4.

Accounting Standards and Financial Reporting Requirements

Ernst & Young, Riyadh

Accounting books and records

The Ministry of Commerce and Industry (MOCI) requires that all companies and establishments (with capital that exceeds SR100,000) should keep the following books of account in Arabic within the Kingdom:

daily journal; general ledger; inventory book this is a comprehensive trial balance of all assets, liabilities and results for the year, which should be comparable to a detailed balance sheet and income statement.

These requirements were enforced by Royal Decree in July 1989. Taxpayers must maintain Arabic accounting records within the Kingdom, and field inspections are frequently carried out by the Department of Zakat and Income Tax (DZIT). Computerized accounting systems are allowed, provided that they comply with the requirements of the MOCI and that Arabic printouts of the accounts are generated on a regular basis. A penalty of SR5,000 is imposed where a company does not comply with the requirements for Arabization. There are also tax implications if no Arabic books are properly maintained. To help English speaking taxpayers, some companies have computerized English and Arabic translation services.

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The Ministry of Finance controls the enforcement of these requirements by having the DZIT report to the MOCI those cases where companies do not comply with Arabization rules.

Accounting standards
Companies registered in Saudi Arabia are required to comply with the accounting standards issued by the Saudi Organization of Certified Public Accountants (SOCPA). In case no SOCPA accounting standard exists, International Financial Reporting Standards (IFRS) are to be used as a guide. The major accounting and auditing regulations are contained in the following:

Regulations for Companies; Income Tax Regulations; Saudi Arabian accounting and auditing standards issued by SOCPA; additional accounting standards issued for financial institutions by the Saudi Arabian Monetary Agency (SAMA); IFRS.

The regulations require that financial statements should include auditors report, balance sheet, statements of income, cash flows and changes in the shareholders equity and notes to the financial statements. Auditors are required to be licensed by SOCPA in Saudi Arabia, which functions under the auspices of the MOCI. It has been vested with the responsibility of monitoring and guiding the auditing profession, issuing auditing standards and accounting principles and enforcing the rules and regulations relating to the licensing of auditors and reporting violations.

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Specific standards and regulations

Certain accounting standards and regulations for financial statements presentation include the following:

in cases where the losses of a limited liability company reach threequarters of its share capital, the partners must convene a meeting to determine whether the company shall continue to exist or be dissolved before the expiry of the term specified in its articles of association. Such decision should be published in the Official Gazette; limited liability companies are not allowed to lend money to their partners because lending transactions are considered to be a banking activity and a means of repaying capital, and therefore a violation of the Banking Control Law and the Regulations for Companies; companies assets cannot be revalued except in cases of reorganization or liquidation. This is intended to prevent abuse by fictitiously overstating the value of property, plant and equipment; income tax for a wholly-owned foreign company is charged to the income statement; zakat for companies wholly owned by Saudi or GCC nationals is charged to the income statement; income tax and zakat on mixed ownership companies is charged to retained earnings and may be deducted from dividends.

Financial reporting
Filing with MOCI
All publicly-held and limited liability companies are required to file copies of the board of directors report and audited financial statements with the MOCI within six months after their financial year-end. In addition, manufacturing entities are required to file a performance report including financial and operational ratios.

Filing with the DZIT

All incorporated entities operating within Saudi Arabia, regardless of ownership, are required to file a tax and zakat return at the DZIT and pay any taxes/zakat due. For detailed information in respect of filing with the DZIT please refer to Chapter 4.6.

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Audit requirements
Companies are required to have annual independent audits. Joint stock companies and limited liability partnerships must appoint at least one independent auditor, and banks are required to have two independent joint auditors. The auditor must be a licensed accountant. Banks and joint stock companies auditors must have been registered for more than five years.