Impact of The Conversion to Full International Financial Reporting Standards; Saudi Arabia Case Study


International Finance Reporting Standards (IFRS) play a crucial role in determining accounting standards of a company. They stipulate specific rules and accounting standards to be followed by companies globally. In other words, reporting standards set global rules in preparing financial statements. These financial statements indicate the performance of a company at a particular time. Companies that comply with IFRS have the benefit of raising additional capital from foreign investors because such investors can compare their financial statements with other firms and use such standards to advocate the same preparation of statements. Saudi Organisation for Certified Public Accountants (SOCPA) has noted the importance of a changing business world due to the existing complex nature of transactions. Such changes occurred after SOCPA joined the World Trade Organisation (WTO), and many global companies opened branches in their countries. Therefore, they updated the existing standards to be in tandem with the current business world which mainly consists of IFRS. New requirements make them change their standards to be in line with the standards of IFRS.


Financial statements are very important because they provide information about an entity’s financial performance and financial position within a given period. According to Hamidah (2013), the primary goal of financial statements is to offer information about a firm’s financial performance and position, which can be used by both the internal and external stakeholders to make economic decisions. Shareholders rely on these financial statements to know whether their investments are generating the desired income or not. Top managers need the financial statements to determine if their management policies are yielding the desired outcome. Investors rely on these statements to know which firm they need to invest in within the stock market. The government uses such statements to determine the amount of tax that it is owed by a company. As Alyammahi (2013) notes, financial statements often provide information relating to a company’s assets and liabilities, income and expenses, profit and losses, and cash flows and owners’ contributions.

In the past, each country had its accounting standards, based on a number of the local internal factors. However, this approach had some challenges, especially for multinational corporations. Companies operating in numerous countries would be forced to prepare financial statements as per the standards of their host country before converting them to the standards acceptable in their home country. It was a hectic process that also increased the costs of preparing the statements. The approach also, made it difficult for the local firms to access funds from the international financial institutions. For instance, Saudi Arabia used GAAP, which is hard to comprehend especially for the foreign investors. It was, therefore, a significant development when IFRS Foundation brought a common language, the International Financial Reporting Standards (IFRS), which would be used in the international community. These standards would help in the harmonisation of accounting standards and practices. They must ensure that they adopt, implement, monitor, and sanction accounting in Saudi Arabia to achieve international standards (AlMotairy & Stainbank 2014). However, it is not a complete list of new obligations and improvements in the financial field of the country.

The International Financial Reporting Standards were developed to help come up with a common global accounting language that can be used by companies all over the world to prepare their financial statements (LeTendre & Wiseman 2015). It was a deliberate effort by the International Accounting Standards Board to ensure that the relevant stakeholders can easily interpret financial statements developed by a company in one country in a different country. The standards have already been embraced by various countries around the world. Saudi Arabia is one of the countries that have considered adopting the new standards, as a way of enabling its local firms to operate with ease in the global market. The new standards were introduced in January 2017, and businesses are finding ways of adopting the new standards to ensure that they can operate effectively locally and in the international market. It is expected that the conversion to full International Financial Reporting Standards in Saudi Arabia will have a major impact on the local economy. This research will make a comparative analysis between SOCPA old standards and IFRS. The standards will help analyse and identify factors which have been adopted and implemented by the SOCPA. As firms are forced to embrace the new methods, some of them will be struggling to operate under these standards while others may enjoy working in the new environment. There is also the issue of Sharia and Zakat which will be affected by the new standards. Some of the requirements of the new standards are now in line with Sharia. Payment of Zakat will also be affected by the requirements to revalue all assets on a regular basis. The following research question was used to guide the study: Are the IFRS standards are going to be compatible in Saudi Arabia?

Literature Review

Saudi Arabia is increasingly becoming open to the global business world after it joined the World Trade Organisation (WTO) in 2005. However, the move by the country to fully embrace International Financial Reporting Standards may have unprecedented outcome that the country had not anticipated (Van den Berg, Thijs & Viaene 2014). Scholars, accounting experts, and the business community have been keen on determining the impact that the move may have on the country’s economy within the short-term and in the long-term. In this section of the report, the researcher will focus on a detailed review of literature relevant to this topic. The researcher will look at what other scholars have already found out on this issue and identify the knowledge gaps that need to be explored further. In order to answer the research question that seeks to determine if IFRS standards are going to be compatible in Saudi Arabia, it will be necessary to examine in detail what other scholars have found out in the previous studies, compare the results from different perspectives, and clarify if the success of one study depends on the activities and conclusions demonstrated in other studies.

Traditional Financial Reporting Standards in Saudi Arabia

The business community within the Kingdom of Saudi Arabia has been using the standards laid down by the Saudi Organisation for Certified Public Accountants (SOCPA) when preparing financial statements within the country. The SOCPA standards were simple when compared with other international standards and many believed that they were deeply entrenched in the Sharia teachings (Archer & Abdel 2013). The local standards have experienced a number of changes as the accounting body tried to make it fall in line with the international standards. However, Giachetti (2013) says that these standards have received criticism and praise in equal measures. They are praised by the locals because of their strict adherence to Sharia. However, they have been criticized when it comes to their applicability outside the country. Saudi Arabia still has a limited number of professional accountants who can help take the country to the next level. As such, the simple standards set forth by SOCPA were seen as appropriate given the level of knowledge in the local community. Moreover, these local standards were developed taking into account the laws and regulations set forth in the Sharia teachings. However, Azzam (2012) says that these local standards were too simplistic to be useful to firms interested in accessing loans from international institutions. Sometimes, the local firms would be forced to convert their financial statements to other accounting languages acceptable in the international community. Doing that was not only time consuming but also expensive to the concerned firms.

Firms unwilling or unable to convert their financial statements to the acceptable standards would be locked out of the international financial market. In a world that is increasingly becoming global, the local stakeholders got worried that the traditional financial reporting standards used in Saudi Arabia might be a hindrance to the local firms, making it difficult to compete favourably in the international markets. Foreign firms are flocking the country to take advantage of the existing opportunities in the market. It is important for the local firms to consider exploring foreign markets to ensure that their survival is protected. The cracks seen in the local accounting standards made it necessary to embrace the new international standards (Dima et al. 2014). That is why the SOCPA announced that beginning January 2017 all the listed companies in the country were required to embrace the new standards. Other companies operating in the country were expected to do the same a year later.

International Financial Reporting Standards

International Financial Reporting Standards were introduced by IFRS Foundation in 2001. The non-profit making organisation has its headquarters in 30 Canon Street in London (Larkin & DiTommaso 2015). According to Needles and Powers (2012), the primary goal of this organisation at the time of its inception was to harmonise accounting standards among the European Union member states. The stakeholders in the accounting community were concerned that, although the union had come up with a common currency and was operating as a common market, companies operating in the member states were using different accounting standards. The difference was making it difficult for the companies to operate beyond their national borders.

The use of a common currency had made it easy to do business in this country. However, for firms operating in more than one country within the union, it was necessary to prepare different financial statements at the end of the financial year, especially for the purpose of taxation. IFRS Foundation realised that it was necessary to come up with a common financial reporting standard for all the member states to ensure that financial statements prepared in one country would easily be used in another country without making any changes. Fawcett (2016) says that IFRS was a huge success in Europe. It was accepted by the accountants and the business community within Europe. After a while, the standards started gaining popularity in the global community. Other than the United States, all the major global economies have embraced these standards. Emerging economies in Asia and Africa have also started embracing the new standards.

According to Lev and Gu (2016), IFRS is specifically unique when it comes to preparation of financial standards. When compared with the standards that were introduced by SOCPA, IFRS is keen on ensuring that asset appreciation or depreciation is factored in regularly (quarterly) when preparing financial statements (Hamidah et al. 2015). This is specifically important for firms with immovable assets such as land and buildings. Sapelli (2015) says that SOCPA standards would not factor in such depreciations or appreciations. It means that the financial statements prepared by the firms would not be a true reflection of their financial position, especially in terms of their wealth at a given period. As such, a firm would be easily valued for less or more than its true worth because of lack of factoring in of the depreciations and appreciations. Under the new system, the statements would give a true financial position of an entity by revaluing all its assets and taking into consideration any depreciations or appreciation over a given period.

IFRS, as Flood (2015) puts it, is focused on providing a true reflection of all the assets and liabilities of a firm based on the prevailing forces. It means that when forces are favourable to a firm within a given period- such as a sudden appreciation on the value of land- that will be reflected in its financial statements. Investors will be assured that the information presented in the financial statements is true and current. These are some of the factors that have made the new standards very popular in the international community. Liu (2014) says that Saudi Arabia has been preparing to embrace the IFRS for a while. Although some local stakeholders tried to resist the move, the government considered it appropriate to embrace the new standards. Most of the issues raised by the stakeholders have been addressed, and small and medium sized companies (SMEs) which are not currently listed on the stock exchange have been given a grace period of one year to adopt the new standards.

The Need to Embrace International Financial Reporting Standards

According to Bandyopadhyay and McGee (2012), the Kingdom of Saudi Arabia is one among some countries in the Middle East and North Africa (MENA) region to embrace the International Financial Reporting Standards. The journey towards IFRS was long and characterised by some challenges. The country has been investing heavily in the field of education, especially in higher education. However, the number of certified accountants with practical skills and willingness to work in either public or private sectors in the country is lower than the market demand. This is one of the challenges that the country has faced as it tried to introduce the new standards. Opponents of the new standards stated that it would be appropriate to continue using the traditional standards introduced by SOCPA until such a time when the country has the needed human resource capacity to embrace the new system. However, the proponents of the new system stated that time has come when the country can no longer ignore the need to adopt new methods of preparing financial statements.

Through negotiations and dialogues, the country has finally agreed to embrace the new methods. It is now official that all publicly traded companies in the country are required to use the IFRS standards when preparing their financial statements. It means that their financial statements for the year ending December 2017 will be prepared under the new standards. They are also required to prepare the quarterly statements using the new IFRS. For the SMEs operating in the country, the authority gave them a whole year to adjust. Within that period, they can learn from the other firms what they need to do when using the IFRS to prepare financial statements. It is important to look at the positive impacts that the new standards will have on the country and the individual firms as it becomes apparent that it will be the standard practice within the country.

Improved Valuation Opportunities

Assets such as land, and in some cases buildings, often experience appreciation in value with time. Others such as motor vehicle and machinery often depreciate with time. These are facts that a firm cannot ignore when preparing financial statements. Under SOCPA, companies were required to maintain the historical value of the assets as at the time they were purchased. As Beke (2012) notes, it is illogical to ignore the changes that often occur in the value of an asset as time passes. It is unfair for a firm to be denied the opportunity to factor in the appreciated value of the land because it takes the effort to retain such a property in a society where demand is on the rise. Firms should be allowed to factor in the appreciated value of land to reflect the current rates as a way of strengthening their financial statements. Stronger financial statements can easily attract investors, in particular for firms operating in the stock market. It increases the value of investors’ money.

On the other hand, it is unfair for the new investors to be denied the opportunity to know the actual value of the assets they shall own when they purchase shares of a company at any given time. For instance, when a company purchases machinery worth £ 250,000, it is certain that its value will depreciate as time goes by. In fact, it is possible that the value can depreciate to £ 200 or lesser. When the book value reflects that the value of the machine is £ 250,000 while the true value is £ 250,000, then investors will feel cheated after knowing the truth. In fact, such failures to depreciate the value of some assets to reflect their current value at a given time may create a false confidence in the management even at times when the company is facing a severe financial problem (PKF International 2016). It means that valuation issues affect not only the investors but also the management of the firm. IFRS eliminates such problems. Every asset of a company will be re-valued on a regular basis to bring out its true worth at a given period. The investors will benefit by knowing the actual value of what they are purchasing at a given time. At the same time, the management will know whether their firms are performing as per the expectations.

Streamlining Operations and Reducing Costs

Saudi Arabia is home to numerous companies which are operating in the global market. Under the previous SOCPA system, these companies had to prepare two sets of financial statements, one for domestic operations and another for international operations (Mirza & Nandakumar 2012). It was a highly demanding process, and these companies had no option. However, the new IFRS has eliminated such tedious tasks of preparing two sets of financial statements. Currently, the new financial reporting standards have streamlined everything, making it possible for the companies to prepare only one set of financial statements. Financial statements that a Saudi Arabian company uses domestically can still be used in its international operations. The new standards streamline the local transactions with foreign ones so that domestic companies can easily compare their performance with other global firms (Moeller 2016). The cost of preparing these documents will also be reduced by more than 50%, especially given the fact that other neighbouring countries are also embracing these new standards.

Enabling Local Companies to Access Funds from International Institutions

According to Chua, Cheong, and Gould (2012), when planning to expand, companies often require additional funds other than what is generated from their normal operations. Financial institutions offer the most reliable source of such additional funds. Locally within Saudi Arabia, there are some financial institutions that offer loans to companies for expansion or meeting urgent financial needs. However, it is in the interest of a company to have a wide variety of options when planning to have access to loans. A firm will often choose an institution that charges the lowest interest on the loans they offer to their customers. By switching to IFRS, the local Saudi firms can now have access to funds from international financial institutions. The foreign lenders can easily understand the financial position of these local firms and determine whether or not they qualify for the loan. In the past, these local firms would be forced to convert their financial statements prepared under the guidelines of SOCPA to international standards in case they wanted to borrow from international banks (Ruppel 2015). Some companies considered it to be a challenging requirement and opted to avoid such sources of funds. However, under the new system, it will be easy to get foreign funding.

Attracting International Investors

According to Shamrock (2012), many foreign investors often avoid investing in countries where they cannot have proper access to financial information about firms they wish to invest into within a given period. For a long time, Saudi Arabian business community was locked out of the world because of ambiguous financial reporting standards and regulations deeply entrenched into Sharia. Investors feared that limited information about this market made it impossible to understand the local forces hence it was easy to make fundamental investment mistakes. However, such concerns will be eliminated by the introduction of the IFRS. The new standards are practiced in many countries around the world, especially in Europe.

The new standards will provide investors with the right information they need before making their investments. Investors willing to buy shares of companies traded in the stock market will find it easy to gather the information they need about the financial performance of these enterprises and their real financial position as at the time of the investment. As Ramanna (2015) says, the introduction of the new standards is expected to increase the foreign capital inflows within Saudi Arabia. The oil and gas industry, which has been attracting foreign investors from all over the world, is likely to be more attractive because of the standardised financial reporting system adopted in the country. Other industries are also expected to grow as the country tries to diversify its economy and reduce its overreliance on the oil and gas industry.

Promoting Professionalism in the Field of Accounting

Accounting is one of the most important fields of business that define how firms are run within a given region. Robinson (2012) says that any business entity, irrespective of its size, cannot achieve proper growth without embracing proper accounting procedures. It is in the interest of every firm to know its financial performance over a given period to know which decision is appropriate. The decision needed when a firm is making losses or running on heavy debts is different from the decision that another firm making profits will make. For a firm to know its financial performance, it needs an accountant to go through the books and prepare cash flows, income statements, balance sheet, and profit and loss accounts among others. Moreover, when a firm starts making tax returns, it must prepare proper financial statements that will determine how much it will be paying the government as tax.

According to Elliott and Elliott (2017), Saudi Arabia has experienced a massive increase in the number of people graduating with varying degrees over the recent past. However, the country still has less number of professional accountants than what the market needs. Moreover, the local accountants who are used to the local financial reporting standards find it difficult to work in other countries. The local standards that were previously used were simple and less detailed than the new standards. When the local accountants are exposed to foreign accounting standards such as IFRS, they find it difficult to cope. However, that will no longer be the case following the introduction of the new standards. It is expected that the new standards will promote professionalism in the field of accounting. The local accountants will find it easy working in other countries within the MENA region or other foreign countries.

Improved Comparability within Regional Economic Block

Gulf Cooperation Council, popularly known as GCC, is one of the most important regional economic blocks within the MENA region. It allows companies within the region to operate freely in any of the countries without being subjected to stringent policies that other foreign companies face. However, the traditional financial reporting standards that were used in each member state within GCC made it difficult to compare the financial performance of the companies. A financial report prepared by a company in Saudi Arabia could not easily be used by an investor or a different company in the United Arab Emirates. This problem was particularly affecting corporations operating in Saudi Arabia and other countries (Ramanna 2015). Trying to convert the financial statements from one standard to another was proved challenging, especially with the fact that valuation of assets varied from one country to another. However, this problem will be eliminated given that most of these countries are now embracing IFRS.

The new standards will make it possible for companies operating in more than one country to prepare statements that can easily be used in any country within the economic block. Companies seeking to expand their operations through mergers will easily compare their financial performance before agreeing on the terms of the merger. Each of the companies can analyse the financial performance and position of the other company before making any commitments (Ramanna 2015). It eliminates any doubts that may develop when engaging in business partnerships with other regional firms.

Improved Transparency in Financial Reporting

Accepted accounting principles (GAAP) allowed individual countries to embrace specific standards while at the same time making adjustments to the reporting standards in line with the local forces. However, Collings (2015) notes that some countries have embraced standards that make it difficult to promote transparency in financial reporting. A good example is the issue of asset valuation when preparing financial statements under the traditional financial reporting standards in Saudi Arabia. The traditional standards required that a company must use the historic value of an asset instead of revaluing it regularly to know its current worth. That practice in itself limited transparency in financial reporting.

Cases, where investors made wrong decisions because of basing the value of assets on historical records, were common. Other investors would be forced to guess the current value of a given asset by determining when it was purchased and whether or not it is expected to depreciate or appreciate. Such guesses were not only tedious undertaking but also less accurate. The introduction of IFRS is expected to improve transparency. Firms will no longer have the capacity to hide their actual financial statements when making financial reports. They will be expected to re-evaluate their assets on a regular basis so that investors and other business partners can have the right information they need to make decisions. The improved transparency is expected to attract more local and foreign investors into the country’s stock exchange. They will always have the information they need to make the right investment decision.

Challenges Associated with Changing to the International Standards

International Financial Reporting Standards have been embraced by many countries around the world because of some benefits discussed in the section above. However, Iatridis (2012) notes that it also comes with some challenges that local companies in Saudi Arabia should be ready to combat. The new standards faced opposition when a section of the stakeholders indicated that it would be necessary to embrace it. In fact,  such opposition that has forced the government to implement the new policy in phases.Thia has allowed the SMEs, especially those who are not listed in Saudi Stock Exchange (Tadawul) to take a whole year to adjust to the new standards and to start using them when preparing their financial statements (Erkens, Hung & Matos 2012). The stakeholders must know how to overcome the expected challenges given that it is now official that the country will fully embrace IFRS after the one-year grace period given to the non-listed firms is over. They need to know the truth and to be fully prepared so that they can enjoy the benefits brought about by the new standards without being adversely affected by the associated challenges. In this section of the paper, the researcher will look at the fundamental challenges that local firms in Saudi Arabia should be prepared to deal with as IFRS become the official financial reporting standards in the country.

Impact on Companies with Higher Asset Depreciation Charges

In the Kingdom of Saudi Arabia, many companies were used to standards that allowed them to retain the value of the asset at their historical records despite changes that may occur with time due to depreciation or appreciation. However, that will no longer be the case. Firms will have to revalue their assets on a regular (quarterly) basis to get their real worth as at a given time. It means that companies with higher asset depreciation charges may suffer more than those with assets which appreciate in value. According to Stefanova (2015), companies dealing in machinery may be the worst affected by this new financial reporting standards. When not sold at the expected time, machinery often depreciates as new ones get introduced at lower prices because of improved technology. Companies that rely on heavy machinery for their operations may also suffer because every time their assets are valued, these machines will be worth lower value than they originally were (Whittington & Delaney 2013). Many companies in the country were not used to such constant adjustments in the value of their assets, and it may take them time to adjust. Many of them will be forced to find alternative ways of compensating for the loss in the value of their assets.

Shortage of Qualified Accountants

According to a report by Dudley (2016), Saudi Arabia has 300 qualified accountants (Muhtasib), although SOCPA says it has 5000 members. On the other hand, Canada- with the same population as Saudi Arabia- has over 100,000 qualified accountants. It means that for every one accountant in Saudi Arabia, there are over 333 accountants in Canada. The ratio of 1:333 is a clear indication that there is a serious problem in the country when it comes to accessing qualified accountants in the country. Even if the records of SOCPA- which states that there are 5000 registered accountants in the country- are used, it still means that the ratio is 1:20. Riccardi (2016) says that the problem with the SOCPA records is that it is relying on information about those who registered with them as qualified accountants without taking into consideration changes that have happened over a given period. Some of these accountants in SOCPA records are out of the country, pursuing further education in Europe and North America. Others have moved to other countries to work there, while others are into private business.

Some of them are not practicing either in the private or public sector, which means that although they are qualified accountants, their impact is not felt in the country. As such, the number of qualified accountants who are actively working in the country is fewer than that provided in the records of SOCPA. With the limited number of qualified practicing accountants in the country, it is likely that many companies will struggle to adjust to the new system. Most of the publicly traded companies rely on international accounting companies such as Deloitte, PricewaterhouseCoopers (PWC), KPMG, and Ernst & Young. It means that the local businesses may be forced to spend more to have their books audited and financial statements prepared as per the new standards. As long as the country still has a shortage of the qualified practicing accountants, Zeff (2012) says that preparation of financial statements will continue to be expensive. Such high expenses have an adverse impact on the profitability of a company.

The Need to Comply with Sharia

The Kingdom of Saudi Arabia has strict Sharia code that has to be observed by the business community. The emergence of Sharia compliant financial institutions that do not charge interest was as a result of the pressure for these organisations to operate under the Islamic laws and principles (Skowron & Kristensen 2012). IFRS was set in Europe without giving any consideration to the present Sharia principles. Issues such as asset depreciation and appreciation, interest, and profits among other fundamental accounting principles are keenly observed in the new financial reporting standards. However, Saudi Arabia is one of the few countries that strictly follow Sharia in its social, economic, and political spheres. It means that when implementing IFRS, the stakeholders will have to know how to deal with riba and other unacceptable practices under Islamic laws.

The primary reason for embracing IFRS was to standardise and to streamline the financial reporting in the country with that of the international community. However, the country has to choose as to whether it will embrace the international standards in complete disregard to the Sharia or it will be forced to adjust these standards in line with the Islamic laws. Any adjustments made to the new standards may defeat the very goal of setting them because they will be different from the international standards. Currently, this is one of the biggest dilemmas that stakeholders face as they try to implement the new standards (Claessens & Kose 2013). It is agreed that companies will be required to embrace IFRS in its original form, but efforts are still in place to find ways of making it compliant with the Sharia principles. It may take a while to find a way of making IFRS work effectively in an environment where the Islamic laws are still considered supreme to any other existing law.

The sharia laws state that financial liabilities were supposed to be placed in different classes in regards to their nature. Such terms as an overdraft and tawarruq have to be differentiated. An overdraft is a bank facility whereby an individual or a company is allowed to take more money than they have on their bank account. These funds must have a shorter repayment period than a typical loan and incur a higher interest rate in comparison to an average credit facility.

Tawarruq is a financial product in terms of which a customer may buy an asset with a high resale value and resell it obtaining money easily and quickly. This asset can be acquired at a price specified by a financial institution. When a client sells their product, they can repay the money at a financial institution.

Standards can be explicitly distinguished between bonds and Sukuk. A bond is a debt instrument whereby an individual loans money to the government of a company. It has a specified interest rate, payback period, and a payable amount that is well stated. Government bonds are T-bills that can be matured after six months and one year. Bonds are used by governments and companies to undertake large investment projects requiring high amounts of capital. Governments and companies prefer issuing out bonds because they have a lower interest rate compared to banks with no strict repayment schedule.

Sukuks are Islamic bonds which do not earn an interest rate because of the existing Sharia laws. Sukuk’s differ from bonds in that an investor has an equal share in the ownership of the assets. Unlike conventional bond holders, Sukuk’s are beneficial because bond holders share in the sale of property bought with their money.

Therefore, financial institutions like banks ought to inform investors about the existing differences between conventional bonds and Sukuk’s. Potential investors must understand that Sukuk’s do not attract an interest charge. Such requirement to provide investors with information can ensure that no confusion occurs in bonds investment.

Impact on Zakat Tax

In a report by Nurunnabi (2017), Zakat is a religious obligation (tax) that companies and individuals give as directed in the Quran. It is considered the second-most important responsibility among the Muslims after salat (prayer). A company or an individual, whose wealth is more than the nisab (the threshold for paying Zakat) is required to pay Zakat. The payment is often made at the end of the year. In the past, nisab would be calculated from the value of gold. Currently, one has to convert the value to Saudi Riyal. It is a religious requirement that one has to pay Zakat, often calculated as a quarter of one-tenth of the wealth that a person has (2.5%). Under the new arrangements, companies may find it difficult to make such payments, especially those businesses that own large tracts of land that are yet to be put into use. In the past, they would use historical prices of such parcels of land, which means that they would pay less.

A tax is paid by every business operating in a county. It is paid to the government which then ensures efficient service delivery to the populace. According to Iqbal (2012), Zakat is a compulsory payment under the Saudi Organisation for Certified Public Accountants (SOCPA). This payment occurs only when Saudi shareholders fully own a company. If all shareholders are from overseas, they pay an income tax. The government collects these payments to be represented as a charitable organisation. In fact, it receives 2.5% of accumulated profits during the Ramadan period (Stirk 2015). During this period, money is collected and given to charitable organisations like children’s homes and poor society.

The International Finance Reporting Standards (IFRS) rules state that an income tax is charged on a financial statement, and Zakat is not even recognised. The standards define the tax and explain how people with different incomes ought to pay taxes in their relevant currencies.

A deferred tax is similar in both criteria. An income tax that is the difference between the tax laws and the accounting methods has to be paid to the government. For instance, there may be a variation between tax payable and tax expense. The difference between these two items is known as a deferred tax.

The new standards will mean that they will pay a percentage of the appreciated value of these idle assets. They will pay more for assets that are not generating income at the moment. As a religious obligation, these companies are expected to be truthful when making such calculations, and it may not be easy to come up with a negotiated payment (Nurunnabi 2017). This is so because it is not the government or the current religious authorities that set Zakat at 2.5% of an entity’s wealth. It is a religious obligation that is stipulated in the holy Quran. Firms may be forced to dispose of lands that are not in use or find a way of making them yield some returns to help in the payment of Zakat.

In traditional guidelines of the Saudi Organisation for Certified Public Accountants, SOCPA 1 and SCOPA 2, an amount paid describes any amount owed to a particular entity or an individual. A company or an individual whose wealth is more than nisab (the threshold for paying Zakat) is required to pay Zakat. This payment is often made at the end of the year. In the past, nisab was calculated from the value of gold. However, an addition was done in paragraph 54. It was stated that Saudi companies were required to pay Zakat. However, it was decided that since Zakat was an obligation for all Saudi companies, it was necessary to recognise liabilities for Zakat payable. SOCPA completely accepted that modification.

Training Cost to the Companies

It is now clear that Saudi Arabia is one of the countries that have adopted IFRS despite the opposition that came from a section of the business community citing challenges that local stakeholders will face. Bragg (2017) observes that local companies now have no alternative but to operate under the new system and ensure that their financial statements are prepared as per the guidelines of IFRS. Not all companies can rely on leading auditing firms to prepare their financial statements. In fact, even top multinational companies have their internal auditors who often prepare these financial statements on a regular basis. Independent external auditors are only invited when it is necessary to have financial statements that can be used by external stakeholders such as the government for tax or when preparing annual reports.

Zeghal and Mhedhbi (2012) say that local Saudi companies will be forced to make heavy investments in training their internal accountants so that they can have a proper understanding of the principles that define IFRS. Most of these accountants were trained under the old standards, and in all their practice they have not used IFRS as a mandatory reporting standard within the country. However, things have changed, and they have to adjust to the new changes. They have to learn how to determine the appreciated or depreciated value of assets of the companies they work for in the country. They have to know how to factor in such appreciations or depreciations when preparing financial statements. It may take a while for these accountants to understand the new standards fully. In the meantime, individual companies will be forced to spend more resources on training their accountants.

Increased Asset Volatility

According to Wahlen, Jones, and Pagach (2013), the traditional accounting practices that insisted on using historical prices of assets partly helped in regulating the cost of some assets, specifically land. However, the new system brought about by IFRS requires firms to regularly value property as one of the assets whose price often change whether or not it is put into use. Bellandi (2012) says that there is a possibility that the country will witness a sharp increase in the value of land in the days to come. Companies holding large tracts of land will try to use it as leverage to show that they have a strong asset base, especially when planning to get external funding either through financial institutions or in the stock market. The country may start witnessing cases of the constant rise in the cost of this asset as companies and individuals try to increase their wealth by holding large tracts of land.

The government may not have the capacity to control that price volatility as it did in the past under the traditional accounting standards. It must allow the forces of demand and supply to determine such rates as required under the new standards. However, Chatterjee (2014) warns that the poor may be negatively affected by the new system. In such a highly capitalistic system, it will cost more to hold land that they are not putting into proper economic use. As such, they might be forced to sell their small parcels of land to the wealthy, leaving them landless. The new standards may create a scenario where the rich will get richer while those who are poor will become poorer (Babu 2012). It may require the government to come up with other alternative measures of protecting the less fortunate in the society.

Case Study: United Arab Emirates 

According to research by Irvine and Lucas (2006), the United Arab Emirates has never had a local GAAP because the country has been relying on the internationally accepted accounting practices. The UAE Accountants and Auditors Association (UAE-AAA) is the national authority and professional body for the auditors and accountants responsible for recommending accounting standards to be legislated upon by the legislative authority (Accounting and Auditors Association 2017). On July 1, 2015, the UAE Commercial Companies Law No. 2 came into force, requiring all companies to comply with IFRS when preparing their financial statements (Wiley 2014). The new law affected all the four major public securities markets in the country. They include NASDAQ Dubai, Dubai Financial Market PJSC, Dubai Financial Services Authority (DFSA), and Abu Dhabi Securities Exchange (Squalli 2005). All companies listed in these securities exchange markets are required to embrace IFRS when preparing their financial statements. The country introduced both IFRS and IFRS for SMEs to take care of the small and medium sized companies in the country. All foreign corporations operating in the country are required to embrace these standards before they can be listed in any of the above major securities exchange markets. However, some government entities still use International Public Sector Accounting Standards (IPSAS) because of the nature of their operations (Irvine & Lucas 2006).

The IFRS standards used in the United Arab Emirates are issued by the International Accounting Standards Board (IASB). The IFRS Foundation has oversight authority over operations of the board. In a report by Alyammahi (2013), the United Arab Emirates did not find it challenging when it came to adopting the IFRS because it had been using international accounting practices before. The absence of local GAAP made it easy for the local accountants to swiftly change to the new international standards because they were used to international standards which do not have major variation from IFRS. This is a privilege that local accountants in Saudi Arabia do not have. The UAE has found ways of using these international accounting principles while at the same time ensuring that Sharia teachings are adhered to as stated in the Quran. For instance, Murabaha and tawarruq are used in place of riba. Other products such as musawamah, musharakah, Sukuk are used to avoid riba or gharar, which are illegal as per the Islamic teachings (Alyammahi 2013). The system has worked well in the United Arab Emirates, and other Islamic countries such as Saudi Arabia may need to follow the same principles and strategies when introducing the IFRS.

Sharia and Its Impact on the New Accounting Standards

Islamic finance, also known as Sharia-compliant finance, refers financial practices strictly based on Islamic law. According to Tsionas (2014), there are specific financial practices which are forbidden under Islamic finance. Riba, gharar, and maysir are strictly prohibited in Islamic finance. When borrowing from financial institutions, it is also a requirement that the bank must ensure that the activity for which the money is borrowed is not haram (illegal under Islamic teaching). Selling of pork and alcoholic beverages is considered haram. As Saudi Arabia embraces IFRS, some issues may arise because of various contradictions between Islamic law and the new standards. For instance, in the Western countries, companies often earn huge profits from activities that involve speculations. This practice may be unavoidable in the country under the new standards.

Given that all assets within a company will be regularly evaluated to get their current value, there is a possibility that the value of land may start being speculated. As the demand for this asset rises, auditors may be forced to increase the book value of property owned by companies based on the market forces. It may force the government to find ways of managing such speculations (Bliss et al. 2013). The new standards will empower companies, especially in an economy that is increasingly becoming capitalistic, by enabling them to come up with true market value for their products. Being a country that is still governed by strict Islamic principles, it may be necessary for the government to be actively involved in the implementation of the new policies.

Some of the Sharia laws have limited impact when it comes to the implementation of the new accounting standards. However, through a commitment by both the government and stakeholders in the business community, it will be possible to find a way of making the new accounting standards work without adversely infringing on the Islamic principles. It may be necessary for the country to emulate the United Arab Emirates, which has successfully introduced IFRS in a way that does not go against Islamic teachings. Some regional countries such as Indonesia have opted to embrace IFRS selectively. In fact, Indonesian GAAP which is known as Indonesian Financial Accounting Standards (IFAS) is still in use instead of IFRS. The country borrows heavily from the International Accounting Standards but has opted to embrace some of the traditional practices in line with the Islamic law, making its accounting reporting standards different from that used by countries which have fully embraced IFRS (Archer & Abdel 2013). The new standards, if implemented properly, will have long-term benefits to local companies in Saudi Arabia keen on expanding their operations to the global market and those that want to get funding from international financial institutions.

In this paper, the researcher was interested in determining the impact of conversion to full International Financial Reporting Standards in Saudi Arabia. The research question indicates whether the IFRS standards are going to be compatible in Saudi Arabia.

The main knowledge gap that comes out is how the government plans to deal with the incompatibility of some of the IFRS principles with Sharia practices. Saudi Arabia is governed by strict Islamic principles, and the business community sometimes has to adjust to these principles. It is not yet clear how the government will regulate the new standards without infringing on Islamic laws. It is also not clear yet how the government will be able to control speculative appreciation of some assets such as land. If the government controls speculative appreciation by giving a standard price for assets regarding the IFRS principles, they have to be compatible in Saudi Arabia.

A knowledge gap exists in the classification of Zakat. It is an obligation paid by Saudi companies which comprise 100% Saudi nationals. The classification is unique to Muslim countries because other nations use the International Finance Reporting Standards which are not the subject to Zakat. Therefore, it is important for professionals and policymakers to come up with a standard classification method to be used in reporting Zakat using the International Financial Reporting Standards. Zakat can only be implemented in Muslim countries where they hold 100% stake in a company. In case this is not entirely implemented, the IFRS standards cannot be compatible in Saudi Arabia.

Another knowledge gap is the implementation of Sukuk’s according to the IFRS principles. The IFRS principles indicate that if a company or a government wants to borrow funds from an individual, they must issue bonds. Bonds are debts instruments. They show the amount borrowed, coupon rate, and the principal amount to be paid after a maturity date. However, SOCPA rules state that Suku’s are Islamic bonds in terms of which an investor gets returns to their investment without paying interest. According to the Islamic laws, Riba that is a type of interest rate is prohibited. According to the International Finance Reporting Standards, individuals are encouraged to invest in bonds and get guaranteed returns based on the fixed or variable interest rate. In Sukuk’s, an investor is allowed to have a common share of the company’s assets, whereas, in bond, companies owe a debt to a bondholder. It is crucial for concerned parties to come together and negotiate full implementation of Sukuk into the IFRS principles without infringing on the Islamic rights. There should be a clear distinction between bonds and Sukuk’s for full implementation of IFRS.

A research gap also exists in the classification of financial liabilities. SOCPA promotes financial products known as tawarruq. This financial product allows customers to acquire an asset from the bank and sell it later at a predetermined price. They do not charge interest rates because the Islamic laws prohibit such operations. Therefore, it will be a big challenge to classify tawarruq in the financial statement according to the International Financial Reporting Standards because of its acceptance in Muslim countries only. There is a necessity to incorporate this type of production with the IFRS. Nonetheless, it is not clear on how the state may classify tawarruq. Policy makers should come up with solutions on an appropriate method for the classification of tawaruq by making the IFRS standards compatible in Saudi Arabia.

Comparative Analysis

The Saudi Organisation for Certified Public Accountants suggested adopting IFRS regulations. There are several differences between SOCPA and IFRS to be taken into consideration. Some notable differences include the classification of liabilities, inventories, income statement, taxation, Zakat, property, plant, and equipment.

Classification of Liabilities

A liability is a financial obligation incurred in the course of a business operation. In this case, SOCPA and IFRS demonstrate different ways of liabilities classification. SOCPA regulations indicate that liability with a contractual arrangement should not be placed as a liability. Therefore, when issuing a financial statement, this section would be omitted. According to IFRS, a liability may be classified as a non-current asset (Iqbal 2012).

In regards to the standards, liabilities would be settled over time with certain economic implications on a financial statement.  If an investor wants to buy a business, they must inherit the business which means both profits and liabilities. If an investor buys the business, they may have an obligation to pay the liabilities owed by the firm. This means that liabilities cannot be assumed to be written off by a contract agreement which promises to pay off debts at a later date. IFRS ensure that an investor has a complete and trusted financial statement before investing, which makes it viable to calculate the payback period and the net present value of the business.


According to Iqbal (2012), inventories for SOCPA are not covered meaning that in case an asset depreciates, its final cost is not calculated. In accounting, such operation is known as impairment loss meaning that in case an asset decreases in value, it has an adverse impact on the cash flow. This change must be noted in a financial statement. Impairment mostly happens when a company neglects an asset. IFRS recognise the impairment losses which are reversed. The standards suggest that the inventory should be written off to reduce the net income hence having an impact on a financial statement.

Both IFRS and SOCPA agree that inventory should be entered at the net realisable value though under different conditions. Still, SOCPA permits inventory for particular metals, and IFRS allow inventories for agriculture and mineral products (Iqbal 2012).

In SOCPA, the weighted average method can be used. This process occurs when a factor multiplies certain inventory, and their worth is determined. Also, goods can be valued using the FIFO and LIFO methods. These methods determine the exact value of assets and can be used to determine the inventory accurately and prepare the correct financial statement of a company (Iqbal 2012).

However, in IFRS, the FIFO method is prohibited (Iqbal 2012). FIFO stands for “first in first out” (Onoja & Abdullahi 2015). The first goods to be added to the inventory are the first goods to be taken out of the inventory for sale. Therefore, they are used as an accurate measurement of inventory valuation where the cost of goods sold is calculated (Onoja & Abdullahi 2015).

Income Statement

There are several differences in understanding the essence of income statement between SOCPA and IFRS. First of all, there is a difference with foreign currency denomination. According to SOCPA, foreign currency is recognised and recorded regarding Saudi Riyal only. If a foreign company uses US dollars in Saudi Arabia, the company can get their income statement in Saudi Riyal (Iqbal 2012). This is a disadvantage to foreign companies because they are not aware of the exact value of their businesses when they start operating in the country. Also, overseas companies cannot trade due to foreign exchange variations. High inflation rate causes currency depreciation and low purchasing power of commodities. All investors hedge against risk and avoid foreign exchange risk by taking appropriate measures.

IFRS stipulate that any foreign transaction should be recorded in the denomination of that currency (Iqbal 2012). This is applicable and enjoyed for investors globally since it cuts across every member country. When an American investor invests in Saudi Arabia, the income statement will be denominated regarding American dollars. This will show the assets and liabilities of the business. After that, investors of the company can decide on what amount of cash to invest in the firm. IFRS are adhered to by member states, and the balance sheet is indicated in foreign currency. However, the SOCPA insists that all companies in Saudi Arabia should use the local currency.

It is clear that regarding foreign currency, IFRS are recommended because they show the external currency of the company rather than the local currency. This helps to plan and facilitate investment operations because a company can measure its profit or loss using its home currency without worrying about price fluctuations. Also, the use of foreign currency helps to hedge against foreign exchange rate risk. When there is inflation in a country, it affects the purchasing power, as well as local and international business, especially if the business uses local currency to prepare the financial statements. Therefore, using a foreign exchange is the best solution to hedge against exchange rate fluctuations.

Property, Plant, and Equipment

According to the traditional SOCPA requirements, only pre-operating costs can be recognised. Expenses incurred during the setting up of property, plant or equipment. After that, in case of a wear and tear of the equipment, they will not be recorded in the income statement.

According to IFRS, operational costs should be capitalised (Iqbal 2012). For instance, any expense incurred during the testing of the plant should be indicated in the financial statement to clarify depreciation costs in the assets. Also, the reporting standards state that the cost reported on the balance sheet should be less than the cost of depreciation and impairment losses. The depreciation value is calculated by taking the original cost of an asset and then subtracting it from the salvage value after the useful life of the property. Likewise, the impairment loss is derived by subtracting the market value of an asset with the value of the asset on the balance sheet. Both the methods of depreciation and impairment loss ensure that an asset gets its approximate value before it is entered into the balance sheet

Modification of Standards

In order to meet the IFRS requirements, some amendments have been done by SOCPA. Some of those modifications and additions are the disclosure of information and the presentation of revenue.

Addition of Disclosed Information

SOCPA 1 and SOCPA 2 traditional guidelines argued that if an investor wanted to invest, they must solely examine the return of the business and not rely on other factors. Also, investors must know the history, nature, financial instruments of the business they want to acquire, and the exact valuation of the business to avoid acquisition at high prices. When an investor pays an exorbitant amount for a property, they may end up getting losses thus delaying the payback period of the project. Also, the cash flow may be inconsistent which may cause massive losses to the investor. Therefore, it is necessary to make wise business decisions, and the first step is to have adequate knowledge about the firm. The modifications of new standards indicated additional information regarding the size, nature, and all transactions involved. All these factors are very crucial to determine the net present value of the business, as well as the payback period. The returns in business help an investor to make projected cash flow and determine an appropriate payback period for the project because the nature of the firm determines the profitability of the business. The primary objective of any business is to make profits which further guarantee the business of continuity. If a company continue losing, it cannot be sustained but has to be closed. The nature of the firm will determine if the business can make fast moving products which guarantee profits thus continuity of the product and the firm. The modifications state that the inventories should be classified according to materials, merchandise, production supplies and finished goods. This new standard is completely embraced.

Presentation of Revenue

In the old standards, revenues would not be classified differently. As a part of modifications, an addition was done in the revenue section. It was divided into three sections: finance revenue, revenue from central operations, and other revenue. The business can get revenue from other sources other than the business itself. This money can only be used to propel the business to another level. Revenue from main operations means that a company finances its activities. For instance, a financial institution can get money from its profits and then return this money back into the business.


International Financial Reporting Standards have become popular, not only in Europe where it started but also in many other countries around the world. In a global society where geographic boundaries are increasingly being eliminated in the business world, it has become necessary for the accounting standards and practices to be harmonised. Companies are finding it necessary to expand their operations to other global markets. Sourcing for funds in the international financial market has also been seen as being less expensive and more reliable than local supply. As seen in the review of the literature, in the globalised business market of today, firms need a common financial reporting standard that can easily be interpreted across the border. They need to ensure that their books of account can easily be understood by foreign investors who may be interested in doing business with them. They also need to understand books of account of foreign companies that they want to partner with in their expansion strategies. That is why IFRS has been considered one of the most significant advancements witnessed in the field of accounting over the recent past.

Saudi Arabia has made a bold step of introducing these standards in the country. In the past, companies used local GAAP that many stakeholders have criticized as being inadequate in the current competitive business environment. The move was seen as a deliberate effort by the government to position local firms as global companies capable of competing favourably against other companies in the international market. However, some challenges lie ahead that the stakeholders must be ready to deal with effectively. A limited number of practising professional accountants, principles of Sharia, and resistance from a section of the stakeholders may have a negative impact on the implementation of this new system. It is believed that the local IFRS will be comparable to those used in other countries if Saudi Organisation of Certified Public Accountants makes adjustments in the right manner and with proper consultation.


International Finance Reporting Standards (IFRS) aim at promoting transparency and accountability among the accounting professionals around the world. They set same instructions for preparation of financial statements which follow the same procedures and guidelines. During a short run, the impact of these standards has been spread through many European countries, as well as other regions globally. Still, the analysis of IFRS proves that it is not enough to create a new requirement and introduced it to society. It is necessary to investigate its possible effects, identify positive and negative aspects of the work with such standards, and find out the required portion of harmony in terms of which it can co-exist with other standards. Nowadays, many organisations find it effective to use different payment methods and develop new operations in order to obtain new results and develop new types of business relations. The idea of funding in the global market is complex because companies want to save their money but be confident in the quality of services and their reliability. The process of business globalisation has its pros and cons in the development of IFRS. Some companies are eager to use them just in order to find out a good financial system. Still, there are many organisations which want to get new guarantees so that they continue comparing IFRS with other alternatives available to that at the moment.

In its turn, SOCPA has a different structure from IFRS. Some of the notable differences between SOCPA and IFRS include classification of liabilities, inventories, income statement, taxation and Zakat and property, plant and equipment. Saudi Arabia has made a bold step to introduce these standards and modified the existing standards to match the international level. The modifications done are Zakat payable, the disclosure of information, the classification of financial liabilities, and the presentation of revenue.

In the past, companies used local GAAP that many stakeholders criticized as being inadequate in the current competitive business environment. The move was seen as a deliberate effort of the government to position local firms as global companies capable of competing favourably against other companies in the international market. However, some challenges lied ahead that the stakeholders must be ready to deal with effectively. Certain positive and negative outcomes may be observed by shareholders in case they decide to use new accounting services and systems. The comparison of IFRS and SOCPA is a unique chance to get a consultation, learn something new, and be ready for a new step in the world of business. These amendments continue assisting in an easy preparation of the financial documents which have opened Saudi Arabia for global investors.


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