Introduction
International Financial Reporting Standards (IFRS) is the set of accounting standards developed, issued and maintained by International Accounting Standard Board (IASB) with an objective to provide uniform accounting standards globally. These standards are already been followed by more than hundred countries including European Union and majority of G20 countries. Many internationally recognized organizations have continuously praised IASB’s initiatives for global accounting standards.
Kingdom of Saudi Arabia (KSA) has also started the process of implementation of IFRS. It will be done in two phases. In first phase all the listed companies will be mandated to follow IFRS with effect from March 2017 and in the second phase all unlisted companies shall be mandated to follow IFRS for SME framework from March 2018. Currently the companies follow local standards issued by Saudi Organization of Certified Public Accountants (SOCPA). Implementation of IFRS is a part of SOCPA Project for Transition to International Accounting and Auditing Standards to bring the financial reporting and transparency level of Saudi Companies at par with their international counterparts and gain confidence of international investors.
The Transition
The deadline of SOCPA to Saudi company for maintaining and reporting of financial records as per IFRS is very close and the companies in the region are concerned about various issues related with transition from old local standards to new international standards. Currently, only banks and Insurance providers follow IFRS in KSA.
It is definitely not going to be a simple process as there are many fundamental differences between the existing and new standards. Many are finding these changes an aid to provide a boon to business, other are concerned about lack of clarity and increased burden of maintaining and reporting requirements.
SOCPA has also added additional disclosure requirements to some IFRS primarily to meet the requirements of Shariah and local law. SOCPA also keeps the power to amend or modify any IFRS if its requirements contradict with Sharia or local law.
How will it impact?
Though majority feels that the impacts will be significant for both businesses and investors, there are still a few who feels it will be less of an impact. Some of the major impacts of these standards will be on calculation of earnings per share (EPS), revenue recognition and cost structures specially for large corporate having complex structures.
One of the major changes for Saudi companies will be revaluation of fixed assets as the current standards do not require any regular valuation of assets and the book value is generally the price paid for acquiring the asset while IFRS require residual value calculation to be done annually. It will significantly impact the asset value the companies. While the companies into real estate will see a sharp upside movement in their asset value, industrial companies will face otherwise, because they have to show depreciated value of their decade old machines whose purchase and installation cost is much higher than their depreciated value on the current date.
Introduction of IFRS will substantially change the shape of balance sheet of Corporates and this will significantly impact the credit ratings and borrowing costs which may result in decreased confidence of international investors and directly brunt to the stock markets in the country.
Bottom Line
Initial few years after implementation of IFRS will be challenging for already grappling economy but in the long run it shall definitely benefit the companies to stand at par with their international counterparts. It can also help the companies to recognize the actual present value of their assets since as per existing standard only historic value of assets are depicted in the books. IFRS will be implemented in the next year and the actual picture will be revealed only after implementation as it is difficult to predict its true impact before practically applying it. It is tough to judge the impact of implantation of IFRS as there are many big companies having many foreign affiliates and already maintaining the records as per global standards.
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