The Saudi Organization for Chartered and Professional Accountants, represented by the Accounting Standards Committee, adopted the standard "financial reporting on liquidation basis: principles and requirements of proof, measurement, presentation and disclosure" and the standard "financial reporting during bankruptcy proceedings: preventive settlement or financial reorganization".
This adoption followed a study of the need for the domestic market and the reality of financial reporting on liquidation and bankruptcy cases, especially after the issuance of the Bankruptcy Law, and the absence of international standards covering those topics.
In order to achieve this accreditation, SOCPA's Accounting Standards Committee has carried out a number of due processes and discussed them during several Committee meetings to ensure that the above-mentioned standards are issued with the quality necessary to achieve their objectives, including:
1. Conducting a research study of international best practices and the reality of financial reporting locally.
2. Preparing draft standards in the light of global best practices and in proportion to the local legal environment.
3. Holding dialogue meetings with stakeholders and supervisory bodies to discuss draft standards.
4. Displaying draft standards publicly.
5. Studying the views of interested parties and supervisory authorities, and update the draft standards accordingly.
6. Adopting standards in their final form.
Highlights of the "liquidation-based financial report standard: principles and requirements for proof, measurement, presentation and disclosure" include:
- The International Financial Reporting Standards adopted in Saudi Arabia do not contain an appropriate basis for enterprises in the process of liquidation.
- The Saudi Organization for Chartered and Professional Accountants issued this standard to fill this gap by issuing a standard that includes principles and requirements for proof, measurement, presentation, and disclosure when the entity enters into liquidation phase. This standard is a framework for financial reporting, independent from the international standards of financial reporting adopted in Saudi Arabia and other local complementary pronouncements.
- In the process of liquidation, users of financial statements need information to know the general effect of the liquidation of the entity and the value that will be returned to them from their investments or the loss that will be distributed to them after the liquidation is completed.
- The standard shifts the focus of the financial report to the net assets of the entity instead of focusing on measuring income.
The standard applies to the following liquidation cases:
1- Voluntary liquidation: liquidation according to the partners' desire not to continue the business and liquidation of the company before the period specified for it. The voluntary liquidation decision is issued by the partners or the general assembly.
2- Compulsory liquidation: it is either:
A- Judicial liquidation: the liquidation of the company according to a judicial decision issued by the competent judicial authority. And most often it is due to a dispute between the partners or by filing a lawsuit from the shareholders at the competent judicial authority to demand the liquidation of the joint-stock company, or
B- Liquidation due to the expiration of the legal life of the company, and the exclusion of the possibility of extending it.
- When the entity enters the phase of liquidation, the legal unit is considered predominant over the accounting unit, because the liquidation falls on the legal unit, and then the appropriate financial information for the beneficiaries is focused on the assets and liabilities of the legal unit, including the expected monetary value from excluding the investments of that legal unit. Hence, the entity that prepares its financial statements on the basis of liquidation must prepare non-consolidated financial statements in accordance with this standard as being its general purpose financial statements, and measure all its investments with the cash amount or compensation expected to be collected upon excluding those investments to implement the liquidation plan.
Liquidation is based on the following:
1- Measuring the assets of the entity with the cash amount, or compensation, expected to be collected upon excluding those assets.
2- Measuring obligations with the contractual amount due to settle those obligations.
3- Recognizing other assets that were not established in accordance with the financial reporting framework applicable to the entity when it was operational (for example, trademarks) when an estimated value for it can be reliably identified, and it is expected that it will be sold in liquidation or the settlement of obligations thereto.
4- Recognizing the entitlement of the expected costs of excluding the assets or other elements expected to be sold in the liquidation, and displaying them in the list of net liquidation assets minus the related assets, or presenting those costs in total separately from the assets, when they can be estimated reliably and when the assumptions of this estimate are verifiable.
5- Recognizing the entitlement to costs and items of income expected to be incurred or earned (for example, salary costs or income from pre-existing orders which the entity expects to complete during the liquidation) until the end of the liquidation, when they can be estimated reliably and when the assumptions of this estimate are verifiable.
- The complete set of financial statements, upon application of the liquidation basis, shall consist of the following:
1- A list of net assets, which shows the entity's assets and liabilities.
2- The list of changes in net assets, which shows the items that led to the change in net assets between the beginning and end of the fiscal period/year.
3- Notes, which provide detailed information to clarify the amounts recorded in the financial statements.
- The standard requires an entity to disclose a set of appropriate information to understand the list of net liquidation assets and the list of changes in the entity's net liquidation assets. The entity shall contain the disclosures information about the monetary amounts or other compensation that the entity expects to collect and the value of existing or potential liabilities.
Among the most prominent features of the “Financial Reporting Standard during Bankruptcy Procedures: Preventive Settlement or Financial Reorganization” are the following:
- Although entering into one of the preventive settlement procedures or financial reorganization according to the Saudi bankruptcy law does not change the status of the entity as a going concern, it is one of the important events that change the needs of users of the financial statements for appropriate information, and therefore there is a need to add requirements that display and disclose the financial report that complements the requirements of international standards to provide that appropriate information.
- The standard does not apply to the restructuring procedure, including rescheduling or negotiating debts, as long as this was not done in accordance with bankruptcy procedures in the Saudi bankruptcy law and its implementing regulations.
- The requirements of this standard are complementary to the requirements of the International Financial Reporting Standards in their full version, and the IFRS for Small and Medium Enterprises, and are not inconsistent with them. - Accordingly, this standard must be read in the context of the International Financial Reporting Standards, standards, and other complementary pronouncements approved in Saudi Arabia.
- The standard provides additional requirements for display and disclosure to provide useful information to users of financial statements regarding the impact of bankruptcy procedures on the financial report.
- The standard requires the list of financial position of the entity subject to the procedure, to distinguish the obligations existing before the request to open the procedure and subject to negotiation or omission from non-subject obligations (such as fully secured obligations that are not expected to be compromised or dropped) and from obligations after the application is submitted.
- The standard requires that the profit and loss statement clearly distinguish income and expenses (including professional fees), any realized gains or losses, and any provisions for losses resulting from preventive settlement or financial reorganization, as clearly as elements of a preventive settlement or financial reorganization.
- The standard requires distinguishing the cash flows resulting from entering into a preventive settlement procedure or financial reorganization within the operational, investment, and financing activities of the cash flow statement as elements of a preventive settlement or financial reorganization.
- The standard requires an entity to provide additional disclosures when it enters into one of the preventive settlement procedures or financial reorganization when applying the International Financial Reporting Standards or the International Financial Reporting Standard for Small and Medium Enterprises, as applicable to the entity.