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IFRS

Getting it rightAdoption of IFRS in Saudi ArabiaThe Kingdom of Saudi Arabia (KSA) is soon set to join130+ countries across the globe in the application ofInternational Financial Reporting Standards (IFRS). Today,all companies in Saudi Arabia, other than banks andinsurance companies, must follow accounting standardsgenerally accepted in KSA as issued by the SaudiOrganization for Certified Public Accountants (SOCPA).Banks and insurance companies are regulated by the

Saudi Arabian Monetary Authority (SAMA-the SaudiArabian central bank) and are already required tocomply with IFRS.

In an era of globalization of businesses and markets,financial information prepared and audited according to national accounting Generally Accepted AccountingPrinciples (GAAP) no longer satisfies the needs of users

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whose decisions are more international in scope. SaudiArabia has recognized the need to participate in theopportunities offered by globalization and consequently,SOCPA approved an IFRS Convergence Plan, called the“SOCPA Project for Transition to InternationalAccounting & Auditing Standards.” Under thisconvergence plan, all listed companies are required toadopt IFRS for financial periods beginning on or afterJanuary 1, 2017, and all other entities for financialperiods beginning on or after January 1, 2018. Unlistedentities may opt for an early adoption of IFRS fromJanuary 1, 2017. SOCPA is in the process of adoptingIFRS for small- and medium-sized entities (SMEs) to beeffective in 2018 for use by non-publicly accountableentities.

Since Saudi Arabia joined the Group of Twenty FinanceMinisters and Central Bank Governors (G20) in 2009,the adoption of IFRS has been viewed as an importantmilestone in the country’s future economic developmentand has been working towards this end ever since.

The convergence of national GAAP with IFRS (Fontes et al, 2005, p. 416) promises “transparent, comparableand consistent financial information” to guide investorsin making “optimal investment decisions” (Jacob andMadu, 2004, p. 357.)

Increased foreign direct investment and enhancedquality reporting, transparency and comparability aresome of the key benefits that the country will enjoyfrom IFRS adoption. As KSA moves to reduce itsdependency on oil, quality, transparent information,comparable to other preparers of IFRS reporting, willserve to attract direct foreign investment to the country.

The view that adoption of IFRS improves quality offinancial information is critical to its adoption. Ifcompanies do not view the application of IFRS asbeneficial to their business, then they are likely to facegreater challenges in complying. As countries have overthe years transitioned to IFRS, a common recurrencenoted is that small businesses were slow to complybecause they could not immediately see the benefits of the transition.

IFRS reporting is significantly more onerous than SaudiGAAP, in that its application will necessitate additionaldisclosures that will contribute to better informingthe users.

The step change of moving from Saudi GAAP to IFRScomes with its challenges to corporates, practitionersand regulators alike. Some of the key challenges are the limited resource pool from which to draw upon, as well as Saudi’s unique national practices. KSA isgeographically the second largest state in the Arabworld after Algeria, having a population of 32.2 million

Since Saudi Arabia joined the Group ofTwenty Finance Ministers and CentralBank Governors (G20) in 2009, theadoption of IFRS has been viewed as animportant milestone in the country’sfuture economic development and hasbeen working towards this end ever since

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people. Yet despite its size and population, the numberof qualified Saudi accountants is a low 300. Comparethat to Canada that has a similar population and hasover 100,000 qualified accountants and the UnitedKingdom that boasts in excess of 200,000, theseriousness of the shortage is glaring and one whichwill need to be addressed if the adoption of IFRS andthe regulation thereof by SOCPA is to achieve thedesired results. The shortage of skilled accountants inSaudi Arabia is partially bridged by the numerousexpatriates that have moved to the Kingdom, yet theArabic language poses yet another challenge. Allstatutory financial statements prepared in accordancewith Saudi GAAP are required to be filed with therelevant authority in Arabic. It is expected that thisrequirement will continue with the transition to IFRS.Consequently, there will be added pressure on Arabic-speaking qualified accountants to ensure thatcompliance with IFRS is, literally, not lost in translation.

A further challenge is the unique national practices ofthe country. Compliance with strict local laws andSharia’ law may not always be in accordance with IFRS.Additional disclosure requirements have been added tosome standards, mainly to reflect Sharia’ or local law.Also, going forward, SOCPA may from time to timedecide to amend any IFRS requirement that contradictsSharia’ or local law, also taking into consideration thelevel of technical and professional preparedness in theKingdom. Adding disclosures or removing an optionfrom a standard would not normally prevent an entityfollowing the standards from asserting compliance withIFRS. However, amending the requirements wouldgenerally prevent an entity following the standards fromasserting compliance with IFRS if the amendment has amaterial effect.

Getting it rightCareful planning and preparation by corporates,practitioners and regulators over the next one to twoyears will determine the success or otherwise of theeffective IFRS implementation in the Kingdom.Stakeholders should put in place adequate resources to support the sustainable implementation of IFRS. Thisincludes setting up consultative groups to be available to respond promptly to challenges faced by users.Another critical element underlying the successfulimplementation of IFRS will be the assistance given tokey stakeholders, including regulators, with training anddedicated required resources to interpret and apply therequirements of IFRS. It is imperative that the variousstakeholders are integrally involved, because a smoothtransition to IFRS cannot be achieved without theirsupport.

The resource shortage will likely continue for someyears, but it is now that the industry and policy makersneed to act, in order to begin to see the fruit in the nearfuture. Extensive education is needed in schools anduniversities through the targeted allocation of resources.

by Paul Manduca, Partner, Audit, Deloitte Middle East

IFRS

There will be added pressure on Arabic-speaking qualified accountants to ensurethat compliance with IFRS is, literally, notlost in translation