FINANCIAL INFORMATION AND DISCUSSION OF THE MANAGEMENT ANALYSIS
6.3 Significant Accounting Policies
The following is an overview of the significant accounting policies applied in the preparation of these financial statements of the company (Saudi joint stock company) (“Company”). These policies are applied consistently to all periods presented, except for what is mentioned in the bases for preparation Note 2, unless otherwise stated.
Foreign Currency Translation
Translation of Foreign Currency Transactions
Transactions in currencies other than the Company’s functional currency (foreign currencies) are recorded at the exchange rates prevailing at the date of the transactions. Monetary assets and liabilities denominated in foreign currencies are translated at the end of each reporting period at the exchange rates prevailing at that date. Non-monetary items carried at fair value that are denominated in foreign currencies are translated at the exchange rates prevailing at the date when the fair value was determined.
Exchange differences on monetary items are recognized in the statement of profit or loss in the year in which they arise except for foreign exchange differences on monetary items due from or due to a foreign operation that are not likely or scheduled to be settled) and therefore form part of the net investment in the foreign operation) which is initially recognized in other comprehensive income and is reclassified from shareholders’ equity to the statement of profit or loss when the monetary items are settled.
Company’s Foreign Currency Translation Differences
Transactions denominated in currencies other than the presentation currency are recorded at the exchange rates prevailing at the date of the transactions. Monetary assets and liabilities denominated in foreign currencies are translated at the end of each reporting period at the exchange rates prevailing at that date. Exchange differences on monetary items are recognized in profit and loss in the period in which they arise except when other comprehensive profit is deferred to cover qualifying cash flows.
Assets and liabilities included in the financial statements of foreign companies that are issued in their functional currency are presented in Saudi Riyals, which is the functional and presentation currency using the exchange rates prevailing at the end of the year. Revenues and expenses are translated in Saudi Riyals at the weighted average exchange rates during the year or according to the exchange rates prevailing at the date of the transaction for significant transactions.
Changes resulting from retranslation of the opening balance of net assets from foreign operations and changes resulting from translating the net results for the year from foreign operations are recognized in the statement of other comprehensive income.
When there is a change in control of an external operation, the change in exchange rates is recognized in equity and charged to the statement of profit or loss as part of the gain or loss on disposals.
Segments Reports
The operating segment is a component of the company that carries out activities from which it may generate revenues and incur expenses, including revenues and expenses related to transactions with other components of the company.
All segment results are periodically evaluated by the company’s chief operating decision maker so that decisions and evaluation of the performance of the resources allocated to each segment and the financial information available are made separately. .
Segment results that are reported to the operating decision maker include items directly attributable to the segment as well as those that can be allocated on an appropriate basis. The unallocated items mainly consist of corporate expenses and related assets/liabilities (related to the company’s head office) such as head office expenses, research and development costs, related assets/liabilities and zakat assets and liabilities.
Property, Plant and Equipment
Property, plant and equipment excluding freely owned land and properties under construction are stated at cost less accumulated depreciation and impairment losses. In the case of the existence of freely owned lands and real estate under construction, they are valued at cost.
Depreciation is charged on a straight-line basis at the depreciation rates specified for each type of property, plant and equipment.
Depreciation is recognized so that the cost of assets (excluding freely owned land and properties under construction) is written off less their residual value over their useful lives using the straight-line method.
The following are the useful lives used for depreciation.
Years
Buildings 5 to 30
Marina Equipment 10 to 20
Vehicles 4
Marina Machinery and Equipment 5 to 10
Furniture and office equipment 4 to 10
Tools and Equipment 5
With regard to additions and exclusions during the period, depreciation is charged starting from the month of acquisition or capitalization until the month in which the cost of those assets was excluded (the date of exclusion).
Annual Audit of Residual Values and Useful Lives
The residual value of an asset is the current estimated amount that the company would be able to obtain from the disposal of the asset after deducting the estimated costs of disposal if the asset has already reached its expected life and condition at the end of its useful life.
The residual values and useful lives of the assets are reviewed and adjusted, if necessary, at the end of each reporting period. If expectations differ from previous estimates, the change(s) are accounted for as a change in accounting estimates.
Asset Segmentation
Property, plant and equipment often consist of different parts with different useful lives or depreciation patterns. These parts are replaced (independently) during the useful life of the asset. Therefore:
y Each part of an item of property, plant and equipment whose cost is relatively significant to the total cost of the item is depreciated independently (unless one significant part has the same useful life and depreciates another part of the same item of property, plant and equipment, in which case the two parts can be combined together for the purpose of consumption).
y Under the retail curriculum. The Company does not recognize the costs of day-to-day maintenance of the item within the carrying amount of the item of property, plant and equipment. These costs are recognized in profit or loss when incurred. The components of different assets are identified and depreciated separately only for significant parts of an item of property, plant and equipment with different useful lives or depreciation patterns. However, the principles relating to the replacement of parts (which represent the subsequent cost of the replaced part) generally apply to all specified parts, regardless of whether they are significant or insignificant.
Capitalization of costs within property, plant and equipment
The cost of the property, plant and equipment item consists of the following:
y The purchase price, including import duties and non-refundable purchase taxes, net of trade discounts and rebates.
y Any costs directly associated with bringing the asset to the location and condition necessary to operate it in the manner contemplated by management.
y Preliminary estimate of the costs of dismantling and transporting the item and restoring the site on which it is located, and the liability incurred either as a result of purchase
y This item or the result of its use during a certain period for purposes other than the production of inventory during that year.
Subsequent costs are included in the asset’s carrying amount or recognized as a separate asset, as the case may be, only when it is probable that future economic benefits associated with the item will flow to the Company and the cost of the item can be measured reliably. The carrying amount of an installed part is derecognized as a separate asset when it is replaced.
Borrowing costs related to qualifying assets are capitalized as part of the cost of the qualifying assets until commercial production begins.
All other repair and maintenance expenses are charged to the statement of profit or loss during the financial statement period in which they are incurred.
Regular maintenance and repairs that do not extend the estimated useful life of the asset or production output are charged to profit or loss when incurred.
Gains and losses on disposal of property, plant and equipment are determined by comparing the proceeds with the net book value and are included in other income.
Impairment of Non-Financial Assets
An impairment loss is recognized when the carrying amount of the asset exceeds its fair value, less cost to sell. The impairment losses are recognized in the statement of profit or loss, if any.
The fair value is determined in accordance with International Standard No. 13 on fair value and disposal cost, which is the cost that can only be added. The book value of the assets is evaluated by the discounted present value of the future cash flows, taking into account the risks related to the money in the country in which it is dealt.
At each financial position date, the values of non-financial assets other than those that are impaired and those that are impaired are reviewed for possible reversal of the impairment. When the impairment loss is subsequently reversed, the carrying amount of the asset or cash-generating unit is increased in accordance with revised estimates of its recoverable amount, but does not exceed the carrying amount had no impairment loss been recognized for the asset or cash-generating unit in prior years. The reversal of the impairment loss is recognized as direct income in the statement of profit or loss.
Impairment in the value of property, plant and equipment resulting mainly from idle capacity of the plant by closing or selling ineffective ancillary products. When an impairment loss is subsequently reversed, the carrying amount of the asset is increased to the revised recoverable amount to the extent of the carrying amount that would have been determined if no impairment loss had been recognized for the asset in prior years. A reversal of an impairment loss is recognized immediately in the statement of profit or loss, unless the underlying asset is carried at a revalued amount, in which case the reversal of the impairment loss is treated as a revaluation increase.
Assets held for sale and disposal groups
Non-current assets held for sale and disposal groups are presented separately under current assets in the statement of financial position when all of the following conditions are met:
y When the company commits to sell the asset or dispose of a group of assets.
y Having an effective plan to sell this asset.
y The sale is expected to be completed within the next 12 months.
At this time and before the initial classification of assets and the exclusion of a group of assets classified within the assets held for sale, and it represents the book value of the assets) or all assets and liabilities in the excluded groups (measured according to the accounting policies applied. Assets held for the purpose of sale and disposal of the company are subsequently measured in value Book value or net realizable value less cost to sell (whichever is lower) Assets held for sale are neither depreciated nor amortized.
Discontinuous Activities
Discontinued activities are disclosed when the company is able to separate the operations of the operating activity and the cash flows of this activity can be measured independently and its activity and financial reports can be determined independently from the company’s activities and classified as held for sale or disposed of and in the case of measuring it independently of the activity The company, geographically or operationally, or as part of a single plan as a whole, in order to exclude a major sector of the company, a geographical or operational sector, or to be a subsidiary company that was acquired and resold. Also, when the discontinuation plan is approved by the board of directors with the announcement of that plan.
Gains or losses from discontinued activities are recognized in the statement of profit and loss and disclosed separately from income and expenses from continuing activities and are restated in comparative figures. In the statement of cash flows, cash flows from discontinued activities are presented separately from cash flows from continuing activities, and the assets and liabilities related to them are disclosed, excluded or settled, and the reasons for these changes. As for the comparative figures, they are presented for comparison for this transaction.
Cash and cash equivalents
For the purposes of preparing the statement of cash flows, the cash and cash equivalents item consists of cash in hand, current accounts, deposits with banks and other short-term highly liquid investments with original maturities within three months or less from the date of acquisition, which can be easily converted into a specific amount of cash and are subject to an insignificant risk of change in the value, demand liabilities and overdrafts that are paid on demand are deducted.
Business Risk Management
In the course of the Company’s normal activities, the Company is exposed to a number of financial risks: credit risk, liquidity risk, (including foreign exchange risk, interest rate risk, commodity price risk and stock price risk). In this clarification, it is presented how the company manages financial risks and risks capital.
Financial risk management is an integral part of the company’s management style. The Board of Directors sets the principles of financial control, as well as the principles of financial planning. The CEO organizes, manages and controls all financial risks, including matters relating to assets and liabilities.
The Asset and Liability Management Committee, chaired by the Chief Financial Officer, is the governing body for the development and subsequent implementation of the company’s financial asset and liability management policies. It ensures the implementation of strategies and the achievement of the company’s financial assets and liabilities management objectives, which are implemented by the central cash management, under specific conditions, and defines the approved guidelines for managing cash risks and their classification, and also determines, according to the transaction category, the approval, approval and implementation procedures. Central cash management activities are subject to supervision by the Chief Financial Officer who checks the implementation of strategies and/or processes with approved guidelines and decisions taken by the Board of Directors.
Credit Risk Management
Credit risk refers to the risk that the other party (the customer) will not be able to fulfill its contractual obligations, which will lead to a financial loss for the company. Credit risk arises in monetary assets, non-current financial assets, financial derivative assets and trade and other receivables.
The Company aims to reduce financial credit risk by implementing risk management policies. Credit limits are determined based on the size of each customer and the risk of default. The methodology used to determine the credit limit takes into account the counterparties, credit ratings, risk ratios and the probability of default when making a professional assessment of this party when granting a credit limit. Parties are monitored regularly, taking into account the development of the above information, and cases of non-payment. As a result of this monitoring, changes are made to credit limits and risk allocation. The company avoids concentrating credit risk on the liquidity of its assets by distributing them over several institutions and sectors.
Trade receivables are subject to credit limits and controls and procedures. Due to the large number of clients and the wide geographical base, the company is exposed to a significant concentration of credit risk on its trade receivables. However, trade receivables are monitored on an ongoing basis in accordance with the similar methodology used for financial counterparties. The maximum exposure to credit risk arising from financial activities, without taking into account netting agreements and without taking into account any collateral held or other credit enhancements, is the carrying amount of the Company’s financial assets.
Liquidity Risk
Liquidity risk is the risk that the company will encounter difficulty in meeting its obligations associated with financial obligations that are settled by delivery of cash or other financial assets. Liquidity risk can result from the company’s inability to sell financial assets quickly or close to their fair value. The company aims to manage this risk by limiting entry into financial instruments that may be affected by liquidity problems and maintaining a reserve of facilities.
Market Risk
The Company is exposed to changes in foreign exchange rates, interest rates and market rates that affect assets, liabilities and future transactions.
Foreign Exchange Risk
The Company is exposed to foreign exchange risk from transactions and translation. Transaction risk arises from dealing in foreign currencies. This risk is managed within the hedging policy according to the needs of the specific activity of the company through the use of currency exchange contracts.
Commission Rate Risk
Commission rate risks arise from the possibility of fluctuation in commission rates, which will affect the future profitability or the fair value of financial instruments. Changes in commission rates relating to liabilities for which the Company pays a commission.
Financial Instruments
The financial instrument is any contract that results in a financial asset for one entity and a financial liability or equity instrument of another entity.
Financial Assets
Recognition and Initial Measurement:
The company’s financial assets consist of cash and cash equivalents, trade and other receivables.
Financial assets are initially recognized when the company becomes a party to the contractual provisions of the instrument.
The financial asset is initially measured at fair value plus, for an item not at fair value through profit or loss, transaction costs directly attributable to its acquisition or disposal.
Classification and Post-Measurement:
The classification of financial assets on initial recognition depends on the contractual cash flow characteristics of the financial asset and the company’s business model for managing them. Trade receivables that do not contain a significant financing component or for which the company has applied the practical means are measured, and the company initially measures the financial asset at its fair value plus transaction costs, in the case of a financial asset that is not at fair value through profit or loss. Trade receivables that do not contain a significant financing component or for which the Company has applied the practical expedient are measured at the transaction rate established under IFRS 15 Revenue from Contracts with Customers.
On initial recognition, the financial asset is classified according to the measurement as:
y Amortized cost,
y Fair value through other comprehensive income y Debt instruments,
y Equity investment at fair value through other comprehensive income, or y Fair value through profit or loss.
Financial assets are not subsequently reclassified after initial recognition, unless the Company changes its business model for Managing the financial assets.
Financial asset is measured at amortized cost if it meets the following two conditions and is not designated at FVTPL:
y The asset is held within a business model whose objective is to hold assets in order to collect contractual cash flows, and
y The contractual terms of the financial asset give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding.
Debt instrument is measured at fair value through other comprehensive income only if it meets the following two conditions and is not designated at fair value through profit or loss:
y Holding the asset within a business model whose purpose is achieved by both collecting contractual cash flows and selling financial assets; and
y The contractual terms of the financial asset give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding.
Classification and Post-Measurement (continued)
On initial recognition of an equity investment that is not held for trading, the company has the right to definitively elect to present subsequent changes in the fair value of the investment in other comprehensive income (classified as equity investment - at fair value through other comprehensive income). This choice is made on the basis of Each investment separately. All financial assets that are not measured at amortized cost or at fair value through other comprehensive income as described above, are measured at fair value through profit or loss. Upon initial recognition, the company may irrevocably choose to measure a financial asset that meets the measurement requirements. at amortized cost or at fair value through other comprehensive income, as well as at fair value through profit or loss if doing so eliminates or significantly reduces an accounting variance that may arise.
Financial Assets: Business Model Evaluation
The company makes an assessment of the purpose of the business model under which the asset is held at the portfolio level because this reflects the best way in which the business is managed and the information that is communicated to management.
Post-measurement, profit and loss
Financial assets at fair value through profit or loss
These assets are subsequently measured at fair value. Net gains and losses, including any interest or dividend income, are recognized in profit or loss.
Financial assets at amortized cost
These assets are subsequently measured at amortized cost using the effective interest method. The amortized cost is reduced by the amount of the impairment loss. Interest income, foreign currency translation gains and losses and impairment are recognized in profit or loss. Any gain or loss is recognized in profit or loss.
Debt investments at fair value through other comprehensive income
These assets are subsequently measured at fair value. Interest income under the effective interest method, as well as foreign currency translation gains and losses and impairment, are recognized in the statement of profit or loss. Net gains and losses are recognized in other comprehensive income. On derecognition, the cumulative gain and loss in other comprehensive income is reclassified to profit or loss.
Equity investments at fair value through other comprehensive income
These assets are subsequently measured at fair value. Dividends are recognized as income in the statement of profit or loss unless the dividends clearly represent a recovery of part of the cost of the investment. Other net gains and losses are recognized in other comprehensive income and are not reclassified to profit or loss.
Initial Recognition and Measurement
Financial liabilities are classified upon initial recognition as financial liabilities at fair value through profit or loss, and advances or payables, as appropriate. All financial liabilities are initially recorded at fair value, and in the case of payables, after deducting direct costs attributable to the transaction. Significant financial liabilities of the company include trade and other payables.