Financial Statements for the year end 31 December 2007 · KMPG Fakhro Audit 5th Floor Chamber of Commerce Building ... reader with the International Financial Reporting Standards

Auditors’ Report to the Shareholders 34

Primary statements Balance sheet 35Income statement 36Statement of changes in equity 37Statement of cash flows 38

IntroductionThe formation, status and activities of APICORP 39

Significant Accounting Policies applied in the financial statements 40-44

Notes of the Financial Statements 45-66

Financial Statementsfor the year end 31 December 2007

APICORP Annual Report 2007 33

REPORT OF THE AUDITORS TO THE SHAREHOLDERS

Arab Petroleum Investments CorporationDammamSaudi Arabia 11 April 2008

Report on the financial statements

We have audited the accompanying financial statements of Arab Petroleum Investments Corporation (“the Corporation”), which comprise the balance sheet as at 31 December 2007, and the income statement, statement of changes in equity and cash flow statement for the year then ended, and a summary of significant accounting policies and other explanatory notes.

Responsibility of the directors for the financial statements

The Directors of the Corporation are responsible for the preparation and fair presentation of these financial statements in accordance with International Financial Reporting Standards. This responsibility includes designing, implementing and maintaining internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatements, whether due to fraud or error; selecting and applying appropriate accounting policies; and making accounting estimates that are reasonable in the circumstances.

Auditors’ responsibility

Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with International Standards on Auditing. Those standards require that we comply with relevant ethical requirements and plan and perform the audit to obtain reasonable assurance whether the financial statements are free of material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on our judgement, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, we consider internal controls relevant to the Corporation’s preparation and fair presentation of the financial statements 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 entity’s internal controls. An audit also includes evaluating the appropriateness of accounting principles used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the financial statements.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

Opinion

In our opinion, the financial statements present fairly, in all material respects, the financial position of the Corporation as at 31 December 2007, and of its financial performance and its cash flows for the year then ended in accordance with International Financial Reporting Standards.

34 APICORP Annual Report 2007

KMPG FakhroAudit5th FloorChamber of Commerce BuildingPO Box 710, ManamaKingdom of Bahrain

CR No. 6220Telephone +973 17 224807Fax +973 17 227443Internet www.kpmg.com.bh


BALANCE SHEET as at 31 December 2007 US$ 000

Note 2007 2006

ASSETS

Cash and cash equivalents 15,510 10,264Trading securities 11 50,822 63,698Available-for-sale securities 12 817,648 582,087Available-for-sale direct equity investments 13 343,266 256,731Deposits with banks 14 391,575 345,000Syndicated and direct loans 15 1,892,499 1,304,554Property and equipment 16 36,518 38,300Other assets 17 25,519 34,090

TOTAL ASSETS 3,573,357 2,634,724

LIABILITIES

Deposits from banks 18 1,342,906 1,155,668Deposits from corporate 294,730 5,000Securities sold under agreements to repurchase 225,557 -Term financing 19 648,033 549,045Other liabilities 20 41,728 28,496

Total Liabilities 2,552,954 1,738,209

EQUITY

Share capital 550,000 550,000Legal reserve 111,300 103,100General reserves 66,539 15,000Fair value reserve 255,488 191,339Retained earnings 37,076 37,076

Total Equity (Page 37) 1,020,403 896,515

TOTAL LIABILITIES AND EQUITY 3,573,357 2,634,724

OFF- BALANCE SHEET EXPOSURES 22 1,051,857 807,722

The financial statements were approved by the Board of Directors on 11 April 2008 and were signed by:

Abdullah A. Al Zaid Ahmed Bin Hamad Al Nuaimi Chairman Chief Executive and General Manager

The financial statement consists of pages 35 to 66.

APICORP Annual Report 200736

INCOME STATEMENT for the year ended 31 December 2007 US$ 000

Note 2007 2006

Interest income 1 153,703 116,684Interest expense (112,935) (87,195)

NET INTEREST INCOME 40,768 29,489

Fee income 3,625 2,318Fee expense (180) (159)

Net fee income 2 3,445 2,159

Dividend income 3 31,649 30,103Gains on trading securities 4 6,686 5,640Gains on available-for-sale securities 5 6,039 1,331Gains on available-for-sale direct equity investments 6 5,433 -Other income 7 1,591 698General administrative expenses 8 (22,296) (20,326)Impairment reversals 9 7,982 1,914Other expenses 10 (1,558) (30)

NET INCOME FOR THE YEAR BEFORE APPROPRIATIONS 79,739 50,978

2007 2006Appropriations of net income:

Legal reserve 8,200 5,100General reserve 51,539 -Dividend to shareholders (see below) 20,000 20,000Retained earnings - 25,878

79,739 50,978

Appropriations of net income for dividends are proposed by the Directors and are subject to approval by the Annual General Assembly of the shareholders.

2007 2006Per US$ 1,000 share information

• Earnings (based on weighted average number of shares outstanding) US$ 144.98 US$ 92.69

• Proposed dividend (2006: actual) US$ 36.36 US$ 36.36

• Net asset value US$ 1,855 US$ 1,630


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STATEMENT OF CASH FLOWS for the year ended 31 December 2007 US$ 000

Note 2007 2006CASH FLOWS FROM OPERATING ACTIVITIES 24

Interest received 150,237 114,525Interest paid (108,446) (75,969)Fees received 3,628 4,272Fees paid (180) (159)Other income received 14 14Net receipts from trading activities 19,588 11,206Operating expenses paid (18,564) (15,846)

Cash flows before changes in operating assets 46,277 38,043

DECREASE (INCREASE) IN OPERATING ASSETSIncrease in deposits with banks (46,575) (80,080)Syndicated and direct loans drawn down 15 (1,237,502) (745,369)Loan repayments and prepayments received performing loans 15 654,435 583,303Recovery from Aradet (guarantee) 5,000 5,000Increase in deposits from banks 702,525 178,228Net inflows / (payments) from other operating assets and liabilities 10,446 (11,298)

Cash flows from operating activities 134,606 (32,173)

CASH FLOWS FROM INVESTING ACTIVITIESProceeds from redemptions and sales of available-for-sale securities 469,079 238,175Purchase of available-for-sale securities (696,963) (255,544)Dividends from available-for-sale direct equity investments 31,635 30,095Payments for available-for-sale direct equity investments (24,226) (2,573)Proceeds from sales of investment property 2,697 -Proceeds from sales of available-for-sale direct equity investments 6,494 -Rent received 886 692Capital expenditure on property and equipment paid (962) (696)

Cash flows from investing activities (211,360) 10,149

CASH FLOWS FROM FINANCING ACTIVITIES

Term financing drawn down 19 400,000 50,000Term financing repaid 19 (300,000) -Dividends paid (18,000) (36,000)

Cash flows from financing activities 82,000 14,000

Net Increase (Decrease) in cash flows for the year 5,246 (8,024)

Cash and Cash equivalents at the beginning of the year 10,264 18,288

Cash and cash equivalents at 31 December as per the balance sheet (see page 35) 15,510 10,264



Activities APICORP is independent in its administration and the performance of its activities, and operates on a commercial basis with the intention of generating net income. It operates from its registered head office in Dammam, Kingdom of Saudi Arabia and its Banking Unit in Manama, Kingdom of Bahrain.

Currently the Corporation’s project-financing activities take the form of loans and direct equity investments in projects. These activities are funded by shareholders’ equity, medium-term financing, deposits from government, corporate and short-term deposits from banks.

INTRODUCTION

The formation, status and activities of APICORPThe information on this page is presented in order to provide the reader with background information about APICORP that is essential to the understanding of the financial statements, as set out in pages 37 to 66. Similarly, the significant accounting policies as explained in pages 40 to 44 are intended to acquaint the reader with the International Financial Reporting Standards (IFRS) and the methodology followed by the Corporation in the presentation of its financial statements, and the classification and measurement of assets and liabilities therein.

Arab petroleum investments corporation (APICORP - the Corporation) is an Arab joint stock company established on 23 November 1975 in accordance with an international agreement signed and ratified by the ten member states of the Organization of Arab Petroleum Exporting Countries (OAPEC). The agreement defines the objectives of the Corporation as:

• participation in financing petroleum projects and industries, and in fields of activity which are derived there from, ancillary to, associated with, or complementary to such projects and industries; and

• giving priority to Arab joint ventures which benefit the member states and enhance their capabilities to utilise their petroleum resources and to invest their funds to strengthen their economic and financial development and potential.

Domicile and taxationThe Corporation is an international entity, and operates from its registered head office in Dammam, Kingdom of Saudi Arabia. The establishing agreement states that APICORP is exempt from taxation in respect of its operations in the member states.

Share capitalThe capital is denominated in shares of US$ 1,000 and is owned by the governments of the ten OAPEC states as follows:

US$ 000 Issued and Authorised Percentage fully paid capital

United Arab Emirates 93,500 204,000 17%Kingdom of Bahrain 16,500 36,000 3%Democratic and Popular Republic of Algeria 27,500 60,000 5%Kingdom of Saudi Arabia 93,500 204,000 17%Syrian Arab Republic 16,500 36,000 3%Republic of Iraq 55,000 120,000 10%State of Qatar 55,000 120,000 10%State of Kuwait 93,500 204,000 17%Socialist Peoples’ Libyan Arab Jamahiriya 82,500 180,000 15%Arab Republic of Egypt 16,500 36,000 3%

550,000 1,200,000 100%


SIGNIFICANT ACCOUNTING POLICESA GENERAL

A-1 Compliance with International Financial Reporting Standards

The financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS).

A-2 Basis of preparation

APICORP presents its financial statements in United States dollars (rounded to the nearest thousand) because it is a supranational organisation with its capital and the majority of its transactions and assets denominated in that currency.

The financial statements have been prepared on the historical cost convention except for the measurement at fair value of trading securities, certain available-for-sale investments, derivative financial instruments and investment property.

The preparation of financial statements in conformity with the IFRS, that requires the use of certain critical accounting estimates. It also requires management to exercise its judgement in the process of applying the Corporation’s accounting policies. The areas involving a higher degree of judgement or complexity, or areas where assumptions and estimates are significant to the financial statements are disclosed in notes J and K.

These accounting policies have been applied consistently to all periods presented in the financial statements. In preparing these financial statements the Corporation has adopted IFRS 7 Financial Instruments: Disclosures and amended IAS 1 Presentation of Financial Statements – Capital Disclosures. The adoption of IFRS 7 and amendments to IAS 1 impacted the type and amount of disclosures made in these financial statements, but had no impact on the reported profits or financial position of the Corporation. In accordance with the transitional requirements of the standards, the Corporation has provided full comparative information.

A-3 Foreign currency transactions

Transactions in currencies other than US dollars (foreign currencies) are translated at the exchange rates ruling at the date of the transaction. All monetary assets and liabilities denominated in foreign currencies are translated into US dollars at rates prevailing at the balance sheet date. Differences arising from changes in exchange rates are recognised in the income statement.

Available-for-sale direct equity investments (non-monetary assets) denominated in foreign currencies, that are stated at fair value, are translated to US dollars at prevailing exchange rates. Differences arising from changes in rates are included in the fair value reserve in equity. Capital expenditure on property and equipment is stated at the historical rates of exchange. There are no other foreign currency denominated non-monetary assets or liabilities.

Share capital originally contributed in Saudi Riyals is maintained at the historical rates of exchange.

B FINANCIAL ASSETS

B-1 Classification

Trading securities are those that the Corporation purchased principally for the purpose of gains over the short-term. These consist of listed managed funds and listed equity securities.

Loans arise when the Corporation provides money to a debtor, other than those created with the intention of gains over the short-term. Loans comprise deposits with banks, and syndicated and direct loans.

Available-for-sale investments are non-derivative financial assets that are not classified as held for trading or loans provided by the Corporation or held to maturity. Available-for-sale investments include certain debt securities, managed funds and direct equity investments.

B-2 Recognition

Available-for-sale and held for trading financial assets are recognised on a settlement date basis.

Loans are recognised on the day on which they are drawn down by the borrower.


SIGNIFICANT ACCOUNTING POLICES (continued) B Financial assets (continued)

B-3 Measurement

Financial assets are measured initially at fair value plus transaction costs except for financial assets held for trading where transaction costs are recognised in the income statement. Subsequent to initial recognition, all trading and available-for-sale investments are re-measured to fair value.

Loans are carried at amortised cost using the effective interest method, less allowances for impairment, if any. The unamortised portion of deferred participation and commitment fees received is deducted from the carrying values of the loans.

B-4 Amortisation

Where financial assets, mainly bonds, have been purchased at a premium or a discount, the premiums and discounts are amortised through the income statement over the period from the date of purchase to the date of maturity.

B-5 Fair value measurement principles

The fair value of financial instruments is based on their quoted market price at the balance sheet date without any deduction for transaction costs. Financial assets, for which there is no quoted market price or other appropriate methods from which to derive fair value are stated at cost less impairment allowances, if any.

B-6 Gains and losses on subsequent measurement

Gains and losses arising from changes in the fair value of available-for-sale financial assets are recognised directly in a fair value reserve as a separate component of equity. When the assets are sold, collected or otherwise disposed-off, or are impaired, the cumulative gain or loss recognised in equity is transferred to the income statement. Gains and losses arising from a change in the fair value of trading securities are recognised in the income statement in the period in which it arises.

B-7 Derecognition

A financial asset is derecognised when the Corporation loses control over the contractual rights attached to that asset. This occurs when the rights are realised, expire or are surrendered. A financial liability is derecognised when the contract obligations are discharged or cancelled or expires.

B-8 Impairment

Financial assets are reviewed at each balance sheet date to determine whether there is objective evidence of impairment. If any such indication exists, the assets’ recoverable amounts are estimated. The recoverable amount of an equity instrument is its fair value. The recoverable amount of loans and debt instruments remeasured to fair value is calculated as the present value of the related expected future cash flows discounted at the current market rate of interest for such an instrument.

Where a financial asset remeasured to fair value directly through equity is impaired, and a write-down was previously recognised directly in equity, the write-down is transferred to the income statement and is recognised as part of the impairment loss. Any subsequent additional impairment loss is also recognised in the income statement. Similarly the increase in the fair value of financial asset, previously been recognised in equity is reversed to the extent, it is impaired.

Allowances for Loans uncollectibility (impairment) consist of:

- Specific allowances for individual loans when circumstances are identified that may lead to significant, possibly permanent, losses. The most common occurrences are failure to meet interest or repayment commitments.

- Loans not found to be individually impaired are grouped on similar credit characteristics. Each group is collectively evaluated for impairment and collective impairment allowance is calculated.

Increases and decreases in allowances for uncollectibility are recognised in the income statement.


SIGNIFICANT ACCOUNTING POLICES (continued)B Financial assets (continued)

B-8 Impairment (continued)

When a loan is known to be uncollectible, and the final loss has been determined, the loan is written off after receiving specific approval to do so from the Board of Directors.

If in a subsequent period the amount of impairment loss decreases, and the decrease is due to a change in estimates, or can be linked objectively to an event occurring after the write-down, the write-down is reversed through the income statement, except for available-for-sale equity investments, which is reversed through the equity.

C CASH AND CASH EQUIVALENTS

For the purpose of the statement of cash flows, cash and cash equivalents comprise cash balances on hand and cash in call accounts.

D REPURCHASE AND RESALE AGREEMENTS

Assets sold with a simultaneous commitment to repurchase at a specified future date (repos) are not derecognised. As the Corporations retains all or substantially all risks and rewards of the transferred assets. Amounts received under these agreements are treated as liabilities and the difference between the sale and repurchase price treated as interest expense using the effective yield method.

Assets purchased with a corresponding commitment to resell at a specified future date (reverse repos) are not recognised in the balance sheet. Amounts paid under these agreements are treated as assets and the difference between the purchase and resale price treated as interest income using the effective yield method.

E PROPERTY AND EQUIPMENT

E-1 Classification

Items of property and equipment are stated at cost less accumulated depreciation and impairment losses, if any.

Where an item of property and equipment comprises major components having different useful lives (for example: the Corporation’s head office building), these components are accounted for as separate items of property and equipment. No borrowing costs have been capitalised.

E-2 Subsequent expenditure

Expenditure incurred subsequently to replace a major component of an item of property and equipment that is accounted for separately is capitalised. Other subsequent expenditure is capitalised only when it increases the future economic benefits expected to accrue from the item of property and equipment.All other expenditure, for example on maintenance and repairs, is expensed in the income statement as incurred.

E-3 Depreciation

Depreciation is charged to the income statement on a straight-line basis over the estimated useful lives of the items of property and equipment, and of the major components that are accounted for separately. Land is not depreciated.

The estimated useful lives of the Corporation’s property and equipment are as follows:

• Head office building (civil works and other major components) 20 to 40 years • Head office building (finishes, systems and equipment) 5 to 20 years • Housing compound buildings (including extension completed in 2000) 15 years (from 2000) • Housing compound equipment, furniture and fittings 5 to 10 years • Office furniture, equipment and computer hardware (and related software) 3 to 10 years

The property and equipment residual values and useful lives are reviewed, and adjusted if appropriate, at each balance sheet date.


SIGNIFICANT ACCOUNTING POLICES (continued)F INVESTMENT PROPERTY

The Corporation’s investment property is carried at fair value. Fair value is determined by an independent, professional property valuator based on open market prices. Any gain or loss arising from a related change in fair value is recognised in income.

G INCOME RECOGNITION

G-1 Interest income and expenses

Interest income and interest expense for all interest-bearing financial instruments except those classified as

held-for-trading are recognised within “interest income” and “interest expense” in the income statement using the effective interest rate method. Fees, including loan origination less and early redemption fees are included in the calculation of the effective interest rate to the extent that they are considered to be an integral part of the effective interest rate.

G-2 Fee income

Fee income arises from financial services provided by the Corporation including project and structured finance transactions, for example advising on underwriting and arranging syndicated loan facilities, and is recognised when the service is provided.

Fees that are analagous to interest and are considered to be part of the overall yield on loans, specifically participation and commitment fees are initially deferred and then amortised over the lives of the related loans. The amortised income is included in interest income.

G-3 Dividend income

Dividend income is recognised in the income statement when the right to receive is established.

H EMPLOYEES’ END OF SERVICE BENEFITS

The Corporation provides end of service benefits to its employees. The entitlement to these benefits is based upon the employees’ final salary and length of service subject to the completion of a minimum service period. Provision for the unfunded commitment (which is a defined benefit scheme under IAS 19) has been made by calculating the notional liability, had all the employees left at the balance sheet date.

I DERIVATIVE FINANCIAL INSTRUMENTS

Derivative financial instruments are contracts, the value of which is derived from one or more underlying financial instruments and include interest rate swap and forward currency contracts.

Derivative financial instruments are initially recognised at fair value on the date on which a derivative contract is entered into and are subsequently remeasured at their fair value. The fair value of a derivative is the equivalent to its prevailing market rates or is based on broker quotes. Derivatives with positive market values are disclosed as assets and derivatives with negative market values are disclosed as liabilities in the balance sheet. Any gains or losses arising from changes in fair value on derivative instruments are recognised directly in the income statement in period in which it arises.

J JUDGEMENTS

In the process of applying the Corporation’s accounting policies, management has made the following judgements, apart from those involving estimations, which have the most significant effect in the amounts recognised in the financial statements:

J-1 Classification of investments

Management decides on acquisition of an investment whether it should be classified as trading or available for sale, which is based on the intention of the management.


SIGNIFICANT ACCOUNTING POLICES (continued)J JUDGEMENTS (continued)

J-2 Impairment of investments

The Corporation considers quoted available for sale investments as impaired when there has been a significant or prolonged decline in the fair value below its cost or where other objective evidence of impairment exists. The determination of what is “significant” or “prolonged” requires considerable judgement. For AFS investments that are current at cost less impairment, corporation considers among other factors, the evidence of deterioration in the financial health of the investee, industry and sector performance, changes in technology and operational and financing cash flows.

K ESTIMATION UNCERTAINTY

The key assumptions concerning the future and other key sources of estimation uncertainty at the balance sheet date, that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below:

K-1 Impairment losses on loans and advances

The Corporation reviews its loans portfolio on a quarterly basis to assess whether a provision for impairment should be recorded in the income statement. In particular, considerable judgement by Corporation is required in the estimation of the amount and timing of future cash flows when determining the level of provisions required. Such estimates are necessarily based on assumptions about several factors involving varying degrees of judgement and uncertainty, and actual results may differ resulting in future changes to such provisions.

K-2 Collective impairment provisions on loans and advances

In addition to specific provisions against individually significant loans and advances, the Corporation also makes a collective impairment provision against loans and advances which although not specifically identified as requiring a specific provision have a greater risk of default than when originally granted. This collective provision is based on any deterioration in the internal grade of the loan, since it was granted. The amount of the provision is based on the historical loss pattern for loans within each grade and is adjusted to reflect current economic changes.

These internal grading take into consideration factors such as any deterioration in country risk, industry, technological obsolescence, as well as identified structural weaknesses or deterioration in cash flows.

L NEW INTERNATIONAL FINANCIAL REPORTING STANDARDS AND INTERPRETATIONS NOT YET ADOPTED

During the year IAS 1 – Presentation of Financial Statements was issued which becomes effective for financial years beginning on or after 1 January 2009. The adoption of this standard will result in changes in the presentation of the financial statements and is not expected to have any impact on the financial position of the Corporation.

M LEGAL AND GENERAL RESERVES

Under Article 35 of APICORP’s statues, 10% of annual net income is to be transferred to a legal reserve until such reserve equals the paid up share capital. The legal reserve is not available for distribution.

Article 35 also permits the creation of other reserves such as a general reserve. The general reserve may be applied as is consistent with the objectives of the Corporation, and as may be resolved by the General Assembly, on the recommendation of the Board of Directors.


NOTESto the year ended 31 December 2007 financial statements US$ 000

1. NET INTEREST INCOME

2007 2006

Interest incomeInterest income arises from:

Cash and cash equivalents 290 133Deposits with banks - Islamic 287 143 - Conventional 18,002 11,592Available-for-sale securities - coupon interest 29,421 27,179Available-for-sale securities - amortisation of purchase premiums 838 (5,372)Syndicated and direct loans - Islamic 14,695 2,817 - Conventional 85,854 76,308Amortisation of loan participation and commitment fees 4,316 3,884

Total interest income 153,703 116,684

Interest expenseInterest expense arises from:

Deposits from banks (49,494) (38,109)Term financing (34,828) (29,813)Amortisation of term financing front-end fees and commitment fees (641) (623)Unpaid dividends (see note 15) (2,382) (2,014)

Total interest expense (87,345) (70,559)Other charges arise from:

Profit on Murabaha financing (25,590) (16,636)

Total interest expense (112,935) (87,195)

Net interest income 40,768 29,489

2. NET FEE INCOME 2007 2006

Fee incomeFee income derived from the Corporation’s lending activities:

Underwriting and arranging services 1,765 1,622Agency, advisory and other services 1,725 668Fee from securities lending activities 135 28

3,625 2,318Fee expenseCustody fees and other charges paid to banks (180) (159)

Net fee income 3,445 2,159

3. DIVIDEND INCOME 2007 2006

Dividend income generated from:Trading securities 14 8Available-for-sale direct equity investments 31,635 30,095

Total dividend income 31,649 30,103



4. GAINS ON TRADING SECURITIES 2007 2006

Gains on trading securities arise from:Realised gains 3 120Unrealised gains on revaluation 6,683 5,484

Total realised and unrealised gains on trading securities 6,686 5,640

5. GAINS ON AVAILABLE-FOR-SALE SECURITIES 2007 2006Realised gains on available-for-sale securities arise from:

Bonds and structured notes (4) -Managed funds 6,043 1,331

Total gains on available-for-sale securities 6,039 1,331

6. GAINS ON AVAILABLE-FOR-SALE DIRECT EQUITY INVESTMENTS 2007 2006

Realised gains on sale of listed available-for-sale direct equity 5,433 -

7. OTHER INCOME 2007 2006

Other income consists of:Rent – head office building and housing compound 886 692Gains on disposal of investment property 702 -Miscellaneous income 3 6

Total other income 1,591 698

8. GENERAL AND ADMINISTRATIVE EXPENSES 2007 2006

General administrative expenses consist of:Human resources costs 14,405 11,216Staff retirement fund contributions - 1,836Premises costs, including depreciation 2,696 2,670Equipment and communications costs 1,055 907Key Management’s benefits, fees and expense 1,719 1,583Key Management’s post employment benefits 73 19 Donations 305 303 Consultancy 1,123 1,010 Other corporate expenses 920 782

Total general and administrative expenses 22,296 20,326



9. IMPAIRMENT LOSSES / REVERSALS 2007 2006Write-downs Syndicated and direct loans (see note 15)

Specific impairment allowance (79) (2,801)Collective impairment allowance (1,704) (187)Available-for-sale direct equity investments (see note 13) (1,600) (7,482)

(3,383) (10,470)Reversals of write-downs Syndicated and direct loans (see note 15)

Government of Iraq – reduction against increase in unpaid dividends 4,382 6,013Specific impairment allowance reversals on recovery 1,400 1,018Payments under guarantees – Recovery from Aradet, Iraq (see below) 5,000 5,000 Others 583 353

11,365 12,384

Net decrease in impairment losses 7,982 1,914

Payments under guarantees - Aradet, IraqFollowing the lifting of the United Nations sanctions against Iraq, APICORP was successful in negotiating terms for the settlement of amounts paid on behalf of Aradet under guarantees. The balance due till date, under the 2005 settlement agreement of guarantees was duly received and the related provisions were released, accordingly.

10. OTHER EXPENSES 2007 2006

Exchange gains (losses) 7,185 (30)Derivatives fair values changes (see note 22) (8,743) -

Total other expenses (1,558) (30)

11. TRADING SECURITIES 2007 2006

Listed equities 600 497Listed managed funds 50,222 63,201

Total at trading securities 31 December 50,822 63,698

12. AVAILABLE-FOR-SALE SECURITIES 2007 2006Available-for-sale securities consist of: Fixed-rate bonds issued by

Governments and other public sector issuers - 63,418Other issuers – mainly US and EU corporates 383 8,919

Floating-rate bonds issued by other issuers 339,993 291,342 US Treasury Bills 99,057 - US Treasury Notes 110,411 - Structured notes 151,927 117,874 Managed funds 115,877 100,534

Total available-for-sale securities at 31 December 817,648 582,087



12. Available-for-sale securities (continued)

Securities sold under agreements to repurchase: The Corporation enters into collateralised borrowing transactions (repurchase agreements) in the ordinary course of its financing activities. Collateral is provided in the form of securities held within the available-for-sale portfolio. At 31 December 2007, the fair value of available-for-sale that had been pledged as collateral under repurchase agreements was US$ 261.120 million (2006: US$ nil). These transactions are conducted under the terms that are usual and customary to standard lending and securities borrowings & lending activities.

13. AVALIABBLE-FOR-SALE DIRECT EQUITY INVESTMENTS

APICORP has the following available-for-sale direct equity investments in companies in the Arab petroleum and petrochemical industries:

UNLISTED INVESTMENTS – CARRIED AT COST 2007 2006

KingdomofBahrainBahrain National Gas Company (Banagas) – liquefied petroleum gas 11,491 11,491

KingdomofSaudiArabiaSaudi European Petrochemical Co. (Ibn Zahr) – MTBE & polypropylene 142,219 142,219 Arabian Industrial Fibres Co (Ibn Rushd) – polyester fibres - -

RepublicofIraqArab Company for Detergent Chemicals (Aradet) – Linear alkyl benzene 5,120 6,720

Socialist Peoples’ Libyan Arab JamahiriyaArab Drilling and Workover Company (Adwoc) – drilling & related services 11,686 11,686Arab Geophysical Exploration Services Company (Agesco) –seismic services 594 594

ArabRepublicofEgyptAlexandria Carbon Black Company – carbon black 10,996 10,996Alexandria Fibre Co. SAE (AFC) – acrylic fibre 4,550 2,101Oriental Petrochemicals Company – polypropylene 6,151 6,151Egyptian Methanex Methanol Company – methanol company 7,099 2,571Egyptian Agrium Nitrogen Products Company (Agrium Co.) – fertilizer products 16,750 -Egyptian Bahraini Gas Derivative Company – Gas liquids extraction plant 500 -

Non-shareholdercountriesTankage Mediterranee (Tankmed), Tunisia – storage facilities 1,112 1,112

LISTED INVESTMENTS – CARRIED AT FAIR VALUE

KingdomofSaudiArabiaYansab Petrochemical Complex (YANSAB) – Olefin derivaties 124,998 58,494

Non-shareholdercountiesJordan Phosphate Mining Company – Jordan – fertilizers - 2,596

Net carrying value at 31 December 343,266 256,731



13. Available-for-sale direct equity investments (continued) 2007 2006Movements in the year

Net carrying value at the beginning of the year 256,731 234,318Additions during the year 24,226 2,571Disposals during the year (4,866) -Net increase in fair value in the year 68,775 33,993Impairment charge for the year (1,600) (7,482)Transferred from fair value reserve on impairment - (6,669)


Movements in allowance for specific impairment

At the beginning of the year 84,890 77,408Impairment charge for the year 1,600 7,482

Allowance for specific impairment at 31 December 86,490 84,890

Commitments – uncalled share capital

At the beginning of the year 26,478 4,649Additional commitments 65,019 24,400Commitments fulfilled (24,226) (2,571)

Commitments at 31 December 67,271 26,478

Companies in which the Corporation holds 20% or more of the equity are not treated as associates under IAS 28 - Investments in Associates because APICORP’s philosophy is that it should act in a fiduciary and advisory capacity and not exercise significant influence over the management and operations of the companies. Once the companies become established and begin paying dividends, it is the Corporation’s intention to profitably dispose of its holdings in order to recycle the funds to new projects. Investment committee, with Corporation’s representatives on the boards of investee companies regularly evaluates exit opportunities. Accordingly, these investments are classified as available-for-sale assets.

Unquoted available-for-sale direct equity investments are carried at cost in the absence of reliable measure of fair value. The fair value of these investments cannot be reliably measured due to lack of information from the investee companies, which is primarily due to lack of influence of the Corporation on the investee companies.

14. DEPOSITS WITH BANKS 2007 2006Deposits with banks

Murabaha with Islamic financial institutions 20,000 -Deposits with conventional financial institutions 371,575 345,000

Total deposits with banks at 31 December 391,575 345,000



15. SYNDICATED AND DIRECT LOANS 2007 2006

Unimpaired loans

- Islamic 429,985 40,387- Conventional 1,456,613 1,251,570

1,886,598 1,291,957Unamortised participation and commitment fees (13,108) (10,549)Collective impairment allowance (6,020) (4,316)

1,867,470 1,277,092Impaired loans

Non-performing loans (see below) 21,262 26,395 Performing loans 27,898 30,901Allowance for specific impairments (24,131) (29,834)

25,029 27,462

NET CARRYING VALUE AT 31 DECEMBER 1,892,499 1,304,554

Impaired (non-performing) loans – Fully provided

Iraqi companies fully owned by Government of Iraq 51,848 51,848Dividends & interest due to Government of Iraq, offset against defaulted loans (47,146) (42,764)Net Iraqi loans, after dividends offset (see below) 4,702 9,084Others 16,560 17,311

Total impaired (non-performing) loans at 31 December 21,262 26,395

Impaired loans to companies fully owned by Government of Iraq

As a result of the 1990-1991 second Gulf war, certain Government of Iraq controlled companies defaulted on loans from the Corporation. Consequently, since 1992 dividends (and non contractual accrued interest thereon) due to the Government of Iraq (a shareholder in APICORP) have not been paid.

With effect from 1998, the Corporation reduced impairment allowances against the defaulted loans by the amount of the unpaid dividends, while still carrying the dividends as liabilities in the balance sheet up to 2003.

In May 2003, APICORP Board of Directors adopted a resolution authorizing management, in cases where no settlement is reached, to set-off bad debts owed to the Corporation by companies and public corporations fully owned by any of APICORP’s shareholder governments, against accounts held by the Corporation belonging to such bodies and governments including dividends, provided all legal requirements are satisfied and complied with.

Accordingly, and until negotiation is undertaken with the Government of Iraq, the Corporation starting from 2003, has made a primary offset of the unpaid dividends (and non contractual accrued interest thereon) due to the Government of Iraq, against the principal amounts of the defaulted loans due from Government of Iraq controlled companies.

Since the beginning of default during 1990-1992, the Corporation has kept memorandum record for contractual interest and fee on the defaulted Iraqi loans. The total contractual overdue interest and fee on these impaired Iraqi loans as on 31 December 2007 amounts to US $ 107.8 million (US$ 96.9 million).



15. Syndicated and direct loans (continued)

Impaired performing loans

Total contractual interest and fee accrued on performing impaired loans during 2007 is US$ 0.483 million (2006: US$ 0.343 million).

2007 2006Movements on unimpaired loans in the year

Outstanding at the beginning of the year 1,291,957 1,153,719Draw-downs on new and existing loans 1,237,502 745,369Repayments and prepayments received (650,660) (583,303)Reclassified as performing (impaired) - (28,039)Exchange rate movements (Euro and Swiss Franc-denominated loans) 7,799 4,211

Unimpaired loans outstanding at 31 December 1,886,598 1,291,957

Undrawn loan commitments and guarantees

At the beginning of the year 710,511 488,732Additional underwriting and commitment during the year 1,667,224 1,090,902Drawdowns during the year (1,237,502) (745,369)Expired commitments and other movements - net (155,647) (123,754)

Undrawn commitments at 31 December 984,586 710,511

2007 2007Allowance for specific impairments

At the beginning of the yearAllowance for specific impairments – gross 72,598 70,815Less: Unpaid dividends and interest due to Government of Iraq (42,764) (36,751)

29,834 34,064

Write-downs (see note 9) 79 2,801Reversals of write-downs (see note 9)

- Increase in unpaid dividends & interest due to the Government of Iraq (4,382) (6,013)- Partial recoveries received (1,400) (1,018)

Net reduction in the year (5,703) (4,230)

Allowance for specific impairments at 31 December – gross 71,277 72,598Unpaid dividends and interest due to the Government of Iraq (47,146) (42,764)

Allowance for specific impairments at 31 December - net 24,131 29,834

Allowance for collective impairmentAt the beginning of the year 4,316 4,129Additional allowance during the year-net 1,704 187

Allowance for collective impairment at 31 December 6,020 4,316



16. PROPERTY AND EQUIPMENT 2007 2006

Land at Rakah – head office building and housing compound 4,003 4,004Head office building, equipment, décor and furnishings 38,415 37,287Housing compound buildings, equipment, décor and furnishings 28,275 28,121Computer hardware and other office equipment 771 1,841Computer systems software 869 809Bahrain Banking unit office equipment, décor and furnishings 868 214

Total cost at 31 December 73,201 72,276

Accumulated depreciation (36,683) (33,976)


2007 2006Movements in the year

Net carrying value at the beginning of the year 38,300 40,473Additions at cost

Head office building, operating equipment, décor and furnishings 176 38Housing compound buildings, equipment, décor and furnishings 154 294Core Computer systems software – acquisition and implementation 100 11Other 569 366

Depreciation charge (2,744) (2,869)Disposals at net carrying value – mostly fully depreciated (37) (13)


Capital commitments 2007 2006

Contracted for - 333

17. OTHER ASSETS 2007 2006

Investment property – land at Dammam at estimated fair value - 1,995Advance to purchase available-for-sale investments managed funds - 7,500Receivables:

- Accrued interest receivables 24,403 19,217- Employee loans and advances 911 409- Miscellaneous receivables and advance payments 205 4,969

Carrying value at 31 December 25,519 34,090

18. DEPOSITS FROM BANKS 2007 2006

Short-term US dollar deposits from banks 506,125 709,557Short-term non-US dollar deposits from banks (EURO, CHF and SAR) 333,219 121,614Short-term US dollar Murabaha financing from Islamic financial institutions 133,179 269,717Short-term non-US dollar Murabaha financing from Islamic financial institutions (EURO and SAR) 370,383 54,780

Total at on 31 December 1,342,906 1,155,668



19. TERM FINANCING 2007 2006

US$ 300 million loan 2002-2007 - 300,000Interest rate US$ LIBOR plus 45 basis points

US$ 250 million loan 2005-2010 – fully drawn 250,000 250,000Interest rate – US$ LIBOR plus 37.5 basis points

US$ 400 million loan 2007 – 2012 – fully drawn 400,000 -Interest rate: US$ LIBOR plus 28.5 basis points

Unamortised front-end fees for all current facilities (1,967) (955)

Total amortised cost at 31 December 648,033 549,045

The agreement for the US$ 400 million (to partially refinance the US $300 million facility that matured in 2007) was signed on 17 May 2007 with a consortium of 16 international banks, with a maturity date on 17 May 2012. The agent is CALYON Paris, France.The loans are subject to similar financial covenants, with which the Corporation has complied:

• The ratio of total shareholders’ funds to total assets shall at all times be equal to or greater than 20%; and

• The amount of total shareholders’ funds shall at all times be greater than US$ 500 million.

20. OTHER LIABILITIES 2007 2006

Accrued interest payable 21,722 18,603Employees’ end of service benefits 6,334 6,330Accrued expenses 4,405 2,188Derivatives fair values changes 8,743 -Other payables 524 1,375

Total other liabilities at 31 December 41,728 28,496

21. EMPLOYEE RETIREMENT BENEFITS 2007 2006The movement on the provision is as follows:Balance as at 1 January 6,330 92Charge for the year 653 1,358Transferred from staff retirement fund - 4,910Paid during the year (649) (30)

Balance as at 31 December 6,334 6,330

22. OFF-BALANCE SHEET EXPOSURES 2007 2006The Corporation has off-balance sheet exposures as follows:Commitments to underwrite and fund loans (see note 15) 984,586 710,511Commitments to subscribe capital to available-for-sale direct equity investments 67,271 26,478Guarantees as shareholder (see below) - 70,400Contracted capital expenditure commitments (see note 16) - 333

Total off-balance sheet exposures 1,051,857 807,722



22. Off-balance sheet exposures (continued)

Guarantees as shareholder

APICORP an 8.28% (after restructuring 3.45%) shareholder in The Arabian Industrial Fibres Company (Ibn Rushd) (see note 15), which in turn had a senior debt facility from a consortium of banks (including the Corporation) of US$ 850 million. The shareholders had given a guarantee whereby they would be severally liable to repay the loan to the banks in full, should the borrower fail to comply with certain conditions. In September 2002 this loan was prepaid and replaced by a similar loan from the Public Investment Fund, Saudi Arabia, similarly guaranteed by the shareholders.

Under the restructuring scheme approved by the Ibn Rushd extraordinary general meeting on 1 December 2007, major outstanding debts of Ibn Rushd were converted into equity (including loan from the Public Investment Fund).

All legal formalities related to implementation of this restructuring are completed (including issue of revised Memorandum and Articles of Association of Ibn Rushd). Based on this restructuring the Corporation’s obligation as a guarantor of Ibn Rushd loan from Public Investment Fund has extinguished. As at 31 December 2007, the Corporation is in the process of obtaining official release of this guarantee from the beneficiary.

Derivative financial instruments

The Corporation uses derivatives, not designated in a qualifying according hedge relationship, to manage its exposure to market risks. The Company enters into interest rate swap agreements to hedge the exposure to interest rate risks on deposits placed with banks. The Company also enters into forward currency contract to hedge against foreign exchange fluctuations. Fair values of the interest rate swap agreements and forward currency contracts are estimated based on the prevailing market rates of interest and forward rates of the related foreign currencies, respectively.

The details of derivative financial instruments held by the Corporation as at 31 December are provided below:

Negative fair value Notional Amount

2007 2006 2007 2006

Interest rate swap 1,115 - 63,885 -Forward exchange contract 7,628 - 234,526 -

At 31 December 8,743 - 298,411 -

The contractual maturity analysis of the derivative instruments are included as part of liquidity risk information in note 26.

23. RELATED PARTY TRANSACTIONS

APICORP’s principal related parties are its shareholders. Although the Corporation does not transact any commercial business directly with the shareholders themselves, it does finance companies which are either controlled by the shareholder governments or over which they have significant influence.

Loans to related parties 2007 2006

Loans outstanding at 31 December – gross 1,553,793 914,907Allowance for specific impairments outstanding at 31 December (4,702) (4,132)Dividends & interest due to Government of Iraq, offset againstdefaulted loans at 31 December (47,146 (42,764)

Commitments to underwrite and fund loans at 31 December (910,977) 616,855

Interest from loans during the year 102,033 54,987Loan fees received during the year 10,363 5,244



23. Related party transactions (continued)

Loans to related parties are made at ruling market interest rates and subject to normal commercial negotiation as to terms. The majority of loans to related parties are syndicated, which means that participation and terms are negotiated by a group of arrangers, of which the Corporation may, or may not, be a member. No loans to related parties were written off in 2007-2006.

For key management’s compensation see note 8.

Available-for-sale direct equity investments in related parties 2007 2006

Investments at 31 December 313,971 232,317Guarantees as shareholder at 31 December - 70,400Commitments to invest at 31 December 26,799 26,478Dividends received during the year 30,321 29,046

24. CASH FLOWS FROM OPERATING ACTIVITIES

Cash flows from operating activities are reconciled to net income 2007 2006 for the year as follows:

Net income for the year 79,739 50,978Adjustments for non-cash items:

Gains on trading securities (6,686) (5,521)Realised gains on sale of available-for-sale securities (6,039) (1,331)Realised gains on sale of available-for-sale direct equity investments (5,433) -Depreciation of property and equipment 2,744 2,869Gains on sale of investment property (702) -Net reversals of impairment losses - loans (4,382) (3,212)Impairment losses - available-for-sale direct equity investments (1,600) 7,482Amortisation and exchange differences - net (10,282) (180)Other non-cash items 16,557 (36,663)

63,916 14,422

Net sales of trading securities 19,588 11,206Dividends from available-for-sale direct equity investments (included in investing activities) (31,635) (30,095)Rent received (included in investing activities) (886) (692)

50,983 (5,159)

Changes in operating assets and liabilities Increase in deposits with banks (46,575) (80,080)Syndicated and direct loans drawn down (1,237,502) (745,369)Loan repayments and prepayments received - performing loans 654,435 583,303Recovery from Aradet (guarantees) 5,000 5,000Increase (decrease) in other operating assets (1,787) 26,135Increase in deposits from banks and corporate 709,786 178,228Increase in other operating liabilities 266 5,769

Cash flows from operating activities 134,606 (32,173)



25. CAPITAL ADEQUACY AND MANAGEMENT

The risk asset ratio at 31 December 2007, calculated in accordance with the capital adequacy of the Basel I Committee on Banking Supervision, is as follows: 2007 2006Carrying values

On-balance sheet assets (see page 35) 3,573,357 2,634,724Off-balance sheet exposures (see note 22) 1,051,857 807,722

4,625,214 3,442,446

Risk-weighted exposures

On-balance sheet assets 2,891,206 2,268,511 Off-balance sheet exposures 1,053,422 794,483

Total risk-weighted exposures 3,944,628 3,062,994

Capital adequacy ratio

Tier – 1 capital: share capital, legal & general reserves and retained earnings 764,915 705,176Tier – 2 capital: Investments fair value reserve & collective impairment allowance 261,508 195,655

Qualifying capital 1,026,423 900,831

Capital base expressed as a percentage of total risk-weighted exposures:Qualifying capital 26.0% 29.4%

Tier – 1 capital 19.4% 23.0%

The Corporation’s policy is to maintain a strong capital base so as to maintain investor, creditor and market confidence and to sustain future development of the business. The impact of the level of capital on shareholders’ return is also recognized and the Corporation recognises the need to maintain a balance between the higher returns that might be possible with greater gearing and the advantages and security afforded by a sound capital position. The Corporation manages / monitors its capital based on the capital adequacy ratios prescribed by Basel Committee.

The Corporation has complied with all externally imposed capital requirements throughout the year (see note 19). There have been no material changes in the Corporation’s management of capital during the year.

26. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT

Financial instruments

A financial instrument is any contract that gives rise to both a financial asset in one enterprise and a financial liability or equity instrument in another enterprise.

• APICORP’s financial assets are principally trading securities, available-for-sale securities, deposits placed with banks, syndicated and direct loans, available-for-sale direct equity investments and certain other assets.

• Financial liabilities consist of commitments to lend and invest, deposits from banks, term financing, other liabilities, and guarantees.

These financial instruments expose APICORP to varying degrees of market risk (including currency, interest rate and price risks), credit risk and liquidity risk.

Credit risk managementCredit risk is the risk that a borrower or counter-party of APICORP will be unable or unwilling to meet a commitment that it has entered into with the Corporation. It arises from the lending, treasury and other



26. Financial instruments and risk management

Credit risk management (continued)

activities undertaken by the Corporation. Policies and procedures are in place for the control and monitoring of all such exposures.Proposed loans and available-for-sale direct equity investments are subject to systematic investigation, analysis and appraisal before being reviewed by the Credit Committee (consisting of the General Manager and senior managers), which makes appropriate recommendations to the Board of Directors, who have the ultimate authority to sanction commitments. These procedures, plus the fact that most of the loans are backed by sovereign guarantees and export credit agency cover, limit APICORP’s exposure to excessive credit risk.

The Corporation faces a credit risk on undrawn commitments because it is potentially exposed to loss in an amount equal to the total unused commitments. However the eventual loss, if any, will be considerably less than the total unused commitments, since most commitments to extend credit are contingent upon borrowers maintaining specified credit standards. All loan commitments, whether drawn or undrawn, are subject to systematic monitoring so that potential problems may be detected early and remedial action taken.

Treasury activities are controlled by means of a framework of limits and external credit ratings. Dealing in marketable securities is primarily restricted to United States and major European stock exchanges. Dealings are only permitted with approved internationally rated banks, brokers and other counter-parties. Securities portfolios and investing policies are reviewed from time to time by the Assets and Liabilities Committee.

The maximum exposure to credit risk on cash and cash equivalents is their carrying amount. Details of credit risk exposure on other financial instruments are as follows:

Syndicated and direct Deposits with banks Available for Sales loans (note 15) (note 14) securities (note 12)

2007 2006 2007 2006 2007 2006Carrying amount on 31 December 1,892,499 1,304,554 391,575 345,000 701,771 481,553Individually impaired Impaired non performing

Grade F 68,408 69,159 - - - -Grade E - - - - - -

Gross amount 68,408 69,159 - - - -Allowance for impairment (68,408) (69,159) - - - -

Carrying amount on 31 December - - - - - -Impaired performing

Grade D - 1,289 - - - -Grade C 27,898 29,612 - - - -

Gross amount 27,898 30,901Allowance for impairments (2,869) (3,439) - - - -

Carrying amount on 31 December 25,029 27,462 - - - -Past due but not impaired

Grade C+ - - - - - -Neither past due nor impaired

Grade B - - - - - -Grade A 1,758,985 1,291,957 - - - -

Includes accounts with renegotiable terms

Grade B - - - - - -Grade A 127,613 - - - - -

Loans & Advances to banks in Organisation for Economic Co-operation and Development countries (OECD) - - 93,527 275,000 - -Loans & Advances to banks in non-OECD countries - - 298,048 70,000 - -Externally rated (investment grade) AFS investments - - - - 701,771 481,553Gross amount 1,886,598 1,291,957 391,575 345,000 701,771 481,553Collective impairment allowance (6,020) (4,316) - - - -Unamortised participation and commitment (13,108) (10,549) - - - -Net neither past due nor impaired 1,867,470 1,277,092 391,575 345,000 701,771 481,553

Carrying amount on 31 December 1,892,499 1,304,554 391,575 345,000 701,771 481,553


NOTES for the year ended 31 December 2007 financial statements US$ 000

26. Financial instruments and risk management (continued)

The Corporation monitors concentration of credit risk by sector and by geographic location. An analysis of concentration of risk at reporting date is shown below (also see note 32 and 33).

Syndicated and direct Deposits with banks Available for Sales loans (note 15) (note 14) securities (note 12)

Carrying amount on 31 December 2007 2006 2007 2006 2007 2006 1,892,499 1,304,554 391,575 345,000 701,771 481,553Concentration of credit risk by sector

Petroleum and petrochemicals 1,196,009 846,465 - - 21,716 10,549Fertilizer plants 379,697 71,497 - - - -Maritime transportation 168,920 208,461 - - - -Power generation 122,139 112,971 - - - -Banks and financial institutions - - 391,575 345,000 445,933 383,411Governments and public sector - - - - 209,468 62,863Other industries 25,734 65,160 - - 24,654 24,730


Concentration of credit risk by location

Kingdom of Saudi Arabia 418,952 296,618 45,280 - 49,048 32,356State of Qatar 385,222 263,004 30,000 - 20,378 10,569Other Gulf Cooperation Council states 329,898 274,596 222,768 70,000 244,814 248,973Other Middle East states 28,318 50,000 - - - -Egypt and North Africa 382,127 253,778 - - - 5,726

Total Arab World 1,544,517 1,137,996 298,048 70,000 314,240 297,624Western Europe 115,762 120,228 93,527 275,000 15,676 68,275Asia Pacific Rim 4,374 8,441 - - - -United States 200,000 - - - 278,439 63,992Other North and South America 27,846 37,889 - - 93,416 51,662


Liquidity risk and funding management

Liquidity risk is the risk of being unable to raise funds at a reasonable price to meet commitments when they fall due, or to take advantage of investment opportunities when they arise. Liquidity risk management ensures that funds are available at all times to meet the funding requirements of the Corporation.

APICORP’s liquidity management policies are designed to ensure that even under adverse conditions, the Corporation has access to adequate funds to meet its obligations, and to service it core investment and lending functions. This is achieved by the application of prudent but flexible controls, which provide security of access to liquidity without undue exposure to increased costs from the liquidation of assets or to bid aggressively for deposits.

As part of liquidity management the Corporation also ensures availability of term financing at a competitive rates, at all times to meet long term funding requirements of the Corporation.

Daily liquidity position is monitored and regular stress testing is conducted under a variety of scenarios covering both normal and more severe market conditions. All liquidity policies are subject to review and approval by Assets and Liabilities Committee. Liquidity controls are provided for an adequately diversified deposit base in terms of maturities and the range of counter-parties. The asset and liability maturity profile based on contractual repayment terms is set out in note 29.




Liquidity risk and funding management (continued)

Contractual maturities of financial (including interest):

Up to 3 months 1 year 5 years Contractual Carrying 2007 3 months to 1 year to 5 years and over outflows value

Liabilities

Deposits from banks (1,099,839) (369,444) - - (1,469,283) (1,342,906)

Deposits from corporates (65,623) (131) - - (65,754) (294,730)

Securities sold under

agreements to repurchase (184,788) (58,301) - - (243,089) (225,557)

Term financing (12,844) (26,240) (789,667) - (828,751) (648,033)

(1,363,094) (454,116) (789,667) - (2,606,877) (2,511,226)

Derivative instruments (32,809) (218,519) - - (251,328) (8,743)

Off-balance sheet exposures (75,923) (222,119) (749,130) (4,686) (1,051,858) (1,051,857)

(1,471,826) (894,754) (1,538,797) (4,686) (3,910,063) (3,571,826)

2006

Deposits from banks (1,104,457) (73,885) - - (1,178,342) (1,160,668)

Term financing - (307,357) (305,789) - (613,146) (549,045)

(1,104,457) (381,242) (305,789) - (1,791,488) (1,709,713)

Off-balance sheet exposures (62,706) (206,385) (463,544) (75,088) (807,723) (807,722)

(1,167,163) (587,627) (769,333) (75,088) (2,599,211) (2,517,435)

Market risk management

Market risk is the risk that changes in market factors, such as interest rate, equity prices and foreign exchange rates will affect the Corporation’s income or the value of its holdings of financial instruments. The objective of market risk management is to manage and control market risk exposures within acceptable parameters, while optimizing the return on risk.

APICORP holds (but currently does not actively trade) debt and equity securities. Treasury activities are controlled by the Assets and Liabilities Committee and are also subject to a framework of Board-approved currency, industry and geographical limits and ratings by agencies including Standard & Poors.

The principal risk to which non-trading portfolios are exposed is the risk of loss from fluctuations in the future cash flows or fair values of financial instrument because of a change in market interest rates, foreign exchange rates and equity prices.

Interest rate risk: Syndicated and direct loans are normally denominated in United States dollars, as is the Corporation’s funding, and interest rates for both are normally linked to LIBOR. The Corporation’s exposure to interest rate fluctuations on certain financial assets is also hedged by entering into interest rate swap agreements.

Exposure to interest rate risk is restricted by permitting only a limited mismatch between the repricing of the main components of the Corporation’s assets and liabilities. The repricing profile of assets and liabilities is set out in note 30.


NOTES for the year ended 31 December 2007 financial statements


Market risk management(continued)

The management of interest rate risk against interest rate gap limits is supplemented by monitoring the sensitivity of the Corporation’s financial assets and liabilities to various standard and non-standard interest rate scenarios. Standard scenarios that are considered on a periodic basis include a 100 basis point (bp) parallel fall or rise in all yield curves worldwide. An analysis of the Corporation’s income statement sensitivity to an increase or decrease in market interest rates (assuming no asymmetrical movement in yield curves and a constant balance sheet position) is as follows:

100bp 100bp parallel increase parallel decrease

At 31 December 2007 166 (166)

At 31 December 2006 896 (896)

Currency risk is minimised by regular review of exposures to currencies other than United States dollars to ensure that no significant positions are taken which may expose APICORP to undue risks. Currently there is no trading in foreign exchange. The Corporation’s net currency exposures are set out in note 31. The Corporation’s exposures in the currencies other than United States dollars is also hedged by entering into forward contracts.

Equity prices risk is the risk that Corporations quoted equity investments will depreciate in value due to movements in the quoted equity prices. The overall authority of equity prices risk management vested in Assets and Liabilities Committee. Periodical listed equity prices movements are reviewed by executive management and Assets and Liabilities Committee. Corporation’s exposure to listed equities is insignificant hence sensitivity to equity prices risk is not significant.

27. EFFECTIVE INTEREST RATES

The weighted average effective interest rates of the Corporation’s financial instruments at the balance sheet date were:

2007 2006Interest-bearing financial assets

Fixed-rate bonds 3.48% 2.60%Floating-rate bonds 5.49% 5.78%US Treasury notes 3.79% 4.66%Structured notes 6.00% 5.75%Deposits placed with banks 5.02% 5.19%Syndicated and direct loans 5.78% 5.97%

US dollar denominated 5.85% 6.15%Non-dollar – mainly denominated in Euros 4.48% 3.33%

Interest-bearing financial liabilities

Deposits from banks 5.29% 5.17%US dollar denominated 5.31% 5.40%Non-dollar – Euros, Swiss Francs and Saudi Riyals 5.25% 3.91%Term financing 5.40% 5.34%

US$ LIBOR AT 31 December was:

One-month 4.63% 5.37%Three-month 4.73% 5.38%Six-month 4.73% 5.34%



28. FAIR VALUE INFORMATION

The table below set outs the Corporations’ classification of each class of financial assets and liabilities and fair values (excluding interest).

Trading Loans & AFS Others at Carrying Fair receivables investments amortised amount values31 December 2007 cost

Cash and cash equivalents - 15,510 - - 15,510 15,510Trading securities 50,822 - - - 50,822 50,822Available-for-sale securities - - 817,648 - 817,648 817,648Available-for-sale direct equity (see note 13) at cost - - 343,266 - 343,266 343,266Deposits with banks - 391,575 - - 391,575 391,575Syndicated and direct loans (Fair value - based on discounted cash flows at current market prices) - 1,890,486 - - 1,890,486 1,929,699Other Assets - 911 - - 911 911

Total assets 50,822 2,298,482 1,160,914 - 3,510,218 3,549,431

Deposits from banks - - - (1,342,906) (1,342,906) (1,342,906)Deposits from corporates - - - (294,730) (294,730) (294,730)Securities sold under agreement to repurchase - - - (225,557) (225,557) (225,557)Term financing (Fair value - based on current market rates for similar remaining maturity) - - - (648,033) (648,033) (630,449)Other liabilities - - - (524) (524) (524)

Total liabilities - - - (2,511,750) (2,511,750) (2,494,166)

31 December 2006

Cash and cash equivalents - 10,264 - - 10,264 10,264Trading securities 63,698 - - - 63,698 63,698Available for sale securities - - 582,087 - 582,087 582,087Available-for-sale direct equity investments at cost - - 256,731 - 256,731 256,731Deposits with banks - 345,000 - - 345,000 345,000Syndicated and direct loans - 1,304,554 - - 1,304,554 1,296,290Other assets - 409 - - 409 409

Total assets 63,698 1,660,227 838,818 - 2,562,743 2,554,479

Deposits from banks - - - (1,155,668) (1,155,668) (1,155,668)Deposits from corporates - - - (5,000) (5,000) (5,000)Term financing - - - (549,045) (549,045) (532,303)Other liabilities - - - (1,375) (1,375) (1,375)

Total liabilities - - - (1,711,088) (1,711,088) (1,694,346)



29. MATURITY PROFILE OF ASSETS AND LIABILITIES

The maturity profile of the Corporation’s assets and liabilities as at 31 December, based on contractual repayment arrangements and in certain cases management’s judgement of its realizations, is set out below. The apparent significant short-term mismatch between maturities of assets and liabilities is substantially reduced in practice because the majority of deposits from banks are routinely rolled over on maturity.

2007 Up to 3 months 1 year 5 years 2007 3 months to 1 year to 5 years and over TotalAssetsCash and cash equivalents 15,510 - - - 15,510Trading securities - - - 50,822 50,822Available-for-sale securities - 99,057 433,791 284,800 817,648Available-for-sale direct equity investments - - - 343,266 343,266Deposits with banks 326,575 65,000 - - 391,575Syndicated and direct loans 44,832 150,637 812,919 884,111 1,892,499Property and equipment - - - 36,518 36,518Other assets 12,072 11,028 803 1,616 25,519

Total assets 398,989 325,722 1,247,513 1,601,133 3,573,357

Liabilities and EquityDeposits from banks (1,101,591) (241,315) - - (1,342,906)Deposits from corporates (97,035) (197,695) - - (294,730)Securities sold under agreements to repurchase (182,348) (43,209) - - (225,557)Term financing 141 426 (648,600) - (648,033)Other liabilities (24,933) (13,628) (1,580) (1,587) (41,728)Equity - - - (1,020,403) (1,020,403)

Total liabilities and equity (1,405,766) (495,421) (650,180) (1,021,990) (3,573,357)

Maturity Gap (1,006,777) (169,699) 597,333 579,143 -

CUMULATIVE MATURITY GAP (1,006,777) (1,176,476) (579,143) -

2006

Total assets 528,114 175,178 952,533 978,899 2,634,724Total liabilities and equity (1,112,951) (353,453) (300,576) (867,744) (2,634,724)

Maturity gap (584,837) (178,275) 651,957 111,155 -

CUMULATIVE MATURITY GAP (584,837) (763,112) (111,155) -



30. REPRICING PROFILE OF FINANCIAL ASSETS & LIABILITIES

The reporting profile of the Corporation’s interest bearing financial assets and liabilities at 31 December was as follows:

2007 Total Up to Between Between Between More than 3 months 3 months 1 year 2 years 5 years and 1 year and 2 years and 5 yearsASSETS

Available-for-sale securitiesFixed-rate bonds 383 - - 383 - -Floating-rate bonds 339,993 281,771 58,222 - - -US Treasury notes 110,411 - - 110,411 - -Structured notes 151,927 58,618 93,309 - - -

Deposits with banks 391,575 326,575 65,000 - - -Syndicated and direct loans

US$ denominated 1,869,556 1,166,620 702,936 - - -Euro and Swiss Francs 113,348 87,938 25,410 - - -

LIABILITIES

Deposits from banksUS$ denominated (843,735) (705,353) (138,382) - - -Saudi Riyal and Euro (499,171) (396,238) (102,933) - - -Deposits from corporate (294,730) (97,035) (197,695) - - -Securities sold under agreements to (225,557) (182,348) (43,209) - - -Term financing (648,033) (648,033) - - - -

Interest rate sensitivity gap 465,967 (107,485) 462,658 110,794 - -

CUMULATIVE INTEREST RATE SENSITIVITY GAP - (107,485) 355,173 465,967 465,967 465,967

2006

ASSETSAvailable-for-sale securities

Fixed-rate bonds 72,337 67,400 4,937 - - -Floating-rate bonds 291,342 273,537 17,805 - - -Structured notes 117,874 29,546 88,328 - - -

Deposits with banks 345,000 345,000 - - - -Syndicated and direct loans

US$ denominated 1,254,979 803,102 451,877 - - -Euro and Swiss francs 67,879 39,905 27,974 - - -

LIABILITIESDeposits from banks

US$ denominated (984,274) (913,774) (70,500) - - -Saudi Riyal and Euro (176,394) (176,394) - - - -

Term financing (549,045) (449,859) (99,186) - - -

Interest rate sensitivity gap 439,698 18,463 421,235 - - -

CUMULATIVE INTEREST RATE SENSITIVITY GAP - 18,463 439,698 439,698 439,698 439,698



31. CURRENCY EXPOSURES

The Corporation’s currency exposures at 31 December were as follows:

2007 2006 Assets Liabilities Net Net and equity Exposure Exposure

ASSETS, LIABILITIES AND EQUITY

United States dollar 2,940,400 (2,517,623) 422,777 (35,862)Euro 156,222 (138,679) 17,543 619Other OECD currencies (see below) 240,886 (233,555) 7,331 112Arab currencies

GCC (see below) 235,849 (668,888) (433,039) 14,244Other Middle East - - - 1,061Egypt and North Africa - (14,612) (14,612) 19,826

3,573,357 (3,573,357) - -

COMMITMENTS AND GURANTEES

United States dollar 1,047,208 802,740Arab currencies – GCC (see below) 4,649 4,982

1,051,857 807,722

Other OECD currencies

The other member countries of the Organisation for Economic Co-operation and Development, excluding the United States and the twelve European Monetary Union countries are: Australia, Canada, Czech Republic, Denmark, Hungary, Iceland, Japan, Mexico, New Zealand, Norway, Poland, South Korea, Sweden, Switzerland, Turkey and the United Kingdom.

GCC

The member states of the Gulf Co-operation Council are: Bahrain, Oman, Qatar, Saudi Arabia and the United Arab Emirates. Their currencies are pegged against the United States dollar.

Significant exchange rates

The following year-end rates have been used in translating other currencies to United States dollars:

2007 2006

Euro EUR 1=US$ 1.4749 1.3158Saudi Riyal US$ 1=SAR 3.7500 3.7500Swiss Franc US$ 1=CHF 1.2163 1.2188Egyptian Pound US$ 1=EGP 5.5300 5.7185

Since the Corporation’s net foreign currency exposures to currencies other then US dollar and GCC currencies is not significant , the sensitivity of fluctuation in the currencies will not be significant.



32. INDUSTRY DISTRIBUTION OF ASSETS AND LIABILITIES

The industry distribution of the Corporation’s assets and liabilities was as follows:

2007 2006

ASSETSPetroleum and petrochemicals

Refineries 166,170 113,582Oilfield production development and services 327,617 159,027Floating production, storage and offloading facilities 8,555 -Pipelines and distribution 5,846 10,772Gas-to-liquids plants 36,241 38,667Liquefied natural gas plants 284,059 216,180Petrochemical plants 691,949 555,873Fertilizer plants 398,218 72,294Maritime transportation 172,694 210,785Power generation 123,659 114,230Other petroleum 57,467 80,536

Total petroleum and petrochemicals 2,272,475 1,571,946

Banks and financial institutions 406,737 351,879Banks and financial institutions – managed funds 166,099 171,235Other industries 62,883 73,495Governments and public sector institutions 665,163 466,169

Total assets at 31 December 3,573,357 2,634,724

LIABILITIES AND EQUITY Banks and financial institutions 2,541,693 1,728,585Other industries 11,261 9,624Shareholders 1,020,403 896,515

Total liabilities and equity at 31 December 3,573,357 2,634,724

COMMITMENTS AND GUARANTEESPetroleum and petrochemicals

Refineries 29,700 124,896Oilfield production development and related services 176,542 1,669Floating production, storage and offloading facilities 39,959 -Liquefied natural gas plants 161,883 119,980Petrochemicals plants 236,568 403,786Fertilizer plants 169,465 4,000Maritime transportation 86,560 30,873Power generation 69,519 47,785Other petroleum 81,661 4,000

Total petroleum and petrochemical 1,051,857 736,989

Other industries - 333Governments and public sector institutions - 70,400

Total commitments and guarantees at 31 December 1,051,857 807,722



33. GEOGRAPHICAL DISTRIBUTION OF RISK

The geographical distribution of risk of the Corporation’s assets and liabilities, after taking into account insurance and third-party guarantees, was as follows: 2007 2006

ASSETS

Kingdom of Saudi Arabia 820,701 579,712State of Qatar 440,097 276,965Other Gulf Cooperation Council states 815,476 610,722Other Middle East states 33,525 59,458Egypt and North Africa 445,736 297,256

Total Arab World 2,555,535 1,824,113

Western Europe 328,420 550,235Asia Pacific Rim 4,378 8,527United States 563,538 162,724Other North and South America 121,486 89,125

Total assets at 31 December 3,573,357 2,634,724

LIABILITIES AND EQUITY

Kingdom of Saudi Arabia 980,132 656,254State of Qatar 185,562 139,780Other Gulf Cooperation Council states 881,273 954,278Other Middle East states 149,604 135,524Egypt and North Africa 351,658 269,963

Total Arab World 2,548,229 2,155,799

Western Europe 951,309 408,190Asia Pacific Rim 26,000 20,000United States 47,819 50,735

Total liabilities and equity at 31 December 3,573,357 2,634,724

COMMITMENTS AND GUARANTEES

Kingdom of Saudi Arabia 419,547 391,271State of Qatar 187,774 195,657Other Gulf Cooperation Council states 177,569 122,980Egypt and North Africa 190,653 52,499

Total Arab World 975,543 762,407

Western Europe 76,314 41,315Asia Pacific Rim - 4,000

Total commitments and guarantees at 31 December 1,051,857 807,722


Documents

Financial Statements for the year end 31 December 2007 · KMPG Fakhro Audit 5th Floor Chamber of Commerce Building ... reader with the International Financial Reporting Standards