MISC Integrated Annual Report 2020

38. 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 to the security carried at fair value was RM40,671,000 (2019: RM47,255,000). 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 2020 Malaysian quoted equity shares 40,671 +10 4,067 Malaysian quoted equity shares 40,671 -10 (4,067) 2019 Malaysian quoted equity shares 47,255 +15 7,088 Malaysian quoted equity shares 47,255 -15 (7,088) 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. 39. CAPITAL MANAGEMENT The Group, as an essential part of its capital management strategy, is committed towards achieving financial resilience and ensuring long-term business sustainability to a policy of financial prudence as outlined in the PETRONAS Group Corporate Financial Policy (formerly known as Group Corporate Financial Policy). The Group’s capital structure consists of consolidated equity plus debt, defined as the current and long-term portions of the Group’s debt. The objective of the Group’s capital management is to maintain an optimal capital structure and ensure availability of funds in order to meet financial obligations, support business growth and maximise shareholders’ value. The Group monitors and maintains a prudent level of debt to total asset ratio to optimise shareholder value and to ensure compliance with covenants under debt and shareholders agreements and regulatory requirements if any. There were no changes in the Group’s approach to capital management during the year. The debt to equity ratios of the Group and of the Corporation as at 31 December 2020 and 31 December 2019 are as follows: Group Corporation Note 2020 2019 2020 2019 RM’000 RM’000 RM’000 RM’000 Short term borrowings 20(c) 2,005,523 5,599,481 583,678 1,620,012 Long term borrowings 20(c) 11,434,863 7,552,692 641,059 29,908 Gross debts 13,440,386 13,152,173 1,224,737 1,649,920 Cash, deposits and bank balances 24 6,855,005 7,030,814 1,620,947 2,817,049 Net debts 6,585,381 6,121,359 (396,210) (1,167,129) Total equity 33,151,119 35,753,718 23,928,856 23,921,238 Gross debt equity ratio 0.41 0.37 0.05 0.07 Net debt equity ratio 0.20 0.17 (0.02) (0.05) The gearing ratio is not governed by MFRS and its definition and calculation may vary from one group/company to another. 31 December 2020 NOTES TO THE FINANCIAL STATEMENTS 31 December 2020 NOTES TO THE FINANCIAL STATEMENTS 10 448 10 449 /// Leadership / Governance / Financial Statements / Additional Information / Annual General Meeting ////// /// Leadership / Governance / Financial Statements / Additional Information / Annual General Meeting ////// Section Section MISC Berhad / Integrated Annual Report 2020 MISC Berhad / Integrated Annual Report 2020