Capital Market Authority has told the nation's 175 listed companies to adopt International Financial Reporting Standards from the start of 2017
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 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 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.