Saudi Arabia to require use of IFRS Standards in 2017 and IFRS for SMEs in 2018 Dr.T.P.Ghosh Professor, Institute of Management Technology, Dubai tpghosh@imtdubai.ac.ae While the International Accounting Standards Board is celebrating ten years of IFRS based financial reporting in the European Union , global acceptance of IFRS has been enlarged by the commitment of Saudi Arabia to adopt IFRS for all listed companies starting in 2017 and the IFRS for SMEs for unlisted companies starting in 2018. IFRS Foundation has notified the news on 13 November 2015 under the caption ‘Saudi Arabia to require use of IFRS Standards in 2017 and IFRS for SMEs in 2018’ . This re-ignites the discussion of the time bound Saudi project of IFRS adoption. Saudi Arabia as a member of G20 is committed to IFRS implementation which is a high quality, understandable and enforceable global accounting standards that require high quality, transparent and comparable information in financial statements and other financial reporting to help participants in the world’s capital markets and other users make economic decisions. G20 among other international organisations supports IFRS as set of a global financial reporting standards, and the recent announcement reminds the timeframe of IFRS transition in Saudi Arabia which matches the IFRS convergence timeframe of India, another G 20 member. Back in 2012, the Saudi Organization for Certified Public Accountants (SOCPA), which is the Saudi Arabian national standard-setter had floated 'Project for Transition to International Accounting and Auditing Standards'. Currently, the Saudi Arabian Monetary Authority (which is the Saudi Arabian central bank) requires banks and insurance companies in Saudi Arabia (both listed and unlisted) to report using IFRS Standards. SOCPA standards apply to all other companies, listed and unlisted. IFRS adoption in Saudi Arabia requires bridging many differences with the existing accounting practices. During the “Initial Diagnostic Phase” accounting and disclosure gaps were identified through various seminars. Now the critical conversion phase is approaching. Adoption of amortised cost accounting in respect of financial assets and financial liabilities is a major challenge in IFRS . IFRS 9 and IFRS 13 require recognition all financial assets and liabilities at fair value at initial recognition , and adoption of amortised cost when the business model of the entity is to collect scheduled principal and interest over the tenure of the financial assets. Most of the Financial liabilities are accounted applying amortised cost method . The implicit interest rate is an ‘all in cost’ . The principle extends to discover fair value of ‘below market rate of interest rate’ transactions. Even implicit government grants are established out of ‘below market rate of interest ‘ government loan or guarantee. Also fair value of long term trade receivables and trade payable needs to be analysed in IFRS based fair value accounting. Book entries of amortised cost accounting demand major changes in the accounting system.

Presently , Saudi companies do not report ‘other comprehensive income’ out of specified unrelised gain or loss. Routing all items of ‘ other comprehensive income’ through a Statement of Other Comprehensive Income involves structural change in the financial report. Rectification errors committed in prior periods would require restatement of financial statements of the comparative period and preparation of balance sheet at the beginning of the earliest comparative period. Component-wise accounting for property, plant and equipment is another major difference. Replaced components are capitalised rather than treating as repairs and maintenance expense. SABIC , a leading Saudi company, follows a practice of deducting marketing and distribution expenses while reporting sales which is not permitted in the IFRS. Similarly, the SABIC recognises provision for final dividend which is contradictory as the IFRS principle of events after the reporting period. SABIC’s commitment disclosures simply reflect capital commitment and lease commitments whereas IFRS envisages disclosure of all commitments including purchase and sale commitments. Also IFRS does not permit recognition of pre-operative expenses and deferral of costs unless those qualify to be recognised as assets which SABIC , on the contrary, recognises as intangible assets. Discounting of long term provision is another area of accounting difference which includes discounted provisioning of decommissioning , site restoration , and mine closures obligations , and unwinding of discounts in subsequent period till the settlement of obligations. Disclosure of segment information complying with ‘ operating segment principles’ enunciated in IFRS 8 including entity –wide disclosures , disclosures of related party transactions, estimation uncertainty , critical managerial judgement, fair value hierarchy are the few areas in which improvement of disclosures initiatives to be introduced. Implementation of fair value accounting for service concession arrangement relating to ‘ Built, Operate and Transfer’ projects in private public partnership projects requires adoption of receivables accounting or intangible accounting approach. Discovering lease out of specific asset linked outsourcing projects or specific asset linked hiring transactions poses accounting challenge which are to accounted as leases rather than simply hiring arrangements. IFRS has overstretched ‘substance over form’ that may even change the character of the business when glanced through financial reports. IFRS Interpretation ‘Determining whether an arrangement contains a lease’ unnecessarily enlarges the scope of lease. First time adoption of IFRS is equally challenging. Preparation of opening Balance Sheet on the transition date , parallel accounting for developing comparative of the first IFRS compliant financial statements and reconciliation of equity and other comprehensive income is a cumbersome and costly process. It is expected that the SOCPA would successfully lead the transition.