STATEMENT ON RISK MANAGEMENT AND INTERNAL CONTROL The FRC includes among others, documentation of controls, testing of internal control design effectiveness, remediation of control gaps as well as a periodic testing of control operating effectiveness. The objective of conducting the assurance and evaluating the test results is to conclude whether the controls are designed and operating effectively to support the financial statement assertions. If internal control deficiencies are noted during the testing, management shall determine whether they constitute a material misstatement to the financial statements. The root cause for each deficiency shall be documented and the Corrective Action Plan for the ineffective controls shall be monitored and reported periodically. FRC Assurance testing requirement is performed semiannually for relevant processes. • MISC Financial Policy The Group has adopted MISC Financial Policy (MFP) which sets out the overarching philosophy of our commitment towards becoming a financially resilient organisation through robust capital and liquidity management practices. The MFP is supplemented with the existing Petronas Corporate Financial Policy’s (CFP) guidelines in the areas of liquidity management, cash repatriation, financing, investment, banking, asset-liability management, foreign exchange management, credit, tax, inward financial guarantee and documentary credit, and integrated financial risk management. CFP activities carried out by MISC during FY2022 include the following: • Conducting counterparty assessments prior to accepting Inward Financial Guarantee and Documentary Credit from vendors. • Monitoring trade receivables on a monthly basis. • Managing interest rate risk exposures via interest rate swaps to hedge against cashflow volatility arising from fluctuations in floating rates. • Debt Covenant Monitoring The Group monitors its financial and non-financial covenants set out under all its external financing facilities on a quarterly basis, to ensure that the covenants are observed and complied with. • Financial Risk Appetite The Group has established the Financial Risk Appetite Setting (FRAS), which sets out KRIs as a means of monitoring and mitigating against adverse trends in the following financial risk areas: • Interest rate risk appetite limit, where the Weighted Average Cost of Debt (WACD) for the year is set to monitor the overall cost of debt of the Group. • Debt appetite limit, where the debt threshold is set to monitor the Group’s debt levels. • Minimum liquidity requirement level, to ensure that the Group can meet its immediate operating expenses payables, committed debt service obligation and capital expenditures. In addition to the minimum liquidity requirement, additional cash reserves and credit facilities available for utilisation are maintained to meet contingency payments and opportunistic investments. • Foreign exchange risk appetite, to set out thresholds for net currency exposures to mitigate the financial risk arising from non-functional currency transactions. • Financial institution credit counterparty risk appetite, to mitigate financial exposures arising from failure of financial institutions counterparties. The KRIs thresholds of FRAS are reviewed and refreshed annually. • Credit Risk Framework and Guidelines MISC has adopted the Petronas Credit Guidelines to facilitate the management of credit risk exposures from our customers and to guide credit risk decision. In this regard, the Group applies the Petronas Credit Risk Rating System to evaluate the creditworthiness of our external counterparties. In addition, the Group’s trade receivables’ aging profile is closely monitored and deliberated on a monthly basis as part of our credit risk exposure management practice. Taxation • MISC Tax Policy With the tax policy in place, MISC continues to enhance its tax compliance with the required legislations in the countries where it has presence, with the aim for the Group to be a responsible corporate taxpayer and to maintain cooperative relationships with the relevant tax authorities. In addition, overall tax risks of the Group are being managed, among others, through:- • Risk Register which set out KRI in relation to non-compliance events which resulted in penalties being imposed by tax authorities; • Tax Compliance & Control (TCC) Assurance [formerly known as Tax Control Framework] which is designed to enforce effective governance and management of tax risks for both direct and indirect tax areas; and • Performing tax assessment covering contractual, business structure and operational tax risks as part of Project Risk Assessment (PRA). Project Evaluation The Group continues to use a risk-based pricing framework to ensure that the returns of any capital investment or project, adequately cover the risks assumed for undertaking such investment or project. PRA Framework was established to provide a stringent tool in identifying project risks prior to embarking on a new capital-intensive project. The risk-based project feasibility assessment aims to increase the likelihood of achieving project objectives and is used to assess risks associated with a project and identify action plans to mitigate/ eliminate each risk exposure. In addition, the PRA advocates and ensures a consistent approach to project prioritisation during the overall planning and budget cycle throughout the Group, whilst promoting investment discipline. Ultimately, the objective of PRA is to ensure that project returns are commensurate with the level of risk taken. Amongst the risk elements considered in the PRA framework are counter-party credit risk, project tenure, project and commercial risk, overall project economics against risk, assumed level of debt taken to fund the project and the residual value risk of the asset at the end of the contract period. The PRA framework, which covers a complete project life cycle, also includes the review of project implementation, identification of lessons learnt and evaluation on whether agreed objectives, targets and returns have been achieved. MISC is committed to become a financially resilient organisation. MISC shall continuously strive to achieve the following: • Capital efficiency in pursuit of business objectives with appropriate balance between risk and reward. • Maintain an investment grade credit rating (if applicable). • Sustain a strong cash repatriation discipline in the most optimal manner. • Uphold strong governance at all times. Adherence to this Policy is everyone’s responsibility. Note: MISC refers to MISC Berhad and its subsidiaries, excluding the joint venture companies and associate companies MISC Group is committed to be a responsible taxpayer by: • Complying in good faith with all applicable tax laws, regulations, guidelines and international tax treaties, and settling tax obligations when legally due, as company and employer; and • Maintaining cooperative working relationships with tax authorities. Adherence to this Policy is everyone’s responsibility, by referring all tax related matters to the appropriate parties. Note: MISC refers to MISC Berhad and its subsidiaries, excluding the joint venture companies and associate companies. 227 226 Governance Governance MISC Berhad Integrated Annual Report 2022
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