial Shared Services Centre (“IFSSC”). The centralisation of fund management allows more effective cash visibility and fund management of the Group, as well as minimise exposure to counterparty credit risk. The beneficiary of these financial assets remains with the Corporation. PETRONAS IFSSC, which functions as a treasury management platform, in turn, places all funds under management in licensed financial institutions with strong credit ratings globally and in Malaysia. In addition, a majority of the Group’s deposits are placed with licensed banks with strong credit ratings in Malaysia. Credit risk from balances with banks and financial institutions is managed by Group Treasury in accordance with the Group’s policy. The Group Treasury Investment Guideline defines the parameters within which the investment activities shall operate to achieve the Group’s investment objective of preserving capital and generating optimal returns. In accordance with the guideline, investment of surplus funds are made only with highly credit rated counterparties. The past due receivables balances are either secured by collaterals or relate mainly to customers who have never defaulted on payments but are slow paymasters and hence, are periodically monitored. (e) Equity price risk Equity price risk arises from the Group’s investment in quoted equity shares listed on Bursa Malaysia. At the reporting date, the exposure security at fair value was RM47,255,000 (2018: RM47,786,000). The following table demonstrates the indicative effects on the Group’s and the Corporation’s investment in quoted equity shares applying reasonably foreseeable market movements in the following index rates: Group and Corporation Effect on Weighted profit before average taxation Carrying change in Increase/ value index rate (Decrease) RM’000 % RM’000 2019 Malaysian quoted equity shares 47,255 +15 7,088 Malaysian quoted equity shares 47,255 -15 (7,088) 2018 Malaysian quoted equity shares 47,786 +15 7,168 Malaysian quoted equity shares 47,786 -15 (7,168) This analysis assumes all other variables remain constant and that the price of the Group’s quoted equity investment is perfectly correlated to the market index. 38. CAPITAL MANAGEMENT Capital management is defined as the process of managing the composition of the Group’s debt and equity to ensure it maintains a strong credit rating and healthy capital ratios that support its businesses and maximise its shareholder value. The Group’s approach in managing capital is set out in the Group Corporate Financial Policy. The Group and the Corporation monitor and maintain a prudent level of total debt to total equity ratio to optimise shareholder value and to ensure compliance with covenants under debt agreements. The debt to equity ratios of the Group and of the Corporation as at 31 December 2019 and 31 December 2018 are as follows: Group Corporation Note 2019 2018 2019 2018 RM’000 RM’000 RM’000 RM’000 Short term borrowings 19(c) 5,599,481 5,778,493 1,620,012 2,048,630 Long term borrowings 19(c) 7,552,692 7,271,413 29,908 4,248,740 Gross debts 13,152,173 13,049,906 1,649,920 6,297,370 Cash, deposits and bank balances 23 7,030,814 5,755,604 2,817,049 1,957,819 Net debts 6,121,359 7,294,302 (1,167,129) 4,339,551 Total equity 35,753,718 36,364,131 23,921,238 23,657,050 Gross debt equity ratio 0.37 0.36 0.07 0.27 Net debt equity ratio 0.17 0.20 (0.05) 0.18 The gearing ratio is not governed by MFRS and its definition and calculation may vary from one group/company to another. NOTES TO THE FINANCIAL STATEMENTS 31 December 2019 NOTES TO THE FINANCIAL STATEMENTS 31 December 2019 FINANCIAL STATEMENTS MISC BERHAD PEOPLE. PASSION. POSSIBILITIES ANNUAL REPORT 2019 360 361