IFRS Consultancy Services. IFRS convergence for unlisted companies in KSA

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Bethany Hubbard
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1 IFRS Consultancy Services IFRS convergence for unlisted companies in KSA

2 contents 01 IFRS- Road map 02 Key differences between SOCPA and IFRS in certain critical areas 03 Convergence process 04 Our Approach 2

3 IFRS Road map In a move to adopt international best practices and open up the markets to outside investors, the kingdom of Saudi Arabia (KSA) is in the process of adopting International Financial Reporting Standards (IFRS). Previously, all companies in KSA, other than banks and insurance companies, were required to follow accounting standards generally accepted in KSA as issued by the Saudi Organization for Certified Public Accountants (SOCPA). Banks and insurance companies are regulated by the Saudi Arabian Monetary Authority (SAMA-the Saudi Arabian central bank) and are already required to comply with IFRS. In 2012, SOCPA approved an IFRS Convergence Plan, called the SOCPA Project for Transition to International Accounting & Auditing Standards. Under this convergence plan, all listed companies are required to adopt IFRS for financial periods beginning on or after January 1, 2017 (Phase 1), and all other entities for financial periods beginning on or after January 1, 2018 (Phase 2) Phase I Phase II January December January December January December January December Opening balance sheet January 1, 2016 Comparatives for December 31, 2016 Financial Statements for the year ended December 31, 2017 Opening balance sheet January 1, 2017 Comparatives for December 31, 2017 Financial Statements for the year ended December 31,

4 Key differences between SOCPA and IFRS There are many areas of differences between SOCPA and IFRS because current local GAAP is driven by form in a number of areas rather than substance, which is the focus under IFRS. We discuss below certain critical areas that would have a transformational impact on convergence to IFRS: Revenue recognition (IFRS 15) Customer contracts within scope should be analyzed against a five-step model that supports the core principle of the new revenue standard, IFRS 15. The core principle of this standard is that an entity will recognize revenue when it transfers control over goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for underlying performance obligations arising from the transaction. This will require entities to use more judgement and make more estimates than under today s revenue standards. IFRS 15 is likely to have an impact on the identification of performance obligations, warranties, sales incentives, right of return and options granting a material right. In such a scenario, it will be critical for companies to clearly understand the effects of the new standard, provide early communication to stakeholders and undertake advanced planning. The level of effort involved in transitioning to the new revenue standard may be significant and should not be underestimated. This is especially the case for industries that tend to have complex customer contracts. Financial instruments (IFRS 9) IFRS 9 would have a significant impact on the way financial assets and liabilities are classified and measured, resulting in volatility in profit or loss and equity. The new impairment model will have a significant impact on the systems and processes of entities due to its extensive requirements for data and calculation. Additionally, significant impact is anticipated in the areas of debt vs. equity classification, compound financial instruments, derivatives and hedging, and foreign currency convertible bonds. 4

5 Key differences between SOCPA and IFRS Consolidated financial statements (IFRS 10) IFRS 10 establishes a single control model for all entities (including special purpose entities, structured entities or variable interest entities). The implementation of this standard will require management to exercise significant judgment to determine which entities are controlled and are, therefore, required to be consolidated. It changes whether an entity is consolidated, by revising the definition of control. This is a radical change in the KSA environment, because by applying the new control definition, it may change which entities are included within a group. This standard will be significant to companies that have complex holding structures and have formed special purpose vehicles. Business combinations (IFRS 3) IFRS 3 will apply to all business combinations, including amalgamations. Once IFRS 3 is effective, all assets and liabilities acquired will be recognized at fair value. Additionally, contingent liabilities and intangible assets not recorded in the acquiree s balance sheet are likely to be recorded in the acquirer s balance sheet on acquisition date. Goodwill on acquisition will not be amortized, but may only be tested for impairment. Employee Benefits (IAS 19) Limited guidance available under SOCPA in respect of accounting for post retirement benefits, however the standards do require the long term obligations to be discounted to reflect the current costs. Practically, companies are accounting for the End of Service Benefits (EOSB) obligations based actual payments that the Company would require to make few companies are using the actuarial valuations also. However detailed guidance is available under IAS 19 for post employment benefits. The accounting requires the Companies to discount their obligation under the defined benefit plans and reflect the current costs in their financial statements; the present obligation is usually determined based on actuarial valuation. 5

6 Key differences between SOCPA and IFRS Accounting for investment properties (IAS 40) SOCPA requires investment properties shall be valued at cost. SOCPA allows only disclosure of the fair value information in the explanatory notes to the financial statements. IAS 40 requires investments properties to be valued at cost or at fair value. Property, plant and equipment (IAS 16) IFRS 16 mandates component accounting where by Components of an asset with differing patterns of benefits must be depreciated separately. SOCPA does not mandate component accounting. Under IFRS, idle assets need to be depreciated. As per opinion issued by SOCPA, assets that were permanently idle and still in the entity s possession should be, if material, separated from other assets and their depreciation should be suspended. IAS 16 requires estimates of useful lives, depreciation method and residual values to be reviewed at least at the end of each financial year. As per SOCPA, the same are reviewed only when events or changes in circumstances indicate. Leases (IFRS 16) The IASB published IFRS 16 Leases in January 2016 with an effective date of 1 January IFRS 16 specifies how an IFRS reporter will recognise, measure, present and disclose leases. The standard provides a single lessee accounting model, requiring lessees to recognise assets and liabilities for all leases unless the lease term is 12 months or less or the underlying asset has a low value. Lessors continue to classify leases as operating or finance, with IFRS 16 s approach to lessor accounting substantially unchanged from its predecessor, IAS 17. The new standard requires lessees to recognize nearly all leases on the balance sheet which will reflect their right to use an asset for a period of time and the associated liability for payments. 6

7 Convergence process In an IFRS convergence an entity undertakes to change its financial reporting from SOCPA to IFRS. The differences between the SOCPA treatment and IFRS may vary significantly from one entity to another depending on the industry and the current accounting policies chosen under SOCPA. However, the magnitude of an IFRS convergence project will not depend solely on the magnitude of the GAAP differences, but will be influenced by other factors such as: The quality and flexibility of the existing financial reporting infrastructure The size and complexity of the organization The effect of GAAP changes on the business Ultimately, the purpose of an IFRS convergence is enable an entity to report, unaided and reliably, under IFRS and is able to recognize the IFRS dimension of its actions. However, before the actual start of the convergence project, an initial assessment phase should put companies in a position where they are aware of: The differences between IFRS and the entity s current accounting policies The impact of the change to IFRS on financial statements The impact of the change to IFRS on tax, business IT and process The impact of IFRS on future business decisions An understanding of the approach underlying the formulation of IFRS Adopting IFRS may affect many facets of an organization beyond its financial reporting. Every aspect of a company affected by financial information has the potential for change (for example, key performance indicators, employee and executive compensation plans, management s internal reporting, investor relations and analyst information). Both the process and the implications of the convergence can vary widely among companies based on a number of variables, such as levels of expertise, degree of centralization of accounting processes and data collection, and the number of existing accounting methods currently being used. 7

8 Our Approach Full Scope Convergence 1 3 Phase 1: Awareness and project plan 2 Phase 2 Gap and Impact Assessment Provide awareness session to key stakeholders Set up project management office Prepare draft project plan, key dates, and involvement of key stakeholders Prepare list of information, data and documents required from Finance, Risk and IT Project kick-off with key stakeholders Carry out a workshop with key individuals to understand various revenue streams, including operational, commercial and financial rationale. Understand internal controls environment, current policies and procedures. Understand existing IT systems. High level identification of accounting and reporting differences and its consequences to the business, IT, processes and tax. Carry out a workshop and upon further discussion with management, identify specific contracts to review against the requirement of IFRS. Carry out a detailed gap assessment on current accounting vs the requirement of the new accounting standards. Summarize in a report and prepare accounting position papers in respect of key accounting issues. 4 Post implementation support Phase 3: Implement ation Develop comprehensive implementation roadmap for IFRS convergence based on the gap and impact assessment conducted in previous phases. Converge to IFRS at the consolidated and/or standalone reporting level Perform tax convergence Design IFRS accounting, reporting, consolidation, and reconciliation processes and controls Design future state IT systems to incorporate IFRS reporting Develop change management strategy and revised operating model 8

9 Our Approach Convergence Assist Services Carry out a detailed gap assessment on current accounting vs the requirement of the new accounting standards Prepare accounting position papers in respect of key accounting issues Preparation of IFRS converged opening trial balance based on the gap assessment and accounting position papers Preparation of IFRS compliant financial statements based on the gap assessments and inputs from management Preparation of combined lead sheets based on trial balance Assistance in obtaining actuarial valuation Validating management assumptions used in actuarial valuation Finalizing accounting entries and FS disclosures based on actuarial valuation Finalizing accounting entries and FS disclosures based on fair valuation of Property, plant and equipment and immovable properties Finalizing accounting entries and FS disclosures in respect of business combination under IFRS 3 Assistance in computation of deferred tax based on IFRS converged financial statements and finalizing accounting entries and disclosures in FS Assistance in re-computation of depreciation and updating the fixed asset register considering the provision of IFRS 9

10 About us CAPITAIRE is a multi-disciplinary firm formed by a team of professionals having more than 25 years of collective Big4 experience. CAPITAIRE has extensive experience across a range of industries, market segments, and international business. CAPITAIRE s Audit, Tax and Advisory Team to provide solutions on complex business and financial matters with our focused professionals. CAPITAIRE focus to develop core specialist services in the field of audit, accounting, tax, regulatory and advisory domain to help clients to provide tailored solutions to meet their needs. Contact us Jacob Brillas P T Director Contact no: brillas@capitaire.com Sreejith Kuniyil Director Contact no: sreejith@capitaire.com Naveen Kumar V R Director Contact no: naveen@capitaire.com This material has been prepared for general informational purposes only and is not intended to be relied upon as accounting, tax, or other professional advice. Please refer to your advisors for specific advice. 10

FM119: Saudi GAAP Transition to International Financial Reporting Standards (IFRS): Compliance with SOCPA

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