2
H. H.
Sheikh Sabah Al Ahmad Al Jaber Al Sabah
The Amir of the State of Kuwait
H. H.
Sheikh Naser Al Mohammad Al Ahmad Al Sabah The Prime Minister of the State of Kuwait
H. H.
Sheikh Nawaf Al Ahmad Al Jaber Al Sabah The Crown Prince of the State of Kuwait
Members of the Board of Directors
Nader Hammad Sultan Chairman of the board
Suhail Yousef Abograis Chief Executive Officer
Dr.Hammad al-Mattar Member
Dr. Soud Al-Farhan Member
Dr.Adel Al-Sabeeh
Vice Chairman of the Board
Reyad Salem Al-Idreesi Member
Salah Al-TarkAIt Member
3
Ikarus Petroleum Industries Company – SAK (Closed)
4
Ikarus Petroleum Industries Company – SAK (Closed)
Report of the Board of Directors
For the financial year ending 31/12/2009
5
Ikarus Petroleum Industries Company – SAK (Closed)
Financial / Economic Conditions:
The effects of the global financial crisis continued to dominate the financial and economic landscape in the region, particularly in Kuwait, where asset values remained very volatile throughout 2009. Over the year, total market capitalization of KSE listed stocks fell by around KD 3 billion (10%). Some Gulf markets rebounded better than Kuwait, such as Saudi Arabia, where the index rose 27% in 2009. This increased the value of Ikarus’ foreign assets, which are mostly concentrated in Saudi Arabia, and more than compensated for the decline in the company’s local assets. 2009 Kuwaiti / Saudi stock Market performance
The credit crisis made banks reluctant to grant financing facilities without strict conditions and safeguards, such as higher collateral ratios. This severely reduced the volume of investment activity across the region. The most positive factor during the year was the rise in oil prices 2009 Average price of oil (OPEC basket)
6
Ikarus Petroleum Industries Company – SAK (Closed)
Petrochemical Sector In 2009 the petrochemical sector saw a gradual improvement in prices and demand, following the sharp decline that occurred during the second half of 2008/early 2009 in the wake of the global financial crisis. By the end of the year prices for some basic petrochemical products had recovered by 50% to 100% from their lows during the recession. This improvement was mainly due to the recovery in oil prices and the return to positive economic growth in most regions of the world, especially in India and China. However, prices remain below the peak levels achieved in 2007/8, and are expected to remain depressed in 2010 because of the enormous additional capacity due to be commissioned. This supply glut, combined with reduced demand growth, will continue to depress operating rates and profitability. The recovery of oil prices to $70-80/bbl in 2010 will put pressure on petrochemicals producers to increase their prices. Middle East producers should benefit from high oil prices because they enjoy fixed feedstock costs, 2009 Petrochemical Average Price Trend
Ikarus’ strategic investments National Industrialization Co. “Tasnee”: Ikarus owns 5.7% of Tasnee. National Industrialization Company “Tasnee” was founded in 1985 as the first joint stock company listed on the Saudi stock exchange, with a capital of SR 4,606 million (KD 340 million). Tasnee’s key activity is the ownership, construction and management
7
Ikarus Petroleum Industries Company – SAK (Closed)
of industrial and chemical projects. In 2009 Tasnee achieved a net profit of SAR 525.6 million (KD 40 million), compared to 2008, when net profit was SAR 601 million (KD 46 million). The decrease in profit was mainly due to the results of the first quarter of 2009, which saw a decline in selling prices, as well as extended shutdowns for maintenance and the expansion of the Polypropylene operation. This was offset by the start of commercial operation of the Ethylene and Polyethylene plants. In 2009 Tasnee completed the expansion of Polypropylene capacity from 450,000 to 720,000 tonnes/year.
2009 Sipchem/Tasnee/ Saudi Petchem Sector Stock Performance
Saudi International Petrochemical Company “Sipchem”: Ikarus owns 8.9% of Sipchem. Sipchem was established in 1999, and is a joint stock company listed on the Saudi Stock Exchange with a capital of SAR 3,333 million (KD 245). Sipchem manufactures petrochemicals and intermediates for use in construction and other industrial applications. Through its subsidiary the International Methanol Company (IMC), Sipchem produces one million tonnes/year of Methanol which is both marketed directly and used inhouse for the manufacture of Acetic Acid. The International Diol subsidiary produces 75,000 tonnes/year of Butanediol and other products, which are used in a range of specialized applications. In 2009 Sipchem reported a profit of SAR 141 million (KD 11 million), a decline of 74% over the previous year. This was due to lower prices and poor demand following the economic crisis of 2008/9. In 2009 Sipchem commissioned the Acetyls complex, comprising 460,000 tonnes/year Acetic Acid, 330,000 tonnes/year Vinyl Acetate Monomer and 345,000 tonnes/year Carbon Monoxide. Sipchem’s Ethylene derivatives project is scheduled to begin operation in 2013.
8
Ikarus Petroleum Industries Company – SAK (Closed)
International Acetyls Co. Ikarus owns 11% of IAC. The 460,000 tonne Acetic Acid plant was commissioned in 2009 at a total cost of SAR 3,343 million (KD 240 million). The plant consumes 25% of IMC’s Methanol production. Over 50% of Acetic Acid production is used in-house for the manufacture of Vinyl Acetate. The rest is exported for use in a wide range of industrial applications.
International Vinyl Acetate Co. Ikarus owns 11% of IVAC. The 330,000 ton Vinyl Acetate plant was commissioned in 2009 at a total cost of SAR 2,251 million (KD 162 million) and made its first export shipment in January 2010. Vinyl Acetate is used mainly in the manufacture of paints, adhesives, paper, packaging, and processing fabrics.
Ikarus Strategy The revised company strategy is to take a controlling stake in operating companies with strong cash flows. The focus remains on the MENA energy sector. The move away from green field projects is in response to the global financial crisis, and is designed to maximize cash returns in the short-medium term. Establishing Ikarus as an operating company will diversify the company away from dividends as the principal source of its revenues.
Investment Opportunities During the course of 2009 Ikarus evaluated more than 20 investment opportunities in the targeted sectors in order to implement the revised strategy to own and control operational assets. Of these, 3 fitted the strategic criteria well, and the company conducted a detailed investment analysis. At least 1 of these projects is being actively pursued with the intention to complete the acquisition early in 2010. As Ikarus already has substantial exposure to the Saudi petrochemicals sector, the next 1-2 investments are likely to be in other countries and industries in order to diversify the company’s holdings.
9
Ikarus Petroleum Industries Company – SAK (Closed)
Funding In 2009 the company succeeded in meeting its obligations to its lenders, including the repayment of US$50 million to settle in full a debt owed to a foreign bank. Ikarus also made significant strides towards renegotiating its US$115 million facility with a local bank. The company is evaluating various alternatives for funding future investments.
Local share portfolio In 2009 Ikarus liquidated approximately 25% of its local portfolio in order to meet its financial obligations. These divestments netted the company a profit of around KD 2 million.
Financial Results for the FY ended 31/12/2009: In the financial year ending December 31, 2009 the company reported a loss of KD 994,000, equivalent to -1.33 fils / share. This compares with a loss of KD 49.2 million (-65.6 fils/share) in FY 2008. Gross Revenue was KD 6.5 million, of which KD 4.6 million were cash dividends from investments. The loss was primarily due to a KD 3.17 million impairment in the market value of the local portfolio. This is in line with IAS 39, which stipulates that a decline in the fair value of investments available for sale is recognized in the profit and loss statement. Comprehensive
10
Ikarus Petroleum Industries Company – SAK (Closed)
Income (change in Shareholder Equity) was KD 50.7 million compared to KD -125.8 million in 2008.
Total Assets were KD 150 million KD (2008: KD 111 million), an increase of 34.6%. This was due to the recovery in the share prices of Sipchem and Tasnee. Liabilities fell to KD 37 million (2008: KD 49 million), an improvement of 24.5% as the company settled debts amounting to KD 14.5 million. Shareholder Equity was KD 113 million (2008: KD 62 million), an increase of 81%. This improvement was due mainly to the accumulated appreciation in the value of available for sale investments. Ikarus book value increased to 151 fils/share (2008: KD 81 fils/share).
11
due to the recovery in the share prices of Sipchem and Tasnee. Liabilities fell to KD 37 million (2008: KD 49 million), an improvement of 24.5% as the
Ikarus Petroleum Industries Company – SAK (Closed)
company settled debts amounting to KD 14.5 million. Shareholder Equity was KD 113 million (2008: KD 62 million), an increase of 81%. This improvement was due mainly to the accumulated appreciation in the value of available for sale investments. Ikarus book value increased to 151 fils/share (2008: KD 81 fils/share). 160 140 120
MM KD
100 80 60 40 20 0 ‐20 ‐40 Total Assets
Cum Change in Fair Value
Total Shareholder Equity
Total Liabilities
Book Value (Fils/ Share)
2008
112
‐14
62
49
83
2009
150
38
113
37
151
Operating & Finance costs fell by 20% to KD 2.3 million.
Operating & Finance costs fell by 20% to KD 2.3 million. The 2009 results illustrate the financial strength of the company and the sound economic
The 2009 results illustrate the financial strength of the company and the sound economic feasibility feasibility of its strategic investments. The book loss incurred is a consequence of market of its strategic investments. The book loss incurred is a consequence of market conditions resulting conditions resulting from the global financial crisis and does not reflect the underlying from the global financial crisis and does not reflect the underlying strength of Ikarus’ assets. strength of Ikarus’ assets.
7
12
Ikarus Petroleum Industries Company – SAK (Closed)
2010 Objectives Our objectives for 2010 are: Maintain the company’s strategic investments in the Saudi petrochemical sector. Acquire a controlling share in an operating company with free cash flows. Develop options to finance future investments. Maintain a strong balance sheet and fully meet all of the company’s financial obligations. Shareholders: The Board of Directors recommends to the General Assembly not to distribute dividends for the year 2009. In conclusion, I and my colleagues on the Board of Directors are pleased to extend our thanks and appreciation to the shareholders for their support and confidence and to the employees of Ikarus for their efforts and their distinctive dedication in the service of the goals of the company.
Chairman of the Board
13
Ikarus Petroleum Industries Company – SAK (Closed)
14
Financial statements and independent auditors’ report
Ikarus Petroleum Industries Company – SAK (Closed) Kuwait 31 December 2009
15
Ikarus Petroleum Industries Company – SAK (Closed)
16
Contents Independent auditors’ report
Page 16 - 17
Statement of income
18
Statement of comprehensive income
19
Statement of financial position
20
Statement of changes in equity
21
Statement of cash flows
22
Notes to the financial statements
25 - 44
17
Independent auditors’ report To the shareholders of Ikarus Petroleum Industries Company – SAK (Closed) Kuwait
Report on the Financial Statements We have audited the accompanying financial statements of Ikarus Petroleum Industries Company (A Kuwaiti Closed Shareholding Company) (“the company”), which comprise the statement of financial position as at 31 December 2009, and the related statements of income, comprehensive income, changes in equity and cash flows for the year then ended, and a summary of significant accounting policies and other explanatory notes.
Management’s Responsibility for the Financial Statements
Management is responsible for the preparation and fair presentation of these financial statements in accordance with International Financial Reporting Standards. This responsibility includes: designing, implementing and maintaining internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error; selecting and applying appropriate accounting policies; and making accounting estimates that are reasonable in the circumstances.
Auditors’ Responsibility
Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with International Standards on Auditing. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditors’ judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditors consider internal control relevant to the entity’s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating
the overall presentation of the financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
18
Opinion
In our opinion, the financial شmaterial respects, the financial position of Ikarus Petroleum Industries Company as at 31 December 2009, and its financial performance and its cash flows for the year then ended in accordance with International Financial Reporting Standards.
Report on Other Legal and Regulatory Requirements In our opinion, proper books of account have been kept by the company and the financial statements, together with the contents of the report of the company’s board of directors relating to these financial statements, are in accordance therewith. We further report that we obtained all the information and explanations that we required for the purpose of our audit and that the financial statements incorporate all information that is required by the Commercial Companies Law of 1960, and by the company’s articles of association, as amended, that an inventory was duly carried out and that, to the best of our knowledge and belief, no violations of the Commercial Companies Law, or of the company’s articles of association, as amended, have occurred during the financial year ended 31 December 2009 that might have had a material effect on the business of the company or on its financial position.
Abdullatif M. Al-Aiban (CPA) (Licence No. 94-A) of Grant Thornton – Al-Qatami, Al-Aiban & Partners
Abdullatif A.H. Al-Majid (Licence No. 70-A)
of Allied Accountants - MAZARS
19
Ikarus Petroleum Industries Company – SAK (Closed)
Statement of income Note
Year ended 31 Dec. 2009
Year ended 31 Dec. 2008
KD
KD
Income
Unrealised loss on investments at fair value through profit or loss
(624,232)
(1ŘŒ035)
258,473
(1,035)
Gain/(loss) on sale of available for sale investments
2,178,906
(570,000)
Dividend income from available for sale investments
4,602,363
3,341,459
-
1,594,467
(3,180,727)
(48,123,284)
109,064
264,569
(257,811)
(417,268)
(2,009,550)
(1,573,954)
1,136,486
(46,341,515)
433,161
423,718
1,403,952
1,826,798
293,902
618,093
2,321,015
2,868,609
(994,529)
(49,210,124)
(1.3) Fils
(65.6) Fils
Realised gain/(loss) on sale of investments at fair value through profit or loss
Dividend income from investments at fair value through profit or loss
Impairment in value of available for sale investments
7d
Interest and other income
Net loss from interest rate swap
18
Foreign exchange loss
Expenses and other charges
Staff costs 5a
Finance costs Other operating expenses
Loss for the year Basic and diluted loss per share
6
The notes set out on pages 25 to 44 form an integral part of these financial statements.
20
Ikarus Petroleum Industries Company – SAK (Closed)
Statement of comprehensive income
Loss for the year
Year ended 31 Dec. 2009
Year ended 31 Dec. 2008
KD
KD
(9 94,529)
(49,210,124)
48,781,889
(124,713,733)
3,180,727
48,123,284
9,720
-
Total other comprehensive income for the year
51,972,336
(76,590,449)
Total comprehensive income for the year
50,727,807
(125,800,573)
Other comprehensive income: Available for sale investments: - Net change in fair value arising during the year - Transferred to statement of income on impairment - Transferred to statement of income on sale
The notes set out on pages 25 to 44 form an integral part of these financial statements.
21
Ikarus Petroleum Industries Company – SAK (Closed)
Statement of financial position
Note
31 Dec. 2009
31 Dec. 2008
KD
KD
Assets Non-current assets Available for sale investments
7
133,726,692
99,007,446
Available for sale investments
7
8,067,994
-
Investments at fair value through profit or loss
8
6,460,380
7,359,024
Current assets
Due from parent company Accounts receivable and other assets Cash and cash equivalents
9
Total current assets Total assets
-
61,682
123,209
159,612
1,671,190
4,877,081
16,322,773
12,457,399
150,049,465
111,464,845
Equity and liabilities Equity Share capital
10
75,000,000
75,000,000
Legal reserve
11
3,288,139
3,288,139
Voluntary reserve
11
1,177,293
1,177,293
Cumulative changes in fair value
11
37,540,176
(14,432,160)
(3,549,206)
(2,554,677)
113,456,402
62,478,595
Accumulated losses Total equity Liabilities Current liabilities Due to parent company
15
3,018,521
-
Short term borrowings
12
32,982,000
48,203,750
Other liabilities
13
Total current liabilities Total equity and liabilities
Nader Hamad Al-Sultan Chairman
592,542
782,500
36,593,063
48,986,250
150,049,465
111,464,845
Suhail Yousef Abograis Director & CEO
The notes set out on pages 25 to 44 form an integral part of these financial statements.
22
Ikarus Petroleum Industries Company – SAK (Closed)
Total comprehensive income for the year
Other comprehensive income for the year
Loss for the year
75,000,000
Share capital
-
-
-
75,000,000
KD
-
-
-
-
3,288,139
Legal reserve
-
3,288,139
KD
-
-
-
-
-
1,177,293
Voluntary reserve
-
1,177,293
KD
-
37,540,176
51,972,336
51,972,336
(14,432,160)
(76,590,449)
(76,590,449)
Cumulative changes in fair value
-
62,158,289
KD
-
(3,549,206)
(994,529)
(994,529)
(2,554,677)
(49,210,124)
46,655,447
Retained earnings/ (accumulated losses)
-
(49,210,124)
KD
-
113,456,402
50,977,807
51,972,336
(994,529)
62,478,595
(125,800,573)
(76,590,449)
(49,210,124)
188,279,168
KD
Total
Statement of changes in equity
Loss for the year
-
-
1,177,293
Balance as at 31 December 2007
Other comprehensive income for the year
-
3,288,139
Balance as at 31 December 2008
Total comprehensive income for the year
75,000,000
Balance as at 31 December 2009
The notes set out on pages 25 to 44 form an integral part of these financial statements.
23
Ikarus Petroleum Industries Company – SAK (Closed)
Statement of cash flows Note
Year ended 31 Dec. 2008 KD
Year ended 31 Dec. 2009 KD
OPERATING ACTIVITIES (994,529)
(49,210,124)
(Gain)/loss on sale of available for sale investments
(2,178,906)
570,000
Dividend income from available for sale investments
(4,602,363)
(3,341,459)
Impairment in value of available for sale investments
3,180,727
48,123,284
257,811
417,268
Loss for the year Adjustments:
Net loss from interest rate swap Interest income
(65,588)
(254,307)
Finance costs
1,403,952
1,826,798
Foreign exchange loss on non-operating liabilities
2,171,250
1,665,775
(827,646)
(202,765)
898,644
(201,801)
36,403
(101,958)
Changes in operating assets and liabilities: Investments at fair value through profit or loss Accounts receivable and other assets Due from/to parent company Other liabilities Net cash from/(used in) operations
80,204
(16,793,775)
(79,757)
7,915
107,848
(17,292,384)
(105,956)
-
1,892
(17,292,384)
Dividend received
4,602,363
3,341,459
Proceed from sale of available for sale investments
8,217,505
1,210,000
(34,200)
(28,601,855)
KFAS paid Net cash from/(used in) operating activities
INVESTING ACTIVITIES
Purchase of available for sale investments Interest received Decrease/(increase) in blocked short term deposits Net cash from/(used in) investing activities
65,588
240,303
2,754,500
(2,754,500)
15,605,756
(26,564,593)
(1,403,952)
(1,826,798)
3,000,000
-
-
46,537,975
(17,393,000)
-
(262,087)
-
FINANCING ACTIVITIES Finance cost paid Short term advance obtained from the parent company Short term loans obtained Short term loans repaid Net payments made in relation to the Interest rate swap
(16,059,039)
44,711,177
Net (decrease)/increase in cash and cash equivalents
(451,391)
854,200
Cash and cash equivalents at beginning of the year
2,122,581
1,268,381
1,671,190
2,122,581
Net cash (used in)/from financing activities
Cash and cash equivalents at end of the year
9
The notes set out on pages 25 to 44 form an integral part of these financial statements.
24
Ikarus Petroleum Industries Company – SAK (Closed)
Notes to the financial statements 31 December 2009
1. Incorporation and activities Ikarus Petroleum Industries Company – SAK (Closed), (“the company”) was incorporated on 1 February 1997 and listed on the Kuwait stock exchange on 14 April 2008. The company is a subsidiary of National Industries Group Holding – SAK “parent company”. Its principal objective is to engage in chemical and petrochemical related activities and utilise excess funds in investing in securities portfolios managed by other specialised companies. The address of the company is Al-Qiblah Area – Part 6, Building 3 – Sheikh Salem Al-Ali Al-Subah Complex – Second Floor, Office No. 18. The board of directors approved these financial statements for issue on 7 March 2010 The general assembly of the company’s shareholders has the power to amend these financial statements after issuance.
2. New and revised International Financial Reporting Standards (“IFRS”) and Interpretations (“IFRIC”) a). Standards and Interpretations affecting amounts reported and/or disclosures made in the current period (and/or prior periods) The company has adopted the following new standards, revisions and amendments to IFRS issued by International Accounting Standards Board, which are relevant to and effective for the company’s financial statements for the annual period beginning 1 January 2009. Certain other new standards and interpretations have been issued but are not relevant to the company’s operations and therefore not expected to have a material impact on the company’s financial statements. •• Amendments to IFRS 7 Financial instruments: Disclosures •• IFRS 8 Operating Segments •• IAS 1 Presentation of Financial Statements (Revised) •• Annual Improvements 2008 Significant effects on current, prior or future periods arising from the first-time application of these new requirements in respect of presentation, recognition and measurement are described below. •• Amendment to IFRS 7: Financial Instruments: Disclosures The amendments require additional disclosures for financial instruments that are measured at fair value in the statement of financial position. These fair value measurements are categorised into a three-level fair value hierarchy (see note 16), which reflects the extent to which they are based on observable market data. A separate quantitative maturity analysis (see note 17.4) must be presented for derivative financial liabilities that shows the remaining contractual maturities, where these are essential for an
25
Ikarus Petroleum Industries Company – SAK (Closed)
2. New and revised International Financial Reporting Standards (“IFRS”) and Interpretations (“IFRIC”) continued understanding of the timing of cash flows. The company has taken advantage of the transitional provisions in the amendments and has not provided comparative information in respect of the new requirements. •• IFRS 8 Operating Segments The new standard which replaced IAS 14 ‘Segment reporting’ requires a management approach for segment reporting under which segment information is presented on the same basis as that used for internal reporting purposes. However, the application of the revised standard has had no impact on designation of the company’s reporting segments as it has previously been consistent with the internal reporting provided to the chief operating decision maker. •• IAS 1 Presentation of Financial Statements (Revised) The adoption of IAS 1 (Revised 2007) makes certain changes to the format and titles of the primary financial statements and to the presentation of some items within these statements. The revised standard also separates owners and now-owner changes in equity. The statement of changes in equity includes only details of transaction with owners, with non-owner changes in equity presented in a reconciliation of each component of equity. In addition, the standard introduces the statement of comprehensive income: it presents all items of recognised income and expenses, either in one single statement or in two linked statements. The company has elected to present two statements (i.e a statement of income and a statement of comprehensive income). IAS 1 Presentation of Financial Statements (Revised 2007) requires presentation of a comparative statement of financial position as at the beginning of the first comparative period, in some circumstances. Management considers that this is not necessary this year because the 2007 statement of financial position is the same as that previously published. •• Annual Improvements 2008 The improvements include 35 amendments across 20 different standards that largely clarify the requied accounting treatments where previous practice had varied. The Improvements have led to a number of changes in the detail of the company’s accounting policies – some of which are changes in terminology only, and some of which are substantive but have had no material effect on amounts reported. The majority of these amendments are effective from 1 January 2009. b). Standards and Interpretations in issue not yet adopted At the date of authorisation of these financial statements, certain new standards, amendments and interpretations to existing standards have been issued but are not yet effective, and have not been adopted. Management anticipates that all of the pronouncements will be adopted in the company’s accounting policies for the first period beginning after the effective date of the pronouncement. Information on new standards, amendments and interpretations that are expected to be relevant to the company’s financial statements is provided below. Certain other new standards and interpretations have been issued but are not relevant to the company’s operations and therefore not expected to have a material impact on the company’s financial statements. •• IFRS 9 Financial Instruments •• IFRIC 17 Distribution of Non Cash Assets to Owners •• Annual Improvements 2009 •• IFRS 9 Financial Instruments (effective from 1 January 2013) The IASB aims to replace IAS 39 Financial Instruments: Recognition and Measurement in its entirety
26
Ikarus Petroleum Industries Company – SAK (Closed)
by the end of 2010, with the replacement standard to be effective for annual periods beginning 1 January 2013. IFRS 9 is the first part of Phase 1 of this project. The main phases are: •• •• ••
Phase 1: Classification and Measurement Phase 2: Impairment methodology Phase 3: Hedge accounting
In addition, a separate project is dealing with derecognition. Although early application of this standard is permitted, the Technical Committee of the Ministry of Commerce and Industry of Kuwait decided during December 2009, to postpone this allowed early application until further notice. •• IFRIC 17 Distribution of on-Cash Assets to Owners(effective for annual periods beginning on or after 1 July 2009) The Interpretation provides guidance on the appropriate accounting treatment when an entity distributes assets other than cash as dividends to its shareholders. •• Annual Improvements 2009 The IASB has issued Improvements for International Financial Reporting Standards 2009 which will lead to a number of changes in the detail of the company’s accounting policies in the future – some of which are changes in terminology only, and some of which are substantive but will have no material effect on amounts reported. Most of these amendments become effective in annual periods beginning on or after 1 July 2009 or 1 January 2010.
3. Significant accounting policies The accounting policies used in the preparation of the financial statements are consistent with those used in the preparation of the financial statements for the year ended 31 December 2008 except as noted in note 2 above. The significant accounting policies adopted in the preparation of the financial statements are set out below:
Basis of preparation The financial statements of the company have been prepared in accordance with International Financial Reporting Standards. The financial statements are prepared under the historical cost convention modified to include the measurement at fair value of investments at fair value through profit or loss, available for sale investments and derivative financial instruments.
Income recognition Income is recognised to the extent that it is probable that the economic benefits will flow to the company and the income can be reliably measured. The following specific recognition criteria must also be met before income is recognised.
Dividend income Dividend income is recognised when the company’s right to receive payment is established.
Interest income Interest income is recognised using the effective interest method.
Finance costs Finance costs are calculated and recognised on a time proportionate basis taking into account the principal finance balance outstanding and the cost rate applicable.
27
Ikarus Petroleum Industries Company – SAK (Closed)
Financial instruments Classification The company classifies financial assets upon initial recognition into the following categories: i. Investments at fair value through profit or loss ii. Loans and receivables iii. Available for sale investments Except for derivatives all other financial liabilities are classified as “non trading financial liabilities”. The company’s non-trading financial liabilities are classified under “due to parent company”, “short term borrowings” and “other liabilities” in the statement of financial position. Investments at fair value through profit or loss are either “held for trading” or “designated” as such on initial recognition. The company classifies investments as trading if they are acquired principally for the purpose of selling or are a part of a portfolio of identified financial instruments that are managed together and for which there is evidence of a recent actual pattern of short term profit taking. This category includes derivative financial instruments entered into by the company that are not designated as hedging instruments in hedge relationships as defined by IAS 39. Investments are classified as designated at fair value through profit or loss at inception if they have readily available reliable fair values and the changes in fair values are reported as part of the statement of income in the management accounts, according to a documented investment strategy. Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. The company’s loans and receivables are classified under “due from parent company”, “accounts receivable and other assets” and “cash and cash equivalents” in the statement of financial position. Financial assets which are not classified as above are classified as available for sale. The classification depends on the purpose for which the financial assets were acquired. Management determines the classification of these financial instruments at initial recognition.
Measurement Investments at fair value through profit or loss Investments at fair value through profit or loss are initially recognised at cost, being the fair value of the consideration given, excluding transaction costs. Subsequent to initial recognition, investments at fair value through profit or loss are re-measured at fair value and changes in fair value are recognised in the statement of income.
Loans and receivables Loans and receivables are stated at amortised cost using the effective interest method.
Available for sale investments Available for sale investments are initially recognised at cost, being the fair value of the consideration given, plus transaction costs that are directly attributable to the acquisition. Subsequent to initial recognition, available for sale investments are re-measured at fair value unless fair value cannot be reliably measured, in which case they are measured at cost less impairment, if any. Changes in fair value of available for sale investments are recognised as other comprehensive income in the “cumulative changes in fair value” reserve account until the investment is either derecognised or
28
Ikarus Petroleum Industries Company – SAK (Closed)
determined to be impaired. On derecognition or impairment, the cumulative gain or loss previously recognised in other comprehensive income is recognised in the statement of income.
Financial liabilities Non-trading financial liabilities are stated at amortised cost using the effective interest method.
Fair values For investments traded in organised financial markets, fair value is determined by reference to stock exchange quoted market bid prices at the close of business on the reporting date. For investments where there is no quoted market price, a reasonable estimate of fair value is determined by using valuation techniques. The company uses a variety of methods and makes assumptions that are based on market conditions existing at each reporting date. Valuation techniques used include the use of comparable recent arm’s length transactions, and other valuation techniques commonly used by market participants. The determination of fair value is done for each investment individually.
Derivative financial instruments The company uses derivative financial instruments, such as interest rate swaps to mitigate its risks associated with interest rate fluctuations. Such derivative financial instruments are initially recognised at cost, being the fair value on the date on which a derivative contract is entered into, and are subsequently re-measured at fair value. The fair value of a derivative is the equivalent of the unrealised gain or loss from marking to market the derivative using valuation quotes provided by financial institutions, based on prevailing market information. Derivatives are carried as trading financial assets under “other assets” when the fair value is positive and as trading financial liabilities under “other liabilities” when the fair value is negative. The company does not adopt hedge accounting, and any realised and unrealised (from changes in fair value) gain or losses are recognised in the statement of income.
Trade and settlement date accounting All “regular way” purchases and sales of financial assets are recognised on the trade date, i.e. the date that the company commits to purchase or sell the asset. Regular way purchases or sales are purchases or sales of financial assets that require delivery of assets within the time frame generally established by regulation or convention in the market place concerned.
Recognition and derecognition of financial assets and liabilities A financial asset or a financial liability is recognised when the company becomes a party to the contractual provisions of the instrument. A financial asset (or, where applicable a part of a financial asset or part of a group of similar financial assets) is derecognised when: -- the rights to receive cash flows from the asset have expired; or -- the company has transferred its rights to receive cash flows from the asset or has assumed an obligation to pay the received cash flows in full without material delay to a third party under a ‘pass-through’ arrangement; and either (a) the company has transferred substantially all the risks and rewards of the asset, or (b) the company has neither transferred nor retained substantially all the risks and rewards of the asset, but has transferred control of the asset. A financial liability is derecognised when the obligation under the liability is discharged or cancelled or expires. When an existing financial liability is replaced by another from the same lender on substantially different terms, or the terms of an existing liability are substantially modified, such an exchange or
29
Ikarus Petroleum Industries Company – SAK (Closed)
modification is treated as a derecognition of the original liability and the recognition of a new liability, and the difference in the respective carrying amounts is recognised in the statement of income.
Impairment of financial assets An assessment is made at each reporting date to determine whether there is objective evidence that a specific financial asset may be impaired. If such evidence exists, any impairment loss is recognised in the statement of income. Impairment is determined as follows: A. For financial assets carried at fair value, impairment is the difference between cost and fair value; and B. For financial assets carried at cost, impairment is the difference between carrying value and the present value of future cash flows discounted at the current market rate of return for a similar financial asset. C. For financial assets carried at amortised cost, impairment is the difference between carrying amount and the present value of future cash flows discounted at the original effective interest rate. Reversal of impairment losses recognised in prior years is recorded when there is an indication that the impairment losses recognised for the financial asset no longer exist or have decreased and the decrease can be related objectively to an event occurring after the impairment was recognised. Except for reversal of impairment losses related to equity instruments classified as available for sale, all other impairment reversals are recognised in the statement of income to the extent the carrying value of the asset does not exceed its amortised cost at the reversal date. Impairment reversals in respect of equity instruments classified as available for sale are recognised in other comprehensive income in the “cumulative changes in fair value” reserve.
Provisions Provisions are recognised when the company has a present obligation (legal or constructive) resulting from a past event and the costs to settle the obligation are both probable and reliably measurable.
Provision for end of service indemnity Provision for end of service indemnity is calculated on the employees’ accumulated periods of service at the reporting date in accordance with the Kuwait labour law for the private sector.
Foreign currencies Functional and presentation currency The financial statements are presented in Kuwaiti Dinars, which is the company’s functional and presentation currency. Transactions and balances Transactions in foreign currencies are initially recorded in the functional currency rate of exchange ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are retranslated at the functional currency rate of exchange ruling at the reporting date. All differences are taken to “foreign exchange gain/loss” in the statement of income, if any. Non-monetary items that are measured in terms of historical cost in a foreign currency are translated using the exchange rates as at the dates of the initial transactions. Non-monetary items measured at fair value in a foreign currency are translated using the exchange rates at the date when the fair value
30
Ikarus Petroleum Industries Company – SAK (Closed)
was determined. Translation difference on non-monetary asset classified as, “fair value through profit or loss ” are reported as part of the fair value gain or loss in the statement of income and “available for sale” are reported as part of the “cumulative change in fair value”, in other comprehensive income.
Cash and cash equivalents Cash and cash equivalents consist of bank balances and short term deposits maturing within three months from the date of inception.
Contingencies Contingent liabilities are not recognised in the statement of financial position, but are disclosed unless the possibility of an outflow of resources embodying economic benefits is remote. Contingent assets are not recognised in the financial statements, but are disclosed when an inflow of economic benefits is probable.
4. Critical accounting judgements and key sources of estimation uncertainty In the application of the company’s accounting polices which are disclosed in note 3, the management is required to make judgements, estimates and assumption about the carrying amounts of assets and liabilities that are not readily apparent from other sources. The estimates and associated assumptions are based on historical experience and other factors that are considered to be relevant. Actual results may differ from these estimates. The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised if the revision affects only that period, or in the period of the revision and future periods if the revision affects both current and future periods.
Judgments In the process of applying the company’s accounting polices, management has made the following judgements, which have the most significant effect in the amounts recognised in the financial statements: Classification of investments Management decides on acquisition of an investment whether it should be classified as at fair value through profit or loss, loans and receivables or available for sale. In making that judgement the company considers the primary purpose for which it is acquired and how it intends to manage and report its performance. Such judgement determines whether it is subsequently measured at cost, amortised cost or at fair value and if the changes in fair value of instruments are reported in the statement of income or directly in equity.
Impairment of available for sale investments The company treats available for sale equity investments as impaired when there has been a significant or prolonged decline in the fair value below its cost or where other objective evidence of impairment exists. The determination of what is “significant” or “prolonged” requires considerable judgement. In addition, the company evaluates other factors, including normal volatility in share price for quoted equities and the future cash flows and the discount factors for unquoted equities. During the year ended 31 December 2009 impairment loss of KD3,180,727 (2008: KD48,123,284) was recognised for available for sale investments.
31
Ikarus Petroleum Industries Company – SAK (Closed)
5. Net gain or (loss) on financial assets and financial liabilities
Net gain or (loss) on financial assets and financial liabilities, analysed by category, is as follows: 2009
2008
KD
KD
227,288
346,128
Loans and receivables - Cash and cash equivalents (refer 5b) Investments at fair value through profit or loss - Investments held for trading - Investments designated on initial recognition
-
5,609,181
(365,759)
(4,872,218)
51,972,336
(76,590,449)
6,790,990
(2,771,459)
(3,180,727)
(48,123,284)
(9,720)
-
55,434,408
(126,402,101)
(3,575,202)
(3,492,573)
(257,811)
(417,268)
51,601,395
(130,311,942)
Available for sale investments - Recognised directly in other comprehensive income - Recognised directly in statement of income - Recycled from other comprehensive income to statement of income On impairment On sale Financial liabilities at amortised cost - Short term borrowings (refer 5a) Financial liabilities at fair value through profit or loss - Net gain from interest rate swaps
Net loss recognised in the statement of income Net gain/(loss) recognised directly in other comprehensive income
5a.
5b.
(370,941)
(53,721,493)
51,972,336
(76,590,449)
51,601,395
(130,311,942)
2009
2008
KD
KD
Net loss on financial liabilities at amortised cost is arrived at as follows: −
Finance costs – on short term borrowings
− −
Finance costs – on short term advances from parent company (refer note 15) Foreign exchange loss on retranslation of short term borrowings, included under “Foreign exchange loss” in the statement of income
1,323,226
1,662,158
80,726
164,640
2,171,250
1,665,775
3,575,202
3,492,573
Net gain on cash and cash equivalents is arrived at after adjusting for foreign exchange gains of KD161,700 (2008: KD91,821).
6. Basic and diluted loss per share
Loss per share is calculated by dividing the loss for the year by the weighted average number of shares outstanding during the year as follows: 2009
Loss for the year (KD) Weighted average number of shares outstanding during the year Basic and diluted loss per share
32
2008
(994,529)
(49,210,124)
750,000,000
750,000,000
(1.3) Fils
(65.6) Fils
Ikarus Petroleum Industries Company – SAK (Closed)
7. Available for sale investments 2009 KD Non-current Quoted shares - local - foreign Unquoted shares - local - foreign
Current Quoted shares - local Total
2008 KD
110,487,024 110,487,024
14,400,765 59,997,461 74,398,226
30,100 23,209,568 23,239,668 133,726,692
30,100 24,579,120 24,609,220 99,007,446
8,067,994 141,794,686
99,007,446
a. The local quoted shares at 31 December 2009 and 31 December 2008 represent the investments which were transferred from investments at fair value through statement of income as of 1 July 2008 (refer note 8). These investments are included in current assets where management intends to dispose of such investments within 12 months of the end of the reporting date. The local quoted shares are held through portfolio managers and represent investments in various sectors. b. Foreign quoted shares represent investment in quoted Saudi companies operating in the fields of chemicals and petrochemicals. c. Investments in unquoted shares are stated at cost due to the non availability of quoted market prices or other reliable measures of its fair value. Management is not aware of any circumstances that would indicate impairment in the value of these investments. The foreign unquoted shares represent investments in Saudi unlisted companies operating in the field of petrochemical and related products. d. During the year , the company recognised an impairment loss of KD3,180,727 (2008: KD48,123,284) for certain local and foreign quoted investments, as the market value of these shares declined significantly below their costs. e. Certain foreign quoted shares are held in the name of the parent company with letters of assignment in the company’s favour.
8. Investments at fair value through profit or loss 2009 KD Designated on initial recognition : Quoted shares – local Local funds investing in quoted shares Local money market funds
1,812,600 2,215,230 2,432,550 6,460,380
2008 KD 3,804,375 3,554,649 7,359,024
a. Effect of reclassification During the previous year, as a result of adoption of the amendments to IAS 39 and IFRS 7 with effect from 1 July 2008 the company reclassified certain investments with a fair value of KD30,065,885 as at 1 July 2008 from “fair value through profit or loss” category to “available for sale” category. The fair value of the remaining reclassified investments as of 31 December 2009 amounted to KD8,067,994 (2008: KD14,400,765).
33
Ikarus Petroleum Industries Company – SAK (Closed)
b. During October 2008, a local money market funds, in which the company has investments totaling to KD2,244,433 as at 31 December 2009 (31 December 2008: KD3,225,305), suspended redemption requests. Management has been informed by the manager of the fund that redemptions will be made depending on availability of liquid funds. The company’s management considers this to be a situation arising from the current crisis in the global financial market and its impact on the local market. The investment has been fair valued based on the unaudited net asset value reported by the fund manager as of 31 December 2009. Therefore the company’s management expects to realise these investments at not less than its carrying value.
9. Cash and cash equivalents
Cash and bank balances Cash balances held with portfolio managers Short term deposits Cash and cash equivalents Less: blocked short term deposits Cash and cash equivalents for the purpose statement of cash flows
Effective yield rate (per annum) 3%
2009
2008
KD
KD
336,398 332,600 1,002,192 1,671,190 -
542,911 4,334,170 4,877,081 (2,754,500)
1,671,190
2,122,581
10. Share capital As of 31 December 2009, the authorised, issued and fully paid up share capital of the company comprised 750,000,000 shares of 100 fils each. (2008: 750,000,000 shares of 100 files each).
11. Reserves 11.1 Statutory and voluntary reserves14 As required by the Commercial Companies Law and the company’s articles of association, 10% of the profit before KFAS, NLST, Zakat and Directors’ remuneration is transferred to the statutory reserve until the balance reaches 50% of the company’s issued and paid-up capital. Any transfer to the statutory reserve thereafter is subject to approval of the general assembly. No transfer is required in a year when losses are made or where cumulative losses exist. Distribution of the statutory reserve is limited to the amount required to enable the payment of a dividend of 5% of paid-up share capital to be made in years when retained earnings are not sufficient for the distribution of a dividend of that amount. In accordance with company’s articles of association, a certain percentage of the profit before KFAS, NLST, Zakat and directors’ remuneration, is to be transferred to the voluntary reserve at the discretion of the board of directors which is to be approved at the general assembly. No transfer is required in a year in which the company has incurred a loss or where cumulative losses exist.
11.2 Cumulative changes in fair value 2009 KD Balance at 1 January Net change in fair value arising during the year Transferred to statement of income on impairment Transferred to statement of income on sale of investments Balance at 31 December
34
2008 KD
(14,432,160) 48,781,889 3,180,727 9,720
62,158,289 (124,713,733) 48,123,284 -
37,540,176
(14,432,160)
Ikarus Petroleum Industries Company – SAK (Closed)
The reserve represents accumulated gains and losses arising from changes in fair value of available-forsale financial assets that have been recognised in other comprehensive income, net of amounts reclassified to profit or loss when those assets have been disposed of or are determined to be impaired.
12. Short term borrowings Effective interest rates % Local bank – US Dollar Foreign bank – US Dollar
3.3% -
2009 KD 32,982,000 32,982,000
2008 KD 34,431,250 13,772,500 48,203,750
a. The loans from the local bank matured in March 2009. The company has principally agreed with the bank to restructure the loan for a three year period secured by the company’s investments. At 31 December 2009, the company is working with the local bank to finalize the nature and details of the required security. The loan is presently secured by a corporate guarantee from the parent company. b. The loan from the foreign bank has been fully settled during the year.
13. Other liabilities 2009 KD Fair value of interest rate swap (refer note 18) KFAS and Zakat payable Accrued expenses Others
412,992 107,171 15,662 56,717 592,542
2008 KD 417,268 213,127 87,200 64,905 782,500
14. Segmental analysis The company has adopted IFRS 8 Operating Segments with effect from 1 January 2009. Under IFRS 8, reported segment profits are based on internal management reporting information that is regularly reviewed by the chief operating decision maker in order to allocate resources to the segment and to assess its performance, and is reconciled to company profit or loss. In contrast, the predecessor Standard (IAS 14 Segment Reporting) required an entity to identify two sets of segments (business and geographical). However, following the adoption of IFRS 8, the identification of the company’s reportable segments has not changed. The measurement policies the company uses for segment reporting under IFRS 8 are the same as those used in its financial statements. The company activities are concentrated in two main segments: Domestic (Kuwait) and International (Kingdom of Saudi Arabia). The following is the segments information, which conforms with the internal reporting presented to management:
35
Ikarus Petroleum Industries Company – SAK (Closed)
Domestic
International
Total
KD
KD
KD
2009 Segment income
(1,384,897)
4,530,933
3,146,036
Segment results
(2,111,960)
4,530,933
2,418,973
Less: Finance costs and foreign exchange loss on loans
(3,413,502)
Loss for the year
(994,529)
Impairment in value of available for sale investments
3,172,730
7,997
3,180,727
Net change in fair value of available for sale investments recognised directly in comprehensive income
1,233,646
50,738,690
51,972,336
16,322,773
133,726,692
150,049,465
(179,550)
-
(179,550)
16,143,223
133,726,692
149,869,915
Segment assets Segment liabilities Segment net assets Short term borrowings and other unallocated liabilities
(36,413,513)
Net assets
113,456,402
2008 Segment income
(13,871,379)
(30,896,182)
(44,767,561)
Segment results
(14,913,190)
(30,896,182)
(45,809,372)
Less: (3,400,752)
Finance costs and foreign exchange gains on loans
(49,210,124)
Loss for the year Impairment in value of available for sale investments Net change in fair value of available for sale investments recognised directly in equity
Segment assets Segment liabilities Segment net assets Short term borrowings and other unallocated liabilities Net assets
36
13,885,643
34,237,641
48,123,284
-
(76,590,449)
(76,590,449)
26,888,264
84,576,581
111,464,845
(569,373)
-
(569,373)
26,318,891
84,576,581
110,895,472 (48,416,877) 62,478,595
Ikarus Petroleum Industries Company – SAK (Closed)
15. Related party transactions Related parties represent, the parent company, the company’s directors and key management personnel of the company, and other related parties such as subsidiaries of the parent company (fellow subsidiaries), major shareholders and companies in which directors and key management personnel of the company are principal owners or over which they are able to exercise significant influence or joint control. Pricing policies and terms of these transactions are approved by the company’s management. Details of significant related party transactions and balances are as follows: 2009 KD Statement of financial position Due from parent company Due to parent company (*) Statement of income Finance cost charged by – parent company (see below) Compensation of key management personnel of the company: Short term employee benefits Employee end of service benefits
2008 KD
3,018,521
61,682 -
80,726
164,640
93,600 17,127 110,727
93,600 15,294 108,894
* Due to parent company includes a short term advance of KD3,000,000 provided to the company at an interest rate of 5% per annum.
16. Summary of financial assets and liabilities by category 16.1
Categories of financial assets and liabilities
The carrying amounts of the company’s financial assets and liabilities as stated in the statement of financial position may also be categorized as follows: Financial assets: Loans and receivables: • Cash and cash equivalents • Accounts receivable and other assets • Due from parent company Investments at fair value through profit or loss (refer Note 8) Available for sale investments (refer Note 7) Financial liabilities: At amortised cost: • Short term borrowings • Due to parent company • Other liabilities At fair value: Fair value of interest rate swap
2009 KD
2008 KD
1,671,190 123,209 -
4,877,081 159,612 61,682
6,460,380 141,794,686 150,049,465
7,359,024 99,007,446 111,464,845
32,982,000 3,018,521 179,550
48,203,750 365,232
412,992 36,593,063
417,268 48,986,250
Fair value represents amounts at which an asset could be exchanged or a liability settled on an arm’s length basis. In the opinion of the company’s management, except for certain available for sale investments which are carried at cost for reasons specified in Note 7 to the financial statements, the carrying amounts of financial assets and liabilities as at 31 December 2009 and 2008 approximate their fair values as defined by International Financial Reporting Standards.
37
Ikarus Petroleum Industries Company – SAK (Closed)
16.2 Fair value hierarchy for financial instruments measured at fair value The company adopted the amendments to IFRS 7 Improving Disclosures about Financial Instruments effective from 1 January 2009. These amendments require the company to present certain information about financial instruments measured at fair value in the statement of financial position. In the first year of application comparative information need not be presented for the disclosures required by the amendment. Accordingly, the disclosure for the fair value hierarchy is only presented for the 31 December 2009 year end. The following table presents the financial assets which are measured at fair value in the statement of financial position in accordance with the fair value hierarchy. This hierarchy groups financial assets and liabilities into three levels based on the significance of inputs used in measuring the fair value of the financial assets and liabilities. The fair value hierarchy has the following levels: - Level 1: quoted prices (unadjusted) in active markets for identical assets or liabilities; - Level 2: inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices); and - Level 3: inputs for the asset or liability that are not based on observable market data (unobservable inputs). The level within which the financial asset or liability is classified is determined based on the lowest level of significant input to the fair value measurement. The financial assets and liabilities measured at fair value in the statement of financial position are grouped into the fair value hierarchy as follows
Assets at fair value Available for sale investments -- Local quoted shares -- Foreign quoted shares Investments at fair value through profit or loss -- Local quoted shares -- Local funds investing in quoted shares -- Local money market funds
Level 1
Level 2
Level 3
Total
Note
KD
KD
KD
KD
a a
8,067,994 110,487,024
-
-
8,067,994 110,487,024
a
1,812,600
-
-
1,812,600
b
-
2,215,230
-
2,215,230
c
-
2,432,550
-
2,432,550
120,367,618
4,647,780
-
125,015,398
Total assets Liabilities at fair value Interest rate swap Total Liabilities
d
-Â
412,992 412,992
-Â
412,992 412,992
Measurement at fair value The methods and valuation techniques used for the purpose of measuring fair value are as follows:.
a) Local and foreign quoted securities All quoted equity securities are publicly traded in stock exchanges. Fair values have been determined by reference to their quoted bid prices at the reporting date.
38
Ikarus Petroleum Industries Company – SAK (Closed)
b) Local funds investing in quoted shares The underlying investments of these funds mainly comprise of local quoted shares and the fair value of the investment has been determined based on net asset values reported by the investment manager of the fund as of the reporting date.
c) Local money market funds The underlying investments of these funds mainly comprise of local and foreign variable and fixed income monitory instruments including treasury bills, bonds and sukuk. The fair values of these funds have been determined based on net asset values reported by the investment managers as of the reporting date.
d) Interest rate swaps The interest rate swap has been entered into by the company to mitigate its risks associated with interest rate fluctuations on its USD borrowings. The fair value of the derivative is the equivalent of the unrealised gain or loss from marking to market the derivative using valuation quotes provided by financial institutions, based on prevailing market information.
17. Risk management objectives and policies The company’s principal financial liabilities comprise short term borrowings, due to parent company and other liabilities. The main purpose of these financial liabilities is to raise finance for the company’s operations. The company has various financial assets such as accounts receivable and other assets, cash and cash equivalents and investment securities which arise directly from operations. The company’s activities expose it to variety of financial risks: market risk (including foreign currency risk, interest rate risk and price risk), credit risk and liquidity risk. The company’s management is ultimately responsible for management of risks and implements several measures from time to time to manage the risks discussed below. The company also enters into derivative transactions, primarily interest rate swaps. The purpose is to manage the interest rate risks arising from the company’s sources of finance. The company’s policy is not to trade in derivative financial instruments. The financial risks to which the company is exposed to are described below.
39
Ikarus Petroleum Industries Company – SAK (Closed)
17.1 Market risk a) Foreign currency risk The company mainly invests in Kuwait and Saudi Arabia. However the company is exposed to changes in exchange rates mainly on its US Dollar, borrowings and short term deposits. The company’s financial position can be affected by the movement in the US Dollar. To mitigate the company’s exposure to foreign currency risk, non-Kuwaiti Dinar cash flows are monitored. Foreign currency risk is managed by the company’s management by regular assessment of the company’s open positions. The company’s net exposure to US Dollar denominated monetary assets less monetary liabilities at the reporting date, translated into Kuwaiti Dinars at the closing rates are as follow: 2009 KD US Dollar
(33,393,133)
2008 KD (45,351,622)
If the Kuwaiti Dinar had strengthened against the US Dollar by 5%, then this would have the following impact on the loss for the year. There is no impact on the company’s equity. Loss for the year 2008 2009
US Dollar
KD
KD
1,669,657
2,267,581
If the Kuwaiti Dinar had weakened against the US Dollar by 5%, then there would be an equal and opposite impact on the loss for the year, and the balances shown above would be negative. Exposures to foreign exchange rates vary during the year depending on the volume and nature of the transactions. Nonetheless, the analysis above is considered to be representative of the company’s exposure to the foreign currency risk.
b) Interest rate risk Interest rate risk arises from the possibility that changes in interest rates will affect future profitability. The company is exposed to interest rate risk on its KD short term deposits (refer note 9) and US dollar short term borrowings (refer note 12), which are primarily at floating interest rates based on either Central Bank of Kuwait discount rate or LIBOR. Positions are monitored on a regular basis by the company’s management. The following table illustrates the sensitivity of the loss for the year to a reasonably possible change of interest rate of +75 and -25 (2008: +75 and -25) basis points for the year 2009. The calculation is based on the company’s financial instruments held at each reporting date. All other variables are held constant. There is no impact on company’s equity.
40
Ikarus Petroleum Industries Company – SAK (Closed)
Increase in interest rates 2009 KD Increase/(decrease) in loss for the year
c)
239,849
Decrease in interest rates
2008 KD
2009 KD
2008 KD
329,021
(79,950)
(109,674)
Equity price risk
This is a risk that the value of financial instruments will fluctuate as a result of changes in market prices, whether these changes are caused by factors specific to individual instrument or its issuer or factors affecting all instruments, traded in the market. The company is exposed to equity price risk with respect to its listed equity investments, (including investment in funds where the underlying assets are primarily quoted shares) which are primarily located in Kuwait and the Kingdom of Saudi Arabia. Equity investments are classified either as investments carried at fair value through profit or loss (including trading securities) or available for sale investments. To manage its price risk arising from investments in equity securities, the company monitors its portfolio and diversifies, where possible. The equity price risk sensitivity is determined on the exposure to equity price risks at the reporting date. If equity prices had been 10% higher/lower, the effect on the loss for the year and equity for the years ended 31 December would have been as follows: A positive number below indicates a decrease in loss and the equity where the equity prices increase by 10%. All other variables are held constant. Loss for the year 2008 2009 KD KD Investments at fair value through profit or loss Available for sale investments: - Impaired investments (refer) - Not impaired investments
Equity 2009 KD
2008 KD
402,783
380,437
-
-
402,783
4,049,726 4,430,163
5,386,126 5,386,126
3,390,097 3,390,097
Had equity prices been 10% higher, the impairment loss which was recognised in the statement of income would be reduced and consequently the loss for the year 2009 would be reduced. A negative number below indicates an increase in loss and the equity where the equity prices decreased by 10%. All other variables are held constant. Loss for the year 2008 2009 KD KD Investments at fair value through profit or loss Available for sale investments: - Impaired investments - Not impaired investments: - Change in fair value - Recycled from equity to statement of income
Equity 2009 KD
2008 KD
402,783
(380,437)
-
-
(507,880)
(4,049,726)
-
-
-
-
(5,386,126)
(3,390,097)
-
(17,822,257)
-
17,822,257
(105,097)
(22,252,420)
(5,386,126)
14,432,160
41
Ikarus Petroleum Industries Company – SAK (Closed)
17.2 Credit risk Credit risk is the risk that one party to a financial instrument will fail to discharge an obligation and cause the other party to incur a financial loss. The company’s credit policy and exposure to credit risk is monitored on an ongoing basis. The company’s exposure to credit risk is limited to the carrying amounts of financial assets recognised at the reporting date, as summarized below: 2009 KD
2008 KD
Cash and cash equivalents Due from parent com pany Accounts receivable and other assets
1,671,190 123,209
4,877,081 61,682 159,612
Investment at fair value through profit or loss (local money market funds)
2,432,550
3,554,649
4,226,949
8,653,024
None of the above financial assets are past due nor impaired. The company monitors defaults of customers and other counter parties, identified either individually or by group, and incorporate this information into its credit risk controls. The company’s policy is to deal only with creditworthy counterparties. The company’s management considers that all the above financial assets that are neither past due nor impaired for each of the reporting dates under review are of good credit quality. None of the company’s financial assets are secured by collateral or other credit enhancements. In respect of receivables, the company is not exposed to any significant credit risk exposure to any single counterparty. The credit risk for cash and bank balances and short term deposits is considered negligible, since the counterparties are reputable financial institution with high credit quality. Information on other significant concentrations of credit risk is set out in note 17.3
17.3 Concentration of assets The distribution of financial assets by geographic region as at 31 December 2009 and 2008 is as follows: Kuwait KD At 31 December 2009 Available for sale investments Investments at fair value through statement of income Accounts receivable and other assets Cash and cash equivalents At 31 December 2008 Available for sale investments Investments at fair value through statement of income Due from parent company Accounts receivable and other assets Cash and cash equivalents
42
Other Middle East countries KD
Total KD
8,098,094 6,460,380 123,209 1,671,190 16,352,873
133,696,592 133,696,592
141,794,686 6,460,380 123,209 1,671,190 150,049,465
14,430,865 7,359,024 61,682 159,612 4,877,081 26,888,264
84,576,581 84,576,581
99,007,446 7,359,024 61,682 159,612 4,877,081 111,464,845
Ikarus Petroleum Industries Company – SAK (Closed)
17.4 Liquidity risk Liquidity risk is the risk that the company will be unable to meet its liabilities when they fall due. To limit this risk, management has arranged diversified funding sources, manages assets with liquidity in mind, and monitors liquidity on a regular basis. The table below summarises the contractual maturity of financial liabilities based on undiscounted cash flows: Up to 1 month KD
1-3 months KD
31 December 2009 Financial liabilities Due to parent company Short term borrowings Other liabilities (excluding interest rate swaps) Interest rate swap (*)
-
31 December 2008 Financial liabilities Short term borrowings Other liabilities (excluding interest rate swap) Interest rate swap
3-12 months KD
1-5 Years KD
1,439,000
31,790,365
-
-
-
25,000 1,464,000
-
Total KD
-
33,229,365
179,550
-
179,550
100,000 32,069,915
287,992 287,992
412,992 33,821,907
48,632,419
-
-
48,632,419
-
61,588
303,644
-
365,232
-
48,694,007
303,644
417,268 417,268
417,268 49,414,919
(*) The client settles the quarterly payments on the interest rate swap on a net basis.
18. Derivative financial instrument A derivative financial instrument is a financial contract between two parties where payments are dependent upon movements in price in one or more underlying financial instrument, reference rate or index. Derivative financial instrument of the company represents range accrual interest rate swap. During the previous year the company entered into a 4 year callable range accrual interest rate swap (callable at the option of the bank) with a notional value of USD100,000,000 (equivalent to KD28,720,000 at 31 December 2009 and KD27,545,000 at 31 December 2008) with a local bank. The interest rate swap is based on 3 months LIBOR and accordingly the underlying rates are reset every 3 months and settles on a quarterly basis. The negative fair value of the interest rate swap as at 31 December 2009 amounted to KD412,992 (2008: KD 417,268) and it has been recognised under “other liabilities” (refer note 13). During the year the company made net payments totalling to KD262,087 to the bank to settle the quarterly payments due on the interest rate swap. The negative fair value of the derivative financial instrument is equivalent to the market value and the notional amount is the amount of a derivative’s underlying asset, and is the basis upon which changes in the value of derivatives are measured. The notional amounts indicate the volume of transactions and are not indicative of credit risk. Credit risk in respect to derivative financial instrument arises from the potential for a counterparty to default on its contractual obligations and is limited to the positive fair value of instruments that is favourable to the company.
43
Ikarus Petroleum Industries Company – SAK (Closed)
19. Capital management objectives The company’s capital management objective is to maximise shareholder value. The company manages the capital structure and makes adjustments in the light of changes in economic conditions and risk characteristics of the underlying assets. In order to maintain or adjust the capital structure, the company may adjust the amount of dividends paid to shareholders, buy back treasury shares, issue new shares or sell assets to reduce debt. The capital structure of the company consists of the following: 2009 KD Short term borrowings (refer note 12) Due to parent company Less: Cash and cash equivalents (refer note 9) Net debt Total equity Total capital
32,982,000 3,018,521 (1,671,190) 34,329,331 113,456,402 147,785,733
2008 KD 48,203,750 (4,877,081) 43,326,669 62,478,595 105,805,264
Consistent with others in the industry the company monitors capital on the basis of the gearing ratio. The company’s policy is to keep the gearing ratio within 70%. This ratio is calculated as net debt divided by total capital as follows: 2009 KD Net debt Total capital Net debt to total capital ratio
2008 KD
34,329,331 147,785,733
43,326,669 105,805,264
23.2%
40.9%
20. Comparative amounts Certain comparative amounts have been reclassified to conform to the presentation in the current year. Such reclassification does not affect previously reported net assets, net equity and net results for the year or net increase in cash and cash equivalents.
44