Implementing IFRS in Saudi Arabia: evidence from publicly traded companies

• Pages: 243-273
• DOI: https://doi.org/10.1108/IJAIM-04-2019-0049
• Date: 04 March 2020
• Published date: 04 March 2020
• Author: Mohammad Nurunnabi,Eva K. Jermakowicz,Han Donker
• Subject Matter: Accounting methods/systems,Accounting & Finance,Accounting/accountancy

Implementing IFRS in Saudi

Arabia: evidence from publicly

traded companies

Mohammad Nurunnabi

Department of Accounting, Prince Sultan University, Riyadh, Saudi Arabia,

and St Antony’s College, University of Oxford, Oxford, UK

Eva K. Jermakowicz

Department of Accounting, College of Business, Tennessee State University,

Nashville, Tennessee, USA, and

Han Donker

Department of Accounting, College of Business, Central Washington University,

Ellensburg, Washington, USA

Abstract

Purpose –The Saudi Organization for Certif‌ied Public Accountants (SOCPA) requires that

International Financial Reporting Standards (IFRS),asendorsedinSaudiArabia,beusedbyalllisted

and unlisted companies. This study aims to provide insight into IFRS implementation problems, based

on a survey sent to Saudi Arabian companies listed on Tadawul, the Saudi stock market (i.e. f‌inancial

hubintheMiddleEast).

Design/methodology/approach –The survey focused on the impact that IFRS conversion has had on

companies, their accountingand their f‌inance strategies. The benef‌its and challenges of the adoptionof IFRS

are analyzed, including matters pertaining to the level of understanding and experience with IFRS,

perceptions about the quality of IFRS and the impact of adoption of IFRS on consolidated equity and net

income.

Findings –Thesurveyhadaresponserateof72percent.Theresultsindicateamajorityof

respondents support conversion to IFRS as it results in higher quality f‌inancial reporting; the most

important expected benef‌its of adopting IFRS include greater reporting transparency and improved

comparability with other businesses; other expected benef‌its include harmonization of internal and

external reporting, and increased cross-border investment opportunities; the IFRS process is costly

and ties up resources because of its complexity and training needed and companies expect increased

volatility in reported f‌inancial results that will impact share option plans and/or other incentive plans

tied to prof‌its. However, the authors f‌ind strong support among preparers of the f‌inancial statements for

IFRS, as evidenced by higher agreement among respondents to the survey on the benef‌its of adopting

IFRS, rather than on the costs of its adoption. Furthermore, the analysis shows that the likelihood of

Saudi Arabian f‌irms that are in favor of adopting IFRS decreases if the audit f‌irm is one of the Big 4. The

reason for this negative relationship could be that the cost of transition toward IFRS will be high.

Therefore, Saudi Arabian f‌irms will not favor a transition toward IFRS when their audit f‌irm belongs to

the Big 4. Most diff‌icult to implement IFRS, as listed by respondents, include those on f‌inancial

instruments, revenue, leases and employee benef‌its.

Originality/value –The authors show how economicand environmental factors play a critical role in the

IFRS implementation process. This study should be important to all countries worldwide that are in the

process of adoptingIFRS.

Keywords Survey, IFRS, Saudi Arabia, Implementation

Paper type Research paper

Implementing

IFRS in Saudi

Arabia

243

Received19 April 2019

Revised8 July 2019

Accepted21 July 2019

InternationalJournal of

Accounting& Information

Management

Vol.28 No. 2, 2020

pp. 243-273

© Emerald Publishing Limited

1834-7649

DOI 10.1108/IJAIM-04-2019-0049

The current issue and full text archive of this journal is available on Emerald Insight at:

https://www.emerald.com/insight/1834-7649.htm

1. Introduction

The mission of the International Accounting Standards Board (IASB) is to develop

International Financial Reporting Standards (IFRS) that would bring transparency,

accountability and eff‌iciency to f‌inancialmarkets around the world. Such standards should

foster trust, growth and long-term f‌inancial stability in the global economy (IFRS

Foundation, 2018). The adoption IFRS around the world represents, perhaps, the most

important accounting regulatorychange in recent years. Today, more than 144 jurisdictions

require IFRS to be used in consolidated f‌inancial statements of listed companies, including

86 jurisdictionswhere IFRS is required for all domestic companies (IFRS Foundation,2018).

Adhering to the IASB’s vision of one set of global accounting standards, the Saudi

Organization for Certif‌ied Public Accountants (SOCPA) decided to require all publicly

traded companies to apply IFRS, as endorsed in Saudi Arabia, from 2017, and unlisted

companies from the 2018 f‌iscal year. Since joining the Group of 20 Finance Ministers and

Central Bank Governors (G20) in 2009, IFRS has been viewed as an importantmilestone in

Saudi Arabia’s future economic development. The convergence from domestic GAAP to

IFRS is expected to bring quality, transparent and comparable information to investors in

making optimal resource allocation decision. Furthermore, high-quality f‌inancial reporting

under IFRS should attract foreign direct investments to the country and (Choi and Meek,

2013;Deloitte, 2016).

Saudi Arabia is the second largest state in the Arab World after Algeria, having a

population of 32.2 million people. Its recent economic history is largely predicated on the

discovery of oil in the 1930s and becoming the world’s largest oil supplier.The country has

recently revealed its ambitious economic development program, which aims at increasing

foreign direct investment (FDI) and widespread diversif‌ication of the economy to reduce

dependence on oil by 2030 (Nurunnabi, 2017a). To achieve this, new investment laws have

been enacted, which, for example, allow for businesses to be wholly owned by foreign

investors, reduce corporate income taxes and permit expatriates to own commercial or

residential real estate in all but the two holy cities of Saudi Arabia (Herath and Alsumi,

2017). Consequently,the Saudi economy is strongly interconnected to other economiesin the

world. Many Saudi listed companies have subsidiaries in other countries and many

international companies have startedto establish subsidiaries in Saudi Arabia. In addition,

most of the companies that are listed in Tadawul have many large transactions with the

internationaleconomy.

Using a unique setting in Saudi Arabia, we extendprior research on the adoption of IFRS

in a developing country (Bova and Pereira, 2012). The country setting for this paper, Saudi

Arabia, provides an interesting study of how to manage support for the globalization of

accounting standards concurrently with support for meeting the requirements of Islamic

law requirement. “Livingby Islamic values”is one of the key principles underpinning Saudi

Arabia’s Vision 2030 (http://vision2030.gov.sa/en/node/11). This has implications for the

accounting and f‌inancial industry, the main elements of which must remain Sharīʿah-

compliant. Among key Islamic f‌inance, principles is the prohibition of Riba (usury) and

Gharar (excessive uncertainty). By making the application of IFRS required for all

companies, Saudi Arabia has recognizedthe need to participate in the opportunities offered

by globalization and the importance of adequate f‌inancial reporting geared toward

supplying the informationnecessary for making investment decisions.

Research has shown that all accounting standards international or national are greatly

inf‌luenced by surrounding environmental factors –social, political, legal and economic –

likely to inf‌luence the accounting systemin any country. This inf‌luence has been discussed

and investigated by many accounting authors (Nobes, 1983;Gray, 1988;Hofstede, 2001;

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