MISC Integrated Annual Report 2020

STATEMENT ON RISK MANAGEMENT AND INTERNAL CONTROL KEY INTERNAL CONTROL PROCESSES IN ENTERPRISE RISK AREAS As at end of FY2020, MISC conducted 22 self-assessments through PETRONAS’ MyAssurance system. The purpose of these self-assessments is to ensure that MISC and its subsidiaries comply to the requirements established under the PETRONAS’ frameworks, guidelines and guiding principles. In addition to the yearly self-assurance process, PETRONAS also conducted an Integrated Assurance on three areas within MISC namely the risk management, crisis management and business continuity. Other than self-assessment via MyAssurance, amongst other MISC’s internal control processes in Enterprise Risk Areas are as follows: Financial • Limits of authority (LOA) The LOA manual provides a framework of authority and accountability within the organisation and facilitates sound and timely corporate decision making at the appropriate level in the organisation’s hierarchy. • Reporting The Board reviews quarterly reports from management on key operating performance, legal, environmental and regulatory matters. Financial performance is deliberated monthly by the MC and tabled to the BARC and the Board on a quarterly basis. • Planning and budgeting The Group performs a comprehensive annual planning and budgeting exercise which involves the development of business strategies for the next five years to achieve the Group’s vision. The long-term strategies are supported by initiatives to be pursued in the upcoming year, and for effective implementation, the initiatives are tied to specific measurable indicators which will be evaluated against the relevant business units’, service units’ and subsidiaries’ deliverables. The Group’s strategic direction is then reviewed annually taking into account the current progress level and other indicators such as latest developments in the industry, changes in market conditions and significant business risks. In addition, the Group’s business plan is translated into budgetary numbers for the next five years and financial performance and variance against budget is analysed and reported monthly to the MC and quarterly to the BARC and the Board. • Financial Control Framework To enhance the quality of the Group’s financial reports, the Group continues the execution of the PETRONAS Financial Control Framework (FCF). FCF is a structured process of ensuring the adequacy and effectiveness of internal controls operating at various levels within the Group at all times. FCF covers internal controls related to financial reporting based on the identified processes and risks. It is a consistent approach in which the internal controls over financial reporting are documented and evaluated for their effectiveness in design and operations. FCF requires documentation of process workflows, process narratives, control descriptions, testing on control effectiveness as well as remediation of control gaps. FCF testing requirement is performed semi-annually for relevant processes. On a semi-annual basis, the process owner at the management levels and operating entities is required to complete the FCF testing and present the results to the management. The management will submit a Letter of Assurance to PETRONAS which provides confirmation on the effectiveness of specified internal controls over financial reporting of the entities and be accountable for the reliability of financial statements. If ineffective controls exist, the process owner will have to put in place appropriate remediation plans and the control owner will monitor the execution plans to ensure the controls are mitigated by the next FCF compliance testing and reporting period. • Corporate Financial Policy The Group continues to monitor and ensure effective and robust execution of financial risk management through the implementation of the PETRONAS Corporate Financial Policy (CFP). The CFP supports the delivery of a consistent approach in financial and risk management discipline across the Group. The CFP is supplemented with guidelines in the areas of liquidity management, cash repatriation, financing, investment, banking, asset liability management, foreign exchange management, credit, tax, inward financial guarantee and documentary credit, and integrated financial risk management. Amongst activities in CFP is managing credit risk via Counterparties Credit Risk Review Assessment which is conducted on a yearly basis. During the year, PETRONAS introduced a new financial policy to supersede the CFP. The new financial policy was approved by the Board on 16 November 2020 for adoption by the MISC Group and renamed MISC Financial Policy. The new financial policy anchors on MISC Group’s commitment to become a financially resilient organisation. The replacement will result in financial management and financial risk management being governed by three inter-related policies namely: • Financial policy , for policy stances on financial management areas of cash and liquidity management; • Tax policy , which is being developed as a separate policy in consideration of the criticality of tax governance and tax risk management; and • Risk policy , for policy stances on risk management and applicable to financial risk management. The adopted policy stance is as follows: • Debt Covenant Monitoring The Group monitors its financial and non-financial covenants set out under all its external financing facilities on a quarterly basis, to ensure that they are observed and complied within the parameters imposed. • Financial Risk Appetite The Group has established Financial Risk Appetite Setting (FRAS), which sets out KRIs in the following areas, as a means of monitoring and mitigating against adverse trends in the relevant financial risks: • Foreign exchange and financial institution credit counterparty risk appetite, to mitigate risks arising from operations in non-functional currencies and financial losses arising from failure of counterparty financial institutions. • Interest rate risk appetite limit, where the weighted average cost of debt threshold of the Group for the specific year is set to monitor the overall cost of debt of the Group. • Debt appetite limit, where threshold is set to monitor the Group’s debt levels. • Minimum liquidity requirement level, to ensure that the Group is able to meet its immediate operating expense payables, committed CAPEX and debt obligations. Additional cash reserves, on top of the minimum liquidity requirement, are also maintained to meet contingency payments and/or opportunistic investments. Project Evaluation The Group continues to use a risk-based pricing framework to ensure that the returns of any capital investment or project, adequately covers the risks assumed for undertaking such an investment or project. Amongst the risk elements considered in the Project Risk Assessment (PRA) are counter-party credit risk, project tenure, project and commercial risk, overall project economics against risk, assumed level of debt taken to fund the project and the residual value risk of the asset at the end of the contract period. The PRA is continuously reviewed and refined to ensure the robustness of the risk assessment process. MISC is committed to become a financially resilient organisation. MISC shall continuously strive to achieve the following: • Capital efficiency in pursuit of business objectives with appropriate balance between risk and reward. • Maintain an investment grade credit rating (if applicable). • Sustain a strong cash repatriation discipline in the most optimal manner. • Uphold strong governance at all times. Adherence to this policy is everyone’s responsibility. Note: MISC refers to MISC Berhad and its subsidiaries, excluding the joint venture companies and associate companies /////// Business Review / Leadership / Governance / Financial Statements / Additional Information / MISC Berhad / Integrated Annual Report 2020 9 300 MISC Berhad / Integrated Annual Report 2020 9 301 / Additional Information / Financial Statements / Governance / Leadership / Business Review /////// Section Section