Note 3. Financial Risk Management The Group’s activities expose it to a variety of financial risks: market risk (including foreign exchange risk and interest rate risk); commodity price risk; credit risk; and liquidity risk. The Group’s overall financial risk management program focuses on the unpredictability of financial markets and seeks to minimise potential adverse effects on the financial performance of the Group. The Group uses different methods to measure the different types of financial risk to which it is exposed. These methods include sensitivity analysis in the case of foreign exchange, interest rates and commodity prices. The overall financial risk management strategy of the Group is governed by the Board of Directors through the Audit and Risk Committee and is primarily focused on ensuring that the Group is able to finance its business plans, while minimising potential adverse effects on financial performance. The Board of Directors provides written principles for overall financial risk management, as well as written policies covering specific areas, such as mitigating foreign exchange, interest rate, commodity price and credit risks, use of derivative financial instruments and investment of excess cash. Financial risk management is carried out by the Company’s finance function under policies approved by the Board of Directors. The finance function identifies, evaluates and if necessary, hedges financial risks in close co‑operation with the Chief Executive Officer and Managing Director. Risk management policies and systems are reviewed regularly to reflect changes in market conditions and Group activities. Details of the significant accounting policies and methods adopted, including the criteria for recognition, the basis of measurement and the basis on which income and expenses are recognised in respect of each class of financial asset and financial liability are disclosed in Note 1. The Group’s financial instruments consist of cash and cash equivalents, receivables, security deposits, trade and other payables, lease liabilities and embedded derivatives. The totals for each category of financial instruments in the consolidated statement of financial position are as follows: Consolidated Restated 2021 2020 Note US$’000 US$’000 Financial assets Cash and cash equivalents 10 133,209 296,420 Receivables 11 34,162 9,380 Security deposits 13 1,615 5,073 Total financial assets 168,986 310,873 Financial liabilities Trade and other payables (refer note (i) below) 79,066 21,167 Other financial liabilities (refer note (ii) below) 22 71,161 – Lease liabilities 21 312,840 1,516 Total financial liabilities 463,067 22,683 (i) Trade and other payables above exclude amounts relating to annual leave liabilities, which are not considered a financial instrument. (ii) Other financial liabilities relate to the contingent consideration payable to Petrobras as part of the acquisition of Baúna (refer Note 22). (a) Market Risk (i)Foreign Exchange Risk Foreign exchange risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in foreign exchange rates. Foreign exchange risk arises when future commercial transactions and recognised financial assets and financial liabilities are denominated in a currency that is not the Company’s functional currency. The Group’s revenue, significant operating expenditure including the FPSO charter lease and a large component of capital obligations are predominantly denominated in US$. The Group’s remaining foreign exchange risk exposures relate to administrative and business development expenditures incurred at the corporate level in A$; and operating and capital expenditures incurred by the Group in relation to operating the Baúna production asset in Brazil in Brazilian REAL. These items are restated to US$ equivalents at each period end, and the associated gain or loss is taken to the Statement of Profit and Loss and Other Comprehensive Income. Karoon Energy Ltd 93 Annual Report 2021