Bahri Annual Report-2011

The National Shipping Company of Saudi Arabia



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. To manage its price risk arising from investments in equity securities, the Company diversifies its portfolio. Liquidity risk This represents risks that the Company, including subsidiaries, will be unable to meet its funding requirements related to financial instruments. The liquidity risk arises if the entity cannot sell its financial assets quickly at an amount close to its fair value. Liquidity risk is managed by systematic monitoring to ensure availability of funds to meet any future liabilities as they become due.Fair value Fair value Fair value is the amount used to exchange assets or to settle liabilities between knowledgeable willing parties on an arms-length basis. As the consolidated financial statements of the Company are compiled based on historical cost convention, except for the investments in financial instruments and derivative financial instruments at fair value, differences might occur between book value and estimates of fair values. The management believes that the fair value of financial assets and liabilities does not materially differ from its book value. RECLASSIFICATION Certain amounts previously reported in 2010 consolidated financial statements have been reclassified to conform to current year presentation.

intends either to settle on a net basis, or to realize the asset and liability simultaneously.

Risk management is carried out by senior management. The most important types of risk are summarized below. Credit risk Credit risk is the risk that counterparties do not meet their obligations, so the other party incurs a financial loss. At the balance sheet date, approximately 21 % of trade receivable balances are due from related parties. The Company and its subsidiaries maintains its cash with high credit rated banks. Receivables are carried net of provision for doubtful debts. Commission rate exposure This relates to the Company’s and subsidiaries’ exposure to the risk of fluctuations in commission rates in the market and the potential impact on the consolidated financial position of the Company and its cash flows. The Company’s and subsidiaries’ commission rate risk arises mainly from its short-term deposits and borrowings. The Company where appropriate uses commission rate swaps to fix the commission rates and uses commission rate caps to hedge the risk of increase in commission rate for its long-term finance. The Company monitors the commission rate changes and believes that expected commission rate change on the Company is not significant. Currency risk This relates to the risk of change in the value of financial instruments due to change in foreign currency rates. The Company’s and subsidiaries’ transactions are mainly in Saudi riyals, UAE Dirhams and US dollars. Management monitors the currency rate changes and acts accordingly. Price risk Price risk is the risk that the value of a financial instrument will fluctuate as a result of changes

The Company has outstanding letters of guarantee of SR 89.6 million at December 31, 2011 issued in the Company’s normal course of business. The Company has also certain outstanding legal proceedings that have arisen in the normal course of business. Although, the outcome of these litigations has not yet been determined, management does not expect that these cases will have a material adverse effect on the Company’s result of operations or its financial position. In addition, refer to Note (12) in relation to future capital commitments to build RoRo vessels, chemical tankers and office building in Dubai. 25. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT The Company’s activities, including subsidiaries, expose it to a variety of financial risks: market risk (including currency risk, fair value and cash flow commission rate exposure and price risk), credit risk and liquidity risk. The Company’s overall risk management program focuses on the unpredictability of financial markets and seeks to minimize potential adverse effects on the Company’s financial performance. Financial instruments carried on the balance sheet principally include cash and cash equivalents, investments, receivables, borrowings, derivative financial instruments, payables and certain accrued expenses. Financial asset and liability is offset and net amounts reported in the financial statements, when the Company has a legally enforceable right to set off the recognized amounts and

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