27. Financial risk management objectives and policies
The group's principal financial liabilities comprise the 2015 Notes, the 2019 Notes, payables to Government of Kazakhstan, trade payables and other current liabilities. The main purpose of these financial liabilities is to finance the development of the Chinarevskoye oil and gas condensate field and its operations. The Group's financial assets consist of trade and other receivables, short-term investments and cash and cash equivalents.
The main risks arising from the Group's financial instruments are interest rate risk, foreign exchange risk, liquidity risk, and credit risk. The Group's management reviews and agrees policies for managing each of these risks which are summarized below.
Interest rate risk
The Group is not exposed to interest rate risk in 2012 and 2011 as the Group had no floating-rate borrowings as of December 31, 2012 and 2011.
Foreign currency risk
As a significant portion of the Group's operation is the Kazakhstani Tenge denominated, the Group's statement of financial position can be affected significantly by movements in the US dollar / Tenge exchange rates. The Group mitigates the effect of its structural currency exposure by borrowing in US dollars and denominating sales in US dollars.
The following table demonstrates the sensitivity to a reasonably possible change in the US dollars exchange rate, with all other variables held constant, of the Group's profit before tax (due to changes in the fair value of monetary assets and liabilities).
Tenge to US$
|Effect on profit
|US dollar thousand||+1.57%||(235)|
|US dollar thousand||+1.57%||(235)|
|US dollar thousand||+10.72%||(2,341)|
|US dollar thousand||-10.72%||2.341|
Liquidity risk is the risk that the Group will encounter difficulty in raising funds to meet commitments associated with its financial liabilities. Liquidity risk may result from an inability to sell a financial asset quickly at close to its fair value.
Liquidity requirements are monitored on a regular basis and management ensures that sufficient funds are available to meet any commitments as they arise.
The table below summarizes the maturity profile of the Group's financial liabilities at December 31, 2012 and 2011 based on contractual undiscounted payments:
December 31, 2012
|On demand||Less than
|3-12 months||1-5 years||More than
|Other current liabilities||10,437||-||-||-||-||10,437|
|Due to Government of Kazakhstan||258||773||4,124||13,402||18,557|
December 31, 2011
|Other current liabilities||8,361||-||-||-||-||8,361|
|Due to Government of Kazakhstan||-||258||773||4,124||14,433||19,588|
Financial instruments, which potentially subject the Group to credit risk, consist primarily of accounts receivable and cash in banks. The maximum exposure to credit risk is represented by the carrying amount of each financial asset. The Group considers that its maximum exposure is reflected by the amount of trade accounts receivable and advances paid.
The Group places its Tenge denominated cash with Sberbank, which has a credit rating of Baa1 (stable) from Moody's rating agency and its US dollar denominated cash with BNP Paribas with a credit rating of A2 (stable) and ING with a credit rating of A2 (negative) from Moody's rating agency at December 31, 2012. The Group does not guarantee obligations of other parties.
The Group sells its products and makes advance payments only to recognized, creditworthy third parties. In addition, receivable balances are monitored on an ongoing basis with the result that the Group's exposure to bad debts and recoverability of prepayments made is not significant and thus risk of credit default is low.
Fair values of financial instruments
Fair value is defined as the amount at which an instrument could be exchanged in a current transaction between knowledgeable willing parties according to arm's length conditions, other than in a forced or liquidation sale. As no readily available market exists for a large part of the Group's financial instruments, judgment is needed to arrive at a fair value, based on current economic conditions and the specific risks attributable to the instrument.
The fair value of borrowings has been calculated by discounting the expected future cash flows at prevailing interest rates. The Group's borrowings are at market rates of interest specific to those instruments and as such are stated at fair value. The Group's derivative is valued with a reference to a quoted market price in an active market. The fair value of other financial assets has been calculated using market interest rates.
Management believes that the Group's carrying value of financial assets and liabilities consisting of cash and cash equivalents, trade accounts receivable, trade and other payables are not significantly different from their fair values at December 31, 2012 and 2011.