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HENGYUAN REFINING COMPANY BERHAD I 105

4 financial risK ManaGeMent oBJectiVes anD policies (continued)

(b) credit risk
Credit risk refers to the risk that a counterparty will default on its contractual obligations resulting in financial loss to
the Company. At the reporting date, the Company’s maximum exposure to credit risk is represented by the carrying
amounts of each class of financial assets recognised in the statement of financial position.
(i) receivables
Credit risk on customers arises when sales are made on deferred credit terms. It seeks to control credit risk
by setting counterparty limits and ensuring that sales of products are made only to approved customers with an
appropriate credit history. It is the Company’s policy to monitor the financial standing of the customers on an
ongoing basis to ensure that the Company is exposed to a minimal credit risk. The maximum credit exposure
associated with financial assets is equal to the carrying amount.
55% (2019: 54%) of the Company’s total receivables at the reporting date are due from two (2019: two) major
customers in the oil and gas industry in Malaysia. The Directors are of the view that such credit risk is minimal in
view of the strength of the customers’ financial position and no history of default from these major customers.
For some trade receivables, the Company may obtain security in the form of guarantees, deeds of underwriting
of letters of credit which can be called upon if the counterparty is in default under the terms of the agreement.
An impairment analysis is performed at each reporting date to measure expected credit losses. The provision
rates are based on days past due and coverage by letters of credit and historical credit losses of the customers.
The calculation reflects the probability-weighted outcome, the time value of money and reasonable and
supportable information that is available at the reporting date about past events and current conditions.
The Company has considered expected oil price and geographical area which the debtor operates in and
concluded that the effect on expected changes in these factors do not significantly affect the historical credit
loss rates. Generally, trade receivables are written off if past due for more than one year unless it is covered
by letters of credits. These letters of credit are considered integral part of trade receivables and considered in the
calculation of impairment.
Information about credit exposure on the Company’s trade receivables is disclosed in Note 17.

(ii) Deposits with licensed banks, bank balances and favourable derivative financial instruments
The Company seeks to invest cash assets safely and profitably. Deposits, forward contracts and interest rate
swaps entered into are placed only with financial institutions with strong long-term credit ratings based on
independent rating agencies. The likelihood of non-performance by these financial institutions is remote based
on their high credit ratings.
For other favourable derivative financial instruments such as refining margin swaps, commodity swaps,
commodity options and forward priced commodity contracts, these are also entered into with counterparties with
strong long-term credit ratings based on independent agencies. In addition, the Company may obtain security
which can be called upon if the counterparty is in default under terms of agreement.
None of the financial assets have been renegotiated in the current financial year except as disclosed in Note 17.
(c) liquidity and cash flow risks
Liquidity risk is the risk that the Company will not be able to meet its financial obligations as they fall due.
The Company’s exposure to liquidity risk arises principally from its payables and borrowings. The Company ensures that
cash is available to meet working capital and other financing obligations, and that cash flows are managed efficiently.
This is done through cash forecasts to achieve optimal cash management planning. The Company sets a minimum
level of cash to be held on a daily basis in order to meet both firm commitments and forecast obligations. The Company
has access to undrawn facilities from its revolving credits subject to scheduled repayment of its term loans.