Ac­count­ing shake-up presents chal­lenge for Saudi com­pa­nies

Kuwait Times - - BUSINESS -

Saudi Ara­bian com­pa­nies al­ready grap­pling with the ef­fects of low oil prices and gov­ern­ment aus­ter­ity mea­sures face a fresh chal­lenge from new ac­count­ing stan­dards that could pro­vide wind­fall gains for some but sad­dle oth­ers with higher charges. As part of ef­forts to bring the Saudi stock mar­ket into the global in­vest­ing main­stream, the Cap­i­tal Mar­ket Au­thor­ity has told the na­tion’s 175 listed com­pa­nies to adopt In­ter­na­tional Fi­nan­cial Re­port­ing Stan­dards (IFRS) from the start of 2017. Most Saudi com­pa­nies have used lo­cal ac­count­ing stan­dards, known as SOCPA, for decades and a shift to IFRS, which has been re­plac­ing na­tional stan­dards around the world with the ex­cep­tion of the United States, is a com­plex task and a source of un­cer­tainty for in­vestors.

“It seems like there will be a lot of work to be done, both by the com­pa­nies and the au­di­tors,” said Riyad Cap­i­tal eq­uity an­a­lyst San­thosh Balakr­ish­nan. “There is a lack of clar­ity on how this will im­pact earn­ings per share, es­pe­cially for com­pa­nies with more com­plex struc­tures and in­ter­na­tional af­fil­i­ates.” It is clear, how­ever, that IFRS could be a boon for some busi­nesses, al­low­ing them to revalue as­sets that have been on their books for years. SOCPA re­quires as­sets to be val­ued at cost when they are ac­quired with no sub­se­quent reval­u­a­tion. IFRS, how­ever, re­quires im­pair­ments to be as­sessed quar­terly, with an an­nual val­u­a­tion on the resid­ual value of fixed as­sets.

“Reval­u­a­tion could in­crease as­set val­ues of most com­pa­nies be­cause of their cur­rent cost-based treat­ment,” Al Ra­jhi Cap­i­tal said in a re­search note. Val­ues of some as­sets could in­crease sig­nif­i­cantly, serv­ing to re­duce com­pa­nies’ re­ported lever­age ra­tios, an­a­lysts have said.

WIN­NERS AND LOSERS

Ma­jor ben­e­fi­cia­ries could in­clude real es­tate-related busi­nesses such as de­vel­oper Dar Al-Arkan, which had a 3.7 bil­lion riyal ($987 mil­lion) in­vest­ment prop­erty val­u­a­tion on its books at the end of last year. How­ever, the sit­u­a­tion is com­pli­cated by an im­pend­ing tax on un­de­vel­oped ur­ban land, which could make it more ex­pen­sive to hold large land banks. Fur­ther­more, the reval­u­a­tion process it­self could prove un­pre­dictable, ow­ing to a lack of liq­uid mar­kets and of val­u­a­tion ex­per­tise in some ar­eas. Mean­while, IFRS could be neg­a­tive for some in­dus­trial com­pa­nies that have to record higher de­pre­ci­a­tion charges for as­sets. For ex­am­ple, an­a­lysts think that ce­ment com­pa­nies with decades-old kilns could face higher de­pre­ci­a­tion ex­penses. Com­modi­ties-linked com­pa­nies such as Na­tional In­dus­tri­al­iza­tion (Tas­nee) could also be hurt. NCB Cap­i­tal said the ti­ta­nium diox­ide pro­ducer could in­cur one-off charges be­cause of the com­mod­ity’s weaker prices this year. Most dif­fi­cult to pre­dict is the im­pact on the big­gest and most com­plex com­pa­nies, such as petro­chem­i­cals and met­als con­glom­er­ate Saudi Ba­sic In­dus­tries (SABIC).

“SABIC has a more com­pli­cated cor­po­rate struc­ture than other listed shares, so we be­lieve the IFRS changes are a short­term con­cern,” NCB Cap­i­tal’s Iyad Ghu­lam said. Only banks and in­sur­ers cur­rently fol­low IFRS in Saudi Ara­bia, while a small num­ber of listed com­pa­nies-in­clud­ing tele­coms group Eti­had Eti­salat (Mo­bily) — have par­tially con­verted.

Some com­pa­nies are mak­ing the change early. SABIC, for in­stance, has said it ex­pects to pub­lish earn­ings in the IFRS for­mat by the fourth quar­ter of this year. Oth­ers could miss the dead­line for con­ver­sion as they con­tend with is­sues such as rev­enue recog­ni­tion, cost struc­tures and iden­ti­fi­ca­tion of em­ployee ben­e­fit schemes, though the CMA has not said how it will deal with any strag­glers.

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