Brief Overview & Analysis of IFRS Implementation in KSA
Since the adoption of International Financial Reporting Standards (IFRS) by SOCPA, the Companies which are subject to IFRS implementation in KSA by max year-end FY 2018 need to understand and implement all the necessary requirements of IFRS guidelines. Keeping in view, the above adoption of IFRS by SOCPA in KSA, the followings are brief guidelines that the company need to focus on the effective IFRS implementation in KSA.
A) An effective Plan for successful IFRS Implementation in KSA
In the first place, the setting of a detailed plan is the pre-requisite before starting any other activity during the IFRS implementation in KSA. As a matter of fact, the detailed scanning of the company’s transactions and account balances should be undertaken (e.g. This involves a review of nature of underlying items and accounting transactions such as revenue, expenses, inventory and provisioning for various account balances etc.).
The project demands the basic understanding, proper and adequate planning, and efficient use of resources, effective consultancy from inside and outside the organization. In the first place, before setting the detailed plan for the successful IFRS transition project, the company should form an IFRS implementation committee responsible for the successful implementation of the IFRS transition project.
The company must provide an adequate training to the accounting and the financial reporting staff as well. The required training includes the followings:
- Arranging IFRS learning sessions within the company and asking one of the professionally qualified IFRS implementation committee members to present the basic differences between SOCPA and IFRS to the accounting and reporting staff.
- Highlighting and listing down the major differences that would affect the company’s account balances and the related transactions. Also, to present the idea as to how efficiently and effectively it needs to be addressed as required by the IFRS guidelines.
- In case, if the company doesn’t have the professional qualified staff for the required IFRS training and implementation, the company can prefer to outsource one of the big 4 or other good audit firms to conduct the special IFRS training and help the staff to successfully implement the IFRS requirements.
- Presenting the practical examples under IFRS by the IFRS implementation committee and encouraging the concerned trainees to participate in the discussion. This will provide them the confidence to better understand the application of IFRS in the required account balances.
- Distributing the IFRS learning material to the trainees for their reading and proper understanding.
B) Review the Financial Statements
The IFRS implementation committee must review the existing financial statements under (SOCPA) and discussing with the senior management, the changes identified under the existing SOCPA financial statements required under IFRS guidelines. These changes could be related to additional accounting policy, disclosure, omissions etc.
Let’s say, the management may decide an additional disclosure related to the change in the accounting policy for recognizing the fixed assets or shifting the carrying values from cost to fair values. The followings are certain examples related to the requirements listed under IFRS for guidance. Not every company, but most of them might encounter the following scenarios where they need to change the accounting treatment or accounting policy of any item or account balance or presenting an additional disclosure due to the first time adoption and the requirements mentioned under IFRS.
- The Fixed assets have been revalued to carry them in the books of accounts at fair value instead of keeping it under the old cost model.
- As per IFRS, the End of service benefits need to be accounted for as per the actuarial valuation method, unlike the SOCPA rules, where the End of service benefits recognition is quite different as per the Saudi labor laws.
- Investment Property: The other example is the reclassification of Owner Occupied Property to Investment Property. The company’s senior management may elect to classify any such property which meets the criteria of IAS-40 (Investment Property) from Owner Occupied Property. The management needs to account for the followings while giving the additional disclosure in the notes to the accounts of the company:
- The date of the revaluation of Investment Property.
- The fair value of the Investment Property.
- Value change in accordance with the requirements presented in IAS-40.
- Where the company’s senior management has elected to shift the property from owner-occupied category to Investment property, it needs to provide the disclosure under IAS-40 stating the followings separately:
- The statement clearly mentioning that the property has been revalued by an independent valuer.
- The statement clearly stating that the valuation has been performed by one of the accredited independent valuer and the fact that he is the specialist in valuing these types of investment properties.
- Key Management Benefits disclosure: The compensation of key management personnel of the company must be shown separately under the Related parties note as follows:
- In case, where the management has opted for the Employees Defined Benefit Plan, The management needs to disclose the company has a post-employment defined benefit plan. The benefits are required by Saudi Labor Law. The benefit is based on employees’ final salaries and allowances and their cumulative years of service, as stated in the laws of Saudi Arabia. After mentioning the above, the disclosure should continue to define the IAS-19 disclosure requirement. The management must disclose the fact that the actuarial valuation report has been used to recognize the End of service liability as at the year-end to comply with the IFRS guidelines and relevant requirements. The management must disclose the significant assumptions used in determining the post-employment defined benefit obligation which includes the following:
- Salary increment rate in Future
- Discount Rate used
- Employee turnover rate in the company
- Mortality rate
- Once the above disclosure is finalized and enacted in the notes to the financial statements, the IFRS financial statements must disclose the following movement in Post-employment benefits:
- At the beginning of the year
- Charge for the year
- Payments during the year
- Transfer from related parties
- Actuarial valuation adjustment
- In case, the company has operating lease commitments for itself as a group or its subsidiaries, then, in that case, it should list down the commitments entered with the lessor for the group or the subsidiaries. The notes must disclose the term of the lease, i.e. the period it covers e.g. From XXX to XXX years. Where the company has the option to renew the leases, the said fact must be disclosed as well. Also, it should be mentioned that the leases don’t impose any restrictions upon the company.
- Financial Instruments Risk Management Objectives and Policies disclosure which will state the company’s principal financial liabilities comprise term loans, trade, and other payables, bank facilities, notes payable, and amounts due to related parties etc. The management will disclose in the note its main purpose of such financial liabilities is to finance the company’s operations and to provide guarantees to support its operations. The company principal financial assets include trade receivables, prepayments, and other receivables, amounts due from related parties and cash that arrive directly from its operations etc.
- The management should disclose under the said note that it is exposed to market risk, credit risk and liquidity risk and the Company’s or Group’s senior management oversees the management of these risks. Under liquidity risk, the management needs to disclose the maturity profile of the Group’s financial liabilities based on contractual undiscounted payment to the user of the financial statements as summarized below.
C) Review and assess General Ledger
Review and assess the company’s General Ledger and its related chart of accounts to make sure it captures the data required under IFRS.
The classification and the presentation of account balances are quite different between SOCPA and IFRS, therefore, the company must amend General Ledger and its reporting tools in the light of the requirement of IFRS.
D) Update IFRS Checklist
The IFRS checklist needs to be updated based on the SOCPA based checklist. This will ensure that the IFRS implementation takes place smoothly and efficiently.
It’s better to prepare the comprehensive checklist and jot down the account balances, items or the transactions that must be modified as per the requirement of IFRS.
E) Review Accounting policy
The significant assessment by the company’s management is the review of its’ accounting policy to ensure its compliance with IFRS.
F) Liaison with Different Departments
Need to interact with the department heads in order to better understand the user needs which ultimately will assist in the design and formulation of accounting policy in the light of IFRS.
G) Construction and Contracting Business
If the company’s main line of business is construction and contracting, then the identification of such contracts which are affected by the implementation of IFRS 15 and IFRS 16 must be done promptly.
H) Required Actuarial Services
The outsourced Actuary must be contacted to conduct the actuarial valuation for the End of service benefits for the company in respect of opening IFRS compliant balance sheet as of January 01, 2017.
The comparatives as at and the year ending December 31, 2017, and as at and for the year ending December 31, 2018.
The above written brief narration related to the IFRS implementation in KSA and it’s successful implementation is intended to provide the basic guideline to all those who are subject to the adoption of IFRS. The examples of changes and disclosures mentioned above are just for the better understanding and can be amended and modified according to the company’s nature of the transaction and the management intention of depicting the changes with better disclosures. Recommended: IFRS adoption in Saudi Arabia
Kindly note that the aforementioned topic related to the IFRS guidance and its implementation is not concluded here, and will continue in future topics also. We will keep you posted on the different aspects of IFRS, its requirements and how the IFRS requirements affects the current accounting and reporting. We will also write that how the IFRS requirements have been modified in order to be replaced effectively in place of SOCPA regulations.