The impact of mandatory adoption of IFRS in Saudi Arabia

Abstract

We examine whether the adoption of International Financial Reporting Standards (IFRS) by companies reporting under an Islamic accounting framework is associated with the greater comparability and relevance of financial reporting. Using a sample of Saudi Arabian companies listed on Tadawul, the Saudi stock market, we compare accounting figures reported under Saudi GAAP (Generally Accepted Accounting Principles) issued by the Saudi Organization for Certified Public Accountants (SOCPA) and IFRS for the same year. The amount of reported shareholders’ equity and net income decreased in the transition to IFRS as a result of adjustments primarily related to consolidation and strategic investments, property, plant and equipment, employee benefits, and other liabilities. Our empirical findings document several reasons for the improved relevancy of the subject financial reports. The main finding was that adopting IFRS enhanced the perceived relevancy of the reports. Additionally, reporting in English versus reporting in Arabic was found to have favorably affected relevancy. Regarding transparency, based on the number of pages and informative notes, reporting under IFRS also engendered improvements to the financial reporting process. The results confirm that IFRS adoption can occur in a very different accounting regime and have positive effects on capital markets and their accounting environment.