Managed by MIDDLE EAST FINANCIAL INVESTMENT COMPANY FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2017 together with the INDEPENDENT AUDITOR S REPORT
FINANCIAL STATEMENTS AND INDEPENDENT AUDITOR S REPORT INDEX PAGE Independent auditor s report 2 4 Balance sheet 5 Statement of income 6 Statement of cash flows 7 Statement of changes in net assets attributable to Unitholders 8 Notes to the financial statements 9 15-1 -
12 MEFIC LOCAL EQUITY FUND BALANCE SHEET As at 31 December 2017 ASSETS Notes 2017 2016 Cash and cash equivalents 7 461,066 1,225,550 Investments held for trading 8 12,149,918 11,081,300 Dividend receivable - 6,000 Total assets 12,610,984 12,312,850 LIABILITIES Management fee payable 9 16,056 15,670 Other expenses payable 9 47,464 40,528 Total liabilities 63,520 56,198 Net assets attributable to the Unitholders 12,547,464 12,256,652 Units in issue (numbers) 143,005.63 143,005.63 Net assets value attributable to each Unit 87.74 85.71 The accompanying notes 1 to 13 form an integral part of these financial statements. - 5 -
STATEMENT OF INCOME Notes 2017 2016 INCOME Realised (loss) / gain on disposal of investments held for trading (373,547) 222,297 Unrealised gain on investments held for trading 638,258 1,180,298 Dividend income 403,974 236,262 Other income 24 58 Total income 668,709 1,638,915 EXPENSES Management fee 6,9 (188,175) (134,383) Other expenses 6,9 (188,175) (134,383) Bank Charges (1,547) (5) Total expenses (377,897) (268,771) NET INCOME FOR THE YEAR 290,812 1,370,144 The accompanying notes 1 to 13 form an integral part of these financial statements. - 6 -
STATEMENT OF CASH FLOWS CASH FLOWS FROM OPERATING ACTIVITIES 2017 2016 Net income for the year 290,812 1,370,144 Adjustments for: Realised loss / (gain) on disposal of investments held for trading 373,547 (222,297) Unrealised gain on investments held for trading (638,258) (1,180,298) 26,101 (32,451) Changes in operating assets and liabilities: Proceeds from sale of investments held for trading 13,544,417 19,852,300 Purchase of investments held for trading (14,348,324) (23,436,291) Dividend receivable 6,000 (6,000) Management fee payable 386 4,766 Other expenses payable 6,936 19,058 Net cash used in operating activities (764,484) (3,598,618) CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from subscription of units - 2,500,000 Net cash generated from financing activities - 2,500,000 Net decrease in cash and cash equivalent (764,484) (1,098,618) Cash and cash equivalent at 1 January 1,225,550 2,324,168 Cash and cash equivalent at 31 December 461,066 1,225,550 The accompanying notes 1 to 13 form an integral part of these financial statements. - 7 -
STATEMENT OF CHANGES IN NET ASSETS ATTRIBUTABLE TO UNITHOLDERS 2017 2016 Net assets at 1 January 12,256,652 8,386,508 Net income for the year 290,812 1,370,144 Changes from unit transactions Proceeds from issuance of units - 2,500,000 Net change from unit transactions - 2,500,000 Net assets value at 31 December 12,547,464 12,256,652 UNIT TRANSACTIONS 2017 2016 Units Units at 1 January 143,005.63 109,632.78 Units issued during the year - 33,372.85 Units at 31 December 143,005.63 143,005.63 The accompanying notes 1 to 13 form an integral part of these financial statements. - 8 -
1. THE FUND AND ITS ACTIVITIES MEFIC LOCAL EQUITY FUND NOTES TO THE FINANCIAL STATEMENTS MEFIC Local Equity Fund (the Fund ) is an open-ended investment fund established and managed through an agreement between Middle East Financial Investment Company (the Fund Manager ) and the Fund Investors (the Unitholders ). The Fund aims to provide long-term capital growth by investing in shares of Saudi companies listed on the Saudi stock market and which are compliant with Shariah investment guidelines of the Fund manager s Shariah Committee. In dealing with the Unitholders, the Fund Manager considers the Fund as an independent accounting unit. Accordingly, the Fund Manager prepares separate financial statements for the Fund. The Fund commenced its operations on 15 Rajab 1436 H (corresponding to 3 May 2015 G). The approval from Capital Market Authority ( CMA ) for the establishment of the Fund was granted in its letter number 15/2001/5/3 dated 21 Rabi Al-Thani 1436 H (corresponding to 10 February 2015 G). 2. REGULATORY AUTHORITY The Fund is governed by Investment Funds Regulations as amended by CMA up to 16 Sha aban 1437 H (corresponding to 23 May 2016 G) detailing requirements for investment funds operating in the Kingdom of Saudi Arabia. 3. SUBSCRIPTION / REDEMPTION (DEALING DAY & VALUATION DAY) Subscription / redemption requests are accepted on all days on which the Saudi Stock Market is open. The value of the Fund s portfolio is determined twice a week on Monday and Thursday (each being a Valuation Day ). The net asset value of the Fund for the purpose of purchase or sale of units is determined by dividing the net value of assets (fair value of the Fund s assets minus fund liabilities) by the total number of outstanding fund units on the relevant valuation day. 4. BASIS OF PREPARATION a) Statement of compliance These financial statements have been prepared in accordance with generally accepted accounting standards in the Kingdom of Saudi Arabia issued by the Saudi Organization of Certified Public Accountants (SOCPA), the Investment Funds Regulations as published by CMA in Saudi Arabia and the Fund s terms and conditions. Transition to International Financial Reporting Standards Saudi Organization for Certified Public Accountants (SOCPA) has approved a plan for transition to International Financial Reporting Standards (IFRS). Accordingly, the Fund will adopt IFRS for the reporting periods beginning on or after 1 January 2018. b) Basis of measurement These financial statements have been prepared under the historical cost convention, except for the investments held for trading which are carried at fair value, using the accrual basis of accounting and the going concern concept. c) Functional and presentation currency These financial statements have been presented in Saudi Riyals (SR), which is the functional currency of the Fund. - 9 -
NOTES TO THE FINANCIAL STATEMENTS BASIS OF PREPARATION (continued) d) Use of estimates and judgment The preparation of these financial statements requires management to make judgments, estimates and assumptions that affect the application of policies and reported amounts of assets, liabilities, income and expense. Actual results may differ from these estimates. Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the year in which the estimates are revised and future years affected. 5. SIGNIFICANT ACCOUNTING POLICIES The accounting policies set out below have been adopted by the Fund and applied consistently throughout all the periods presented in these financial statements. a) Cash and cash equivalents Cash and cash equivalents comprise of cash in hand, cash at banks and other short-term highly liquid investments with original maturities of three months or less, which are available to the Fund without any restriction. b) Investments held for trading Investments are classified as held for trading if they are purchased for the purpose of resale in short term. Investments held for trading are initially recorded at cost which includes the purchase price plus all expenses incurred for the purpose of acquiring the securities. Subsequent to initial recognition, investments held for trading are measured at fair value and resulting gains or losses are recognized in the statement of income but excluding dividend income which is separately shown in the statement of income. Realized gains or losses at disposal and unrealized gains or losses are determined on average cost basis. c) Trade date accounting All regular way purchases and sales of financial assets are recognized / derecognized on the trade date (i.e. the date that the Fund commits to purchase or sell the assets). Regular way purchases or sales are purchases or sales of financial assets that require settlement of assets within the time frame generally established by regulation or convention in the market place. All other financial assets and liabilities (including assets and liabilities designated at fair value through income statement) are initially recognized on trade date at which the Fund becomes a party to the contractual provisions of the instrument. d) Management fee and other expenses Fund management fee and other expenses are charged to the income statement at rates agreed with the Fund Manager. e) Zakat / income tax Zakat / income tax is the obligation of the Unitholders and is not provided for in these financial statements. f) Dividend income Dividend income is recognized when the right to receive the dividend is established. - 10 -
NOTES TO THE FINANCIAL STATEMENTS SIGNIFICANT ACCOUNTING POLICIES (continued) g) Subscription and redemption of units Units subscribed and redeemed are recorded at the net asset value per unit on the valuation day for which the subscription request and redemption applications are received. h) Net assets value The net assets value per unit disclosed in the balance sheet is calculated by dividing the net assets of the Fund by the number of units in issue at the period-end. i) Financial instruments Financial assets and liabilities are recognised at the time when the Fund becomes a party to the contractual provisions of the instrument. Any gain or loss on de-recognition of financial assets and financial liabilities are taken directly to the statement of income. 6. MANAGEMENT FEE AND OTHER EXPENSES The Fund Manager charges each investor a subscription fee of a percentage not exceeding 1.5% of the subscribed amount to cover administration costs and is netted off against proceeds from issuance of units. Under the terms and conditions of the Fund, the Fund is liable to pay the following expenses to the Fund Manager: Management fee - Management fee is accrued at the rate of 1.50% per annum of the net assets value of the Fund at each valuation day, payable monthly. Other expenses - Other expenses are charged at the rate of 1.50% of the net asset value of the fund at each valuation day, payable quarterly. 7. CASH AND CASH EQUIVALENTS As at 31 December 2017, the cash and cash equivalent include an amount of SR 0.46 million (2016: SR 1.20 million) which is held with the Fund Manager as custodian. The Fund Manager is authorized to utilize these funds for the purpose of trading in securities on behalf of the Fund. The remaining balance is held in the current account in a local bank. 8. INVESTMENTS HELD FOR TRADING Note 2017 2016 Equity investments 8.1 12,049,918 11,081,300 Investment in mutual fund units 8.2 100,000-12,149,918 11,081,300-11 -
NOTES TO THE FINANCIAL STATEMENTS INVESTMENTS HELD FOR TRADING (Continued) 8.1 The sector-wise composition of equity investments held for trading is summarized as follows: Fair value as at 31 December 2017 2016* Retailing 946,507 347,250 Food & Staples Retailing 430,465 - Capital goods 198,440 - Insurance 459,350 993,217 Transportation 570,997 - Food & Beverages 206,400 1,021,686 Commercial & Professional Services 194,935 401,700 Energy 253,736 373,414 Banks 2,190,113 1,373,207 Materials 4,242,188 3,749,516 Consumer Services 314,783 367,000 Health Care Equipment & Services 1,116,373 1,507,713 Real Estate Management & Development 674,487 552,850 Telecommunication Services 251,144 393,747 12,049,918 11,081,300 * The Fund has rearranged comparatives to conform to latest sector wise composition of Saudi Stock Market. As at 31 December 2017, the cost of the above-mentioned investments held for trading amounted to SR 10.82 million (2016: SR 9.94 million). These investments are in equity shares quoted on Saudi Stock Market. 8.2 Investment in units of mutual fund comprises the following: Fair value as at 31 December 2017 2016 MEFIC Saudi Freestyle Equity Fund 100,000-9. TRANSACTIONS AND BALANCES WITH RELATED PARTIES Related parties of the Fund include the Fund Manager and majority Unitholder Middle East Financial Investment Company and other funds managed by the Fund manager. In the ordinary course of its activities, the Fund transacts business with related parties. Related party transactions are in accordance with the terms and conditions of the Fund. All transactions with related parties are carried out based on mutually agreed terms under formal agreement. Related party transactions for the year are described as under: Related party Nature of relationship Nature of transaction 2017 2016 Middle East Financial Investment Company MEFIC Saudi Freestyle Equity Fund The Fund Manager Management fee 188,175 134,383 Other expenses 188,175 134,383 Fund managed by Subscription of the Fund Manager units 100,000 - - 12 -
NOTES TO THE FINANCIAL STATEMENTS TRANSACTIONS AND BALANCES WITH RELATED PARTIES (Continued) The above transactions during the year resulted in the following balances due to related party: Related party Nature of relationship Nature of transaction As at December 31, 2017 2016 Middle East Financial Investment Company MEFIC Saudi Freestyle Equity Fund The Fund Manager Fund managed by the Fund Manager Management fee payable 16,056 15,670 Other expenses payable 47,464 40,528 Subscription of units 100,000 - As at 31 December 2017, the Fund holds 1,000 units (2016: Nil) in MEFIC Saudi Freestyle equity Fund, a fund managed by the Fund Manager amounting to SR 100 each. (2016: Nil). 10. FINANCIAL RISK MANAGEMENT Credit risk Credit risk is the risk that one party to a financial instrument fails to discharge an obligation and cause other party to incur a financial loss. The Fund is exposed to credit risk on its bank balance and dividend receivable. However, the bank balance is maintained with reputed local bank in the Kingdom of Saudi Arabia and the receivable is against dividend from reputable companies listed in the Kingdom of Saudi Arabia. Therefore, the Fund Manager believes that the Fund does not have any significant credit risk. Equity price risk Equity price risk is the risk that the fair value of equity investments will decrease as a result of changes in the levels of equity indices and the value of individual stocks. The Fund is exposed to equity price risk arising from its investments in equity shares. The Fund Manager endeavors to minimize the risk through diversification across various sectors of the Saudi stock market. Further, the Fund Manager has established risk guidelines to manage its equity price risk. Liquidity risk Liquidity risk is the risk that the Fund may encounter difficulty in generating funds to meet commitments associated with financial liabilities which comprise of fund management fee and other expenses payable. The Fund Manager monitors the liquidity requirements on a regular basis and ensures that sufficient funds are available to meet any commitments as they arise. Currency risk Currency risk is the risk that the value of a financial instrument may fluctuate due to change in the foreign exchange rates. The financial instruments of the Fund i.e. cash and payables are denominated in Saudi Arabian Riyals. Accordingly, the Fund is not exposed to any currency risk. - 13 -
NOTES TO THE FINANCIAL STATEMENTS 11. FAIR VALUE OF FINANCIAL INSTRUMENTS Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Financial instruments comprise of financial assets and financial liabilities. The Fund s financial assets consist of investments held for trading and cash at bank; its financial liabilities are management fee payable and other expenses payable. Investments held for trading are carried at fair value. The fair value of other financial instruments is not materially different from their carrying values. 12. LAST VALUATION DATE The last valuation date of the year was 31 December 2017 (2016: 31 December 2016). 13. APPROVAL OF ANNUAL FINANCIAL STATEMENTS These annual financial statements were approved by the Fund Board on 26 Jumada II 1439 H corresponding to 14 March 2018 G. - 14 -