With SOCPA’s deadline of 2017 looming, companies are starting to realise the implications of adopting the requirements of International Financial Reporting Standards (“IFRS”). Many are actually finding the effects to be broad ranging and significant in practice whilst others indicate that they think it will be less of an impact.

Broad ranging impact

The impact of IFRS on the structure of the balance sheet and reported results have a direct impact on credit ratings, analysts assessments, borrowing costs and dividend payment policies, all of which affect the performance of shares on the exchange.

It is considered that the application of IFRS has a far more reaching impact than just affecting the accounting entries which requires careful management of stakeholders.

IFRS affects financial results and changes the shape of the balance sheet. It can affect key performance indicators against which management are assessed and change liquidity ratios, impacting the cost of debt for entities.

Anticipating these changes in advance of the adoption date allows entities to manage the impact of IFRS and potentially make changes in advance to negate any detrimental effects.

Adoption of IFRS in Saudi ArabiaGavin Steel, PwC Middle East Partner in Capital Markets and Accounting Advisory Services and Omar Al Sagga, PwC Middle East Partner and Deputy Country Leader in Saudi Arabia

Valuation opportunities

Omar Al Sagga, Deputy Country Leader in PwC Saudi Arabia confirms that IFRS poses a significant challenge to companies but the adoption and transition rules also present significant opportunities. Al Sagga states that “the adoption of IFRS in Saudi Arabia is presenting listed entities with an opportunity to fair value property and other similar assets as at the adoption date.

Previously, under SOCPA companies had to recognisesuch assets at their historic cost. Adoption of IFRS allows entities to demonstrate a more current financial position and potentially create distributable reserves that otherwise would not exist”.

PwC is seeing entities engage with its valuation experts as a result. Companies are taking advantage of the adoption rules to create additional value in the balance sheet that previously was not recognised.

Streamlining and saving costs

In addition to the valuation opportunities, streamlined processes and reporting can be introduced, saving costs and improving the accuracy and speed of the financial reporting processes giving management better information for decision making purposes.

Omar Al Sagga indicates that entities are seeing that the adoption of IFRS enables complex groups to standardiseboth policies and procedures across operations, including those of internationally located subsidiaries where IFRS is often an allowed reporting framework.

IFRS is being seen as a conduit for not only improving the quality of financial reporting but also as a tool for saving costs and improving performance.

Challenges

However, it is not all roses in the garden. IFRS is also placing a heavy burden on entities in terms of the required amendments to systems and processes. Al Sagga indicates that entities are finding themselves having to re-engineer reporting systems to capture and report the data required by IFRS for disclosure purposes.

IFRS also contains distinct rules on what costs can be recognisedin the balance sheet when constructing assets or raising finance and which have to be expensed.

IFRS requires that general overheads should be expensed and only certain direct costs of raising finance can be carried forward in the balance sheet. Entities are finding that not only do allocation processes need to be changed which can be both costly and time-consuming, but also IFRS is forcing costs to be recognised in the income statement, placing downward pressure on reported results in some situations.

Gavin Steel, Partner/Head of PwC’s conversion services in the Middle East indicates that “a well-timed and thoroughly executed conversion program that addresses the broader issues of adopting IFRS is essential, it can help a company identify the issues and mitigating solutions in advance, ensuring management can focus on what they do best; running the business.

As companies get closer to the official adoption date of 1 January 2016, further attention is expected on the implications of IFRS across reported results, systems, people and stakeholders.

It is becoming a key focus of the finance community in Saudi Arabia. The changes to reported results might affect Zakat tax in Saudi Arabia and we expect that a number of companies will need to engage directly with the authorities and their advisors to understand the implications on amounts due and how they will be recorded and disclosed in the financial statements”.

Gavin also indicates that some companies may take some relief from the fact that the changes to revenue recognition are being delayed to 2018.

However, companies that strictly follow the applicable standards as issued by the regulators will then have to implement changes in 2017 and then immediately amend policies in 2018 when the requirements of both IFRS 15 and IFRS 9 are applicable.

Gavin feels that companies will need to consider these standards carefully to assess whether they may want to early adopt these standards as they may bring improved financial reporting whilst also avoiding a second wave of change in 2018.

Adopting these new standards in 2017 may save effort in the longer term, but their implementation can be a significant exercise as they often affect systems and processes.

Consequently, following the requirements of these new standards fully in 2017 may actually be a challenge and the strategy adopted by companies will result in a balancing act between the available time to implement and the effort required to do so.

Companies will be reporting their first IFRS compliant balance sheet as of 31 December of this year. It is yet to be seen what the expected results of the transition to IFRS will be, but PwC indicated that they believe the outcome of the adoption will be surprising for a lot of entities.

© 2016 PwC. All rights reserved.

PwC refers to the PwC network and/or one or more of its member firms, each of which is a separate legal entity. Please see www.pwc.com/structure for further details. This publication has been prepared for general guidance on matters of interest only, and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication, and, to the extent permitted by law, PricewaterhouseCoopers (Dubai Branch), its members, employees and agents do not accept or assume any liability, responsibility or duty of care for any consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.

This article first appeared in CFO Middle East Magazine in October 2015.

Omar Al SaggaGavin Steel

Adoption of IFRS in Saudi ArabiaGavin Steel, PwC Middle East Partner in Capital Markets and Accounting Advisory Services and Omar Al Sagga, PwC Middle East Partner and Deputy Country Leader in Saudi Arabia