aNNUAL FINANCIAL statements - kirnafco.com · Murabaha receivables, net 6 556,447,773 460,380,772 Ijara receivables, ... Functional and presentation currency These financial statements

ANNUAL FINANCIAL STATEMENTS

Kirnaf Finance Company 31 December 2016

The attached notes 1 to 25 form part of these financial statements.

2

KIRNAF FINANCE COMPANY

(A SAUDI CLOSED JOINT STOCK COMPANY)

STATEMENT OF COMPREHENSIVE INCOME FOR THE YEAR ENDED 31 DECEMBER 2016

Notes

2016 SR

2015 SR

INCOME

Income from Murabaha contracts 56,778,047 44,335,324

Income from Ijara contracts 44,041,575 69,613,912 ──────── ──────── INCOME FROM MURABAHA AND IJARA 100,819,622 113,949,236

Finance cost (15,355,839) (19,595,934)

──────── ────────

NET INCOME FROM MURABAHA AND IJARA 85,463,783 94,353,302

Other operating income 2,376,082 2,769,365

──────── ────────

87,839,865 97,122,667

Operating expenses

General and administration expenses 19 (28,006,423) (39,780,348)

Provision for credit losses 6 and 7 (19,601,560) (8,000,000)

Selling and marketing expenses 20 (2,334,418) (2,576,592) ──────── ──────── NET PROFIT BEFORE ZAKAT 37,897,464 46,765,727

Zakat 12 (14,764,336) (14,533,146) ──────── ──────── NET PROFIT FOR THE YEAR 23,133,128 32,232,581

OTHER COMPREHENSIVE INCOME

Other comprehensive income to be reclassified to profit or loss in

the subsequent periods

-

-

Other comprehensive income not to be reclassified to profit or

loss in the subsequent periods

-

-

──────── ────────

TOTAL COMPREHENSIVE INCOME 23,133,128 32,232,581

════════

════════



STATEMENT OF FINANCIAL POSITION AS AT 31 DECEMBER 2016


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Notes

31 December 2016 SR

31 December 2015 SR

ASSETS

Cash and cash equivalents 5 57,054,114 100,122,894

Murabaha receivables, net 6 556,447,773 460,380,772

Ijara receivables, net 7 369,001,518 469,581,008

Accounts receivable, prepayments and others 8 34,361,557 54,554,713

Investment properties 9 71,137,158 71,137,158

Property and equipment 10 9,521,888 8,647,024 ───────── ───────── TOTAL ASSETS 1,097,524,008 1,164,423,569 ═════════ ═════════

LIABILITIES AND SHAREHOLDERS’ EQUITY

Accounts payable, accruals and others 11 3,510,852 3,565,435

Provision for zakat 12 27,793,239 26,157,319

Bank borrowings, net 13 267,676,379 366,118,870

Provision for employees’ terminal benefits 14 4,758,951 3,930,486

───────── ───────── TOTAL LIABILITIES 303,739,421 399,772,110 ───────── ─────────

SHAREHOLDERS’ EQUITY

Share capital 15 600,000,000 540,000,000

Statutory reserve 16 24,488,125 22,174,812

Consensual reserve 16 3,000,000 3,000,000

Other capital reserve 16 - 54,000,000

Retained earnings 166,296,462 145,476,647 ───────── ───────── TOTAL SHAREHOLDERS’ EQUITY 793,784,587 764,651,459

───────── ───────── ───────── ───────── TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY 1,097,524,008 1,164,423,569 ═════════ ═════════



STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY FOR THE YEAR ENDED 31 DECEMBER 2016


4

Share

capital

SR

Statutory

reserve

SR

Consensual

reserve

SR

Other capital

reserve

SR

Retained

earnings

SR

Total

SR

Balance at 1 January 2015 510,000,000 18,951,554 3,000,000 43,200,000 116,467,324 691,618,878

Net profit for the year - - - - 32,232,581 32,232,581

Other comprehensive income - - - - - -

──────── ──────── ──────── ──────── ───────── ────────

Total comprehensive income - - - - 32,232,581 32,232,581

Issuance of share capital (note 15) 30,000,000 - - - - 30,000,000

Transfer to statutory reserve - 3,223,258 - - (3,223,258) -

Shared-based payment - - - 10,800,000 - 10,800,000

──────── ──────── ──────── ───────── ───────── ────────

Balance at 31 December 2015 540,000,000 22,174,812 3,000,000 54,000,000 145,476,647 764,651,459

════════ ════════ ════════ ═════════ ═════════ ════════

Balance at 1 January 2016 540,000,000 22,174,812 3,000,000 54,000,000 145,476,647 764,651,459

Net profit for the year - - - - 23,133,128 23,133,128

Other comprehensive income - - - - - -

──────── ──────── ──────── ──────── ───────── ────────

Total comprehensive income - - - - 23,133,128 23,133,128

Issuance of share capital (note 15) 60,000,000 - - (54,000,000) - 6,000,000

Transfer to statutory reserve - 2,313,313 - - (2,313,313) -

──────── ──────── ──────── ───────── ───────── ────────

Balance at 31 December 2016 600,000,000 24,488,125 3,000,000 - 166,296,462 793,784,587

════════ ════════ ════════ ═════════ ═════════ ════════



STATEMENT OF CASH FLOWS FOR THE YEAR ENDED 31 DECEMBER 2016


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Notes

31 December 2016 SR

31 December 2015 SR

CASH FLOW FROM OPERATING ACTIVITIES Net profit before zakat 37,897,464 46,765,727 Adjustments for: Depreciation 19 1,414,699 1,801,618 Provision for employees’ terminal benefits 14 966,801 877,015 Provision for credit losses 6 and 7 19,601,560 8,000,000 (Gain) loss on disposal of property and equipment (16,000) 19,416 Share-based payment expense 17 - 10,800,000 Financing cost 15,355,839 18,769,862

───────── ───────── 75,220,363 87,033,638

Murabaha receivables, net (106,959,033) (48,802,326)

Ijara receivables, net 91,869,962 155,965,551

Accounts receivable, prepayments and others 20,193,156 (11,259,061) Accounts payable, accruals and others (54,583) (758,172) ───────── ───────── Net cash generated from operating activities 80,269,865 182,179,630

Zakat paid 12 (13,128,416) (5,091,035)

Employees’ terminal benefits paid 14 (138,336) (374,384) ───────── ───────── Net cash from operating activities 67,003,113 176,714,211 ───────── ───────── CASHFLOW FROM INVESTING ACTIVITIES Acquisition of property and equipment 10 (2,289,563) (130,807) Proceeds from disposal of property and equipment 16,000 - ───────── ───────── Net cash used in investing activities (2,273,563) (130,807) ───────── ───────── CASHFLOW FROM FINANCING ACTIVITIES Proceeds from bank borrowings 110,000,000 80,088,016 Repayments of bank borrowings (212,469,727) (235,131,194) Financing cost paid (11,328,603) (4,676,076) Proceeds from issuance of share capital 15 6,000,000 30,000,000 ───────── ───────── Net cash used in financing activities (107,798,330) (129,719,254) ───────── ───────── NET (DECREASE) INCREASE IN CASH AND CASH

EQUIVALENTS (43,068,780) 46,864,150 CASH AND CASH EQUIVALENTS AT BEGINNING OF

THE YEAR 100,122,894 53,258,744 ───────── ───────── CASH AND CASH EQUIVALENTS AT END OF THE YEAR 57,054,114 100,122,894 ═════════ ═════════



NOTES TO THE FINANCIAL STATEMENTS 31 DECEMBER 2016

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1 GENERAL

Kirnaf Finance Company (the “Company”) is a Saudi closed joint stock company, registered in Riyadh, Kingdom of

Saudi Arabia. The Company has obtained a license number 201411/S A/23 dated 9 Muharram 1436H (corresponding

to 2 November 2014) from Saudi Arabian Monetary Authority (SAMA). The Company is registered under

commercial registration number 1010265551 dated 9 Rabie Al Thani 1430H (corresponding to 5 April 2009).

The objectives of the Company is to provide financing to small or medium companies, financing production assets

and providing finance leases.

2 BASIS OF PREPARATION

Statement of compliance These financial statements have been prepared in accordance with International Financial Reporting Standards

(IFRSs) as issued by the International Accounting Standards Board (IASB) as laid down under Article 71 of the

Implementing Regulations of the Finance Companies Control Law which requires the Company to prepare the

financial statements based on IFRS.

Assets and liabilities in the statement of financial position are presented in the order of liquidity.

These financial statements were authorised for issue by the Board of Directors of the Company on 2 Jumad Thani

(corresponding to 1 March 2017).

Basis of measurement These financial statements are prepared under the historical cost convention.

Functional and presentation currency These financial statements are presented in Saudi Arabian Riyals, which is the Company’s functional currency.

Uses of estimates, judgement and assumptions In preparing these financial statements, the management has made judgements, estimates, and assumptions that affect

the application of accounting policies and the reported amounts of assets, liabilities, income and expenses. Actual results

may differ from these estimates.

Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to estimates are recognised

prospectively.

It also requires management to exercise its judgement in the process of applying the Company’s accounting policies.

Such judgements, estimates, and assumptions are continually evaluated and are based on historical experience and other

factors, including obtaining professional advice and expectations of future events that are believed to be reasonable

under the circumstances. Significant areas where management has used judgements, estimates and assumptions are as

follows:



NOTES TO THE FINANCIAL STATEMENTS (continued) 31 DECEMBER 2016

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2 BASIS OF PREPARATION (continued)

Use of estimates, judgement and assumptions (continued)

i. Impairment for credit losses on Murabaha and Ijara receivables The Company considers evidence of impairment for these assets at both individual and collective levels. All assets are

individually assessed for impairment. Assets that are determined not to have a need for specific provision charge are

collectively assessed for collective provision.

In assessing collective provision, the Company uses historical information on the timing of recoveries and the amount

of loss incurred, and makes an adjustment if current economic and credit conditions are such that actual losses are likely

to be greater or lesser than suggested by historic trends.

An impairment loss is calculated as the difference between an asset’s carrying amount and the present value of the

estimated future cash flows discounted at the asset’s original effective rate. Losses are recognised in statement of

comprehensive income and reflected in provision for credit losses. When the Company considers that there are no

realistic prospects of recovery of the asset, the relevant amounts are written off. If the amount of impairment loss

subsequently decreases and the decrease can be related objectively to the event occurring after the impairment was

recognised, then the previously recognised impairment loss is reversed through statement of comprehensive income.

ii. Going concern The Company’s management has made an assessment of the Company’s ability to continue as a going concern and

is satisfied that the Company has the resources to continue in business for the foreseeable future. Additionally,

management is not aware of any material uncertainties that may cast significant doubt upon the Company’s ability to

continue as a going concern. Therefore, the financial statements of the Company continue to be prepared on the going

concern basis.

iii. Useful lives of property and equipment Management determines the estimated useful lives of the Company’s property and equipment for calculating

depreciation. This estimate is determined after considering the expected usage of the asset or physical wear and tear.

Management reviews the useful lives annually and future depreciation charge would be adjusted where management

believes the useful lives differ from previous estimates.

3 SIGNIFICANT ACCOUNTING POLICIES

The accounting policies set out below have been applied consistently to all periods presented in these financial

statements. The significant accounting policies adopted are as follows:

Changes in accounting policies The accounting policies used in the preparation of these financial statements are consistent with those used in the

preparation of the annual financial statements for the year ended December 31, 2015 except for the adoption of the

following new standards and other amendments to existing standards and a new interpretation mentioned below which

has had no material impact on the financial statements of the Company on the current period or prior periods and is

expected to have an insignificant effect in future periods:

i. New standards IFRS 14 – “Regulatory Deferral Accounts”, applicable for the annual periods beginning on or after 1 January 2016,

allows an entity, whose activities are subject to rate regulation, to continue applying most of its existing accounting

policies for regulatory deferral account balances upon its first time adoption of IFRS. The standard does not apply to

existing IFRS preparers. Also, an entity whose current GAAP does not allow the recognition of rate-regulated assets

and liabilities, or that has not adopted such policy under its current GAAP, would not be allowed to recognise them

on first-time application of IFRS.




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3 SIGNIFICANT ACCOUNTING POLICIES (continued)

Changes in accounting policies (continued) ii. Amendments to existing standards Amendments to IFRS 10 – “Consolidated Financial Statements”, IFRS 12 – “Disclosure of Interests in Other Entities”

and IAS 28 – “Investments in Associates”, applicable for the annual periods beginning on or after 1 January 2016,

address three issues that have arisen in applying the investment entities exception under IFRS 10. The amendments

to IFRS 10 clarify that the exemption from presenting consolidated financial statements applies to a parent entity that

is a subsidiary of an investment entity, when the investment entity measures its subsidiaries at fair value. Furthermore,

only a subsidiary of an investment entity that is not an investment entity itself and that provides support services to

the investment entity is consolidated. All other subsidiaries of an investment entity are measured at fair value. The

amendments to IAS 28 allow the investor, when applying the equity method, to retain the fair value measurement

applied by the investment entity associate or joint venture to its interests in subsidiaries.

Amendments to IFRS 11 – “Joint Arrangements”, applicable for the annual periods beginning on or after 1 January

2016, require an entity acquiring an interest in a joint operation, in which the activity of the joint operation constitutes

a business, to apply, to the extent of its share, all of the principles in IFRS 3 – “Business Combinations” and other

IFRSs that do not conflict with the requirements of IFRS 11 Joint Arrangements. Furthermore, entities are required

to disclose the information required by IFRS 3 and other IFRSs for business combinations. The amendments also

apply to an entity on the formation of a joint operation if, and only if, an existing business is contributed by one of

the parties to the joint operation on its formation. Furthermore, the amendments clarify that, for the acquisition of an

additional interest in a joint operation in which the activity of the joint operation constitutes a business, previously

held interests in the joint operation must not be remeasured if the joint operator retains joint control.

Amendments to IAS 1 – “Presentation of Financial Statements”, applicable for the annual periods beginning on or

after 1 January 2016, clarify, existing IAS 1 requirements in relation to;

- The materiality requirements in IAS 1

- That specific line items in the statement(s) of profit or loss and other comprehensive income (“OCI”) and

the statement of financial position may be disaggregated

- That entities have flexibility as to the order in which they present the notes to financial statements

- That the share of OCI of associates and joint ventures accounted for using the equity method must be

presented in aggregate as a single line item, and classified between those items that will or will not be

subsequently reclassified to profit or loss.

The amendments further clarify the requirements that apply when additional subtotals are presented in the statement

of financial position and the statement(s) of profit or loss and OCI.

Amendments to IAS 16 – “Property, Plant and Equipment” and IAS 38 – “Intangible Assets”, applicable for the

annual periods beginning on or after 1 January 2016, restricts the use of ratio of revenue generated to total revenue

expected to be generated to depreciate property, plant and equipment and may only be used in very limited

circumstances to amortise intangible assets.

Amendments to IAS 16 – “Property, Plant and Equipment” and IAS 41 – “Agriculture”, applicable for the annual

periods beginning on or after 1 January 2016, change the scope of IAS 16 to include biological assets that meet the

definition of bearer plants. Agricultural produce growing on bearer plants will remain within the scope of IAS 41. In

addition, government grants relating to bearer plants will be accounted for in accordance with IAS 20 – “Accounting

for Government Grants and Disclosure of Government Assistance”, instead of IAS 41.

Amendments to IAS 27 – “Separate Financial Statements”, applicable for the annual periods beginning on or after 1

January 2016, allows an entity to use the equity method as described in IAS 28 to account for its investments in

subsidiaries, joint ventures and associates in its separate financial statements.




9


Changes in accounting policies (continued)

Annual improvements to IFRS 2012-2014 cycle applicable for annual periods beginning on or after 1 January 2016.

A summary of the amendments is as follows:

- IFRS 5 – “Non-current Assets Held for Sale and Discontinued Operations”, amended to clarify that changing

from one disposal method to the other would not be considered a new plan of disposal, rather it is a

continuation of the original plan. There is, therefore, no interruption of the application of the requirements

in IFRS 5.

- IFRS 7 – “Financial Instruments: Disclosures” has been amended to clarify that a servicing contract that

includes a fee can constitute continuing involvement in a financial asset. The nature of the fee and the

arrangement should be assessed in order to consider whether the disclosures are required under IFRS 7 and

the assessment must be done retrospectively. IFRS 7 has been further amended to clarify that the offsetting

disclosure requirements do not apply to condensed interim financial statements, unless such disclosures

provide a significant update to the information reported in the most recent annual report.

- IAS 19 – “Employee Benefits” – amendment clarifies that market depth of high quality corporate bonds is

assessed based on the currency in which the obligation is denominated, rather than the country where the

obligation is located. When there is no deep market for high quality corporate bonds in that currency,

government bond rates must be used.

Revenue recognition Income on Murabaha and Ijara financing are recognized in the statement of comprehensive income using the effective

profit method (EPR) on the outstanding balance over the term of the contract.

The calculation of effective profit rate takes into account all contractual terms of Murabaha and Ijara receivables

including all the fees, transaction costs, discounts that are integral part of the effective profit but does not include the

future financing loss. Transaction costs are incremental costs that are directly attributable to acquisition of financial

assets and liabilities.

Profit as used in the context of financial instruments refers to special commission income as understood in the

financial community in the Kingdom of Saudi Arabia.

Income from investment properties is recognised when the sale transaction is consummated and ownership title and

related risks and reward have been transferred to the buyer.




10


Financial assets i. Initial recognition and subsequent measurement of financial assets All financial assets of the Company are non-derivative financial assets with fixed or determinable payments that are

not quoted in an active market. Such assets are recognised initially at fair value plus any directly attributable

transaction costs. Subsequent to initial recognition, these are measured at amortised cost using the effective profit

method, less any impairment losses.

Following are the major financial assets as of the reporting date:

Murabaha receivables Murabaha is an agreement whereby the Company sells an asset to a customer, which the Company has purchased and

acquired based on an undertaking received from the customer to buy. The selling price comprises the cost plus an

agreed profit margin. Gross amounts due under the Murabaha sale contracts include the total of future sale payments

on the Murabaha agreement (Murabaha sale receivables). The difference between the Murabaha sale receivables and

the cost of the sold asset, is recorded as unearned Murabaha income (see note 6), and for presentation purposes, is

deducted from the gross amounts due under the Murabaha receivable.

Ijara receivables Ijara is an agreement whereby the Company, acting as a lessor, purchases or constructs an asset for lease according

to the customer request (lessee), based on an undertaking to lease the asset for an agreed rent and specific period that

could end by transferring the ownership of the leased asset to the lessee. The gross amounts due under originated Ijara

(finance) leases includes the total of future lease payments on Ijara receivables (lease receivables), plus estimated

residual amounts receivable. The difference between the Ijara receivables and the cost of the sold asset, is recorded

as unearned Ijara income and for presentation purposes, is deducted from the gross amounts due under the Ijara

receivable.

ii. Impairment of financial assets The Company assesses at each reporting date whether there is any objective evidence that a financial asset or a group

of financial assets is impaired. A financial asset or a group of financial assets is deemed to be impaired if, and only

if, there is objective evidence of impairment as a result of one or more events that have occurred after the initial

recognition of the asset (an incurred ‘loss event’). Further, the loss event (or events) has an impact on the estimated

future cash flows of the financial asset or the group of financial assets that can be reliably estimated. Evidence of

impairment may include indications that the borrower or a group of borrowers is experiencing significant financial

difficulty. The probability that they will enter bankruptcy or other financial reorganisation, default or delinquency in

interest or principal payments; where observable data indicates that there is a measurable decrease in the estimated

future cash flows, such as changes in arrears or economic conditions that correlate with defaults.

Provision for credit losses is based on management assessment as to whether there is objective evidence that a

financial asset may be impaired. If such evidence exists, the estimated recoverable amount is determined and any

impairment loss is recognised in statement of comprehensive income.

iii. Derecognition of financial assets A financial asset (or, where applicable, a part of a financial asset or part of a group of similar financial assets) is

derecognised when:

The rights to receive cash flows from the asset have expired; or

The Company has transferred its rights to receive cash flows from the asset or has assumed an obligation to pay

the received cash flows in full without material delay to a third party under a ‘pass-through’ arrangement; and

either (a) the Company has transferred substantially all the risks and rewards of the asset, or (b) the Company

has neither transferred nor retained substantially all the risks and rewards of the asset, but has transferred control

of the asset.




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Financial assets (continued)

iii. Derecognition of financial assets (continued) When the Company has transferred its rights to receive cash flows from an asset or has entered into a pass-through

arrangement, it evaluates if and to what extent it has retained the risks and rewards of ownership. When it has neither

transferred nor retained substantially all of the risks and rewards of the asset, nor transferred control of the asset, the

asset is recognised to the extent of the Company’s continuing involvement in the asset. In that case, the Company

also recognises an associated liability. The transferred asset and the associated liability are measured on a basis that

reflects the rights and obligations that the Company has retained.

Continuing involvement that takes the form of a guarantee over the transferred asset is measured at the lower of the

original carrying amount of the asset and the maximum amount of consideration that the Company could be required

to repay.

Financial liability i. Initial recognition and subsequent measurement The Company’s financial liabilities consist of bank borrowings and accounts and other payables. Such financial

liabilities are recognised initially at fair value plus any directly attributable transaction costs. Subsequent to initial

recognition these financial liabilities are measured at amortised cost using the effective profit method.

ii. Derecognition of financial liability A financial liability is derecognised when the obligation under the liability is discharged or cancelled or expires.

When an existing financial liability is replaced by another from the same lender on substantially different terms, or

the terms of an existing liability are substantially modified, such an exchange or modification is treated as the

derecognition of the original liability and the recognition of a new liability. The difference in the respective carrying

amounts is recognised in the statement of comprehensive income.

Fair value 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. The fair value measurement is based on the presumption that

the transaction to sell the asset or transfer the liability takes place either:

in the principal market for the asset or liability, or

in the absence of a principal market, in the most advantageous market for the asset or liability.

The principal or the most advantageous market must be accessible to by the Company. The fair value of an asset or a

liability is measured using assumptions that market participants would use when pricing the asset or liability,

assuming that market participants act in their economic best interest.

A fair value measurement of a non-financial asset takes into account a market participant's ability to generate

economic benefits by using the asset in its highest and best use or by selling it to another market participant that would

use the asset in its highest and best use.

Accounts payable and accruals Liabilities are recognised for amounts to be paid in the future for goods or services received, whether billed by the

supplier or not.

Provisions Provisions are recognized when the Company has an obligation (legal or constructive) arising from a past event, and

the costs to settle the obligation are both probable and can be measured reliably.

Borrowings Borrowings are recognised initially at fair value, net of transaction costs incurred. Borrowings are subsequently stated

at amortised cost with any difference between the proceeds (net of transaction costs) and the redemption value

recognised in the statement of comprehensive income over the period of the borrowing using the effective profit

method.




12


Investment properties Investment properties are stated at cost less accumulated depreciation and any accumulated impairment losses. The

cost less estimated residual value of investment properties is depreciated on a straight line basis over the estimated

useful lives of the assets. The carrying values of investment properties are reviewed for impairment when events or

changes in circumstances indicate the carrying value may not be recoverable. If any such indication exists and where

the carrying values exceed the estimated recoverable amount, the assets are written down to their recoverable amount,

being the higher of their fair value less costs to sell and their value in use.

Transfers are made to (or from) investment property only when there is a change in use. Transfers between investment

property and owner-occupied property do not change the carrying amount of the property transferred and they do not

change the cost of that property for measurement or disclosure purposes.

Gains and losses on disposal of investment properties are determined by comparing the proceeds from disposal with

the carrying amount of investment properties and are recognised within other income in the statement of

comprehensive income.

Property and equipment Property and equipment are measured at cost less accumulated depreciation and any accumulated impairment losses.

The cost less estimated residual value of property and equipment is depreciated on a straight line basis over the

estimated useful lives of the assets. The carrying values of property and equipment are reviewed for impairment when

events or changes in circumstances indicate the carrying value may not be recoverable. If any such indication exists

and where the carrying values exceed the estimated recoverable amount, the assets are written down to their

recoverable amount, being the higher of their fair value less costs to sell and their value in use.

Leasehold improvements are amortised on a straight-line basis over the shorter of the useful life of the

improvement/assets or the term of the lease. Expenditure for repair and maintenance are charged to statement of

comprehensive income. Improvements that increase the value or materially extend the life of the related assets are

capitalised.

When parts of an item of property and equipment have different useful lives, they are accounted for as separate items

(major components) of property and equipment.

Gains and losses on disposal of an item of property and equipment are determined by comparing the proceeds from

disposal with the carrying amount of property and equipment, and are recognised within other income in statement

of comprehensive income.

Cash and cash equivalents For the purpose of statement of cash flows, cash and cash equivalents consist of bank balances and cash in hand.

Impairment of non-financial assets The Company periodically reviews the carrying amounts of its non-financial assets to determine whether there is any

indication that those assets have suffered any impairment loss. If any such indication exists, the recoverable amount

of the asset is estimated in order to determine the extent of the impairment loss. Where it is not possible to estimate

the recoverable amount of an individual asset, the Company estimates the recoverable amount of the cash generating

unit to which the asset belongs.

If the recoverable amount of the asset or cash generating unit is estimated to be less than its carrying amount, the

carrying amount of the asset or cash generating unit is reduced to its recoverable amount. Impairment is recognised

in the statement of comprehensive income.

Where impairment subsequently reverses, the carrying amount of the asset or the cash generating unit is increased to

the revised estimate of its recoverable amount, so that the increased carrying amount does not exceed the carrying

amount that would have been determined had no impairment been recognised for the asset or cash generating unit in

prior years. A reversal of impairment is recognised immediately in the statement of comprehensive income.




13


Employees' terminal benefits The Company operates a defined benefit plan for employees in accordance with Saudi Labor Law as defined by the

conditions stated in the laws of the Kingdom of Saudi Arabia. The cost of providing the benefits under the defined

benefit plan is determined using the projected unit credit method.

Remeasurements for actuarial gains and losses are recognized immediately in the statement of financial position with

a corresponding credit to retained earnings through other comprehensive income in the period in which they occur.

Remeasurements are not reclassified to profit or loss in subsequent periods.

Past service cost are recognized in the statement of comprehensive income on the earlier of:

• The date of the plan amendment or curtailment, and

• The date the Company recognizes related restructuring costs

Net special commission income is calculated by applying the discount rate to the net defined benefit liability. The

Company recognizes the following changes in the net defined benefit obligation in the statement of comprehensive

income:

• Service costs comprising current service costs, past service costs, gains and losses on curtailments and non-

routine-settlements (under general and administrative expenses)

• Net special commission expense or income (under financing costs)

Shared-based payments Certain executives of the Company receive remuneration in the form of share-based payments, whereby executives

render services as consideration for equity instruments (equity-settled transactions).

The cost of equity-settled transactions is determined by the fair value at the date when the grant is made using an

appropriate valuation model.

That cost is recognized in employee benefits expense, together with a corresponding increase in equity (other capital

reserve), over the period in which the service and, where applicable, the performance conditions are fulfilled (the

vesting period). The cumulative expense recognized for equity-settled transactions at each reporting date until the

vesting date reflects the extent to which the vesting period has expired and the Company’s best estimate of the number

of equity instruments that will ultimately vest. The expense or credit in the statement of comprehensive income for a

period represents the movement in cumulative expense recognized as at the beginning and end of that period.

Service and non-market performance conditions are not taken into account when determining the grant date fair value

of awards, but the likelihood of the conditions being met is assessed as part of the Company’s best estimate of the

number of equity instruments that will ultimately vest. Market performance conditions, if any, are reflected within

the grant date fair value. Any other conditions attached to an award, but without an associated service requirement,

are considered to be non-vesting conditions. Non-vesting conditions are reflected in the fair value of an award and

lead to an immediate expensing of an award unless there are also service and/or performance conditions.

No expense is recognized for awards that do not ultimately vest because non-market performance and/or service

conditions have not been met. Where awards include a market or non-vesting condition, the transactions are treated

as vested irrespective of whether the market or non-vesting condition is satisfied, provided that all other performance

and/or service conditions are satisfied.

When the terms of an equity-settled award are modified, the minimum expense recognized is the grant date fair value

of the unmodified award, provided the original terms of the award are met. An additional expense, measured as at the

date of modification, is recognized for any modification that increases the total fair value of the share-based payment

transaction, or is otherwise beneficial to the employee. Where an award is cancelled by the Company or by the

counterparty, any remaining element of the fair value of the award is expensed immediately through statement of

comprehensive income.




14


Offsetting of financial assets and financial liabilities Financial assets and financial liabilities are offset and the net amount reported in the statement of financial position

if, and only if there is a currently enforceable legal right to offset the recognised amounts and there is an intention to

settle on a net basis, or to realise the assets and settle the liabilities simultaneously.

Zakat The Company is subject to the regulations of the General Authority of Zakat and Tax (“GAZT”) in the Kingdom of

Saudi Arabia. Zakat is provided on an accrual basis. The zakat charge is computed on the zakat base. Any difference

in the estimate is recorded when the final assessment is approved.

Deferred finance expenses Deferred finance expenses which are related to bank facilities are amortised over the estimated period of benefit of

these facilities. Dividends Final dividends are recognised as a liability at the time of their approval by the shareholders’ General Assembly.

Operating lease Payments made under operating lease are recognised in statement of comprehensive income on a straight line basis

over the term of lease.

Expenses Selling and marketing expenses are those that specifically relate to relationship manager and marketing expenses. All

other expenses are classified as general and administration expenses. Segmental reporting A segment is a distinguishable component of the Company that is engaged either in providing products or services (a

business segment) or in providing products or services within a particular economic environment (a geographic

segment), which is subject to risks and rewards that are different from those of other segments.

4 PROSPECTIVE CHANGES IN THE INTERNATIONAL FINANCIAL REPORTING

FRAMEWORK

The Company has consistently applied the accounting policies set out in note 3 to all periods presented in these

financial statements. The Company has chosen not to early adopt any new standards and revisions to existing

standards which have been published and are not mandatory for compliance for the Company’s current accounting

year, including the standards which are relevant to the Company’s operations and are listed below:

IFRS 9 Financial Instruments

In July 2014, the IASB issued the final version of IFRS 9 Financial Instruments that replaces IAS 39 Financial

Instruments: Recognition and Measurement and all previous versions of IFRS 9. IFRS 9 brings together all three

aspects of the accounting for financial instruments project: classification and measurement, impairment and hedge

accounting. IFRS 9 is effective for annual periods beginning on or after 1 January 2018, with early application

permitted. Except for hedge accounting, retrospective application is required but providing comparative information

is not compulsory. For hedge accounting, the requirements are generally applied prospectively, with some limited

exceptions.

The Company plans to adopt the new standard on the required effective date. During 2016, the Company has

performed a high-level impact assessment of all three aspects of IFRS 9. This preliminary assessment is based on

currently available information and may be subject to changes arising from further detailed analyses or additional

reasonable and supportable information being made available to the Company in the future. Overall, the Company

expects no significant impact on its balance sheet and equity except for the effect of applying the impairment

requirements of IFRS 9. The Company expects a higher loss allowance resulting in a negative impact on equity and

will perform a detailed assessment in the future to determine the extent.




15

4 PROSPECTIVE CHANGES IN THE INTERNATIONAL FINANCIAL REPORTING

FRAMEWORK (continued)

IFRS 14 Regulatory Deferral Accounts

IFRS 14 is an optional standard that allows an entity, whose activities are subject to rate-regulation, to continue

applying most of its existing accounting policies for regulatory deferral account balances upon its first-time adoption

of IFRS. Entities that adopt IFRS 14 must present the regulatory deferral accounts as separate line items on the

statement of financial position and present movements in these account balances as separate line items in the statement

of profit or loss and OCI. The standard requires disclosure of the nature of, and risks associated with, the entity’s rate-

regulation and the effects of that rate-regulation on its financial statements. IFRS 14 is effective for annual periods

beginning on or after 1 January 2016. Since the Company is an existing IFRS preparer, this standard would not apply.

IFRS 15 Revenue from Contracts with Customers

IFRS 15 was issued in May 2014 and establishes a five-step model to account for revenue arising from contracts with

customers. Under IFRS 15, revenue is recognised at an amount that reflects the consideration to which an entity

expects to be entitled in exchange for transferring goods or services to a customer.

The new revenue standard will supersede all current revenue recognition requirements under IFRS. Either a full

retrospective application or a modified retrospective application is required for annual periods beginning on or after

1 January 2018. Early adoption is permitted. The Company plans to adopt the new standard on the required effective

date using the full retrospective method. During 2016, the Company is currently assessing the impact of IFRS 15 and

does not expect that the adoption of the standard will have a material impact in the Company’s future consolidated

financial statements.

IFRS 16 Leases

IFRS 16 was issued in January 2016 and it replaces IAS 17 Leases, IFRIC 4 Determining whether an Arrangement

contains a Lease, SIC-15 Operating Leases-Incentives and SIC-27 Evaluating the Substance of Transactions

Involving the Legal Form of a Lease. IFRS 16 sets out the principles for the recognition, measurement, presentation

and disclosure of leases and requires lessees to account for all leases under a single on-balance sheet model similar

to the accounting for finance leases under IAS 17. The standard includes two recognition exemptions for lessees –

leases of ’low-value’ assets (e.g., personal computers) and short-term leases (i.e., leases with a lease term of 12 months

or less). At the commencement date of a lease, a lessee will recognise a liability to make lease payments (i.e., the

lease liability) and an asset representing the right to use the underlying asset during the lease term (i.e., the right-of-

use asset). Lessees will be required to separately recognise the interest expense on the lease liability and the

depreciation expense on the right-of-use asset.

Lessees will be also required to remeasure the lease liability upon the occurrence of certain events (e.g., a change in

the lease term, a change in future lease payments resulting from a change in an index or rate used to determine those

payments). The lessee will generally recognise the amount of the remeasurement of the lease liability as an adjustment

to the right-of-use asset.

Lessor accounting under IFRS 16 is substantially unchanged from today’s accounting under IAS 17. Lessors will

continue to classify all leases using the same classification principle as in IAS 17 and distinguish between two types

of leases: operating and finance leases.

IFRS 16 also requires lessees and lessors to make more extensive disclosures than under IAS 17.

IFRS 16 is effective for annual periods beginning on or after 1 January 2019. Early application is permitted, but not

before an entity applies IFRS 15. A lessee can choose to apply the standard using either a full retrospective or a

modified retrospective approach. The standard’s transition provisions permit certain reliefs.




16

5 CASH AND CASH EQUIVALENTS

31 December 2016 SR

31 December 2015 SR

Cash in hand 16,487 17,713

Cash at bank 57,037,627 100,105,181

───────── ─────────

57,054,114 100,122,894

═════════ ═════════

6 MURABAHA RECEIVABLES, NET

31 December 2016 SR

31 December 2015 SR

Gross Murabaha receivables 677,470,025 575,973,780

Less: Unearned income (103,200,337) (108,663,125) ──────── ──────── 574,269,688 467,310,655

Less: Provision for credit losses (17,821,915) (6,929,883) ──────── ──────── Murabaha receivables, net 556,447,773 460,380,772 ════════ ════════

Current portion of Murabaha receivables, net 281,976,419 154,336,270

Non-current portion of Murabaha receivables, net 274,471,354 306,044,502 ──────── ──────── Murabaha receivables, net 556,447,773 460,380,772 ════════ ════════

Movement in provision for credit losses: For the year ended 31 December

2016 SR

2015 SR

Balance at the beginning of the year 6,929,883 8,215,278

Charge/(Reversal of provision) for the year 10,892,032 (1,285,395) ─────── ─────── Balance at the end of the year 17,821,915 6,929,883 ═══════ ═══════




17

7 IJARA RECEIVABLES, NET

31 December 2016 SR

31 December 2015 SR

Gross Ijara receivables 459,962,186 560,883,954

Less: Unearned income (66,181,023) (75,232,829) ───────── ───────── 393,781,163 485,651,125

Less: Provision for credit losses (24,779,645) (16,070,117) ───────── ───────── Ijara receivables, net 369,001,518 469,581,008 ═════════ ═════════

Current portion of Ijara receivables, net 244,367,427 264,972,600

Non-current portion of Ijara receivables, net 124,634,091 204,608,408 ───────── ───────── Ijara receivables, net 369,001,518 469,581,008 ═════════ ═════════

Movement in provision for credit losses: For the year ended 31 December

2016 SR

2015 SR

Balance at the beginning of the year 16,070,117 6,784,722

Charge for the year 8,709,528 9,285,395 ──────── ──────── Balance at the end of the year 24,779,645 16,070,117 ════════ ════════

8 ACCOUNTS RECEIVABLES, PREPAYMENTS AND OTHERS

31 December 2016 SR

31 December 2015 SR

Receivable from sale of investment properties 28,636,776 32,136,776

Bank guarantees 1,986,193 19,861,932

Prepaid expenses 1,422,167 917,292

Amounts due from related parties (note 17) 1,091,457 661,176

Deferred sales commission 200,721 546,945

Employees’ receivables 643,262 258,537

Other receivables 380,981 172,055

──────── ────────

34,361,557 54,554,713

════════ ════════

9 INVESTMENT PROPERTIES

Investment properties consist of free hold lands located in Riyadh, Al Khobar and Jeddah. These investment properties

are registered in the name of a director on behalf of the Company.

There were no additions to investment properties during the current or prior year.

As at 31 December 2016, the fair value of these investment properties is SR 178.0 million (2015: SR 136.5 million).




18

10 PROPERTY AND EQUIPMENT

2016

Land SR

Lease hold improvements

SR

Tools and equipment

SR

Computer hardware

SR

Furniture and fixture

SR

Motor vehicles

SR

Total SR

Cost

As at 1 January 3,413,250 8,309,051 599,194 3,872,707 2,166,239 866,401 19,226,842

Additions during the year - 1,646,673 26,184 268,560 306,246 41,900 2,289,563

Disposals during the year - - - - - (140,000) (140,000)

──────── ──────── ──────── ──────── ──────── ──────── ────────

As at 31 December 3,413,250 9,955,724 625,378 4,141,267 2,472,485 768,301 21,376,405

──────── ──────── ──────── ──────── ──────── ──────── ────────

Accumulated depreciation

As at 1 January - 4,096,247 512,756 3,588,148 1,749,774 632,893 10,579,818

Depreciation charge for the year - 888,798 27,406 205,205 139,518 153,772 1,414,699

Relating to disposals during the year - - - - - (140,000) (140,000)

──────── ──────── ──────── ──────── ──────── ──────── ────────

As at 31 December - 4,985,045 540,162 3,793,353 1,889,292 646,665 11,854,517

──────── ──────── ──────── ──────── ──────── ──────── ────────

Net book value

As at 31 December 2016 3,413,250 4,970,679 85,216 347,914 583,193 121,636 9,521,888

════════ ════════ ════════ ════════ ════════ ════════ ════════




19

10 PROPERTY AND EQUIPMENT (continued)

2015

Land SR

Lease hold

improvements

SR

Tools and equipment

SR

Computer hardware

SR

Furniture and fixture

SR

Motor vehicles

SR

Total SR

Cost

As at 1 January 3,413,250 8,309,051 510,843 3,835,250 2,368,577 866,401 19,303,372

Additions during the year - - 88,351 42,456 - - 130,807

Disposals during the year - - - (4,999) (202,338) - (207,337)

──────── ──────── ──────── ──────── ──────── ──────── ────────

As at 31 December 3,413,250 8,309,051 599,194 3,872,707 2,166,239 866,401 19,226,842

──────── ──────── ──────── ──────── ──────── ──────── ────────

Accumulated depreciation

As at 1 January - 3,265,333 476,284 3,117,139 1,656,080 451,285 8,966,121

Depreciation charge for the year - 830,914 36,472 473,297 279,327 181,608 1,801,618

Relating to disposals during the year - (2,288) (185,633) - (187,921)

──────── ──────── ──────── ──────── ──────── ──────── ────────

As at 31 December - 4,096,247 512,756 3,588,148 1,749,774 632,893 10,579,818

──────── ──────── ──────── ──────── ──────── ──────── ────────

Net book value

As at 31 December 3,413,250 4,212,804 86,438 284,559 416,465 233,508 8,647,024

════════ ════════ ════════ ════════ ════════ ════════ ════════




20

10 PROPERTY AND EQUIPMENT (continued)

The useful lives of property and equipment are as follows:

Leasehold improvements Shorter of 10 years or lease period

Computer and equipment 4 years

Tools and equipment 4 years

Furniture and fixture 4 to 10 years

Motor vehicles 3 to 5 years

11 ACCOUNTS PAYABLE, ACCRUALS AND OTHERS

31 December 2016 SR

31 December 2015 SR

Accrued expenses 2,673,546 2,395,097

Unearned rent income 680,952 794,221

Trade accounts payable 91,039 144,534

Deferred staff loan income 65,315 61,333

Advance from customers - 170,250

──────── ────────

3,510,852 3,565,435

════════ ════════

12 PROVISION FOR ZAKAT

Charge for the year Zakat charge for the year amounted to SR 14.8 million (2015: SR 14.5 million) and is based on the following:

31 December 2016 SR

31 December 2015 SR

Equity 764,651,459 691,416,101

Opening provisions and other adjustments 320,717,959 399,900,917

Book value of long term assets (553,261,804) (565,462,305)

───────── ─────────

532,107,614 525,854,713

Adjusted income for the year 58,465,825 55,471,136

───────── ─────────

Zakat base 590,573,439 581,325,849

═════════ ═════════

The difference between the actual and the zakatable income is mainly due to provisions which are not allowed in

the calculation of the zakatable income.




21

12 PROVISION FOR ZAKAT (continued)

Movement in zakat provision during the year Movement in the zakat provision by the year is as follows:

31 December 2016 SR

31 December 2015 SR

As at 1 January 26,157,319 16,715,208

Charge for the year 14,764,336 14,533,146

Payment made during the year (13,128,416) (5,091,035)

───────── ────────

As at 31 December 27,793,239 26,157,319

═════════ ════════

Status of assessment The Company has filed its Zakat returns with the General Authority for Zakat and Tax (“GAZT”) and paid Zakat

for financial years up to and including the year 2015. The GAZT issued final assessment for the years 2009 to 2012

and initial assessment for the years 2013 and 2014, in which GAZT raised additional demands aggregating to SR

55 million. This is principally due to the fact that the GAZT has not allowed a deduction of the net investment in

Ijara receivables from zakat base. The Company has formally contested these assessments and submitted their

appeal to the Preliminary Objection Committee (POC). The Company considers it unlikely that the present position

of GAZT will be upheld throughout the appeal process, because the issue of deduction of net investment in Ijara

receivables has industry wide implications for leasing, mortgage finance business and any other finance related

business where the main assets are receivables. The Company has not considered the disallowances of deduction

of net investment in Ijara receivables for the year ended 31 December 2015 and in making the zakat provision for

current year.

There is a potential risk of additional claims by the GAZT, if the same principle were to be applied for 2015 and

2016. Management believes that if the treatment used by the GAZT in respect of the Company’s zakat base for

2009 to 2014 are applied to 2015 and 2016 as well, the potential risk of additional zakat to be assessed by the GAZT

would be in the region of SR 27 million.

Management is confident of a favourable outcome on its appeals as set out above and therefore has not made any

provision in this respect in these financial statements.




22

13 BANK BORROWINGS, NET

Non-current portion

31 December 2016 SR

31 December 2015 SR

Secured bank loans 115,495,539 185,196,470

Deferred commission (4,481,652) (5,318,406)

───────── ─────────

111,013,887 179,878,064

═════════ ═════════

Current portion

31 December 2016 SR

31 December 2015 SR

Secured bank loans 164,821,412 197,590,208

Deferred commission (8,158,920) (11,349,402)

───────── ─────────

156,662,492 186,240,806

═════════ ═════════

The Company has Murabaha facilities from local commercial banks to finance working capital with a profit rate

ranging from 3.35% to 4.93% (2015: 3.35% to 4.60%) payable every quarter until March 2020. These facilities are

secured by assignment of receivables.

14 PROVISION FOR EMPLOYEES’ TERMINAL BENEFITS

31 December 2016 SR

31 December 2015 SR

Opening balance 3,930,486 3,427,855

Charge for the year 966,801 877,015

Payments made during the year (138,336) (374,384)

───────── ─────────

Closing balance 4,758,951 3,930,486

═════════ ═════════

15 SHARE CAPITAL

Authorized share capital is divided into 60 million shares (31 December 2015: 54 million shares) of SR 10 each, of

which SR 540 million was paid by the founding shareholders as at 31 December 2015. During 2015, the existing

shareholders of the Company subscribed to the additional paid up capital of SR 30 million.

In addition to the paid up capital, the founding shareholders have decided during 2011 to grant Mr. Ahmed bin Rashid

Abdullah Al-Ameer (“CEO”) and Mr. Hassan bin Musa Yousef (“GM”) 10% of the Company’s paid up capital as at

31 December 2015 which represents SR 54 million (5.4 million shares) against initiating the Company and managing

it for a period of five years from 2011. In this respect, a Management Agreement was signed on 5 Muharam 1433H

(corresponding 10 December 2011). Such shares were vested during 2016.

Also during 2016, the existing shareholders of the Company subscribed to the additional paid up capital of SR 6

million thus increasing the paid up capital to SR 600 million (60 million shares of SR 10 each). All legal formalities

for these additional subscriptions have been completed during 2016.




23

16 RESERVES

Statutory reserve In accordance with the Regulation for Companies and Company’s by-laws, the Company is required to transfer 10%

of its net profits to a statutory reserve. The Company can continue transferring such amount until such reserve equals

50% of its share capital. This reserve is not available for distribution to the Company’s shareholders.

Consensual reserve This comprise a voluntary reserve created based on a decision made by shareholder in prior years. The reserve is

available for distribution.

Other capital reserve This pertains to share-based payments reserve for recognising the value of equity-settled share-based payments

provided to the key management personnel, as part of their remuneration (see note 15).

17 RELATED PARTY TRANSACTIONS AND BALANCES

The related parties of the Company include the shareholders, their affiliated entities and certain key management

personnel. Key management personnel are those persons having authority and responsibility for planning, directing and

controlling the activities of the Company, directly or indirectly.

In the ordinary course of its activities, the Company transacts business with related parties on mutually agreed terms.

The following are the details of major related party transactions/balances during the year:

Related party Nature of transactions

31 December 2016 SR

31 December 2015 SR

Key management personnel Income earned on financing 39,588 49,500

Salaries and benefits 5,546,004 5,546,004

Board attendance fees 400,000 400,000

In addition to above, key management personnel were provided with certain share awards in prior years. An amount of

SR nil (2015: SR 10.8 million) was charged to statement of comprehensive income in respect of such share awards. As

at the end of 2016, all such share awards have been vested (see note 15).

The balances with related parties as at 31 December are as follows:

31 December 2016 SR

31 December 2015 SR

Key management personnel – staff loans 1,091,457 661,176

All transactions with the related parties are on normal commercial terms. None of the balance is secured. All the

balances with the related parties are considered good and no provision for credit losses have been recognised for these

balances in these financial statements.




24

18 FINANCIAL INSTRUMENTS AND FAIR VALUE

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. The fair value measurement is based on the presumption that

the transaction to sell the asset or transfer the liability takes place either:

In the principal market for the asset or liability, or

In the absence of a principal market, in the most advantageous market for the asset or liability

The principal or the most advantageous market must be accessible to by the Company.

Financial instruments comprise of financial assets and financial liabilities. Financial assets consist of cash and cash

equivalents, Murabaha and Ijara receivables, margin deposits and accounts and other receivables. Financial liabilities

consist of borrowings, accrued expenses and accounts and other payables.

All financial liabilities are carried at amortised cost.

Fair value hierarchy The Company uses the following hierarchy for determining and disclosing the fair value of financial instruments by

valuation technique:

Level 1: quoted (unadjusted) prices in active markets for identical assets or liabilities

Level 2: other techniques for which all inputs which have a significant effect on the recorded fair value are observable,

either directly or indirectly

Level 3: techniques which use inputs which have a significant effect on the recorded fair value that are not based on

observable market data.

Management has classified all the financial assets and financial liabilities within level 2 of fair value hierarchy other

than Murabaha and Ijara receivables and bank borrowings which are classified within level 3. For the purpose of fair

value disclosures, the Company has determined classes of assets and liabilities on the basis of the nature,

characteristics and risks of the asset or liability and the level of the fair value hierarchy as explained above.

For assets and liabilities that are recognized in the financial statements on a recurring basis, the Company determines

whether transfers have occurred between levels in the fair value hierarchy by re-assessing categorisation (based on

the lowest level input that is significant to the fair value measurement as a whole) at the end of each reporting period.

The Company’s management determines the policies and procedures for both recurring fair value measurement, and

for non-recurring measurement, such as assets held for distribution in discontinued operation.

The fair values of the financial assets and liabilities of the Company at the reporting date are not materially different

from their carrying values.

There have been no transfers to and from Level 2 and Level 3 during the current and prior year.

The Company’s management is responsible for determining fair value measurements included in the financial

statements. At the financial year end, the Company has secured third party valuations for two of its investment

properties.

At the financial year end, the Company has also undertaken a financial assessment of its portfolio of Murabaha and

Ijarah contracts, as well as its bank debt, to determine its fair value. These are carried in the financial statements

based on contractual obligations at fixed rates, and hence the Company cannot unilaterally change any of the fixed

contracted rates for either its portfolio or its bank obligations.

Therefore, the fair value represented herein is not reflective of the Company’s contractual obligations of the existing

contracts. The fair value disclosed herein is more in line with a replacement value.




25

18 FINANCIAL INSTRUMENTS AND FAIR VALUE (continued)

Fair value hierarchy (continued)

Fair value of investment properties

Riyadh and Al Khobar real estate investments have been listed for sale, and the Company has not yet received any

acceptable offers to liquidate these investments. The Company has therefore obtained an independent valuation of

these investments properties to arrive at their fair values. For the real estate in Jeddah, the Company has used the cost

of the property as the fair value considering the amount involved was not significant.

Investments 2016 Carrying value

2016 Fair value

2015 Carrying value

2015 Fair Value

SR SR SR SR Riyadh 58,854,669 164,030,480 58,854,669 123,022,860

Al Khobar 10,957,800 12,646,400 10,957,800 12,160,000

Jeddah 1,324,689 1,324,689 1,324,689 1,324,689

────────── ────────── ────────── ──────────

Total 71,137,158 178,001,569 71,137,158 136,507,549

══════════ ══════════ ══════════ ══════════

Fair value of the portfolio

The process that the Company has undertaken for the portfolio valuation is to assess the level of the market under the

current conditions, and assessed the profit rates that the Company could obtain against its current portfolio. The

portfolio is segregated into 4 categories, those being contracts with no past due, contracts with past due up to 3 months,

contracts with past dues up to 12 months and contracts with past dues over 1 year. The profit rates over the last 4

years have been assessed and used as a base for the discount rate relating to the valuation of the portfolio. The

Company has added premiums to each category, based on the prevailing economic conditions in the country. The

premiums move from 59 basis points to 109 to 209 to 359 basis points for categories 1 through 4, inclusively.

The initial base rate, before premiums, has been calculated using the average quoted rate against contracts from 2013

to 2016. This quoted rate is recalculated to the average effective profit rate that the contracts are contracted to

generate. Management derived the factor translating the quoted rate to an effective rate in order to lift the base rate

from a quoted rate to an effective rate. The average of the quoted rate for the Company’s portfolio over this period

was 8.4%, and the average effective rate for this same portfolio was 14.3%, resulting in a lift factor of 1.7x.

The Company has then added the deemed premium for each category with the base quoted rate, and applied the lift

of 1.7x to arrive at the effective profit rate which is used as the proxy discount rate against the portfolio.

The Company discounted the cash flows against each category using the proxy discount rate applied to each category

to arrive at the fair value of the portfolio. The Company deducted the provision carried against the portfolio to

compare the carrying value to the deemed fair value.

The discount rate used ranges from 15.3% to 20.4%




26

18 FINANCIAL INSTRUMENTS AND FAIR VALUE (continued)

Fair value hierarchy (continued)

Fair value of the portfolio (continued)

Financial assets 2016 Carrying value

2016 Fair value

2015 Carrying value

2015 Fair value

SR SR SR SR Portfolio Ijarah 369,001,518 370,005,377 469,570,696 466,163,544

Murabaha 556,447,773 551,665,207 459,787,708 459,698,881

────────── ────────── ────────── ──────────

Total 925,449,291 921,670,584 929,358,404 925,862,425

══════════ ══════════ ══════════ ══════════

Fair value of bank borrowings

For the purpose of determining the fair value of bank borrowings, management assessed the current available expected

debt rate, if the Company was to replace the existing debt with new debt. The Company assessed the historic debt

rates it has obtained for the current debt obligations. The rate charged by banks is a combination of a base rate plus

the current 3 month SAIBOR, or a similar market rate, locked for the Company over the life of the debt contract,

which is 4 years for each contract with the Company.

The Company has assessed the SAIBOR charged over the past 4 years to arrive at an average SAIBOR rate. The

Company has then researched quoted SAIBOR rates to assess the lift from the 3 month SAIBOR quoted rate to an

estimated 4 year SAIBOR rate that the banks effectively charge the Company. The effective differential between a 3

month SAIBOR quote and the average rate the Company has obtained, is 100 basis points.

The Company has estimated the new base rate based on recent discussions with its bankers. The base rate used is 50

basis points above the current base rate. In addition to the base rate the Company has added the quoted 3 month

SAIBOR rate as at December 31, 2016 plus 100 basis points in order to arrive at the discount rate for the bank debt

to be applied to the future cash flow obligations of the Company.

The resulting discount rate used was 5.68%.

Financial liabilities 2016 Carrying value

2016 Fair value

2015 Carrying value

2015 Fair value

SR SR Bank borrowings 267,676,379 265,390,268 366,118,870 364,947,583




27

19 GENERAL AND ADMINISTRATION EXPENSES

31 December 2016 SR

31 December 2015 SR

Salaries and other employees’ benefits 15,111,789 27,231,937

Rent expense 4,704,598 4,758,976

Consultancy and professional fee 1,650,262 2,095,656

Depreciation (note 10) 1,414,699 1,801,618

Board remuneration and committee fee 1,800,000 1,500,000

Insurance expense 663,552 616,494

Utilities expense 286,128 378,897

Travel expense 400,951 321,392

Subscription fees 222,455 193,579

Cleaning and hospitality expense 260,561 191,314

Maintenance expense 142,345 148,706

Bank charges 835,632 45,756

Others 513,451 496,023 ────────── ───────── 28,006,423 39,780,348 ══════════ ══════════

20 SELLING AND MARKETING EXPENSES

31 December 2016 SR

31 December 2015 SR

Salaries and employees’ benefits 2,334,418 2,554,592

Advertising - 22,000 ────────── ────────── 2,334,418 2,576,592 ══════════ ══════════

21 RISK MANAGEMENT

The Company’s activities expose it to a variety of financial risks: credit risk, market risk (including currency risk and

special commission rate risks), legal risks and liquidity risk. The Company’s overall risk management program

focuses on the unpredictability of financial markets and seeks to minimize potential adverse effects on the Company’s

financial statements. Risk management is carried out by senior management. The most important risks and their

management are summarized below:

Credit risk The Company manages exposure to credit risk, which is the risk that one party to a financial instrument will fail to

discharge an obligation and cause the other party to incur a financial loss. Credit exposures arise principally in lending

activities that relate to Murabaha and Ijara receivables. There is also credit risk in certain other financial instruments,

including loan commitments.

The Company attempts to control credit risk by monitoring credit exposures, limiting transactions with specific

counter-parties, obtaining collaterals, and continually assessing the creditworthiness of counter-parties. The

Company’s risk management policies are designed to identify, set appropriate risk limits and monitor the risks and

adherence to limits. To control the level of credit risk taken, the Company assesses all counter-parties using the same

techniques as it does for its lending activities.

As at the year end, top 10 customers of the Company represent 33.4% (2015: 22%) of the total Murabaha and Ijara

receivables. No single customer balance as at year end is more than 3.5% (2015: 3%) of the total Murabaha and Ijara

receivables.




28

21 RISK MANAGEMENT (continued)

Credit risk (continued)

The Company’s maximum exposure to credit risk at the reporting date was on account of the following:

31 December 2016 SR

31 December 2015 SR

Cash at bank 57,037,627 100,105,181

Murabaha receivables, net 556,447,773 460,380,772

Ijara receivables, net 369,001,518 469,581,008

Accounts and other receivables 32,738,669 53,090,476

───────── ─────────

1,015,225,587 1,083,157,437

═════════ ═════════

Credit quality of Murabaha and Ijara receivables The Company has categorised its Murabaha and Ijara receivables into three sub categories according to its internal

rating system. These are as follows:

Category 1: Contracts with no past due payments. All payments are due in the future

Category 2: Contracts with past due payments outstanding, carrying either a specific provision when impairment is

deemed, and a collective provision if not considered impaired by management.

Category 3: Contracts with past due payments and are considered to be non-performing and therefore have 100%

specific provisions against their net exposures.

Following is the analysis of Murabaha and Ijara receivables in the above mentioned categories:

31 December 2016 Murabaha receivables

SR

Ijara receivables

SR

Total

SR

Category-1 252,208,597 130,899,262 383,107,859

Category-2 299,279,632 205,205,470 504,485,102

Category-3 4,959,544 32,896,786 37,856,330

───────── ───────── ─────────

Total 556,447,773 369,001,518 925,449,291

═════════ ═════════ ═════════

31 December 2015 Murabaha

receivables SR

Ijara receivables

SR

Total SR

Category-1 329,476,964 162,811,779 492,288,743

Category-2 130,903,808 306,769,229 437,673,037

Category-3 - - -

───────── ───────── ─────────

Total 460,380,772 469,581,008 929,961,780

═════════ ═════════ ═════════




29



Credit quality of Murabaha and Ijara receivables (continued)

Following are the details of past due and not impaired Murabaha and Ijara receivables where no specific provisions

have been set against contracts (included under Category 2):

31 December 2016

Murabaha receivables

SR

Ijara receivables

SR

Total

SR

From 1 day to 30 days overdue 4,046,394 2,601,673 6,648,067


Future payments * 70,830,358 41,376,050 112,206,408

───────── ───────── ─────────

Total 82,058,992 49,435,152 131,494,144

═════════ ═════════ ═════════

31 December 2015

Murabaha receivables

SR

Ijara receivables

SR

Total SR



Future payments * 73,769,049 181,758,091 255,527,140

───────── ───────── ─────────

Total 90,594,982 195,381,869 285,976,851

═════════ ═════════ ═════════

* These represent instalments relating to past due loans which are not yet due as at the reporting date.




30



Credit quality of Murabaha and Ijara receivables (continued)

The Company obtains collaterals against all Murabaha and Ijara receivables in the form of real estate security,

vehicles, equipment (movable and non-movable) and third party guarantees. The Company does not annually value

the guarantees and hence does not include their collateral value in the security analysis. The value of such collaterals

backing, excluding consideration of third party guarantees, is SR 1,266,652,214 (2015: SR 1,065,010,479).

Portfolio sector concentration

Sector concentration 2016 2015

Contracting 41.9% 44.9%

Industrial 13.2% 11.0%

Retail businesses 4.4% 1.5%

Services 26.6% 26.7%

Trading 13.9% 15.9%

Total 100% 100%

Special commission rate risk Special commission rate risk is the risk that the value of financial instruments will fluctuate due to changes in the

market special commission rates. The Company is not subject to any special commission rate risk on its Murabaha

and Ijara receivables and term loans as the receivables are priced by the Company at fixed rates and the term loans

obtained by the Company also carry special commission at fixed rates. All other assets and liabilities of the Company

are non-special commission bearing.

The Company manages exposure to the effects of various risks associated with fluctuations in the prevailing levels of

special market commission rates on its financial position and cash flows. The Company is exposed to special

commission rate risk as a result of mismatches or gaps in the amounts of assets and liabilities that mature in a given

period. The Company manages this risk through diversification of funding resources.

Currency risk Currency risk is the risk that the value of financial instruments will fluctuate due to changes in foreign exchange rates.

The Company is not subject to fluctuations in foreign exchange rates in the normal course of its business as all

contracts are denominated in Saudi Riyals. There are some expenses incurred in foreign currencies while staff are on

training programs, but these expenses are settled when incurred. Since the Company does not have any significant

foreign currency denominated monetary assets and liabilities, management believes that the Company is not exposed

to any significant foreign currency risk.

Legal risk Title deeds of the real estate properties are registered either in the Company’s name or in the name of the Chief

Executive Officeer (CEO) as a Saudi Resident, with an undertaking executed verifying that the ownership of the real

estate is being held by the CEO solely for the benefit of the Company. The enforceability of any related rights and

obligations are subject to interpretation and enforceability in the relevant courts of law.




31


Liquidity risk

Liquidity risk is the risk that the Company will encounter difficulty in meeting obligations associated with its financial

liabilities that are settled by delivering cash or other financial assets. The Company monitors and manages the

liquidity structure of its assets and liabilities to ensure that cash flows are sufficiently balanced and that sufficient

liquid funds are maintained to meet liquidity requirements.

i) Analysis of financial liabilities by remaining contractual maturities

The table below summarises the maturity profile of the Company’s financial liabilities at 31 December 2016 and 31

December 2015 based on contractual undiscounted repayment obligations.

31 December 2016 Less than 1

year 1 to 5 years

Total

SR SR SR

Accounts payable and accruals 2,764,585 - 2,764,585

Bank borrowings 164,821,412 115,495,539 280,316,951

─────── ─────── ───────

167,585,997 115,495,539 283,081,536

═══════ ═══════ ════════

31 December 2015 Less than 1

year 1 to 5 years

Total

SR SR SR

Accounts payable and accruals 2,709,881 - 2,709,881

Bank borrowings 197,590,208 185,196,470 382,786,678

─────── ─────── ────────

200,300,089 185,196,470 385,496,559

════════ ════════ ════════




32


Liquidity risk (continued)

ii) Analysis of assets and liabilities by expected maturities

The table below shows an analysis of assets and liabilities, analysed according to when they are expected to be

recovered or settled. See previous tables for the analysis of maturity of contractual undiscounted financial liabilities.

31 December 2016 No fixed

term

Less than 1 year

1 to 5 years

Total

Assets SR SR SR SR

Cash and cash equivalents 57,054,114 - - 57,054,114

Murabaha receivables, net - 281,976,419 274,471,354 556,447,773

Ijarah receivables, net - 244,367,427 124,634,091 369,001,518

Accounts receivable, prepayments and others - 34,361,557 - 34,361,557

Property and equipment 9,521,888 - - 9,521,888

Investment properties 71,137,158 - - 71,137,158

───────── ───────── ──────── ─────────

137,713,160 560,705,403 399,105,445 1,097,524,008

═════════ ═════════ ════════ ═════════

No fixed

term

Less than 1 year

1 to 5 years

Total

Liabilities SR SR SR SR

Accounts payable, accruals and others - 3,510,852 - 3,510,852

Provision for zakat - 27,793,239 - 27,793,239

Bank borrowings, net - 156,662,492 111,013,887 267,676,379

Provision for employees’ terminal benefits 4,758,951 - - 4,758,951

───────── ───────── ──────── ─────────

4,758,951 187,966,583 111,013,887 303,739,421

───────── ───────── ──────── ─────────

Gap 31 December 2016 132,954,209 372,738,820 288,091,558 793,784,587

═════════ ═════════ ════════ ═════════




33


Liquidity risk (continued)

ii) Analysis of assets and liabilities by expected maturities (continued)

31 December 2015 No fixed

term

Less than 1 year

1 to 5 years

Total

Assets: SR SR SR SR

Cash and cash equivalents 100,122,894 - - 100,122,894

Murabaha receivables, net - 154,336,270 306,044,502 460,380,772

Ijarah receivables, net - 264,972,600 204,608,408 469,581,008

Accounts receivable, prepayments and others - 54,554,713 - 54,554,713

Property and equipment 8,647,024 - - 8,647,024

Investment properties 71,137,158 - - 71,137,158

───────── ───────── ───────── ──────────

179,907,076 473,863,583 510,652,910 1,164,423,569 ───────── ───────── ───────── ──────────

No fixed

term

Less than 1 year

1 to 5 Years

Total

Liabilities SR SR SR SR

Accounts payable, accruals and others - 3,565,435 - 3,565,435

Provision for zakat - 26,157,319 - 26,157,319

Bank borrowings, net - 186,240,806 179,878,064 366,118,870

Provision for employees’ terminal benefits 3,930,486 - - 3,930,486

───────── ───────── ───────── ─────────

3,930,486 215,963,560 179,878,064 399,772,110

───────── ───────── ───────── ─────────

Gap 31 December 2015 175,976,590 257,900,023 330,774,846 764,651,459

═════════ ═════════ ═════════ ═════════




34

22 OPERATING LEASE

Company as lessee Non-cancellable operating lease rentals are payable as follows:

31 December 2016

31 December 2015

SR SR

Less than one year 4,388,138 4,138,138

Between one and five years 4,000,000 7,000,000

More than five years - -

──────── ────────

8,388,138 11,138,138

════════ ════════

The Company has building under operating lease. During the year, an amount of SR4,704,598 was recognised as an

expense in the statement of comprehensive income (2015: SR 4,758,976).

The Company has sublet office space in the building to 8 different tenants with leases due to expire up to 2018. Sub

lease payments of SR 1,859,143 (2015: SR 1,996,200) was recognized under other operating income during the year.

23 CONTINGENCIES AND COMMITMENTS

Contingencies

The Company has no contingent assets or liabilities as at year end date (2015: Nil), other than the one disclosed in

note 12 to the financial statements.

Commitments The Company has no outstanding Murabaha and Ijara commitments for disbursements to customers as at 31

December 2016 (2015: SR Nil).

24 CAPITAL ADEQUACY

The Company’s objectives when managing capital are to safeguard the Company’s ability to continue as a going

concern and to maintain a strong capital base. Capital adequacy ratios as monitored and measured by the management

below measure capital adequacy by comparing the Company’s eligible capital with its statement of financial position,

commitments and notional amount of derivatives, if any, at a weighted amount to reflect their relative risk.

31 December 2016

31 December 2015

Total

capital

ratio %

Tier I

capital

ratio %

Total

capital

ratio %

Tier I

capital

ratio %

Capital adequacy ratio:

80.4% 76.3% 74.0% 71.8%

25 COMPARATIVE FIGURES

Certain of the prior year amounts have been re-classified to conform to the current year’s presentation.

Documents

aNNUAL FINANCIAL statements - kirnafco.com · Murabaha receivables, net 6 556,447,773 460,380,772 Ijara receivables, ... Functional and presentation currency These financial statements