The National Shipping Company of Saudi Arabia (A Saudi Joint Stock Company) Notes to the Consolidated Financial Statements As of December 31, 2012 (in Thousands of Saudi Riyals)
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 including due from related parties 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 rates 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 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 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 the 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 values of financial assets and liabilities do not materially differ from their book values.
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