* Listed Saudi firms to adopt IFRS by 2017
* IFRS rules could have allowed big swings in valuations
* But regulator directs cost model to be retained initially
* Impact uncertain for large, complex groups
By Celine Aswad
DUBAI, Oct 16 Saudi Arabia's securities
regulator has acted to prevent big swings in the valuations of
companies' assets after they shift to new accounting standards
As part of efforts to bring the Saudi stock market into the
global investing mainstream, the nation's 175 listed companies
are being required to adopt International Financial Reporting
Standards (IFRS) from the start of 2017.
For decades, most Saudi firms have used local accounting
standards, known as SOCPA, which require assets to be valued at
cost when acquired with no subsequent revaluation. IFRS also
requires impairments to be assessed quarterly, with an annual
valuation of the residual value of fixed assets.
In a statement on Sunday, however, the Capital Market
Authority (CMA) directed that for the first three years after
IFRS adoption, companies should continue to use the cost model
when measuring property, plant, equipment and intangible assets.
During this period, they should disclose estimated changes
in the fair value of their assets only in the footnotes of their
financial statements, the CMA said.
The regulator added that it had not yet decided whether to
continue the cost model after the three-year period ended, or
whether to introduce revaluations at that time.
It did not give a reason for its decision, but many changes
in values could have been highly controversial because Saudi
Arabia lacks liquid markets and valuation expertise in some
A Saudi equity analyst, declining to be named because he was
still studying the CMA's decision, said the regulator appeared
to be acting to reassure investors and limit volatility.
"This addresses the concern of how companies with heavy
assets on their books are expected to be impacted," he said.
Before the CMA's decision, many Saudi companies had been
expected to use IFRS to revalue assets that have been on their
books for years. In some cases, values might have increased
several-fold, reducing firms' reported leverage ratios.
"Revaluation could increase asset values of most companies
because of their current cost-based treatment," Al Rajhi Capital
said in a research note published before the CMA's decision.
Major beneficiaries could have included 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.
Meanwhile, IFRS could have been negative for some industrial
companies by obliging them to record higher depreciation charges
for assets. For example, analysts had thought cement companies
with decades-old kilns could face higher depreciation expenses.
Analysts said the impact of IFRS on the biggest and most
complex companies, such as petrochemicals and metals
conglomerate Saudi Basic Industries (SABIC), was
difficult to predict.
"SABIC has a more complicated corporate structure than other
listed shares, so we believe the IFRS changes are a short-term
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
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.
(Editing by Andrew Torchia and Tom Heneghan)