SAUDI ARAMCO TOTAL REFINING & PETROCHEMICAL COMPANY (SATORP) (A Saudi Arabian Mixed Limited Liability Company)

Transcription

1 SAUDI ARAMCO TOTAL REFINING & PETROCHEMICAL COMPANY (SATORP) CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2017 AND INDEPENDENT AUDITOR S REPORT

2 CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2017 AND INDEPENDENT AUDITOR S REPORT CONTENTS Pages Independent auditor s report 2-4 Consolidated statement of financial position 5 Consolidated statement of comprehensive income 6 Consolidated statement of changes in shareholders equity 7 Consolidated statement of cash flows 8 Notes to the consolidated financial statements 9-35

3 Independent auditor's report to the shareholders of Saudi Aramco Total Refining & Petrochemical Company (SATORP) Report on the audit of the consolidated financial statements Our opinion In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of Saudi Aramco Total Refining & Petrochemical Company (the Company ) and its subsidiary (together the Group ) as at 2017, and its consolidated financial performance and its consolidated cash flows for the year then ended in accordance with International Financial Reporting Standards, that are endorsed in the Kingdom of Saudi Arabia, and other standards and pronouncements issued by the Saudi Organization for Certified Public Accountants (SOCPA). What we have audited The Group s consolidated financial statements comprise: the consolidated statement of financial position as at 2017; the consolidated statement of comprehensive income for the year then ended; the consolidated statement of changes in shareholders equity for the year then ended; the consolidated statement of cash flows for the year then ended; and the notes to the consolidated financial statements, which include a summary of significant accounting policies. Basis for opinion We conducted our audit in accordance with International Standards on Auditing, that are endorsed in the Kingdom of Saudi Arabia. Our responsibilities under those standards are further described in the Auditor s Responsibilities for the Audit of the Consolidated Financial Statements section of our report. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Independence We are independent of the Group in accordance with the code of professional conduct and ethics, endorsed in the Kingdom of Saudi Arabia, relevant to our audit of the consolidated financial statements, and we have fulfilled our other ethical responsibilities in accordance with these requirements. Responsibilities of management and those charged with governance for the consolidated financial statements Management is responsible for the preparation and fair presentation of the consolidated financial statements in accordance with International Financial Reporting Standards, that are endorsed in the Kingdom of Saudi Arabia, and other standards and pronouncements issued by SOCPA, and for such internal control as management determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. PricewaterhouseCoopers, License No. 25, Al Hugayet Tower, P.O. Box 467, Dhahran Airport 31932, Kingdom of Saudi Arabia T: +966 (13) , F: +966 (13) ,

4 Independent auditor's report to the shareholders of Saudi Aramco Total Refining & Petrochemical Company (SATORP) (continued) In preparing the consolidated financial statements, management is responsible for assessing the Group s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless management either intends to liquidate the Group or to cease operations, or has no realistic alternative but to do so. Those charged with governance are responsible for overseeing the Group s financial reporting process. Auditor s responsibilities for the audit of the consolidated financial statements Our objectives are to obtain reasonable assurance about whether the consolidated financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with International Standards on Auditing, that are endorsed in the Kingdom of Saudi Arabia, will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these consolidated financial statements. As part of an audit in accordance with International Standards on Auditing that are endorsed in the Kingdom of Saudi Arabia, we exercise professional judgment and maintain professional scepticism throughout the audit. We also: Identify and assess the risks of material misstatement of the consolidated financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Group s internal control. Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by management. Conclude on the appropriateness of management s use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Group s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor s report to the related disclosures in the consolidated financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor s report. However, future events or conditions may cause the Group to cease to continue as a going concern. Evaluate the overall presentation, structure and content of the consolidated financial statements, including the disclosures, and whether the consolidated financial statements represent the underlying transactions and events in a manner that achieves fair presentation. 3

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7 Consolidated statement of comprehensive income For the year ended Note Revenue 33,934,541 26,751,006 Cost of sales (31,069,721) (23,744,437) Gross profit 2,864,820 3,006,569 Operating (expenses)/income General and administrative expenses 18 (294,000) (336,934) Income from operations 2,570,820 2,669,635 Finance costs net 20 (1,209,000) (1,044,321) Profit before income tax and zakat 1,361,820 1,625,314 Income tax 16 (930,437) (200,220) Zakat expense (23,996) (51,341) Zakat reversal 23,996 - Profit for the year 431,383 1,373,753 Other comprehensive income: Items that may be reclassified to profit or loss Cash flow hedges 73,514 8,555 Items that will not be reclassified to profit or loss Remeasurement loss on employee termination benefits 17 (17,824) - Tax impact of employee termination benefits 16 3,568 - Total comprehensive income for the year 490,641 1,382,308 Earnings per share (Saudi Riyals): Basic earnings per share The accompanying notes on pages 9 to 35 form an integral part of these consolidated financial statements. 6

8 Consolidated statement of changes in shareholders equity Share capital Statutory reserve Retained earnings / (Accumulated losses) Hedge reserve Total Balance at 1 January ,250,000 - (648,853) - 7,601,147 Profit for the year - - 1,373,753-1,373,753 Other comprehensive income for the year ,555 8,555 Total comprehensive income for the year - - 1,373,753 8,555 1,382,308 Transactions with owners in their capacity as owners: Zakat recoverable from shareholder ,341-51,341 Dividends paid Transfer to statutory reserve - 97,646 (97,646) - - Balance at ,250,000 97, ,595 8,555 9,034,796 Profit for the year , ,383 Other comprehensive income for the year - - (14,256) 73,514 59,258 Total comprehensive income for the year ,127 73, ,641 Transactions with owners in their capacity as owners: Dividends paid - - (450,000) - (450,000) Transfer to statutory reserve - 41,712 (41,712) - - Balance at ,250, , ,010 82,069 9,075,437 The accompanying notes on pages 9 to 35 form an integral part of these consolidated financial statements. 7

9 Consolidated statement of cash flows For the year ended Note Cash flows from operating activities Profit before income tax and zakat 1,361,820 1,625,314 Adjustments: Depreciation and amortization 4,5 1,893,301 1,893,324 Finance costs 20 1,251,416 1,064,125 Finance income (42,416) (19,804) Employee termination expense 17 15,068 23,081 Changes in working capital: Accounts receivable (281,862) (612,753) Advances and other receivables 34,487 (60,240) Inventories (210,354) (190,720) Accounts payable 1,135,163 1,528,279 Accrued and other liabilities 116,159 (539,716) Other non-current assets (39,185) (6,484) Employee home loan receivables (33,632) (32,825) Employee home ownership plan (21,016) (52,692) Employee termination benefits (1,630) (581) Cash generated from operating activities 5,177,319 4,618,308 Zakat paid (51,341) (3,234) Net cash generated from operating activities 5,125,978 4,615,074 Cash flows from investing activities Additions to property plant and equipment and intangible assets (339,986) (613,360) Finance income received 38,561 15,820 Net cash used in investing activities (301,425) (597,540) Cash flows from financing activities Repayment of borrowings (2,103,634) (1,953,545) Interest paid (896,446) (715,186) Dividends paid (450,000) - Net cash used in financing activities (3,450,080) (2,668,731) Net change in cash and cash equivalents 1,374,473 1,348,803 Cash and cash equivalents at beginning of year 1,878, ,029 Cash and cash equivalents at end of year 10 3,253,305 1,878,832 The accompanying notes on pages 9 to 35 form an integral part of these consolidated financial statements. 8

10 Notes to the consolidated financial statements for the year ended GENERAL INFORMATION Saudi Aramco Total Refining & Petrochemical Company (SATORP) (the Company ) and its subsidiary (collectively the Group ) are engaged in the construction and operation of the refinery and petrochemical complex at Jubail II Industrial City, with the objective to manufacture and sell refined, petrochemical and other related hydrocarbon products. The Company is a Saudi Arabian mixed limited liability company licensed under industrial investment license No.2/1/2222, issued by the Saudi Arabian General Investment Authority on 25 Sha aban 1429 H (26 August 2008) and was registered on 6 Ramadan 1429 H (6 September 2008) under commercial registration number The Company s principal place of business and address of its registered office is Al Jubail , Al Jubail Industrial City. The Group is owned 62.5% by Saudi Arabian Oil Company ( Saudi Aramco ) and 37.5% by TOTAL Refining & Chemicals Saudi Arabia SAS Limited ( TOTAL ) registered in France, a wholly owned subsidiary of TOTAL S.A. The Group is jointly controlled by Saudi Aramco and TOTAL. The accompanying consolidated financial statements include the financial information of the Company and its subsidiary Arabian Aramco Total Services Company ( AATSC ), a Saudi closed joint stock company, that was incorporated on 21 Sha aban 1431 H (2 August 2010). The Company has an ownership of % in AATSC at 2017 (2016: %). AATSC is engaged in the execution of certain service contracts in construction, development, operating and managing certain of the Company's projects. During the year 2016, a new company was incorporated by SATORP in the Kingdom of Saudi Arabia, under the name of Torathuna Social Responsibility Company ( Torathuna ), as a limited liability company. SATORP holds 99.98% of the issued share capital of Torathuna. The principal objective of Torathuna is to engage in activities relating to the development and sustainability of the artifacts and artisanal heritage in the Kingdom of Saudi Arabia. Since this company does not meet the definition of a subsidiary under IFRS, that are endorsed in the Kingdom of Saudi Arabia, and other standards and pronouncements endorsed by Saudi Organization of Certified Public Accountants (SOCPA), these consolidated financial statements do not include the financial information of Torathuna. Refer to note 24. On 9 October 2011, the Group issued Sukuk amounting to SAR 3,749.9 million at par value maturing on 20 December The Sukuk bears a rate of return based on a market related margin payable semi-annually in arrears. The Sukuk repayments are semi-annual from 20 December 2014 through 20 December The Group completed the commissioning and testing of various elements of the refinery and petrochemical complex and commenced its commercial operations effective 1 June During the year ended December 31, 2017 pursuant to the Royal Order A/136, all the shares in Kingdom resident companies held by Saudi Arabian Oil Company (Saudi Aramco) are subject to income tax law rather than zakat effective January 1, Accordingly, income tax has been recognised for Saudi Aramco s owned interest in the Company. Please refer to note 16.2 for further details. At 2017, the Group s current liabilities exceeded its current assets by SAR 0.71 billion (2016: SAR 1.08 billion). Pursuant to Article 6.3 of the Shareholders Agreement Saudi Aramco and TOTAL shall continue to ensure that the Group is sufficiently funded to meet its anticipated operational and capital requirements (note 11). The accompanying consolidated financial statements were authorised for issue by the Board of Directors on 15 March SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The principal accounting policies applied in the preparation of these consolidated financial statements are set out below. These policies have been consistently applied to all years presented. 2.1 Basis of preparation The consolidated financial statements of the Group have been prepared in accordance with International Financial Reporting Standards ( IFRS ) and interpretations issued by the IFRS Interpretations Committee (IFRS IC) that are endorsed in the Kingdom of Saudi Arabia, and other standards and pronouncements endorsed by Saudi Organization of Certified Public Accountants ( SOCPA ). The consolidated financial statements have been prepared under the historical cost convention, except for derivative financial instruments which are measured at fair value. Amounts and balances relating to Shariah compliant or Islamic financial instruments of the Company, its subsidiary are disclosed separately. All other relevant amounts and balances relate to conventional financial instruments. 9

11 Notes to the consolidated financial statements for the year ended 2017 The Company was historically preparing financial statements using accounting standards generally accepted by the Saudi Organization of Certified Public Accountants. However, the Company also used to prepare financial statements in accordance with IFRS for its internal use. Accordingly, the Company is not a first-time adopter. The preparation of financial statements in conformity with IFRS, that are endorsed in the Kingdom of Saudi Arabia, and other standards and pronouncements endorsed by Saudi Organization of Certified Public Accountants (SOCPA), requires the use of certain critical accounting estimates. It also requires management to exercise its judgment in the process of applying the Group s accounting policies. The areas involving a higher degree of judgement or complexity, or areas where assumptions and estimates are significant to the consolidated financial statements are disclosed in note 2.2. (a) New and amended standards adopted by the Group The Group has applied the following new and amended standards for the first time for the annual reporting period commencing 1 January 2017: Recognition of Deferred Tax Assets for Unrealised Losses Amendments to IAS 12, and Disclosure initiative amendments to IAS 7. The adoption of these amendments did not have any impact on the current or prior period and is not likely to affect future periods. (b) New standards and interpretations not yet adopted Certain new standards and interpretations have been published that are not mandatory for 2017 reporting period and have not been early adapted by the Group. IFRS 9, Financial instruments (effective 1 January 2018); IFRS 15, Revenue from contracts with customers (effective 1 January 2018); and IFRS 16, Leases (effective 1 January 2019). There are no other IFRSs or IFRIC interpretations that are not yet effective that would be expected to have a material impact on the Group. The impact of the adoption of IFRS 9 and 15 is disclosed in note Critical accounting estimates and judgements The preparation of financial statements in conformity with IFRS, that are endorsed in the Kingdom of Saudi Arabia, and other standards and pronouncements endorsed by Saudi Organization of Certified Public Accountants (SOCPA), requires the use of certain critical accounting estimates that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the reporting date and the reported amounts of revenues and expenses during the reporting period. It also requires management to exercise its judgement in the process of applying the Group s accounting policies. Although these estimates are based on management s best knowledge of current events and actions, actual results ultimately may differ from those estimates. Significant estimates and judgement made by management are summarised below: (a) Useful lives of property, plant and equipment The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets are the useful lives of property, plant and equipment. Management determines the estimated useful lives of property, plant and equipment for calculating depreciation. This estimate is determined after considering expected usage of the assets or physical wear and tear. Management reviews the residual value and useful lives annually and future depreciation charges are adjusted where management believes the useful lives differ from previous estimates. (b) Determination of functional currency The Company's revenue and significant portions of its operating and capital expenditures and borrowings are denominated and settled in the United States Dollar ( USD ). Given the Company s exposure to the international oil and gas market, management believes that USD most appropriately reflects the currency with the most influence over its operations and accordingly, is considered to represent the functional currency of the Company. The financial statements of its subsidiary are prepared in Saudi Riyals which reflects its business environment. 10

12 Notes to the consolidated financial statements for the year ended 2017 (c) Non-consolidation of a subsidiary Management primarily considers the following criteria based on IFRS, that are endorsed in the Kingdom of Saudi Arabia, and other standards and pronouncements endorsed by Saudi Organization of Certified Public Accountants (SOCPA), when determining whether the Group has control over the entity: - power over the entity; - exposure, or rights, to variable returns from its involvement with the investee; and - the ability to use its power over the investee to affect the amount of the investor s return Torathuna will primarily be responsible for providing financial support to selected artisans in the form of interest free loans to encourage their work. SATORP is only responsible for irrevocably providing SAR 375 million to Torathuna to enable it to supporting projects for selected artisans. In addition to this, SATORP is also responsible for funding routine operating expenses of Torathuna. SATORP does not have any further obligations in respect of Torathuna nor does it expect to obtain any monetary or financial benefit from its involvement with Torathuna. Management also believes that non-monetary or non-financial benefits from its involvement with Torathuna could be limited and may not be variable. Management has considered relevant criteria under IFRS, that are endorsed in the Kingdom of Saudi Arabia, and other standards and pronouncements endorsed by Saudi Organization of Certified Public Accountants (SOCPA), to determine whether Torathuna is a subsidiary of the Group. Based on the current set-up of the entity and other pertinent information relating to exposure of the Group to variable returns from its involvement with Torathuna, management concluded that Torathuna does not meet the definition of a subsidiary. Accordingly, these consolidated financial statements do not include the financial information of Torathuna. Refer also to note 24. (d) Deferred tax During the year ended December 31, 2017 pursuant to the Royal Order A/136, all the shares in Kingdom resident companies held by Saudi Arabian Oil Company (Saudi Aramco) are subject to income tax law rather than zakat effective January 1, Accordingly, the provisional zakat expense previously recognised in 2017 has been reversed in these consolidated financial statements. This change resulted in the recognition of deferred tax amounts attributable to Saudi Aramco. Judgement was required to determine the recoverability of deferred tax assets. 2.3 Consolidation Investment in subsidiary Subsidiaries are all entities (including structured entities) over which the Group has control. The Group controls an entity when the Group is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect those returns through its power over the entity. Subsidiaries are fully consolidated from the date on which control is transferred to the Group. They are deconsolidated from the date that control ceases. The Group applies the acquisition method to account for business combinations. The consideration transferred for the acquisition of a subsidiary is the fair values of the assets transferred, the liabilities incurred to the former owners of the acquiree and the equity interests issued by the Group. The consideration transferred includes the fair value of any asset or liability resulting from a contingent consideration arrangement. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at their fair values at the acquisition date. The Group recognises any non-controlling interest in the acquiree on an acquisition-by-acquisition basis, either at fair value or at the non-controlling interest s proportionate share of the recognised amounts of acquiree s identifiable net assets. Acquisition-related costs are expensed as incurred. Inter-company transactions, balances and unrealised gains on transactions between group companies are eliminated. Unrealised losses are also eliminated. When necessary amounts reported by subsidiaries have been adjusted to confirm with the Group s accounting policies. 2.4 Foreign currency translation (a) Functional and presentation currency Items included in the financial statements of each of the Group s entities are measured using the currency of the primary economic environment in which the entity operates ( the functional currency ). The functional 11

13 Notes to the consolidated financial statements for the year ended 2017 currency of the Company is the United States Dollar ( USD ). These consolidated financial statements are presented in SAR which is the Group s presentation currency. (b) Transactions and balances Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions or valuation where items are re-measured. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in the consolidated statement of comprehensive income. (c) Group companies The results and financial position of foreign operations that have a functional currency different from the presentation currency are translated into the presentation currency as follows: - assets and liabilities for each statement of financial position presented are translated at the closing rate at the date of that balance sheet. - income and expenses for each statement of profit or loss and statement of comprehensive income are translated at average exchange rates (unless this is not a reasonable approximation of the cumulative effect of the rates prevailing on the transaction dates, in which case income and expenses are translated at the dates of the transactions); and - all resulting exchange differences are recognised in other comprehensive income. 2.5 Property, plant and equipment Property, plant and equipment are carried at historical cost less accumulated depreciation. Assets under construction are carried at historical cost and are transferred to property, plant and equipment when ready for use as intended by management. Historical cost includes expenditure that is directly attributable to the acquisition or construction of the assets. Subsequent costs are included in an asset s carrying amount or recognised as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the Group and the cost of the item can be measured reliably. The carrying amount of a replaced part is derecognised. All other repairs and maintenance are charged to the consolidated statement of comprehensive income during the financial period in which they are incurred. No depreciation is charged on assets under construction until transferred to property, plant and equipment. Depreciation and amortisation is charged to the consolidated statement of comprehensive income, using the straight-line method, to allocate the costs of the related assets to their residual values over the following estimated useful lives: Number of years Buildings and infrastructure 30 Plant, machinery and equipment 5-30 Furniture, fixtures and computer equipment 4-10 Vehicles and other equipment 4-12 The assets residual values and useful lives are reviewed, and adjusted if appropriate, at the end of each reporting period. Maintenance and normal repairs which do not materially extend the estimated useful life of an asset are charged to the consolidated statement of comprehensive income as and when incurred. Major renewals and improvements, if any, are capitalised and the assets so replaced are retired. An asset s carrying amount is written down immediately to its recoverable amount if the asset s carrying amount is greater than its estimated recoverable amount (note 2.7). Gains and losses on disposals are determined by comparing the proceeds with the carrying amount and are recognised in the consolidated statement of comprehensive income. 12

14 Notes to the consolidated financial statements for the year ended Intangible assets (a) Technology licenses Separately acquired technology licenses are shown at historical cost. Licenses have a finite useful life and are carried at cost less accumulated amortisation. Amortisation is calculated using the straight-line method to allocate the cost of licenses over their estimated useful lives of thirty years. (b) Computer software licenses & implementation Computer software licenses are capitalised and are amortised over their license period of five years. Computer software implementation costs that are directly attributable to the acquisition, configuration, design and testing of identifiable software products are recognised as intangible assets and amortised over their estimated useful lives, which commences once the software is operational and does not exceed the license term. 2.7 Impairment of non-financial assets Non-financial assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognised for the amount by which the carrying amount of the asset exceeds its recoverable amount, which is the higher of an asset s fair value less costs to sell or its value in use. For the purpose of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows (cash-generating units). Non-current assets other than goodwill that suffer impairment are reviewed for possible reversal of impairment at each reporting date. Where an impairment loss subsequently reverses, the carrying amount of the asset or cash-generating unit is increased to the revised estimate of its recoverable amount. A reversal of an impairment loss is recognised as income immediately in the consolidated statement of comprehensive income. 2.8 Financial assets The Group s financial assets consist of loans and receivables and derivatives held for hedging. The classification depends on the purpose for which the financial assets were acquired. Management determines the classification of its financial assets at initial recognition. At initial recognition, the Group measures financial assets at its fair value plus, in the case of a financial asset not at a fair value through profit or loss, transaction costs that are directly attributable to the acquisition of the financial asset. Financial asset are derecognised when the rights to receive cash flows from the financial assets have expired or have been transferred and the Group has transferred substantially all the risks and rewards of ownership. Loans and receivables, which are subsequently measured at amortised cost using the effective interest method, are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They are included in current assets, except for maturities greater than 12 months after the statement of financial position date, which are classified as non-current assets. The Group assesses at each statement of financial position date whether there is objective evidence that a financial asset or a group of financial assets is impaired. At 2017 and 2016, the Group s loans and receivables comprised cash and cash equivalents, accounts receivable, and employee home loan receivable and ownership plan. At 2017 and 2016, the Group s derivatives held for hedging comprised of derivative financial instruments. Refer note Impairment of financial assets The Group assesses at the end of each reporting period whether there is objective evidence that a financial asset or group of financial assets is impaired. A financial asset or a group of financial assets is impaired and impairment losses are incurred only if there is objective evidence of impairment as a result of one or more events that occurred after the initial recognition of the asset (a loss event ) and that loss event (or events) has an impact on the estimated future cash flows of the financial asset or group of financial assets that can be reliably estimated. Evidence of impairment may include indications that the debtors or a group of debtors is experiencing significant financial difficulty, default or delinquency in interest or principal payments, the probability that they will enter bankruptcy or other financial reorganisation, and where observable data indicate that there is a 13

15 Notes to the consolidated financial statements for the year ended 2017 measurable decrease in the estimated future cash flows, such as changes in arrears or economic conditions that correlate with defaults. Assets carried at amortised cost For loans and receivables category, the amount of the loss is measured as the difference between the asset s carrying amount and the present value of estimated future cash flows (excluding future credit losses that have not been incurred) discounted at the financial asset s original effective interest rate. The carrying amount of the asset is reduced and the amount of the loss is recognised in the consolidated statement of comprehensive income. If a financial asset has a variable interest rate, the discount rate for measuring any impairment loss is the current effective interest rate determined under the contract. If, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognised, the reversal of the previously recognised impairment loss is recognised in the consolidated statement of comprehensive income Derivatives and hedging activities Derivatives are initially recognised at fair value on the date a derivative contract is entered into and are subsequently remeasured to their fair value at the end of each reporting period. The accounting for subsequent changes in fair value depends on whether the derivative is designated as a hedging instrument, and if so, the nature of the item being hedged. The Group designates derivatives as either: - hedges of the fair value of recognised assets or liabilities or a firm commitment (fair value hedges); - hedges of a particular risk associated with the cash flows of recognised assets and liabilities and highly probable forecast transactions (cash flow hedges); or - hedges of a net investment in a foreign operation (net investment hedges). The Group documents at the inception of the hedging transaction the relationship between hedging instruments and hedged items, as well as its risk management objective and strategy for undertaking various hedge transactions. The Group also documents its assessment, both at hedge inception and on an ongoing basis, of whether the derivatives that are used in hedging transactions have been and will continue to be highly effective in offsetting changes in fair values or cash flows of hedged items. The fair values of various derivative financial instruments used for hedging purposes are disclosed in note 21. The full fair value of a hedging derivative is classified as a non-current asset or liability when the remaining maturity of the hedged item is more than 12 months; it is classified as a current asset or liability when the remaining maturity of the hedged item is less than 12 months. Cash flow hedge The effective portion of changes in the fair value of derivatives that are designated and qualify as cash flow hedges is recognised in other comprehensive income and accumulated in reserves in equity. The gain or loss relating to the ineffective portion is recognised immediately in the consolidated statement of comprehensive income within other income or other expense. Amounts accumulated in equity are reclassified to the consolidated statement of comprehensive income in the periods when the hedged item affects the consolidated statement of comprehensive income (for instance when the forecast sale that is hedged takes place). The gain or loss relating to the effective portion of interest rate swaps hedging variable rate borrowings is recognised in the consolidated statement of comprehensive income within finance costs. When a hedging instrument expires or is sold or terminated, or when a hedge no longer meets the criteria for hedge accounting, any cumulative gain or loss existing in the consolidated statement of changes in shareholders equity at that time remains in the consolidated statement of changes in shareholders equity and is recognised when the forecast transaction is ultimately recognised in the consolidated statement of comprehensive income. When a forecast transaction is no longer expected to occur, the cumulative gain or loss that was reported in equity is immediately reclassified to the consolidated statement of comprehensive income Inventories Inventories include raw materials, intermediate products, finished goods and consumables used for production. Inventories are carried at the lower of cost and net realisable value. Cost is determined using the weighted average method. The cost of finished goods and work in progress comprises raw materials, direct labour, other 14

16 Notes to the consolidated financial statements for the year ended 2017 direct costs and related production overheads. Net realisable value is the estimated selling price in the ordinary course of business, less the costs of completion and selling expenses Accounts receivable Accounts receivable are amounts due from customers for sales made to them under off-take agreements. If collection is expected in one year or less, they are classified as current assets. If not, they are presented as non-current assets. Accounts receivable are recognised initially at fair value and subsequently measured at amortised cost using the effective interest method, less provision for impairment Cash and cash equivalents Cash and cash equivalents include cash in hand and at banks, deposits held at call with banks and other shortterm highly liquid investments with original maturities of three months or less Share capital Ordinary shares are classified as equity. Incremental costs, if any, directly attributable to the issue of new shares are shown in equity as a deduction, from the proceeds Dividends Provision is made for the amount of any dividend declared, being appropriately authorised and no longer at the discretion of the entity, on or before the end of the reporting period but not distributed at the end of the reporting period Accounts payable and accrued liabilities Accounts payable and accrued liabilities are obligations to be paid for goods and services that have been acquired in the ordinary course of business from suppliers. These are classified as current liabilities if payment is due within one year or less. If not, they are presented as non-current liabilities. These are recognised initially at fair value and subsequently measured at amortised cost using the effective interest method Borrowings Borrowings are initially recognised at fair value, net of transaction costs incurred. Borrowings are subsequently carried at amortised cost; any difference between the proceeds (net of transaction costs) and the redemption value is recognised in the consolidated statement of comprehensive income over the period of the borrowings using the effective interest method. In case of variable rate borrowings, transaction cost is amortised over the period of borrowings on a straight line basis. Borrowings are removed from the statement of financial position when the obligation specified in the contract is discharged, cancelled or expired. The difference between the carrying amount of a financial liability that has been extinguished or transferred to another party and the consideration paid, including any non-cash assets transferred or liabilities assumed, is recognised in the statement of comprehensive income as finance costs. Borrowings are classified as current liabilities unless the Group has an unconditional right to defer settlement of the liability for at least 12 months after the reporting period. Fees paid on the establishment of loan facilities are recognised as transaction costs of the loan to the extent that it is probable that some or all of the facility will be drawn down. In this case, the fee is deferred until the draw-down occurs. To the extent there is no evidence that it is probable that some or all of the facility will be drawn down, the fee is capitalised as a pre-payment for liquidity services and amortised over the period of the facility to which it relates Borrowing costs General and specific borrowing costs directly attributable to the acquisition, construction or production of qualifying assets, which are assets that necessarily take a substantial period of time to get ready for their intended use or sale, are added to the cost of those assets, until such time as the assets are substantially ready for their intended use or sale. 15

17 Notes to the consolidated financial statements for the year ended 2017 Investment income earned on the temporary investment of specific borrowings pending their expenditure on qualifying assets is deducted from the borrowing costs eligible for capitalisation. All other borrowing costs are recognised in the consolidated statement of comprehensive income in the period in which they are incurred Current and deferred Income Taxes The tax expense for the period comprises current and deferred tax. Tax is recognised in the consolidated statement of comprehensive income except to the extent that it relates to items recognised directly in equity. In this case the tax is recognised directly in equity. The current income tax charge is calculated on the basis of the tax laws enacted or substantively enacted at the consolidated statement of financial position date in the Kingdom of Saudi Arabia. Management periodically evaluates positions taken in tax returns with respect to situations in which an applicable tax regulation is subject to interpretation. It establishes provisions where appropriate on the basis of amounts expected to be paid to the General Authority of Zakat and Tax ( GAZT ). Deferred income tax is recognised, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the consolidated financial statements. However, the deferred income tax is not accounted for if it arises from initial recognition of an asset or liability in a transaction other than a business combination that at the time of the transaction affects neither accounting nor taxable profit nor loss. Deferred income tax is determined using tax rates (and laws) that have been enacted or substantively enacted on the consolidated statement of financial position date and are expected to apply when the related deferred income tax asset is realised or the deferred income tax liability is settled. Deferred income tax assets are recognised only to the extent that it is probable that future taxable profit will be available against which the temporary differences can be utilised. Deferred income tax is provided on temporary differences arising on investments in subsidiaries, except for deferred income tax liability where the timing of the reversal of the temporary difference is controlled by the Group and it is probable that the temporary difference will not reverse in the foreseeable future. Deferred income tax assets and liabilities are offset when there is a legally enforceable right to offset current tax assets against current tax liabilities and when the deferred income tax assets and liabilities relate to income taxes levied by the same taxation authority on either the same taxable entity or different taxable entities where there is an intention to settle the balances on a net basis. Zakat: The Company was subject to the Regulations of the GAZT, in the Kingdom of Saudi Arabia. Zakat is provided on an accruals basis and charged to the consolidated statement of changes in shareholders equity. Zakat assessable on the Saudi shareholder is computed on the Saudi shareholder s share of the zakat base. The components of the zakat base principally comprise of share capital, loans from shareholders, borrowings and adjusted net loss, less deductions for non-current assets and certain other items. Any difference between the provision and the assessment is recorded when the final assessment is determined Employee end of service benefits Employee end of service benefits required by Saudi Labour and Workman Law are accrued by the Group and charged to the consolidated statement of comprehensive income. The liability is calculated as a defined benefit obligation at the current value of the vested benefits to which the employee is entitled, should the employee leave at the reporting date. Benefit payments are based on employees final salaries and allowances and their cumulative years of service, as stated in the laws of Saudi Arabia. The liability or asset recognised in the statement of financial position in respect of defined benefit plan is the present value of the defined benefit obligation at the end of the reporting period. The defined benefit obligation is calculated annually by independent actuaries using the projected unit cost method. The present value of the defined benefit obligation is determined by discounting the estimated future outflows using interest rates of high quality corporate bonds that are denominated in the currency in which the benefit will be paid and that have terms approximating the terms of the related obligation. In countries where there is no deep market in such bonds, the market rates on government bonds are used. The net interest cost is calculated by applying the discount rate to the net balance of the defined benefit obligation. This cost is included in employee benefit expense in the statement of comprehensive income. Remeasurement gains and losses arising from experience adjustments and changes in actuarial assumptions are recognised in the period in which they occur, directly in other comprehensive income. They are included 16

18 Notes to the consolidated financial statements for the year ended 2017 in retained earnings in the statement of changes in shareholders equity and in the statement of financial position. Changes in the present value of the defined benefit obligation resulting from plan amendments or curtailments are recognised immediately in the statement of comprehensive income as past service costs Provisions Provisions for legal claims are recognised when the Group has a present legal or constructive obligation as a result of past events, it is probable that an outflow of resources will be required to settle the obligation and the amount can be reliably estimated. Provisions are not recognised for future operating losses. Where there are a number of similar obligations, the likelihood that an outflow will be required in settlement is determined by considering the class of obligations as a whole. A provision is recognised even if the likelihood of an outflow with respect to any one item included in the same class of obligations may be small. Provisions are measured at the present value of management s best estimate of the expenditure required to settle the present obligation at the end of the reporting period. The discount rate used to determine the present value is a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the liability. The increase in the provision due to the passage of time is recognised as interest expense Revenue Revenue is measured at the fair value of the consideration received or receivable, and represents amounts receivable for goods supplied. The Group recognises revenue when the amount of revenue can be reliably measured; when it is probable that future economic benefits will flow to the entity; and when specific criteria have been met for the Group s activities, as described below. Revenues from sales of goods are recognised at the point of transfer of risks and rewards of ownership of the goods, normally when the goods are shipped and for pipeline sales, when the goods pass the delivery point as per the terms of the off-take agreements Finance income Finance income is recognised using the effective interest method Leases Leases in which a significant portion of the risks and rewards of ownership are retained by the lessor are classified as operating leases. Payments made under operating leases are charged to the consolidated statement of comprehensive income on a straight-line basis over the period of the lease General and administrative expenses General and administrative expenses include direct and indirect costs not specifically part of production costs Earnings per share Basic earnings per share is calculated by dividing: the profit attributable to owners of the Company, excluding any costs of servicing equity other than ordinary shares. by the weighted average number of ordinary shares outstanding during the financial year Segment reporting Operating segments are reported in a manner consistent with the internal reporting provided to the chief operating decision maker. The senior management of the Group is considered as being the chief operating decision maker. 17

19 Notes to the consolidated financial statements for the year ended FINANCIAL RISK MANAGEMENT 3.1 Financial risk factors The Group s activities expose it to a variety of financial risks: market risk (including currency risk, fair value interest rate risk, cash flow interest rate risk and price risk), credit risk and liquidity risk. The Group s overall risk management program focuses on the unpredictability of financial markets and seeks to minimise potential adverse effects on the Group s financial performance. Risk management is carried out by the Group s management under policies approved by the Board of Directors. Financial instruments carried on the consolidated statement of financial position comprise cash and cash equivalent, Derivative financial instruments, Accounts receivable, Employee home loan receivables, Employee home ownership plan, Accounts payable, Accrued and other liabilities and Borrowings and loans from shareholders. (a) Fair value measurement For information about the methods and assumptions used in determining the fair value of derivatives refer to note 21. For other financial assets and financial liabilities of the Group their fair value approximates the carrying value, unless specifically disclosed in the relevant note. (b) (i) Market risk Foreign exchange risk Foreign exchange risk is the risk that the value of a financial instrument will fluctuate due to changes in foreign exchange rates. As a result of Saudi Arabian Monetary Agency s historical ability to maintain the target exchange rate between USD and SAR, management believes the Group does not have significant exposure to currency risk. (ii) Price risk Price risk is the risk that the value of a financial instrument will fluctuate as a result of changes in market prices, whether those changes are caused by factors specific to the individual instrument or its issuer or factors affecting all instruments traded in the market. The Group is exposed to crude oil price risk however the exposure is limited since refined product are also linked to international prices and fluctuation in commodity prices are transferred to customers. (iii) Cash flow and fair value Interest rate risk Interest rate risk is the exposure to various risks associated with the effect of fluctuations in the prevailing interest rates on the Group s financial position and cash flows. The Group s interest rate risk arises from longterm borrowings, including loans from shareholders. Borrowings issued at variable rates expose the Group to cash flow interest rate risk. Borrowings issued at fixed rates expose the Group to fair value interest rate risk. The Group entered into hedging transactions to manage its cash flow interest rate risk by using floating to fixed interest rate swaps. Under these swaps, the Group agrees with other parties to exchange, at specified intervals (mainly semi-annually), the difference between fixed contract rates and floating rate interest amounts calculated by reference to the agreed notional principal amounts. These interest rate swaps cover 33% of total borrowings at floating rate at year end (2016: 6%). Refer note 21. The fixed interest rates of the swaps used to hedge range between 2.04% and 2.28% (2016: 2.12% and 2.13%) and the variable rates of the borrowings are between 0.95% and 1.7% above the LIBOR/SIBOR rate which at the end of the reporting period were 1.78% and 2.03%, respectively. The swap contracts require settlement of net interest receivable or payable every 180 days. The settlement coincide with the dates on which interest is payable on the underlying debt. At 2017, if interest rates on borrowings had been 10 basis points higher with all other variables held constant, borrowing costs for the year would have been SAR million higher (2016: SAR 39.6 million higher), mainly as a result of higher interest expense on floating rate borrowings. The exposure of the Group s borrowings to interest rate changes at the end of the reporting period are as follows: 18

20 Notes to the consolidated financial statements for the year ended Percentage of total borrowings 2016 Percentage of total borrowings Variable rate borrowings 34,096, % 35,611, % The percentage of total borrowings shows the proportion of borrowings that are currently at variable rates in relation to the total amount of borrowings including borrowings which have been hedged through interest rate swaps. (c) Credit risk Credit risk is the risk that one party will fail to discharge an obligation and cause the other party to incur a financial loss. Credit risk mainly comprises of cash and cash equivalents, accounts receivables, employee home loan receivable, employee home ownership plan and derivative financial instrument. The Group s investment policy limits exposure to credit risk arising from investment activities. The policy requires that cash and cash equivalents, be invested in financial institutions with strong credit ratings. The policy sets investment limits with financial institutions based on ratings by Fitch Ratings Ltd. The maximum credit exposure of the Group approximates the carrying value of its cash and cash equivalents. At 2017 and 2016, bank balances were maintained with financial institutions assigned with long-term bank ratings of BBB+ or better. The majority of accounts receivables (97%) is from shareholders with historically strong credit ratings with no history of defaults, and is stated at respective realisable values. The Group is not exposed to significant credit risk on other receivables. The counter parties to derivative financial instruments are banks with credit ratings of BBB+. The other classes do not contain impaired asset and are not past due. Based on the credit history of these other classes, it is expected that these amounts will be received when due. The Group does not hold any collateral in relation to these receivables. (d) Liquidity risk Liquidity risk is the risk that the Group will encounter difficulty in raising funds to meet commitments associated with financial instruments. Liquidity risk may result from an inability to sell a financial asset quickly at an amount close to its fair value. Liquidity risk is managed by monitoring on a regular basis that sufficient funds are available to meet obligations as they become due (note 1). The following table analyses the Group's non-derivative financial liabilities based on the remaining period at 2017 and 2016 to the contractual maturity date. The liabilities disclosed in the table are the contractual undiscounted cash flows. Between 3 months and 1 year Between 1 year and 2 years Between 2 years and 5 years 2017 Less than 3 months Over 5 years Borrowings - 3,963,090 4,074,795 12,709,451 19,295,006 Loans from shareholders ,992,286 Accounts payable (note 13) 2,888, Accrued and other liabilities (note 14) 3,031, ,919,736 3,963,090 4,074,795 12,709,451 31,287,292 Between 3 months and 1 year Between 1 year and 2 years Between 2 years and 5 years 2016 Less than 3 months Over 5 years Borrowings - 3,412,722 3,587,318 11,437,335 23,028,649 Loans from shareholders ,513,828 Accounts payable (note 13) 1,753, Accrued and other liabilities (note 14) 2,962, ,716,187 3,412,722 3,587,318 11,437,335 34,542,477 Future interest payments are computed on the basis of interest rate set on the recent repricing date of 20 December Capital management The Group s objectives when managing capital are to safeguard the Group s ability to continue as a going concern in order to provide returns for shareholders and benefits for other stakeholders and to maintain an 19

21 Notes to the consolidated financial statements for the year ended 2017 optimal capital structure to reduce the cost of capital. The capital structure may be adjusted by increasing the amount of capital contributions and obtaining borrowings. On 29 May 2017, the Company approved and paid dividends of SAR 450 million amounting to SAR 0.55 per share for the year ended 2016 (2015: Nil), the amount was transferred and paid to shareholders on 7 June PROPERTY, PLANT AND EQUIPMENT 1 January 2017 Additions Transfers 2017 Cost Buildings and infrastructure 1,659, ,660,355 Plant, machinery and equipment 48,251,076 - (18,229) 48,232,847 Furniture, fixtures and computer equipment 57,822-11,606 69,428 Vehicles and other equipment 27, ,694 Assets under construction 76, ,986 5, ,636 50,072, ,986-50,412,960 Accumulated depreciation Buildings and infrastructure 151,749 54, ,717 Plant, machinery and equipment 4,562,188 1,804,526-6,366,714 Furniture, fixtures and computer equipment 35,948 9,345-45,293 Vehicles and other equipment 10,462 2,768-13,230 4,760,347 1,871,607-6,631,954 45,312,627 43,781,006 1 January 2016 Additions Transfers 2016 Cost Buildings and infrastructure 1,654,308-5,376 1,659,684 Plant, machinery and equipment 47,993, ,347 48,251,076 Furniture, fixtures and computer equipment 57, ,822 Vehicles and other equipment 27, ,694 Assets under construction 121, ,375 (263,204) 76,698 49,854, ,375-50,072,974 Accumulated depreciation Buildings and infrastructure 95,286 56, ,749 Plant, machinery and equipment 2,758,433 1,803,755-4,562,188 Furniture, fixtures and computer equipment 27,062 8,886-35,948 Vehicles and other equipment 7,693 2,769-10,462 2,888,474 1,871,873-4,760,347 46,966,125 45,312,627 The Group completed the commissioning and testing of various elements of the refinery and petrochemical complex and effective 1 June 2014, transferred assets under construction of SAR billion to property, plant and equipment, commenced to depreciate the plant over its estimated useful life and ceased to capitalise borrowing costs. The Group has not capitalised any borrowing costs for the year ended 2017 and Depreciation expense of SAR 1,855.5 million (2016: SAR 1, million) has been charged in cost of sales and SAR million (2016: SAR million) in general and administrative expenses. The refinery and petrochemical complex and the plant facilities of the Group are constructed on land leased under a 30 Hijra year operating lease agreement with the Royal Commission for Jubail and Yanbu (note 22.3). The lease is renewable by the Company for two similar periods under mutually agreed terms and conditions for the benefit of the Company. 20

22 Notes to the consolidated financial statements for the year ended INTANGIBLE ASSETS 1 January 2017 Additions Transfers 2017 Cost Technology transfer licenses 98, ,125 Software licenses and implementation 82, ,236 Assets under construction , ,361 Accumulated amortisation Technology transfer licenses 21,782 10,132-31,914 Software licenses and implementation 46,157 11,562-57,719 67,939 21,694-89, ,422 90,728 1 January 2016 Additions Transfers 2016 Cost Technology transfer licenses 98, ,125 Software licenses and implementation 74,003-8,233 82,236 Assets under construction - 8,233 (8,233) - 172,128 8, ,361 Accumulated amortisation Technology transfer licenses 13,000 8,782-21,782 Software licenses and implementation 33,488 12,669-46,157 46,488 21,451-67, INVENTORIES 125, ,422 Raw materials 226, ,251 Intermediate products 365,966 99,126 Finished goods 486, ,975 Consumables 145, ,182 1,223,888 1,013,534 The cost of inventories recognised as an expense and included in cost of sales amounted to SAR billion (2016: SAR billion). 7. FINANCIAL INSTRUMENTS BY CATEGORY Loans and receivables at amortised cost Derivative s used for hedging Loans and receivables at amortised cost Derivatives used for Hedging Note Financial assets Accounts receivable 8 2,934,128-2,652,266 - Cash and cash equivalents 10 3,253,305-1,878,832 - Derivative contract 21-82,069-8,555 Employee home ownership plan 155, Employee home loan receivable 69,057-35,425-6,411,906 82,069 4,566,523 8,555 21

23 Notes to the consolidated financial statements for the year ended 2017 Other financial liabilities Note at amortised cost Borrowings 15 28,859,734 30,889,334 Loans from shareholders ,700,571 6,423,203 Accounts payable 13 2,888,438 1,753,275 Accrued and other liabilities 14 3,031,298 2,962,912 41,480,041 42,028, ACCOUNTS RECEIVABLE Due from related parties (note 23.2) 2,847,885 2,577,610 Trade receivables 86,243 74,656 2,934,128 2,652,266 As of 2017 trade receivables of SAR million (2016: SAR million) were fully performing. As of 2017 trade receivables of SAR 8.93 million (2016: SAR million) were past due but not impaired. The ageing analysis of trade receivables is as follows: Up to 3 months 8,918 10,316 3 to 6 months 19-8,937 10,316 As of 2017, due from related parties comprises of fully performing receivables of SAR 2, million (2016: SAR 2, million) and receivables past due but not impaired of SAR million (2016: SAR million). These primarily relate to receivables from related parties in respect of sales of refined and petrochemical products. The carrying values of accounts receivables as at 2017 and 2016 approximate their fair values due to their short-term nature. Accounts receivables are denominated in USD. 9. ADVANCES AND OTHER RECEIVABLES Withholding tax receivable 100, ,244 Due from related parties (note 23.2) 11,344 51,341 Advances to and receivables from suppliers and contractors 2,781 8,125 Other receivables 53,241 38, , , CASH AND CASH EQUIVALENTS Cash at bank 3,253,264 1,878,772 Cash in hand ,253,305 1,878,832 22

24 Notes to the consolidated financial statements for the year ended SHARE CAPITAL The total authorised number of ordinary shares are 825 million (2016: 825 million) with a par value of SAR 10 per share. Shares issued, which are fully paid, are as follows: As at 2017 and 2016 Shareholder s name Number of shares Percentage of shareholding Par value of each share (SAR) Total value of shares (SAR 000) Saudi Aramco 515,625, % 10 5,156,250 TOTAL 309,375, % 10 3,093, ,000, % - 8,250, STATUTORY RESERVE In accordance with Regulations for Companies in Saudi Arabia, the Company is required to establish a statutory reserve by appropriation of 10% of the profit less accumulated losses, if any, for the year until the reserve equals 30% of the share capital. SAR million was transferred to this reserve for the year ended 2017 (2016: SAR million).this reserve is not available for dividend distribution. 13. ACCOUNTS PAYABLE Due to related parties (note 23.3) 2,854,268 1,647,248 Trade payables 34, ,027 2,888,438 1,753,275 The carrying amounts of accounts payable are assumed to be the same as their fair values, due to their shortterm nature. 14. ACCRUED AND OTHER LIABILITIES Due to related parties (note 23.3) 2,573,085 2,377,102 Project and other costs - 68,606 Zakat payable - 51,341 Retentions 40, ,763 Other 417, ,100 3,031,298 2,962,912 The carrying amounts of accrued and other liabilities are considered to be the same as their fair values due to their short-term nature. 15. BORROWINGS During 2010, 2011 and 2015, the Group entered into long-term financing facilities with various lenders. These financing facilities limit the creation of additional liens and/or financing obligations and are secured over the non-current assets of the Group. Details of the total financing facilities are as follows: 23

25 Notes to the consolidated financial statements for the year ended 2017 Note USD Facilities SAR'000 SAR Facilities SAR'000 Total SAR 000 Wakala , ,000 1,312,500 Commercial ,925,000 1,818,750 7,743,750 Export Credit Agencies ,041,250 1,125,000 10,166,250 Public Investment Fund ,875,000-4,875,000 Procurement ,931,250 2,115,000 4,046,250 Sukuk (Shariah compliant) ,749,900 3,749,900 SIDF ,000,000 2,000,000 Subordinated Bank Loans ,638,524-3,638,524 25,973,524 11,558,650 37,532,174 The Group granted security over its assets and rights to the Onshore and Offshore Issuer Security Agents, each of which will hold such security for the benefit of the secured parties, which include the Sukuk certificate holders and each of the service providers Wakala facilities On 24 June 2010, the Group entered into Shari a compliant islamic facility agreements with two lenders. The facilities are repayable in twenty-three unequal instalments on a semi-annual basis commencing 20 December Commission is payable on amounts drawn and is calculated at a market rate plus margin Commercial facilities On 24 June 2010, the Group entered into two commercial facility agreements with a number of banks. The facilities are repayable in twenty-three unequal instalments on a semi-annual basis commencing 20 December Commission is payable on amounts drawn and is calculated at a market rate plus margin Export credit agency facilities On 24 June 2010, the Group entered into facility agreements with six export credit agencies. The facilities are repayable in twenty-three unequal instalments on a semi-annual basis commencing 20 December Commission is payable on amounts drawn and is calculated at a market rate plus margin Public Investment Fund On 24 October 2010, the Group entered into facility agreements with the Public Investment Fund. The facilities are repayable in twenty-three unequal instalments on a semi-annual basis commencing 20 December 2014.Commission is payable on amounts drawn and is calculated at a market rate plus margin Procurement facility On 21 September 2010, the Group entered into facility agreements with a number of banks. The facilities are repayable in twenty-three unequal instalments on a semi-annual basis commencing 20 December Commission is payable on amounts drawn and is calculated at a market rate plus margin Sukuk On 9 October 2011, the Group issued Sukuk amounting to SAR 3.75 billion at par value maturing on 20 December The Sukuk issuance bears a rate of return based on a market rate plus margin payable semiannually in arrears. The Sukuk repayments are semi-annual from 20 December 2014 through 20 December The Group has provided an undertaking to the Sukuk holders to purchase the Sukuk from the Sukuk holders semi-annually on 20 June and 20 December during the period from 20 December 2014 to 20 December 2025 as per an agreed schedule Saudi Industrial Development Fund On 10 February 2015, the Group entered into facility agreements with Saudi Industrial Development Fund ( SIDF ) amounting to SAR 2 billion. The facilities are repayable in fourteen unequal instalments on a semiannual basis according to the Hijri calendar commencing from 15 Sha aban 1437 H (22 May 2016) to 15 Safar 1444 H (11 September 2022). The conditions precedent to the disbursement were met, following which, the 24

26 Notes to the consolidated financial statements for the year ended 2017 facilities were fully drawn down on 15 June On 22 June 2015, proceeds from the facilities amounting to SAR 1.36 billion were used towards partial early settlement of the USD commercial bank facilities Subordinated bank loans On 23 June 2015, the Company entered into an Amendment, Restated and Transfer Agreement with TOTAL, a consortium of banks and certain other parties, relating to the TOTAL equity advance agreement dated 8 September As a consequence of this agreement, TOTAL transferred to the consortium of banks its rights and obligations relating to its equity advance. The committed amounts transferred to the consortium of banks amounted to SAR 3.36 billion and the commitment retained by TOTAL amounted to SAR million. The loan is repayable in full on 22 June The covenants of the long-term financing facilities require the Group to maintain certain financial and other conditions, such as lenders prior approval for dividends distribution above a certain amount, to limit the amount of annual capital expenditure and certain other requirements. Lender s reliability test In accordance with the project documents, one of the conditions precedent to financial completion is a demonstration of operability or completion test, generally known as the Lender s Reliability Test ( LRT ). The LRT was successfully completed in November As at 2017 the carrying amounts of the above financing facilities are as follows: Borrowings: Export credit agencies 7,494,859 8,173,297 Commercial 5,171,306 5,532,020 Public investment fund 3,990,675 4,269,038 Sukuk (Shariah compliant) 3,069,668 3,283,787 SIDF 1,533,986 1,800,000 Procurement 3,312,259 3,543,301 Wakala 1,074,379 1,149,326 25,647,132 27,750,769 Less: unamortised transaction costs (356,198) (400,896) : unamortized advance interest ( SIDF) (69,724) (99,063) (425,922) (499,959) : current portion of borrowings (2,375,006) (2,103,634) 22,846,204 25,147,176 Subordinated loans: Bank loans 3,638,524 3,638,524 26,484,728 28,785,700 The fair values of non-current borrowings are not materially different from their carrying amounts since the interest payable on those borrowings is linked to the current market rates. They are classified as level 3 fair values in the fair value hierarchy due to the use of unobservable inputs, including own credit risk. Maturity profile of borrowings Year ending : ,103, ,375,006 2,375, ,638,230 2,638, ,652,810 2,652, ,208,894 3,208, through ,772,192 14,772,191 25,647,132 27,750,769 25

27 Notes to the consolidated financial statements for the year ended 2017 The Wakala and Procurement facilities were originally termed as finance leases, within Borrowing, on completion of the construction of certain assets envisaged in the related agreements. In substance these arrangements constitute loans and they are shown as such in these consolidated financial statements. This did not have any measurement impact on the recognized amounts. 16. ZAKAT AND INCOME TAXES 16.1 Components of the zakat base The Company and its subsidiary file separate zakat and income tax declarations on an unconsolidated basis. The components of the zakat base principally comprise of shareholders equity, loans from shareholders, borrowings and adjusted net income, less deductions for non-current assets and certain other items. Zakat is payable at 2.5% of the greater of the zakat base and adjusted net income Provision for zakat and income taxes The Company did not provide for zakat or current income taxes for the years ended 2017 and 2016 as it had both a negative zakat base and adjusted net loss for such years. The Company provided for zakat of SAR 9 million for the year ended 2011 that relates to the zakat assessment of 2010 (note 22.1(2)). During 2017, AATSC had recorded a provision for zakat of SAR 24 million (2016: SAR million) on account of its operating activities for the year which is recoverable by the Group from Saudi Aramco under a side letter to the Shareholder agreement. As per Royal Order No. A/136, dated 27 March 2017, the Company and its subsidiary are no longer subject to Zakat, effective from 1 January Accordingly, Zakat expense recognised during the year for SAR 24 million by AATSC has been reversed. Under previous arrangement, the Group was entitled to recover its Zakat expense from one of its shareholders. The Company recognised a deferred tax charge of SAR million for the year ended 2017 ( 2016: SAR million) Status of final assessments The Group has received a preliminary zakat assessment for the year 2010 amounting to SAR 24 million. The Group has filed an appeal against the additional zakat assessment. The appeal is currently under review by GAZT. On 2 July 2014, the Company received a zakat assessment for the year 2009 amounting to SAR 9.38 million and filed an appeal with GAZT for the same. Management believes that no significant liability will arise upon ultimate resolution of these appeals and accordingly no provision has been made in the accompanying consolidated financial statements. AATSC has not received an assessment from GAZT since its formation Income taxes Income taxes for the years ended December 31, were as follows: Deferred income tax charge for the year 926, ,220 Movements in deferred income tax liability for the years ended December 31, were as follows: January 1 247,601 47,381 Charge during the year (Note 16.5) 930, ,220 Tax impact of items in other comprehensive income (3,568) - December 31 1,174, ,601 26

28 Notes to the consolidated financial statements for the year ended Numerical reconciliation of theoretical tax expense to income tax expense Profit for the year 1,361,820 1,625,314 Tax at 20% on the Group s income 272, ,898 Tax effects of: - Finance costs not deductible 250,283 78,322 - Employee termination benefits 3, Deferred taxes not previously recognised 404,775 - Income tax expense 930, ,220 The tax effect of employee termination benefits presented in other comprehensive income amounted to SAR 3.56 million (2016: nil) Deferred tax liabilities/(assets) The balance comprises of temporary differences attributable to: Property plant and equipment 4,696,841 1,478,317 Set off by deferred tax asset comprising of temporary differences attributable to: Tax losses (3,507,705) (1,230,716) Employee termination benefits (14,666) - Amount recognised at year end 1,174, ,601 The unused tax losses in Saudi Arabia are available for carry forward indefinitely in future years but limited to a utilisation of 25% of the taxable income of any given year Components of the zakat base The Company and its subsidiary filed separate zakat and income tax declarations on an unconsolidated basis. The components of the zakat base principally comprise of shareholders equity, loans from shareholders, borrowings and adjusted net income, less deductions for non-current assets and certain other items. Zakat is payable at 2.5% of the greater of the zakat base and adjusted net income. Since 1 January 2017, zakat is no longer applicable for the Company and AATSC and accordingly no provision has been made during the year. The components of the zakat base attributable to the Saudi shareholder are as follows: For the year ended 2016 Share capital at the beginning of the year 5,156,250 Loans from shareholders 4,014,502 Borrowings 17,991,063 Accounts payable and accruals 123,243 Advances and receivables - Total non-current assets (28,390,656) Accumulated losses (379,379) Income for the year 1,015,821 Approximate zakat base (469,156) 27

29 Notes to the consolidated financial statements for the year ended EMPLOYEE TERMINATION BENEFITS January 1 42,066 19,566 Provisions 32,892 23,081 Payments (1,630) (581) December 31 73,328 42,066 The significant actuarial assumptions are as follows: Discount rate 4.40% 4.95% Salary growth rate 2.00% 2.00% The amounts recognised in the statement of financial position and the movement in the defined benefit obligations over the year are as follows: 1 January 42,066 19,566 Current service cost 12,154 23,081 Interest expense 2,914 - Total amount recognised in profit and loss 15,068 23,081 Remeasurements Experience loss 1,894 - Loss from changes in financial assumptions 4,980 - Other loss 10,950 - Total amount recognised in other comprehensive income 17,824 - Payments (1,630) (581) 73,328 42,066 The net liability disclosed above relates to unfunded plans as follows: Present value of unfunded obligations 73,326 42,066 The sensitivity of defined benefit obligations to changes in the weighted principal assumptions is: Impact on employee termination benefits Change in assumption Increase in assumption Decrease in assumption Discount rate 0.25% 0.25% Decrease by 2.94% 2.91% Increase by 3.09% 3.05% Salary growth rate 0.25% 0.25% Increase by 2.82% 2.80% Decrease by 3.08% 2.98% The above sensitivity analyses are based on a change in an assumption while holding all other assumptions constant. In practice, this is unlikely to occur, and changes in some of the assumptions may be correlated. When calculating the sensitivity of the defined benefit obligation to significant actuarial assumptions the same method (present value of the defined benefit obligation calculated with the projected unit credit method at the end of the reporting period) has been applied as when calculating the defined benefit liability recognised in the statement of financial position. The methods and types of assumptions used in preparing the sensitivity analysis did not change compared to the prior period. The weighted average duration of the defined benefit obligation is 12.3 years ( years). The expected maturity analysis of undiscounted employee termination benefits is as follows: 28

30 Notes to the consolidated financial statements for the year ended 2017 Less than a year Between 1 2 years Between 2 5 years Over 5 years Total 2017 Employee termination benefits 2,779 3,129 16, , , Employee termination benefits 2,065 2,775 13, , , GENERAL AND ADMINISTRATIVE EXPENSES For the year ended Employee benefit expense (note 19) 157, ,789 Contracted services 46,905 56,921 Materials and utilities 22,091 23,546 Depreciation and amortisation 16,448 15,968 Insurance 10,384 10,961 Rental 12,330 11,966 Professional services 5,910 6,488 Training 2,164 5,906 Travel and accommodation costs 1,233 1,493 Others 18,870 15, , , EMPLOYEE BENEFIT EXPENSE For the year ended Salaries and wages 386, ,553 End of service benefits 32,892 23,081 Other benefits 24,162 27, , ,242 Employee benefits of SAR million (2016: SAR million) have been charged in cost of sales. End of service benefits expense of SAR 17.8 million (2016: nil) was charged to other comprehensive income during the year. 20. FINANCE COSTS - NET For the year ended Conventional borrowing 1,008, ,216 Wakala and procurement 144, ,019 Finance charges for Sukuk 98, ,245 Bank charges and others 1,035 1,645 Finance costs 1,251,416 1,064,125 Finance income: Interest income on short-term bank deposits (42,416) (19,804) Finance costs net 1,209,000 1,044, DERIVATIVE FINANCIAL INSTRUMENTS The Group entered into interest rate swap agreements to fix the floating rate on a portion of its borrowing for nine facilities. Table below analyses the notional value and fixed rate for these interest rate swaps. 29

31 Notes to the consolidated financial statements for the year ended 2017 Notional value Fixed rate USD 000 Interest rate swap 231, % Interest rate swap 243, % Interest rate swap 525, % Interest rate swap 127, % Interest rate swap 127, % Interest rate swap 127, % Interest rate swap 122, % Interest rate swap 421, % Interest rate swap 130, % Interest rate swap 467, % Interest rate swap 466, % Notional value of these interest rate swaps is denominated in USD. The table below analyses financial instruments carried at fair value, by valuation method. Level 2 At 2017 Interest rate swaps 82,069 At 2016 Interest rate swaps 8,555 Fair value hierarchy levels are defined as follows: Level 1: The fair value of financial instruments traded in active markets (such as publicly traded derivatives, and trading and available-for-sale securities) is based on quoted market prices at the end of the reporting period. The quoted market price used for financial assets held by the company is the current bid price. These instruments are included in level 1. Level 2: The fair value of financial instruments that are not traded in an active market (for example, over-thecounter derivatives) is determined using valuation techniques which maximise the use of observable market data and rely as little as possible on entity-specific estimates. If all significant inputs required to fair value an instrument are observable, the instrument is included in level 2. Level 3: If one or more of the significant inputs is not based on observable market data, the instrument is included in level 3. Valuation techniques used to determine fair values The fair value of interest rate swaps is calculated as the present value of the estimated future cash flows based on observable yield curves. The tables below analyses the Group s financial liabilities hedged through interest rate swaps into relevant maturity groupings based on their contractual maturities: Contractual maturities of financial liabilities at 2017 Less than 1 year Between 1 and 2 years Between 2 and 5 years Total contractual cash flows Over 5 years Borrowings (Hedged through interest rate swaps) (11,861) 20,618 97,526 42, , Borrowings (Hedged through interest rate swaps) (8,648) ,944 13,639 20,153 30

32 Notes to the consolidated financial statements for the year ended 2017 The amounts disclosed in the table are the contractual undiscounted cash flows. Cash flows have been estimated using interest rates applicable at the end of the reporting period. The contractual terms of the interest rate swap agreements mirror the contractual cash flows arising from the borrowings 22. CONTINGENCIES AND COMMITMENTS 22.1 Contingencies (1) Bank guarantees The Group has issued bank guarantees as of 2017 amounting to SAR million (2016: SAR million) arising in the ordinary course of business. (2) Zakat The Company has received a zakat assessment for the year 2010 amounting to SAR 24 million. The Company recorded a provision for zakat of SAR 9 million and filed an appeal with the GAZT for the remainder. On 2 July 2014, the Company received a zakat assessment for the year 2009 amounting to SAR 9.38 million and filed an appeal with GAZT for the same. Management believes that no significant liability will arise upon ultimate resolution of these appeals and, accordingly, no additional provision has been made in the accompanying consolidated financial statements Capital commitments The capital expenditure contracted by the Group but not incurred until 2017 is SAR million (2016: SAR million) Operating lease commitments The Group has operating leases for its refinery and petrochemical complex land and land at Jubail port. Rental expenses for the year ended 2017 amounted to SAR million (2016: SAR million). Future minimum rental commitments under these operating leases are as follows: Year ending : Within one year 22,856 22,856 Later than one year but not later than five years 91, ,281 Later than five years 370, , , , RELATED PARTY MATTERS The Group s related parties are its shareholders and their related entities, the members of its Board of Directors and their close family members. Close members of the family of a person are those family members who may be expected to influence, or be influenced by, that person in their dealings with the entity and include those who are considered close members of the family according to the law. The following are considered close members of the family of a person: a. that person s children and spouse; b. children of that person s spouses; and c. parents, grandparents, brothers and sisters, grandchildren and other dependants of that person or that person s spouse. 31

33 Notes to the consolidated financial statements for the year ended Significant transactions with related parties The following transactions were carried out with related parties: For the year ended Saudi Aramco and related parties: Purchase of raw materials 28,056,071 20,700,240 Sales of refined and petrochemical products 20,858,711 16,552,485 Purchase of services 26,726 32,719 For the year ended TOTAL and related parties: Sales of refined and petrochemical products 12,177,836 9,549,116 Purchase of services 47, ,338 Goods are sold to and purchased from related parties based on prices as per the terms of the underlying agreements for feedstock and fuels supply and off-take of refined and petrochemical products. Services include provision of personnel to the Group as per the terms of the personnel secondment and technical services agreements. Also, refer to note 25 for details of transactions with the Group s unconsolidated structured entity Due from related parties Amounts due from related parties represent balances due from shareholders for the respective quantities of refined and petrochemical products delivered during the year and are due within one year. Accounts receivable: Saudi Aramco 1,760,192 1,517,876 Saudi Aramco Other related parties 146,608 79,096 TOTAL 811, ,814 TOTAL Other related parties 129,118 99,824 2,847,885 2,577,610 Other receivables: Saudi Aramco 11,344 51, Due to related parties Accounts payable and accrued liabilities for Saudi Aramco primarily represent accruals for raw materials supplied and services provided to the Group. Accounts payable: Saudi Aramco 2,854,118 1,636,538 TOTAL ,710 2,854,268 1,647,248 Accrued and other liabilities Saudi Aramco 2,559,229 2,361,573 TOTAL 13,856 15,529 2,573,085 2,377,102 5,427,353 4,024,350 32

34 Notes to the consolidated financial statements for the year ended Loans from shareholders Loans from shareholders: Saudi Aramco 6,462,045 6,288,694 TOTAL 238, ,509 6,700,571 6,423,203 The subordinated shareholder loans are interest bearing at a rate of LIBOR + 1.3% per annum with maturity of 30 years. The corresponding finance cost since inception of SAR million (2016: SAR million) has been accrued Key management compensation Key management personnel include the President & CEO, CFO, VP Manufacturing, VP of Human Resources and Support Services, B&O Manager and Technical Manager all of whom are employees of the Group s shareholders and seconded to the Group. Key management personnel compensation includes annual pay, benefits, deferred compensation, bonuses and termination benefits all of which are paid for by the Group s shareholders and recharged to the Group. The management charge from shareholders in respect of key management compensation in aggregate amounted to SAR million (2016: SAR million). 24. UNCONSOLIDATED STRUCTURED ENTITY SATORP owns 99.98% of Torathuna, a social responsibility company, which is a structured entity and not consolidated by the Group. The primary goal of Torathuna is to provide interest free loans for potential projects related to the cultural sector and to provide training, support, development and monitoring to ensure success and sustainability of such projects. Total assets of Torathuna, the carrying amount of investment in Torathuna by SATORP, and the potential maximum loss exposure of SATORP are as follows: 2017 Conventional financial assets 75,761 Total assets 75,761 The maximum loss exposure of SATORP * - The carrying amount of the investment recognised by SATORP 500 Commitment contracts related to investment/funding** 300,671 *SATORP meets all the running expenses of Torathuna without recourse and therefore expenses incurred by Torathuna are recharged back to SATORP. Total expenses incurred by Torathuna during the year ended 31 December 2017 amounts to SAR 4.61 million (for the period from 20 June 2016 to 2016 amounted to SAR 2.48 million).. **Funding requirements of Torathuna are met by SATORP and is capped to SAR 375 million. The amount included in the table above only represents the outstanding fixed contribution as at year end. The investment recognised by SATORP is included in Other non-current assets in the consolidated statement of financial position. The potential maximum loss exposure to SATORP from its involvement with Torathuna is limited to the total of the carrying amount of SATORP s investment and outstanding commitment regarding its contribution as set out above. SATORP has neither provided and nor intends to provide any financial guarantees for Torathuna beyond the initial commitment of funding of SAR 375 million as set out above. 33

35 Notes to the consolidated financial statements for the year ended SEGMENT REPORTING 25.1 Business segment The Group operates an integrated petroleum refining and petrochemical complex. The Group also does not distinguish between financial and non-financial information beyond revenue as the operating and financial accounting systems are structured to produce financial and operational information appropriate for an integrated petroleum refining and petrochemical complex. Accordingly, assets and liabilities are also not split into segments. In the opinion of management providing such information will not affect the decisions of the users of the financial statements in view of its nature of operations. Operating segments are reported in a manner consistent with the internal reporting provided to the chief operating decision maker. For allocation of revenue to geographical segments management considers customers location as the appropriate geographical segment. Ultimate destination of products sold may differ from customer locations Geographical segments 2017 Middle East Europe Total Revenue 21,756,705 12,177,836 33,934,541 Gross profit 1,836,743 1,028,077 2,864, Middle East Europe Total Revenue 17,201,888 9,549,118 26,751,006 Gross profit 1,933,335 1,073,234 3,006, EMPLOYEE HOME LOAN AND HOME OWNERSHIP PLAN The Group started a scheme for its employees whereby employees are provided either long term loans to buy or construct a house or the Group constructs houses on behalf of its employees and then recover the amount from its employees through monthly instalments over a period of 10 to 20 years. As of year-end, the construction cost of such houses amounted to SAR million (2016: SAR million) which is presented under Home ownership plan. Once construction is completed and houses are provided to employees they will be required to repay the construction cost to the Group. As of year-end, the Group has receivable of SAR million (2016: SAR million) from its employees for long term loans provided to them for house construction or acquisition. 27. CORRESPONDING AMOUNTS Certain prior year amounts have been reclassified to conform to the current year presentation. This reclassification did not have any impact on the reported earnings for the prior year. 28. NET DEBT RECONCILIATION This note sets out an analysis of net debt and the movements in net debt for each of the periods presented. Cash and cash equivalents 3,253,305 1,878,832 Borrowings repayable in 1 year (2,375,006) (2,103,634) Borrowings repayable after 1 year (26,484,728) (28,785,700) Shareholder loan after 1 year (6,700,571) (6,423,203) Net debt (32,307,000) (35,433,705) Cash and liquid investments 3,253,305 1,878,832 Gross debt - fixed interest rates (1,464,263) (1,700,940) Gross debt - variable interest rates (34,096,042) (35,611,597) Net debt (32,307,000) (35,433,705) 34

36 Notes to the consolidated financial statements for the year ended 2017 Cash and liquid investments Borrowings due in 1 year Borrowings due after 1 year Shareholder loans due after 1 year Total Net debt as at 1 January ,029 (1,937,070) (30,828,233) (6,196,133) (38,431,407) Cash flow movements 1,348,803 (166,564) 1,965,067-3,147,306 Amortization of upfront fees ,466-77,466 Other non-cash movements (227,070) (227,070) Net debt as at 31 December ,878,832 (2,103,634) (28,785,700) (6,423,203) (35,433,705) Cash flow movements 1,374,473 (271,372) 2,226,938-3,330,039 Amortization of upfront fees ,034-74,034 Other non-cash movements (277,368) (277,368) Net debt as at 31 December ,253,305 (2,375,006) (26,484,728) (6,700,571) (32,307,000) 29. NEW STANDARDS NOT YET ADOPTED IFRS 9 Financial Instruments The Group has reviewed its financial assets and liabilities and does not expect the new guidance to affect the classification and measurement of these financial instruments. The Group s financial assets meet the criteria of SPPI (solely payment of principal and interest) and its business model is to hold and collect those assets. Accordingly, they will continue to be measured at amortised cost. Based on the assessments undertaken to date, the Group does not expect a material increase in the loss allowance for its financial assets. The Group has confirmed that its current hedge relationships will qualify as continuing hedges upon the adoption of IFRS 9. The Group will apply the new rules retrospectively from 1 January 2018, with the practical expedients permitted under the standard. IFRS 15 Revenue from contracts with customers The impact on the Group of adopting IFRS 15 is limited to separately disclosing provisional pricing movements. The adoption of IFRS 15 is not expected to have any material impact on total revenue or net income of the Group and will be applied using the full retrospective approach. 35

37 ARABIAN ARAMCO TOTAL SERVICES COMPANY (A Saudi Closed Joint Stock Company) FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2017 AND INDEPENDENT AUDITORS REPORT

38 ARABIAN ARAMCO TOTAL SERVICES COMPANY (A Saudi Closed Joint Stock Company) FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2017 CONTENTS Page(s) Report of the independent auditors 2-6 Statement of financial position 7 Statement of comprehensive income 8 Statement of cash flows 9 Statement of changes in shareholders equity 10 Notes to the financial statements

39 Independent auditor s report to the shareholders of Arabian Aramco Total Services Company Report on the audit of the financial statements Our opinion In our opinion, the financial statements present fairly, in all material respects, the financial position of Arabian Aramco Total Services Company (the Company ) as at 2017, and its financial performance and its cash flows for the year then ended in accordance with International Financial Reporting Standards, that are endorsed in the Kingdom of Saudi Arabia, and other standards and pronouncements issued by the Saudi Organization for Certified Public Accountants (SOCPA). What we have audited The Company s financial statements comprise: the statement of financial position as at 2017; the statement of comprehensive income for the year then ended; the statement of cash flows for the year then ended; the statement of changes in shareholders equity for the year then ended; and the notes to the financial statements, which include a summary of significant accounting policies. Basis for opinion We conducted our audit in accordance with International Standards on Auditing, that are endorsed in the Kingdom of Saudi Arabia. Our responsibilities under those standards are further described in the Auditor s Responsibilities for the Audit of the Financial Statements section of our report. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Independence We are independent of the Company in accordance with the code of professional conduct and ethics, endorsed in the Kingdom of Saudi Arabia, relevant to our audit of the financial statements, and we have fulfilled our other ethical responsibilities in accordance with these requirements. Our audit approach Overview Key audit matters First time adoption of International Financial Reporting Standards (IFRS) that are endorsed in the Kingdom of Saudi Arabia Sukuk PricewaterhouseCoopers, License No. 25, Al Hugayet Tower, P.O. Box 467, Dhahran Airport 31932, Kingdom of Saudi Arabia T: +966 (13) , F: +966 (13) ,

40 Independent auditor s report to the shareholders of Arabian Aramco Total Services Company (continued) As part of designing our audit, we determined materiality and assessed the risks of material misstatement in the financial statements. In particular, we considered where management made subjective judgements; for example, in respect of significant accounting estimates that involved making assumptions and considering future events that are inherently uncertain. As in all of our audits, we also addressed the risk of management override of internal controls, including among other matters consideration of whether there was evidence of bias that represented a risk of material misstatement due to fraud. We tailored the scope of our audit in order to perform sufficient work to enable us to provide an opinion on the financial statements as a whole, taking into account the structure of the Company, the accounting processes and controls, and the industry in which the Company operates. Key audit matters Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the financial statements of the current period. These matters were addressed in the context of our audit of the financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. Key audit matter How our audit addressed the key audit matter First time adoption of International Financial Reporting Standards (IFRS) that are endorsed in the Kingdom of Saudi Arabia For all periods up to and including the year ended 2016, the Company prepared its financial statements in accordance with generally accepted accounting principles as issued by SOCPA ( previous GAAP ). The Company prepared its first annual financial statements for the year ended 2017, in accordance with IFRS, that are endorsed in the Kingdom of Saudi Arabia, and other standards and pronouncements issued by SOCPA. In preparing the financial statements, the Company s opening statement of financial position was prepared as of 1 January 2016, which is the Company s date of transition to IFRS that are endorsed in the Kingdom of Saudi Arabia. We considered the transition from previous GAAP to IFRS as a key audit matter due to its potential pervasive impact on the financial statements in terms of recognition, measurement and disclosure. We performed the following procedures in relation to transition to IFRS as assisted by our financial reporting experts: Obtained an understanding of the transition differences identified by the management between the previous GAAP and IFRS as endorsed in the Kingdom of Saudi Arabia and assessed its completeness and appropriateness by reference to our understanding of the Company s operations; and Evaluated the adequacy and appropriateness of disclosures made in the financial statements in relation to transition to IFRS that are endorsed in the Kingdom of Saudi Arabia. 3

41 Independent auditor s report to the shareholders of Arabian Aramco Total Services Company (continued) Key audit matter How our audit addressed the key audit matter Refer to Note 2 for the basis of preparation, including adoption of IFRS, and accounting policies. Refer also to Note 13 for the transition adjustments and other details in connection with the transition from previous GAAP to IFRS that are endorsed in the Kingdom of Saudi Arabia. Sukuk The Company does not have operations other than the issuance of Sukuk as part of a financing arrangement for its Parent Company. The settlement of the Sukuk liabilities is dependent on the Parent Company settling the amount due by it to the Company as per the agreed schedule and terms. We considered this to be a key audit matter as the Sukuk liabilities are material within the overall context of the financial statements and management exercises judgement that proceeds from the Parent Company will be available to settle the Sukuk liabilities as they fall due. Refer to Note 7 and Note 9 for further details. Our procedures included carrying out the following, among others: Obtained an understanding of the financing arrangements between (a) the Parent Company and the Company; and (b) the Company and the Sukuk holders focusing on the timing of cash inflows and outflows from the Company's perspective, respectively and the matching of the commission income/expense terms in the said agreements; Recomputed the commission expense arising on the Sukuk and agreed this to the income earned on the receivable due from the Parent; Validated the Sukuk repayments made during the year and agreed these to the repayments received from the Parent Company; Assessed the cash generating capability of the Parent Company by reference to the Parent Company's audited financial statements and management s budgets; and Evaluated the adequacy and appropriateness of the disclosures made in the financial statements around this matter. 4

42 Independent auditor s report to the shareholders of Arabian Aramco Total Services Company (continued) Responsibilities of management and those charged with governance for the financial statements Management is responsible for the preparation and fair presentation of the financial statements in accordance with International Financial Reporting Standards, that are endorsed in the Kingdom of Saudi Arabia and other standards and pronouncements issued by SOCPA, and for such internal control as management determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. In preparing the financial statements, management is responsible for assessing the Company s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless management either intends to liquidate the Company or to cease operations, or has no realistic alternative but to do so. Those charged with governance are responsible for overseeing the Company s financial reporting process. Auditor s responsibilities for the audit of the financial statements Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with International Standards on Auditing that are endorsed in the Kingdom of Saudi Arabia, will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements. As part of an audit in accordance with International Standards on Auditing that are endorsed in the Kingdom of Saudi Arabia we exercise professional judgment and maintain professional scepticism throughout the audit. We also: Identify and assess the risks of material misstatement of the financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company s internal control. Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by management. Conclude on the appropriateness of management s use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Company s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor s report to the related disclosures in the financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor s report. However, future events or conditions may cause the Company to cease to continue as a going concern. 5

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