Page 104 - HRC_AR2020

102 I 2020 ANNUAL REPORT I financial reports

NOTES TO THE FINANCIAL STATEMENTS

FOR THE FINANCIAL YEAR ENDED 31 DECEMBER 2020 (CONTINuED)

3 critical accoUntinG estiMates anD JUDGeMents (continued)

(c) net realisable value of the hydrocarbon inventories
The COVID-19 pandemic and an over-supply and supply tightness in various global and regional markets may affect
the estimated net realisable value of hydrocarbon inventories. The estimated selling prices may fluctuate due to
changes in the customers’ demand for petroleum as a result of restricted travel imposed in Malaysia as well as globally.
The Company needs to estimate the net realisable value based on the most reliable evidence at the time the estimate
is made. The Company also considers the effect of events occurring after the end of the financial year in determining
the net realisable value of the hydrocarbon inventories. These estimates require judgements given the uncertainties in
the future selling prices and selling costs of the inventories.
Based on the assessment performed, the Company has provided RM28,110,000 for inventories write down.

4 financial risK ManaGeMent oBJectiVes anD policies

The Company is exposed to a variety of financial risks; market risk (including foreign currency exchange risk, interest rate risk,
commodity price risk and refining margin risk), credit risk, liquidity and cash flow risk and capital risk. The Company’s overall
financial risk management objective is to ensure the Company creates value for its shareholders. The Company focuses on
the unpredictability of financial markets and seeks to minimise potential adverse effects on the financial performance of the
Company. Financial risk management is carried out through risk reviews, assurance plans, internal control systems, insurance
programmes and adherence to the Company’s Treasury Policy and Procedures.

The Company may enter into foreign exchange forward contracts to manage its exposure to foreign currency risks in receivables
and payables. Straightforward derivative financial instruments are utilised by the Company to manage the exposure to foreign
currency exchange risk, commodity price risk, refining margin risk and interest rate risks. The Company does not enter into
derivative financial instruments that are speculative in nature.
Where all relevant criteria are met, hedge accounting is applied to remove the accounting mismatch between the hedging
instrument and the hedged item. This will effectively result in recognising interest expense at a fixed interest rate for the
hedged floating rate loans and locking the refining margin for the hedged forecast purchases and sales.

The Company’s accounting policy on its cash flow hedges is set out on Note 2.8(a).
For information about the methods and assumptions used in determining the fair value of derivatives refer to Note 5.
(a) Market risk
Market risk refers to the risk that changes in market prices, such as foreign exchange rates, interest rates and prices
will affect the Company’s financial position and cash flows.
(i) foreign currency exchange risk
Foreign currency exchange risk is the risk that the fair value of future cash flows of a financial instrument
will fluctuate because of changes in foreign exchange rates.
The objective of the Company’s currency risk management policies is to allow the Company to effectively
manage exposures that may arise from operating and financing activities.

The Company may enter into foreign currency swaps and forward contracts to limit its exposure on foreign
currency receivables and payables and on cash flows generated from anticipated transactions denominated in
foreign currencies. These foreign currency receivables and payables do not qualify as “highly probable” forecast
transactions and hence do not satisfy the requirements for hedge accounting (economic hedges). The foreign
currency swaps and forward contracts are subject to the same risk management policies as all other derivative
contracts. However, they are accounted for as “held for trading” with gains/(losses) recognised in profit or loss.