04 June 2017
All companies listed in Saudi Arabia will be required to adopt International Financial Reporting Standards (IFRS) starting this year, following the lead taken by the UAE in 2016. Furthermore, starting in 2018, unlisted companies will be required to adopt the IFRS for SMEs reporting framework.
The prime benefits of adoption are comparability, information and transparency of financial information. However, are all CFOs in the region ready?
Global accounting standards
Visit the IFRS website and the end-game is clear: "Global standards for the world economy." This single set of high-quality global accounting criteria endeavours to bring transparency, accountability and efficiency to financial markets.
Hans Hoogervorst, chairman of the International Accounting Standards Board, says, "The public benefit of the Standards is their contribution to economic growth and long-term financial stability."
Amr Elsaadani, managing director and financial services lead for Accenture in the Middle East and North Africa, believes that access to improved and more comparable financial reporting will create more integrated capital markets. Greater efficiency in funds allocation will follow, as will decreased cost of capital and a better flow of foreign investments.
"Such outcomes are very important to GCC countries as their markets usually have lower trading and liquidity compared to larger stock exchanges such as London and New York."
Kuwait, Bahrain and Qatar early adopters
Improvement of capital markets in the GCC is a strategic objective and will, according to Elsaadani, assist the six states in diversifying national-income generation away from the oil revenue-related dependencies of the past.
Still, the pace of adoption has not been universal, with Elsaadani noting that while smaller countries such as Kuwait, Bahrain and Qatar were early IFRS adopters, it has taken more time for larger countries like the UAE and Saudi Arabia to introduce the international standards.
"IFRS adoption in GCC countries has not been a smooth process due to cultural challenges faced by these countries in addition to the level of education, professional skills and the need for external support such as the involvement of external auditors and professional consultants."
Regulation and governance required
This is a not a GCC-specific challenge. Global accounting standards need supporting regulation and governance.
Elsaadani cites the International Federation of Accountants, which has noted that a financial reporting system should be supported by strong governance, high quality standards, greater willingness on the part of investors to invest across borders, lower cost of capital and more efficient allocation of resources.
In addition, there must be sound regulatory frameworks for realising the benefits of economic development and of having a global financial reporting framework, such as comparability of financial information for investors.
It admits that there are several challenges for these benefits to be realised, such as issues of incentives, culture, scale, understandability, translation and education.
In terms of corporate-wide disclosure about IFRS adoption, Elsaadani says the listed companies in most GCC countries claim to operate in accordance with IFRS. However, unless regulatory bodies have enforcement and monitoring mechanisms, adoption of the IFRS will be partial, especially if there was no incentive for managers to implement it.
This, he stresses, may indicate that IFRS adoption in countries which have weak regulatory frameworks and enforcement mechanisms still lack quality in their financial reporting.
"This may apply in the case of GCC countries because accounting, as a profession and as a financial reporting and disclosure system, deviates from the development and strong growth of the economy and business sector."
Enablers of global knowledge gateway
Essentially, IFRS is representative of transparency and trade, with globalisation and GDP the desired outcomes. The standards are enablers of the global knowledge gateway.
Expanding on Hoogervorst's comment about the public benefit of IFRS, Elsaadani says local adoption is particularly relevant to individual investors who take investment decisions based on more comprehensive information disclosed in financial statements of companies.
Financial statements of various companies would be easier to compare, he says, due to increased uniformity.
"If strongly enforced, IFRS should allow companies to gain access to more comprehensive information about their business partners, which might result in better assessment of business risk. Banks would be able to assess credit risk of their borrowers, which could redistribute funding to companies with sound financial standing and consequently lead to long-term financial stability."
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