Managing the IFRS transition in Saudi Arabia and the role of technologyAs investors look beyond borders to find the most rewarding business opportunities, the globalization of commerce is being accelerated. Against this backdrop, financial information prepared in line with local Generally Accepted Accounting Principles (GAAP) is losing relevance.

As the international markets aim to create a transparent and robust business environment, we explore the move towards a universal set of International Financial Reporting Standards (IFRS).

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SAUDI ARABIA ADOPTS IFRS Saudi Arabia, a G20 nation, has elected to move towards IFRS after assuring their compatibility with the Saudi environment through an independent process conducted by the Saudi Organization for Certified Public Accountants (SOCPA). This forms part of SOCPA’s Project for Transition to International Accounting and Auditing Standards.

The transition represents a key milestone in Saudi Arabia’s economic development, laying the foundation for a more transparent and robust business environment. However, the move from GAAP to IFRS brings a number of challenges, especially in relation to the nation’s technical and professional capacity to handle the transition effectively.

At present, the Saudi Arabian Monetary Agency (SAMA), requires all banks and insurance companies in the country – both listed and unlisted – to report under IFRS Standards. All other publicly listed and unlisted entities currently adhere to the SOCPA GAAP.

SOCPA IFRS TRANSITION PLAN Under this program, all listed entities other than banks and insurance companies are required to report under IFRS, as adopted by SOCPA for financial periods beginning on or after January 1, 2017. SOCPA is in the process of reviewing each IFRS Standard, including interpretations. As of June 16, 2016, the organization had decided the following2:

“ To date, that review is completed for most IFRS Standards and is ongoing for the remaining ones. As a result of the review, SOCPA may decide to amend any IFRS Standards requirement that contradicts Sharia or local law, taking in consideration level of technical and professional preparedness in the Kingdom. However, for the IFRS Standards for which the review has already been completed, SOCPA has decided not to make any amendments or remove any options.”

SOCPA is also in the process of adopting the IFRS for SMEs Standard, which is designed to meet the unique requirements of small and medium-sized entities (SMEs) that will come into effect in 2018 for use by all non-publicly

accountable entities. Some entities may opt for early adoption in 2017. This Standard, which has been translated into Arabic, provides an alternative, less complex framework that can be applied in place of the full set of IFRS Standards by the eligible entities. SOCPA may add some disclosures to the IFRS for SMEs Standard before the application date, but does not otherwise envision further modifications3.

BENEFITS OF GLOBAL STANDARDS While the conversion to IFRS will no doubt be a challenge for many businesses across Saudi Arabia, there is a lot to be gained by adopting these standards effectively. In a speech delivered at the 8th Annual Forum of the Gulf Cooperation Council Accounting and Auditing Organization in Saudi Arabia, Michel Prada, Chairman of the Trustees for the IFRS Foundation, emphasized the importance of this reform:

“In such a globally interconnected world it makes no sense for each individual jurisdiction to maintain its own set of accounting standards, at least for those entities that have exposure directly or indirectly to international markets. Doing so simply adds costs and complexity to everyone – to market participants, to the accounting profession and to those with responsibility for overseeing the efficient functioning of capital markets”

By offering financial reporting in line with globally accepted standards, the Saudi economy will be more open to international competition, trade and investment. When foreign investors and lenders are more confident about the international comparability and quality of financial information, businesses become less of a risk. It is expected that Saudi firms will have enhanced access to more capital at a better cost, thus increasing financial stability within the Kingdom.

This comes at a time when Saudi Arabia is finalizing plans for the partial privatization of state-owned oil giant Aramco, one of the most significant initial public offering (IPO)s in its history. It is also hoped that the financial reform will bring foreign direct investment into other sectors as the country moves beyond an economy based heavily on oil revenue and public spending.

The International Accounting Standards Board, formed in 2001, developed the International Financial Reporting Standards (IFRS) with the goal of providing one set of high-quality, enforceable global accounting standards. These enable the comparison of financial information from companies across the world in order to better inform global investment decisions. At the same time, entities that implement these standards can improve their access to capital.

This vision is supported by numerous international organizations including the G20, World Bank, IMF, Basel Committee, International Organization of Securities Commissions (IOSCO) and the International Federation of Accountants (IFAC)1.

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THE SKILLS CHALLENGE

The new regime requires professional judgment, with practitioners who are sufficiently trained and qualified. One of the major challenges posed by the transition to IFRS is a shortage of qualified accountants in Saudi Arabia. According to Deloitte, the number of qualified Saudi Arabian accountants amounts to around 300. (However, SOCPA states it has 5,000 members.)4

While the skills gap can be eased by expats working in the Kingdom, the language barrier still poses a challenge. At present, all statutory financial statements prepared under SOCPA GAAP must be filed in Arabic. It is expected that this requirement will continue under IFRS. Consequently, there will be added pressure on Arabic-speaking qualified accountants to provide support in this area.

Hopefully, the Kingdom will address this issue over time by allocating resources to relevant accountancy educational programs at schools and universities.

THE ROLE OF TECHNOLOGYTechnology can play a valuable role in helping Saudi Arabian firms to tackle the transition from SOCPA GAAP to IFRS, especially those with limited resources. Software platforms that are suited to IFRS requirements can save time during the preparation and review of financial reports, offering a dramatic reduction in the hours spent on research, formatting and burdensome manual work.

In fact, the transition can be viewed as an opportunity to make strategic improvements to information technology, systems, and controls. Even if there are current programs in place to upgrade IT systems, these may need to be adjusted to capture and report the appropriate data required under IFRS.

It is critical to address the technology implications at the early stages of a move towards international accounting standards – and to view this as an enterprise-wide opportunity. IFRS adoption does not rest solely on the shoulders of the CFO, but requires the support of the entire leadership.

Technology executives and all other relevant stakeholders need to be involved in the preliminary planning stages. A ‘quick fix’ due to lack of resources or support from the top can lead to costly rework at a later date. For instance, adding manual processes to an existing system to capture data and perform reporting, will likely only add complexity in the long run.

CHOOSING THE RIGHT TOOLSMany technology vendors have solutions that streamline IFRS data capture, calculations and reporting. These help transcend the time-consuming manual processes and multiple rounds of iterations typically associated with statutory reporting. In addition to automating repetitive and simple tasks, the right software tools can offer assurance on the accuracy with which numbers are calculated and classified, helping to increase efficiencies and overall performance.

However, when choosing the appropriate technology, it is essential to look at the overall process. In addition to getting the numbers correct, it is worth considering whether the software will help with the preparation and presentation of reports, including secondary information and disclosures. This avoids time being wasted on report reformatting and prevents a scramble for information at the last minute. Missing deadlines for audited financial statements can carry significant reputational risk, especially for listed entities.

Technology can facilitate the completion of financial statements earlier in the financial process. It is advisable to engage the audit team on the disclosures and then decide what type of data is required and how this information should be shown, in order to avoid having to gather extra data later, especially when deadlines are looming.

It is worth investing in technology that enables a firm to capture data once and then pull this all the way through to the report that goes to the auditors, ensuring that any changes made are reflected throughout all reports. This helps to reduce the risk of human error and improve the overall quality of the work.

THE WAY FORWARDIn closing, business entities across the Kingdom are encouraged to view the transition from SOCPA GAAP to IFRS as an opportunity to adopt better processes and technologies that optimize existing resources. It is advisable to recognize, and address, the technology implications at an early stage of the project. All projects should be informed by a detailed understanding of the new financial language, in order to harness the full benefits of the reforms.

The reforms require a significant effort from business entities, practitioners and regulators alike. Meticulous planning and preparation, well ahead of time, as well as adequate and dedicated resources will foster effective IFRS implementation throughout the Kingdom.

About the author

Pierre Arman is the Market Development Lead for Tax & Accounting at Thomson Reuters, and is responsible for the strategy and product management of all Tax & Accounting and Global Trade Management solutions in the MENA region.

References: 1 ifrs.org/Use-around-the-world/Documents/2016-pocket-guide.pdf2 ifrs.org/use-around-the-world/Documents/Jurisdiction-profiles/Saudi-Arabia-IFRS-Profile.pdf3 ifrs.org/use-around-the-world/Documents/Jurisdiction-profiles/Saudi-Arabia-IFRS-Profile.pdf4 forbes.com/sites/dominicdudley/2016/04/10/saudi-arabia-is-about-to-adopt-international-accounting-standards-and-it-could-cause-problems/2/#2dbbe3cb5468

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