The Customs Authority (ZATCA) in connection with the implementation of executive regulations on charging zakat, promulgated by ministerial resolution no. This guide is indicative and includes a summary of the most important considerations related to the application of International Financial Reporting Standards (IFRS) approved in the Kingdom of Saudi Arabia. The purpose of this handbook is to provide a summary of the most important effects resulting from the transition to International Financial Reporting Standards (IFRS) on the zakat account.
The Authority aims that the manual will also help to narrow the gap between taxpayers' understanding and the Authority's expectations of the mechanisms for estimating and calculating Zakat in light of the transition to these standards. An entity shall consider the terms of the contract and all relevant facts and circumstances when applying this Standard, and the entity shall apply this Standard, including using practical means, consistently to contracts that have similar characteristics and in similar circumstances. When accounting for a portfolio, a company must use estimates and assumptions that reflect the size and composition of the portfolio.
An entity shall apply this Standard to each contract only if the counterparty to the contract is a customer (other than an out-of-scope contract). In addition, the customer is a contracting party with the entity to obtain goods or services resulting from the entity's normal activities, in exchange for consideration, and the counterparty is not a customer. For example, if it has entered into a contract with the entity to carry out an activity or operation where the parties to the contract share the risks or benefits arising from the activity or operation (for example, developing an asset in a cooperative arrangement) rather than obtaining production from the entity's normal activities.
From the beginning of 2017 AD, entities listed on the capital market, as well as for other entities, the application will be from the beginning of 2018 AD, allowing those other entities to apply from the beginning of 2017. AD.
Determining the contract(s) with a client- Defining the Contract
The rights of each party in relation to the goods or services transferred may be specified. It is possible that the institution will receive the compensation to which it will be entitled in exchange for the goods or services that will be transferred to the customer.
Determining the obligations contained in the contract
If the customer can benefit from the goods or service by itself or with other resources immediately available to the customer. It is possible to specify the entity's obligation to transfer the goods or services to the customer separately from other obligations in the contract.
Determining the obligations contained in the contract (Cont’d)
5 Providing a service to another customer to transfer goods or provide services or make goods or services available to the customer for use when the customer chooses. A grant of rights to goods or services to be provided in the future that the customer may resell or provide to their customer. 3 Resale of goods or services purchased by the company (for example: a ticket resold by the institution as a client).
Determining the transaction price
The transaction price must be allocated to the obligations contained in the contract Once the separate obligations have been identified and the transaction price has been determined,
When a contract has multiple obligations of the entity, usually, the transaction price for each obligation in the contract is determined on an arm's length basis.
Recognizing revenue when (or as soon as) an entity fulfills an obligation
Impact of Transition to IFRS 15 on the Zakat Base
- Introduction
- The Financial Impact of the Transition on the Zakat base
- Proposed Zakat Base Financial Implications Handling
- Theoretical Examples on the Effect of Transition on ZB Example (1): Contract’s Origin
- Accounting Handling according to the previous standard as of December 31, 2017 (prior to the implementation of IFRS 15)
- Accounting Handling according to the previous standard as of December 31, 2017 (prior to the implementation of IFRS 15)
- Requirements of IFRS 15
- The resulting impact on the financial statements when applying IFRS 15
- Zakat Handling
- The expected value of the goods to be returned based on Management estimates based on the best previous experience
- Accounting Handling according to prevailing practices as of December 31, 2017 (prior to the implementation of IFRS 15)
- The resulting impact on the financial statements when applying IFRS 15
- Zakat Handling
It is noted that in some sectors this has had a major impact on the revenue recognition mechanism at the date of transition and in the years following transition. Refund obligations: In general, this article refers to the price of the goods within the return period (see below in the theoretical applications section). Within the surcharges on the basis of zakat, it is dealt with if the surcharge controls apply in accordance with the provisions of Article 4 of the Implementing Regulations for the Collection of Zakat.
It should be noted that in this case (sale with right of return) and if the goods are still within the return period, the turnover should not be recognized and the cost of the goods sold should not be recognized in the profit or loss. . When the right of return expires, the income must be recognized by reversing the calculation of the obligation to repay the amount, just as the calculation of the original right of return is reversed. According to the analysis of the nature of the gap between the previous practice and the required practice according to IFRS 15 for the company's income, the following is revealed:.
Entry of the opening balance adjustment as at 1 January 2018 AD (date of application of IFRS 15). Consequently, and from the practical example, it is noted that the opening balance of the retained earnings from 1 January 2018 was modified by SAR 6,250 with an increase (i.e. a higher amount of income was supposed to be recognized in the year of signing the contract with the customer). The amount that will be recognized as an adjustment to the opening balance of the financial statements is the difference between what is recognized as an expense (150,000) and what should be recognized from the remaining period (43,750) as at 1 January 2018 (date). application of IFRS 15).
As a result of the capitalization of commission costs in accordance with the requirements of the standard, an increment on adjustment entry to the opening balance of retained earnings was made with SAR 106,250. Consequently, and from the practical example, it is noted that the opening balance of the retained earnings from 1 January 2018 was modified by SAR 106,250 with an increase (i.e. a higher amount of income was supposed to be recognized in the year of signing the contract with the customer). Contract costs: A new account has been recognized within the assets, which will be amortized over the course of the contract period.
This may result in the addition of the same to the item in the deductions of the zakat base due to its nature and its capitalization of assets in accordance with paragraph (6) of the fifth article, which is specified in the Executive Regulations for charging zakat. An entity may not recognize revenue when control of a product has passed to a customer in connection with a sale that is expected to be returned by the customer. Thus, revenue is recognized three months after the expiration of the right to refund.
From the example used, it can be seen that the initial balance of retained earnings on 01.01.2018 was corrected due to the requirements of the standard after revenue recognition and after the end of the accounting period. Right to refund: A new account has been recognized as part of the assets that will be amortized over the term of the contract.
