What are the 4 principles of IFRS?

In today’s connected global economy, financial transparency is the latest currency. As businesses operate cross borders, which makes the market more unified and the demand for reliable financial reporting has never been greater. The international Financial Reporting Standards (IFRS) are playing the role of legal language for global businesses today. Adopting IFRS is not just a compliance requirement but a strategic move to getting access to the international market, boosting the trust of investors and elevating the credibility of your brand. In KSA, the country’s shift towards alignment with international standards has made it mandatory for listed companies and many other entities regulated by the Capital Market Authority (CMA) and Saudi Organization for Chartered and Professional Accountants (SOCPA) to implement IFRS.

To completely understand the IFRS framework, its four foundational principles are crucial to know.  This blog will further explore those principles, their benefits and challenges in KSA market, lets have a look.

What are International Financial Reporting Standards

IFRS is a set of accounting standards that are recognized globally and issued by the International Accounting Standard Board (IASB) with the aim of standardizing accounting principles across various countries. It offers a single legal set of rules to make financial statements comparable, understandable, and reliable for stakeholders. In 2017, KSA legally mandated IFRS for listed companies on Tadawal, entities regulated by CMA or MOC, and financial institutions regulated by SAMA. It shows the Kingdom’s dedication to transforming into a globally integrated economy with better corporate governance. Although IFRS consists of a wide range of standards but its key four primary principles we will summarize below.

1.   Relevance

Relevance shows that the data provided in financial statements must be competent enough to assist businesses take smart and better decisions. Financial data can only be considered relevant if it helps the stakeholders forecast future performance on the basis of determining past performance. Its key concepts include:

• Predictive: It helps to forecast the future performance
• Confirmatory value: verifies the past achievements and evaluations
• Materiality: Information is considered material and if not included, it might mislead users’ decisions.

In KSA, the companies that are listed on Tadawul must provide relevant information to attract foreign investment and maintain compliance with IFRS standards. If a company provides relevant information about the impact of price volatility on its revenues, it will help international stakeholders predict future outcomes. With the country’s push towards the goals of Vision 2030, the aim is to foster the growth of private sector and foreign direct investment (FDI) and relevant reporting enhances the trust among international investors and encourages economic diversification.

2.   Faithful Representation

Faithful representation shows that the financial information provided must be accurate and shows the true economic substance of the transaction, not just their legal condition. It must be complete, transparent, and error-free. The main components of faithful representation include:

• Completeness: All the required data must be fully completed with all essential details
• Neutrality: All the provided financial data must be unbiased.
• Faultless Data: The information must be free from any errors, with clear disclosure of estimates

As KSA is highly prioritizing transparency and anti-fraud mechanisms in corporate sectors, the demand for faithful representation of finances has become mandatory. Businesses must not exaggerate their earnings or revenues or understate their liabilities even if they seem legal. Because of the rise in anti-money laundering and Zakat/tax compliance requirements in KSA, having a faithful representation not just supports the regulatory compliance but also ensure ethical reporting. Any misleading in revenues or inflating of assets me result in hefty fines and penalties from ZATCA or the CMA.

3.   Comparability

With comparability, users can compare financial statements over time or among different businesses side by side. It represents stability in the implementation of accounting methods and policies. There are two types of comparability which includes:

1. Intra-Company Comparability: Evaluating company’s internal performance over different time periods
2. Inter-Company Comparability: Evaluating different companies or competitors operating in same sector

For better comparability, it is important to use sustainable accounting policies, use proper segment reporting, and disclose any changes in accounting policies. With the diversification in Saudi economy and the implementation of IFRS Saudi Arabia, the need for comparability has become crucial for all businesses. International investors entering in the Saudi Markets also demands financial reports to analyze the financial and operational performance and to compare them with their competitors. IFRS ensures level playing fields and supports cross-border valuation and due diligence.

4.   Understandability

Understandability shows that the financial information must be comprehensive to users that have limited understanding of business, economics, and accounting. To make the documents understandable, it is important to use a clear structure and presentation, avoid the use of any technical jargon, and represent complex statements or data in simpler terms. As much understanding is encouraged, it must also not omit relevant and useful information. Businesses in KSA are still owned by family or held privately, where shifting from traditional local standards like GAAP or SOCPA to IFRS can be demanding, hence the need for understandability in financial reporting has become more necessary than ever. The sudden rise in digital transformation and SME growth in KSA, understandable financial reports help non-technical entrepreneurs in better decision making and external communication with shareholders, banks and regulatory bodies.

Why IFRS Matters for Saudi Businesses?

The implementation of IFRS Saudi Arabia has made it beneficial for businesses to stay aligned with global standard, the various aspects of IFRS helps business through the following ways:

• Relevance: Encourages investor take better decisions based on the accurately provided data
• Faithful Representation: It promotes clarity and minimizes the risk of fines, penalties and legal hurdles
• Comparability: Helps in making better partnerships, attracting foreign investors and facilitates benchmarking
• Understandability: Boost the trust among the stakeholders to clear financial data, it especially helps SMEs and growing businesses.

Benefit of IFRS Implementation

The implementation to IFRS can be demanding but it comes with several benefits such as:

1. Global Comparability: It makes it easier for stakeholders, investors and regulators to compare the financial statements across border which enhances transparency with global investment decisions
2. Access to International Capital Markets: Companies that utilize IFRS attract better international investments as their finance data meets global norms. It also leads to easier listings on international stock markets.
3. Enhanced Corporate Governance: IFRS emphasizes better internal controls, risk management policies, and structured financial reporting which increases accountability.
4. Better Decision Making: With comprehensive and transparent financial reporting, businesses can evaluate their assets for more thoughtful investment decisions.
5. Enhanced Credibility: IFRS implementation shows a business commitment to financial integrity and compliance; it not just elevates their trust across global investors but also boosts their reputation.

Challenges faced in IFRS Implementation in Saudi Arabia

While adopting to IFRS there are several challenges that businesses may face like:

• Less skilled IFRS trained professional specially during the implementation stages
• Traditional accounting systems used by most of the companies are not designed for IFRS
• IFRS integration demands advanced tools for internal controls and documentation
• Translating the complex IFRS concepts into Arabic for local Arabic speaking worker can be tough
• High implementation cost from training to software to consultation may not be budget friendly specifically for SMEs.

The Role of Professional Firms like SS&CO KSA

Accounting and advisory firms like SSCO KSA plays a pivotal role in assisting Saudi Businesses to transition from their legacy systems to IFRS reporting standards, some of the Key services provided by SS&CO include:

• Conversion and Implementation of IFRS
• Audit and Assurance IFRS services
• Zakat, tax and accounting services aligned with IFRS
• ERP systems compatible with IFRS compliance
• Training and skill building sessions for internal finance teams

Hiring firms like SS&CO for IFRS deployment, Tax and accounting services helps them in smooth transition which assist them not only meet the compliance requirements but also open the new doors of opportunities for expanding across the borders.