Saudi Accounting Standards: Full IFRS vs IFRS for SMEs (SOCPA)

Accounting standards are the uniform rules that govern how financial transactions are recorded and presented in the financial statements: the balance sheet, the income statement and the cash flow statement. They exist so that the statements of any two companies can be compared and read in the same accounting language.

Why does that matter to you as a business owner? For three practical reasons:

1. Official acceptance: statements prepared under the endorsed standard are accepted by the Zakat, Tax and Customs Authority (ZATCA), by banks and by investors.

2. Financing: a bank or an investor will ask for financial statements prepared under a recognised standard before extending finance or injecting capital.

3. Meaningful comparison: applying a consistent standard makes year-on-year performance comparisons meaningful, instead of leaving you with numbers whose rules change every year.

The Saudi Organization for Chartered and Professional Accountants (SOCPA) is the body that regulates the accounting and auditing profession in the Kingdom. One of its mandates is endorsing the accounting standards that Saudi entities are required to follow.

SOCPA took a strategic decision to move from the previous local standards to the International Financial Reporting Standards (IFRS) after "endorsing" them locally, meaning reviewing them and adding certain disclosures that reflect Shariah rulings and local regulations.

Adoption ran in two stages:

• Listed companies and public interest entities: the endorsed full international standards, effective from 2017.

• All other (unlisted) entities: effective from 2018, with a dedicated standard made available for small and medium-sized entities.

The official source for the standards and their updates is SOCPA's website, socpa.org.sa.

Full IFRS is the comprehensive version applied by large companies worldwide. In Saudi Arabia it is mandatory for:

• Listed companies on the Saudi Exchange (Tadawul).

• Public interest entities (PIEs): banks, insurance companies and other businesses with a broad impact on the public.

• Any entity that voluntarily chooses to apply the full standards, for example in preparation for a listing or to attract an international investor.

Full IFRS is distinguished by its detailed coverage of every complex case (financial instruments, business combinations, leases under IFRS 16, revenue under IFRS 15) and by extensive disclosure requirements. That depth makes it precise, but also more costly and more complex to apply.

Since 2018, SOCPA has made the "IFRS for Small and Medium-sized Entities" standard available as the default framework for entities that are neither listed nor public interest entities.

This standard was designed specifically to be simpler and cheaper to apply:

• Reduced disclosures: the note requirements are far lighter than under full IFRS.

• Simplified treatments: some of the complex treatments in full IFRS are condensed or removed altogether because they rarely arise in small businesses.

• Less frequent updates: it is not revised often, which reduces the burden of keeping up with changes.

SOCPA added a limited number of amendments (additional disclosures) to reflect Shariah requirements and local regulations. Most small and medium-sized entities in the Kingdom prepare their statements under this standard, and it is the most suitable framework for the majority of business owners.

The practical rule: the larger the business, the more complex its transactions, and the closer it gets to a listing or to institutional financing, the closer it moves to full IFRS. The reverse is equally true. A small private business is well served by the SME standard and saves itself cost and complexity it does not need.

To get to the answer, ask yourself these questions in order:

1. Is your business listed on the Saudi Exchange? Full IFRS is mandatory.

2. Is it a public interest entity (a bank, an insurer, and so on)? Full IFRS is mandatory.

3. Are you planning a listing or looking to attract an international investor soon? Adopting full IFRS ahead of time is preferable.

4. Anything else (a small or medium-sized private business)? The IFRS for SMEs standard is the default and the most suitable choice.

If you are in a grey area (fast growth, multiple branches, potential investors), consult a certified public accountant to settle the question. Switching standards later requires restating the comparative statements and can be expensive.

The choice of standard is not a formality; it changes real numbers:

• Leases: full IFRS (IFRS 16) brings most leases onto the balance sheet as a "right-of-use" asset and a corresponding liability, whereas the SME standard takes a simpler approach to the same treatment.

• Revenue and provisions: the details of recognition and measurement differ, which feeds through to reported net profit.

• Zakat: the Zakat base is built on the balance sheet as prepared under the endorsed standard, so a different classification of assets and liabilities can change both the base and the Zakat due.

That is why your accounting system has to be consistent with the standard you apply, so that your statements and your Zakat and tax returns come out correct at the source.

• Mixing the two standards: applying one treatment from full IFRS and another from the SME standard in the same set of statements, which destroys their consistency.

• Ignoring updates in larger companies: full IFRS changes over time, and failing to keep up with a new standard exposes the statements to a qualified audit opinion.

• No documented accounting policy: without a document that states the standard and the policies followed, the audit becomes harder and lenders lose confidence.

• Using a chart of accounts that does not support the standard: a rudimentary chart of accounts that fails to separate the line items the standard requires forces you to prepare the statements manually and leaves them exposed to error.

Snad is built to produce financial statements that are consistent with the endorsed standard:

• A structured chart of accounts: designed so that assets, liabilities, revenue and expenses are classified in a way that supports preparing the balance sheet, the income statement and the cash flow statement directly.

• Automatic financial statements: the core statements are generated in a structured, audit-ready format instead of being assembled by hand from scattered files.

• Consistency with Zakat and tax: the same figures feed the Zakat and Value Added Tax (VAT) returns, so there is no contradiction between the statements and the returns.

• A documented transaction trail: every journal entry has a clear audit trail, which makes the auditor's work easier and raises lender confidence.

Try Snad free for 30 days and prepare your first set of financial statements under the standard that fits the size of your business, using a chart of accounts that is ready to customise.