Chapter 5 Consolidated Financial Statements and Auditor’s Report for the year ended 31 December 2013
The National Shipping Company of Saudi Arabia (A Saudi Joint Stock Company) Notes To The Consolidated Financial Statements December 31, 2013 (In Thousands Saudi Riyals)
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 Group diversifies its portfolio. 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 Group 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 carrying value and fair value estimates. The management believes that the fair values of financial assets and liabilities are not materially differ from their book values.
Credit risk Credit risk is the risk that one party will fail to discharge an obligation and will cause the other party to incur a financial loss. The Group seeks to manage its credit risk with respect to banks by only dealing with reputable banks and with respect to customers by setting credit limits for individual customers, monitoring outstanding receivables and ensuring close follow-ups. At 31 December 2013, trade accounts receivable include balances totaling SR 353 million (2012: SR 65 million) due from Government and quasi- Government institutions. Liquidity risk Liquidity risk is the risk that the Group will encounter difficulty in raising funds to meet commitments associated with financial instruments. Liquidity risk may result from an inability to sell a financial asset quickly at an amount close to its fair value. The Group manages its liquidity risk by ensuring that bank facilities are available. Currency risk Currency risk is the risk that the value of financial instruments will fluctuate due to changes in foreign exchange rates. The Group is subject to fluctuations in foreign exchange rates in the normal course of its business. The Group transactions are mainly in Saudi Riyals, UAE Dirhams and US Dollars. The currencies of UAE Dirhams and US Dollars are not considered to represent significant currency risk, as these currencies are pegged to the Saudi Riyal.
24. Financial Instruments and Risk Management
The Group’s activities expose 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 Group’s overall risk management program focuses on the unpredictability of financial markets and seeks to minimize potential adverse effects on the Group’s financial performance. Financial instruments carried on the balance sheet principally include cash and cash equivalents, investments, receivables, borrowings, payables and certain accrued expenses. Financial assets and liabilities are offset and net amounts are reported in the financial statements when the Group has a legally enforceable right to set off the recognized amounts and intends either to settle on a net basis, or to realize the asset and liability simultaneously. Risk management is carried out by top management. The most important types of risk are as follows: Commission rate risk Commission rate risk is the risk that the value of financial instruments will fluctuate due to changes in the market commission rates. The Group is subject to commission rate risk on its commission rate bearing assets and liabilities, including bank deposits and term loans. The Group manages its exposure to commission rate risk by continuously monitoring movements in commission rates.
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