aNNUAL FINANCIAL statements - kirnafco.com · Ijara receivables, net 8 469,581,008 634,831,954...

ANNUAL FINANCIAL STATEMENTS

Kirnaf Finance Company (Formerly known as “Kirnaf Investment and Installment Company”) 31 December 2015

The attached notes 1 to 26 form part of these financial statements.

2

KIRNAF FINANCE COMPANY

(A SAUDI CLOSED JOINT STOCK COMPANY)

FORMERLY KNOWN AS KIRNAF INVESTMENT AND INSTALLMENT COMPANY

STATEMENT OF COMPREHENSIVE INCOME FOR THE YEAR ENDED 31 DECEMBER 2015

Notes

2015 SR

2014 SR

INCOME

Income from Murabaha contracts 44,335,324 31,687,500

Income from Ijara contracts 69,613,912 78,557,304 ──────── ──────── INCOME FROM MURABAHA AND IJARA 113,949,236 110,244,804

Finance cost (19,595,934) (20,824,149)

──────── ────────

NET INCOME FROM MURABAHA AND IJARA 94,353,302 89,420,655

Income from sale of investment properties - 6,941,696

Other operating income 2,769,365 4,905,702

──────── ────────

97,122,667 101,268,053

Operating expenses

General and administration expenses 20 (39,780,348) (37,080,014)

Provision for credit losses 7, 8 (8,000,000) (3,000,000)

Selling and marketing expenses 21 (2,576,592) (3,234,421) ──────── ──────── NET PROFIT BEFORE ZAKAT 46,765,727 57,953,618

Zakat 13 (14,533,146) (15,520,417) ──────── ──────── NET PROFIT FOR THE YEAR 32,232,581 42,433,201

════════ ════════

OTHER COMPREHENSIVE INCOME

Other comprehensive income to be reclassified to profit or loss in

the subsequent periods

-

-

Other comprehensive income not to be reclassified to profit or

loss in the subsequent periods

-

-

──────── ────────

TOTAL COMPREHENSIVE INCOME 32,232,581 42,433,201

════════

════════




STATEMENT OF FINANCIAL POSITION AS AT 31 DECEMBER 2015


3

Notes

31 December 2015 SR

31 December 2014 SR

1 January 2014

SR

ASSETS

Cash and cash equivalents 6 100,122,894 53,258,744 146,916,206

Murabaha receivables, net 7 460,380,772 410,293,051 281,907,615

Ijara receivables, net 8 469,581,008 634,831,954 535,879,107

Accounts receivable, prepayments and others 11 54,554,713 43,295,652 48,678,872

Investment properties 10 71,137,158 71,137,158 80,554,188

Property and equipment 9 8,647,024 10,337,251 12,115,398 ───────── ───────── ───────── TOTAL ASSETS 1,164,423,569 1,223,153,810 1,106,051,386 ═════════ ═════════ ═════════

LIABILITIES AND SHAREHOLDERS’ EQUITY

Accounts payable and accruals 12 3,565,435 4,323,607 4,693,698

Provision for zakat 13 26,157,319 16,715,208 13,091,804

Bank borrowings, net 14 366,118,870 507,068,262 447,369,148

Provision for employees’ terminal benefits 15 3,930,486 3,427,855 2,511,059 ───────── ───────── ───────── TOTAL LIABILITIES 399,772,110 531,534,932 467,665,709 ───────── ────────── ─────────

SHAREHOLDERS’ EQUITY

Share capital 16 540,000,000 510,000,000 510,000,000

Statutory reserve 17 22,174,812 18,951,554 13,631,754

Consensual reserve 17 3,000,000 3,000,000 3,000,000

Other capital reserve 17 54,000,000 43,200,000 32,400,000

Retained earnings 145,476,647 116,467,324 79,353,923 ───────── ───────── ───────── TOTAL SHAREHOLDERS’ EQUITY 764,651,459 691,618,878 638,385,677

───────── ───────── ───────── ───────── ───────── ───────── TOTAL LIABILITIES AND SHAREHOLDERS’

EQUITY

1,164,423,569 1,223,153,810 1,106,051,386 ═════════ ═════════ ═════════




STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY FOR THE YEAR ENDED 31 DECEMBER 2015


4

Share

capital

SR

Statutory

reserve

SR

Consensual

reserve

SR

Other capital

reserve

SR

Retained

earnings

SR

Total

SR

Balance at 1 January 2014 510,000,000 13,631,754 3,000,000 32,400,000 79,353,923 638,385,677

Net profit for the year - - - - 42,433,201 42,433,201

Other comprehensive income - - - - - -

──────── ──────── ──────── ──────── ───────── ────────

Total comprehensive income - - - - 42,433,201 42,433,201

Transfer to statutory reserve - 5,319,800 - - (5,319,800) -

Shared-based payment (note 3.5) - - - 10,800,000 - 10,800,000

──────── ──────── ──────── ───────── ───────── ────────

Balance at 31 December 2014 510,000,000 18,951,554 3,000,000 43,200,000 116,467,324 691,618,878

════════ ════════ ════════ ═════════ ═════════ ════════

Balance at 1 January 2015 510,000,000 18,951,554 3,000,000 43,200,000 116,467,324 691,618,878

Net profit for the year - - - - 32,232,581 32,232,581

Other comprehensive income - - - - - -

──────── ──────── ──────── ──────── ───────── ────────

Total comprehensive income - - - - 32,232,581 32,232,581

Issuance of share capital (note 15) 30,000,000 - - - - 30,000,000

Transfer to statutory reserve - 3,223,258 - - (3,223,258) -

Shared-based payment (note 3.5) - - - 10,800,000 - 10,800,000

──────── ──────── ──────── ───────── ───────── ────────

Balance at 31 December 2015 540,000,000 22,174,812 3,000,000 54,000,000 145,476,647 764,651,459

════════ ════════ ════════ ═════════ ═════════ ════════




STATEMENT OF CASH FLOWS FOR THE YEAR ENDED 31 DECEMBER 2015


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Notes 2015 SR

2014 SR

CASH FLOW FROM OPERATING ACTIVITIES Net profit before zakat 46,765,727 57,953,618 Adjustments for: Depreciation 9 1,801,618 2,118,882 Provision for employees’ terminal benefits 502,631 916,796 Provision for credit losses 7, 8 8,000,000 3,000,000 Income from sale of investment properties - (6,941,696) Loss on disposal of property and equipment 19,416 - Share-based payment expense 3.5 10,800,000 10,800,000 Borrowing facility cost and charges 18,769,862 19,560,723

───────── ───────── 86,659,254 87,408,323

Murabaha receivables, net (48,802,326) (130,247,134)

Ijara receivables, net 155,965,551 (100,091,149) Receivable against disposal of investment properties - 16,358,726

Accounts receivable, prepayments and others (11,259,061) 5,383,220 Accounts payable and accruals (758,172) (370,091) ───────── ───────── Cash generated from (used in) operating activities 181,805,246 (121,558,105)

Zakat paid 13 (5,091,035) (11,897,013) ───────── ───────── Net cash from (used in) operating activities 176,714,211 (133,455,118) ───────── ───────── CASHFLOW FROM INVESTING ACTIVITIES Acquisition of property and equipment 9 (130,807) (340,735) ───────── ───────── Cash used in investing activities (130,807) (340,735) ───────── ───────── CASHFLOW FROM FINANCING ACTIVITIES Bank borrowings, net (155,043,178) 63,562,224 Proceeds from issuance of share capital 16 30,000,000 - Borrowing facility cost and charges paid (4,676,076) (23,423,833) ───────── ───────── Net cash (used in) from financing activities (129,719,254) 40,138,391 ───────── ───────── NET INCREASE (DECREASE) IN CASH AND CASH

EQUIVALENTS 46,864,150 (93,657,462) CASH AND CASH EQUIVALENTS AT BEGINNING OF

THE YEAR 53,258,744 146,916,206 ───────── ───────── CASH AND CASH EQUIVALENTS AT END OF THE YEAR 100,122,894 53,258,744 ═════════ ═════════




NOTES TO THE FINANCIAL STATEMENTS 31 DECEMBER 2015

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1 GENERAL

Kirnaf Finance Company (formerly known as Kirnaf Investment and Installment Company) (the “Company”) is a

Saudi closed joint stock company, registered in Riyadh, Kingdom of Saudi Arabia. The Company has obtained a

license number 201411/S A/23 dated 9 muharram 1436H (corresponding to 2 November 2014) from Saudi Arabian

Monetary Agency (SAMA). The Company is registered under commercial registration number 1010265551 dated 9

Rabi Thani 1430H (corresponding to 5 April 2009).

The objectives of the Company is to provide financing to small or medium companies, financing production assets

and providing financial leases.

During 2013, the Saudi Arabian Monetary Agency (“SAMA”) issued the Implementing Regulations of the “Law on

Supervision of Finance Companies” which was published on 24 February 2013 following the “Financial Lease

Law” and the “Law on Supervision of Finance Companies” (the “Laws”) published on 27 August 2012. These

Laws gave the existing finance companies a grace period of two years to align their current position with the Laws’

requirements and required them to register and submit their alignment plans to SAMA before 31 December 2013.

The Company submitted its alignment plan along with its application for license before the said deadline and

consequently obtained SAMA license during November 2014.

The Ministry of Commerce and Industry approved the Company’s new commercial registration dated 2 Rajab

1436H (corresponding to 21 April 2015) changing the Company’s corporate name to Kirnaf Finance Company.

2. BASIS OF PREPARATION

Statement of compliance These financial statements have been prepared in accordance with International Financial Reporting Standards

(IFRSs) as issued by the International Accounting Standards Board (IASB) as laid down under Article 71 of the

Implementing Regulations of the Finance Companies Control Law which requires the Company to prepare the

financial statements based on IFRS.

These financial statements for the year ended 31 December 2015 are the first annual financial statements that the

Company has prepared accordingly with IFRS and IFRS 1 - First-time Adoption of International Financial

Reporting Standards (IFRS1) has been applied.

An explanation of how the transition to IFRSs has affected the reported financial position, financial performance

and cash flows of the Company is provided in note 3 to these financial statements.

Assets and liabilities in the statement of financial position are presented in the order of liquidity.

These financial statements were authorised for issue by the Board of Directors of the Company on 2 Rajab 1437H

(corresponding to 10 April 2016).

Basis of measurement These financial statements are prepared under the historical cost convention.

Functional and presentation currency These financial statements are presented in Saudi Arabian Riyals, which is the Company’s functional currency.




NOTES TO THE FINANCIAL STATEMENTS (continued) 31 DECEMBER 2015

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2. BASIS OF PREPARATION (continued)

Uses of estimates, judgement and assumptions In preparing these financial statements, the management has made judgement, estimates, and assumption that affect

the applications of accounting policies and the reported amounts of assets, liabilities, income and expenses. Actual

results may differ from these estimates.

Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to estimates are recognised

prospectively.

It also requires management to exercise its judgement in the process of applying the Company’s accounting policies.

Such judgements, estimates, and assumptions are continually evaluated and are based on historical experience and

other factors, including obtaining professional advice and expectations of future events that are believed to be

reasonable under the circumstances. Significant areas where management has used judgements, estimates and

assumptions are as follows:

i. Impairment for credit losses on Murabaha and Ijara receivables The Company considers evidence of impairment for these assets at both an individual asset and collective level. All

individually significant assets are individually assessed for impairment. Those found not to be impaired are then

collectively assessed for any impairment that has been incurred but not yet individually identified. Assets that are not

individually significant are collectively assessed for impairment. Collective assessment is carried out by grouping

together assets with similar risk characteristics.

In assessing collective impairment, the Company uses historical information on the timing of recoveries and the

amount of loss incurred, and makes an adjustment if current economic and credit conditions are such that actual losses

are likely to be greater or lesser than suggested by historic trends.

An impairment loss is calculated as the difference between an asset’s carrying amount and the present value of the

estimated future cash flows discounted at the asset’s original effective rate. Losses are recognised in profit or loss and

reflected in an allowance account. When the Company considers that there are no realistic prospects of recovery of the

asset, the relevant amounts are written off. If the amount of impairment loss subsequently decrease and the decrease

can be related objectively to the event occurring after the impairment was recognised, then the previously recognised

impairment loss is reversed through profit or loss.

ii. Going concern The Company’s management has made an assessment of the Company’s ability to continue as a going concern and

is satisfied that the Company has the resources to continue in business for the foreseeable future. Additionally,

management is not aware of any material uncertainties that may cast significant doubt upon the Company’s ability

to continue as a going concern. Therefore, the financial statements of the Company continue to be prepared on the

going concern basis.

iii. Useful lives of property and equipment Management determines the estimated useful lives of the Company’s property and equipment for calculating

depreciation. This estimate is determined after considering the expected usage of the asset or physical wear and tear.

Management reviews the useful lives annually and future depreciation charge would be adjusted where the

management believes the useful lives differ from previous estimates.





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3. FIRST TIME ADOPTION OF IFRS

For all periods up to and including the year ended 31 December 2014, the Company prepared its financial

statements in accordance with accounting standards generally accepted in the Kingdom of Saudi Arabia

(“SOCPA”). The financial statements for the year ended 31 December 2015 are the first annual financial statements

that the Company has prepared in accordance with International Financial Reporting standards (“IFRS”).

Accordingly, the Company has prepared financial statements which comply with IFRS applicable for periods

beginning on or before 1 January 2015, together with the comparative period data, as described in the significant

accounting policies (note 4). In preparing these financial statements, the Company’s opening statement of financial

position was prepared as at 1 January 2014 after incorporating certain adjustments made as required due to the first

time adoption of IFRS.

In preparing its opening IFRS statement of financial position, the Company has analyzed the impact and noted

following adjustments that were required to be made to the amounts reported previously in financial statements

prepared in accordance with the generally accepted accounting standards (GAAP) in Saudi Arabia issued by the

Saudi Organization for Certified Public Accountants (SOCPA).

Reconciliation of total assets, total liabilities, and shareholders’ equity as at 1 January 2014 (date of transition to IFRS) and 31 December 2014 Statement of Financial Position

Total assets Total liabilities Shareholders’

equity

SR SR SR

1 January 2014

As per SOCPA accounting standards 1,295,756,763 654,230,059 641,526,704

Effect of transition to IFRS (189,705,377) (186,564,350) (3,141,027)

As per IFRS 1,106,051,386 467,665,709 638,385,677

31 December 2014

As per SOCPA accounting standards 1,436,218,943 741,494,232 694,724,711

Effect of transition to IFRS (213,065,133) (209,959,300) (3,105,833)

As per IFRS 1,223,153,810 531,534,932 691,618,878

Reconciliation of total comprehensive income for the year ended 31 December 2014

SR

Reported amounts as per SOCPA accounting standards 53,198,007

Effect of transition to IFRS 35,194

Correction of an error (note 3.5) (10,800,000)

As per IFRS 42,433,201





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3 FIRST TIME ADOPTION OF IFRS (continued)

Reconciliation of Other capital reserve and retained earnings as at 1 January 2014 and 31 December 2014

Statement of Changes in Equity

Other Capital

reserve

Retained earnings

SR SR

1 January 2014

Reported amounts as per SOCPA accounting standards - 114,894,950

Effect of transition to IFRS - (3,141,027)

Correction of an error (note 3.5) 32,400,000 (32,400,000)

As per IFRS 32,400,000 79,353,923

31 December 2014

Reported amounts as per SOCPA accounting standards - 162,773,157

Effect of transition to IFRS - (3,105,833)

Correction of an error (note 3.5) 43,200,000 (43,200,000)

As per IFRS 43,200,000 116,467,324

First time adoption of IFRS

(3.1) Murabaha and Ijara receivables: Murabaha and Ijara receivables include principal and profit components. A portion of the profit is deferred into

future periods over the life of the contract. Under SOCPA, the Company reported gross receivables in the assets and

the deferred profit portion under the liabilities. Under IFRS, net amounts have been presented under assets.

(3.2) Bank borrowings: The Company enters into fixed murabaha contracts with banks to fund its operations. The profit commissions

associated with the debt is known when contracts are entered. Under SOCPA, this profit commissions was disclosed

as deferred profit commission within assets. Under IFRS, the debt is disclosed net of the deferred profit

commission.

(3.3) Processing fee: Under SOCPA, the processing fee was recognized as income at the time of its receipt. Under IFRS, this is included

in the income using effective profit rate basis (“EPR”) of the relevant contract and is recognized over the period of

the contract. Therefore, such fee is now recognized over the period of the contract in the statement of

comprehensive income of the Company using EPR.

(3.4) Transaction cost for the contracts: Under SOCPA, the transaction cost was recognized as expense when incurred. Under IFRS, this is included in the

EPR of the relevant contract and is recognized over the period of the contract. Therefore, as at the date of transition

to IFRS, such expense has been deferred and is now recognized over the period of the contract in the statement of

comprehensive income of the Company using EPR.





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3 FIRST TIME ADOPTION OF IFRS (continued)

(3.5) Employee share participation program During 2011, the Company offered certain employees (the “Eligible Employees”) with an option (the “Option”) for

equity ownership (“Restricted Shares”) opportunities that will result in more alignment between the interest of both

shareholders and these employees.

The number of Restricted Shares is 5,400,000 shares and these were granted free of cost to the Eligible Employees

in consideration for the establishment of the Company and to manage the Company for 5 years from 1 January

2011. This equity settled share based payment was not accounted for in the Company’s financial statements of prior

years. Management has now corrected this issue retrospectively and adjusted the comparative information under

IFRS. This has resulted in the reduction in retained earnings of the Company by an amount of SR 32.4 million and

SR 43.2 million as at 1 January 2014 and 31 December 2014 respectively. This also resulted in an equivalent

increase in employee share option plan (ESOP) reserve (separate component of Company’s equity as “other capital

reserve”) at these dates thus resulting in no overall change in the Company’s equity at any of the reporting dates.

This also resulted in a reduction in the net profit and total comprehensive income of the Company by an amount of

SR 10.8 million on an annual basis for each year since 1 January 2011.

4. SIGNIFICANT ACCOUNTING POLICIES

The accounting policies set out below have been applied consistently to all periods presented in these financial

statements and in preparing the opening IFRS statement of financial position at 1 January 2014 for the purposes of

the transition to IFRSs, unless otherwise indicated. The significant accounting policies adopted are as follows:

Revenue recognition Income on Murabaha and Ijara financing are recognized on an effective profit basis (EPR).

Fees charged for providing Murabaha and Ijara financing are recognised as an adjustment to the EPR on these

receivables.

Profit as used in the context of financial instruments refers to special commission income as understood in the

financial community in the Kingdom of Saudi Arabia.

Income from investment properties is recognised when the sale transaction is consummated and ownership title and

related risks and reward have been transferred to the buyer.

Financial assets

i. Initial recognition and measurement of financial assets All financial assets of the Company are non-derivative financial assets with fixed or determinable payments that are

not quoted in an active market. Such assets are recognised initially at fair value plus any directly attributable

transaction costs. Subsequent to initial recognition, these are measured at amortised cost using the effective yield

method, less any impairment losses.

Following are the major financial assets as of the reporting date:

Murabaha contract receivables Murabaha is an agreement whereby the Company sells an asset to a customer, which the Company has purchased

and acquired based on an undertaking received from the customer to buy. The selling price comprises the cost plus

an agreed profit margin. Gross amounts due under the Murabaha sale contracts include the total of future sale

payments on the Murabaha agreement (Murabaha sale contract receivable). The difference between the Murabaha

sale contracts receivable and the cost of the sold asset, is recorded as unearned Murabaha profit and for presentation

purposes, is deducted from the gross amounts due under the Murabaha sale contracts receivable.

Ijara contract receivables Ijara is an agreement whereby the Company, acting as a lessor, purchases or constructs an asset for lease according

to the customer request (lessee), based on an undertaking to lease the asset for an agreed rent and specific period





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4. SIGNIFICANT ACCOUNTING POLICIES (continued)

Financial assets (continued)

i. Initial recognition and measurement of financial assets (continued) Ijara contract receivables (continued) that could end by transferring the ownership of the leased asset to the lessee. The gross amounts due under

originated Ijara (finance) leases includes the total of future lease payments on Ijara finance leases (lease contracts

receivable), plus estimated residual amounts receivable.

ii. Impairment of financial assets The Company assesses at each reporting date whether there is any objective evidence that a financial asset or a

group of financial assets is impaired. A financial asset or a group of financial assets is deemed to be impaired if, and

only if, there is objective evidence of impairment as a result of one or more events that have occurred after the

initial recognition of the asset (an incurred ‘loss event’). Further, the loss event (or events) has an impact on the

estimated future cash flows of the financial asset or the group of financial assets that can be reliably estimated.

Evidence of impairment may include indications that the borrower or a group of borrowers is experiencing

significant financial difficulty. The probability that they will enter bankruptcy or other financial reorganisation,

default or delinquency in interest or principal payments; where observable data indicates that there is a measurable

decrease in the estimated future cash flows, such as changes in arrears or economic conditions that correlate with

defaults.

Provision for credit losses is based on management assessment as to whether there is objective evidence that a

financial asset may be impaired. If such evidence exists, the estimated recoverable amount is determined and any

impairment loss is recognised in statement of profit or loss.

iii. Derecognition of financial assets A financial asset (or, where applicable, a part of a financial asset or part of a Company of similar financial assets) is

derecognised when:

- The rights to receive cash flows from the asset have expired; or

- The Company has transferred its rights to receive cash flows from the asset or has assumed an obligation

to pay the received cash flows in full without material delay to a third party under a ‘pass-through’ arrangement;

and either (a) the Company has transferred substantially all the risks and rewards of the asset, or (b) the Company

has neither transferred nor retained substantially all the risks and rewards of the asset, but has transferred control of

the asset.

When the Company has transferred its rights to receive cash flows from an asset or has entered into a pass-through

arrangement, it evaluates if and to what extent it has retained the risks and rewards of ownership. When it has

neither transferred nor retained substantially all of the risks and rewards of the asset, nor transferred control of the

asset, the asset is recognised to the extent of the Company’s continuing involvement in the asset. In that case, the

Company also recognises an associated liability. The transferred asset and the associated liability are measured on a

basis that reflects the rights and obligations that the Company has retained.

Continuing involvement that takes the form of a guarantee over the transferred asset is measured at the lower of the

original carrying amount of the asset and the maximum amount of consideration that the Company could be

required to repay.

Financial liability

i. Initial Recognition and subsequent measurement The Company’s financial liabilities consist of loans and borrowings and trade and other payables. Such financial

liabilities are recognised initially at fair value plus any directly attributable transaction costs. Subsequent to initial

recognition these financial liabilities are measured at amortised cost using the effective profit rate basis.





12


Financial liability (continued)

ii. Derecognition of financial liability

A financial liability is derecognised when the obligation under the liability is discharged or cancelled or expires.

When an existing financial liability is replaced by another from the same lender on substantially different terms, or

the terms of an existing liability are substantially modified, such an exchange or modification is treated as the

derecognition of the original liability and the recognition of a new liability. The difference in the respective carrying

amounts is recognised in the income statement.

Fair value Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction

between market participants at the measurement date. The fair value measurement is based on the presumption that

the transaction to sell the asset or transfer the liability takes place either:

• in the principal market for the asset or liability, or

• in the absence of a principal market, in the most advantageous market for the asset or liability.

The principal or the most advantageous market must be accessible to by the Company. The fair value of an asset or

a liability is measured using assumptions that market participants would use when pricing the asset or liability,

assuming that market participants act in their economic best interest.

A fair value measurement of a non-financial asset takes into account a market participant's ability to generate

economic benefits by using the asset in its highest and best use or by selling it to another market participant that

would use the asset in its highest and best use.

Accounts payable and accruals Liabilities are recognised for amounts to be paid in the future for goods or services received, whether billed by the

supplier or not.

Provisions Provisions are recognized when the Company has an obligation (legal or constructive) arising from a past event,

and the costs to settle the obligation are both probable and can be measured reliably.

Borrowings Borrowings are recognised initially at fair value, net of transaction costs incurred. Borrowings are subsequently

stated at amortised cost with any difference between the proceeds (net of transaction costs) and the redemption

value recognised in the statement of comprehensive income over the period of the borrowing using the effective

interest method.

Investment properties Investment properties are stated at cost less accumulated depreciation and any accumulated impairment losses. The

cost less estimated residual value of Investment properties is depreciated on a straight line basis over the estimated

useful lives of the assets. The carrying values of investment properties are reviewed for impairment when events or

changes in circumstances indicate the carrying value may not be recoverable. If any such indication exists and

where the carrying values exceed the estimated recoverable amount, the assets are written down to their recoverable

amount, being the higher of their fair value less costs to sell and their value in use.

Transfers are made to (or from) investment property only when there is a change in use. Transfers between

investment property and owner-occupied property do not change the carrying amount of the property transferred

and they do not change the cost of that property for measurement or disclosure purposes.

Gains and losses on disposal of investment properties are determined by comparing the proceeds from disposal with

the carrying amount of investment properties and are recognised within other income in the statement of

comprehensive income.





13


Property and equipment Property and equipment are measured at cost less accumulated depreciation and any accumulated impairment

losses. The cost less estimated residual value of property and equipment is depreciated on a straight line basis over

the estimated useful lives of the assets. The carrying values of property and equipment are reviewed for impairment

when events or changes in circumstances indicate the carrying value may not be recoverable. If any such indication

exists and where the carrying values exceed the estimated recoverable amount, the assets are written down to their

recoverable amount, being the higher of their fair value less costs to sell and their value in use.

Leasehold improvements are amortised on a straight-line basis over the shorter of the useful life of the

improvement/assets or the term of the lease. Expenditure for repair and maintenance are charged to statement of

comprehensive income. Improvements that increase the value or materially extend the life of the related assets are

capitalised.

When parts of an item of property and equipment have different useful lives, they are accounted for as separate

items (major components) of property and equipment.

Gains and losses on disposal of an item of property and equipment are determined by comparing the proceeds from

disposal with the carrying amount of property and equipment, and are recognised within other income in statement

of comprehensive income.

Cash and cash equivalents For the purpose of statement of cash flows, cash and cash equivalents consist of bank balances and cash in hand.

Impairment of non-financial assets The Company periodically reviews the carrying amounts of its non-financial assets to determine whether there is

any indication that those assets have suffered any impairment loss. If any such indication exists, the recoverable

amount of the asset is estimated in order to determine the extent of the impairment loss. Where it is not possible to

estimate the recoverable amount of an individual asset, the Company estimates the recoverable amount of the cash

generating unit to which the asset belongs.

If the recoverable amount of the asset or cash generating unit is estimated to be less than its carrying amount, the

carrying amount of the asset or cash generating unit is reduced to its recoverable amount. Impairment is recognised

in the statement of comprehensive income.

Where impairment subsequently reverses, the carrying amount of the asset or the cash generating unit is increased

to the revised estimate of its recoverable amount, so that the increased carrying amount does not exceed the carrying

amount that would have been determined had no impairment been recognised for the asset or cash generating unit in

prior years. A reversal of impairment is recognised immediately in the statement of comprehensive income.

Employees' terminal benefits The Company operates a defined benefit plan for employees in accordance with Saudi Labor Law as defined by the

conditions stated in the laws of the Kingdom of Saudi Arabia. The cost of providing the benefits under the defined

benefit plan is determined using the projected unit credit method.

Remeasurements for actuarial gains and losses are recognised immediately in the statement of financial position

with a corresponding credit to retained earnings through other comprehensive income in the period in which they

occur. Remeasurements are not reclassified to profit or loss in subsequent periods.

Past service cost are recognised in the statement of comprehensive income on the earlier of:

• The date of the plan amendment or curtailment, and

• The date the Company recognises related restructuring costs

Net special commission income is calculated by applying the discount rate to the net defined benefit liability. The

Company recognises the following changes in the net defined benefit obligation in the statement of comprehensive

income:





14


Employees' terminal benefits (continued)

• Service costs comprising current service costs, past service costs, gains and losses on curtailments and non

routine-settlements (under general and administrative expenses)

• Net special commission expense or income (under borrowing facility cost and charges)

Shared-based payments Certain executives of the Company receive remuneration in the form of share-based payments, whereby executives

render services as consideration for equity instruments (equity-settled transactions).

The cost of equity-settled transactions is determined by the fair value at the date when the grant is made using an

appropriate valuation model.

That cost is recognized in employee benefits expense, together with a corresponding increase in equity (other

capital reserve), over the period in which the service and, where applicable, the performance conditions are fulfilled

(the vesting period). The cumulative expense recognized for equity-settled transactions at each reporting date until

the vesting date reflects the extent to which the vesting period has expired and the Company’s best estimate of the

number of equity instruments that will ultimately vest. The expense or credit in the statement of comprehensive

income for a period represents the movement in cumulative expense recognized as at the beginning and end of that

period.

Service and non-market performance conditions are not taken into account when determining the grant date fair

value of awards, but the likelihood of the conditions being met is assessed as part of the Company’s best estimate of

the number of equity instruments that will ultimately vest. Market performance conditions, if any, are reflected

within the grant date fair value. Any other conditions attached to an award, but without an associated service

requirement, are considered to be non-vesting conditions. Non-vesting conditions are reflected in the fair value of

an award and lead to an immediate expensing of an award unless there are also service and/or performance

conditions.

No expense is recognised for awards that do not ultimately vest because non-market performance and/or service

conditions have not been met. Where awards include a market or non-vesting condition, the transactions are treated

as vested irrespective of whether the market or non-vesting condition is satisfied, provided that all other

performance and/or service conditions are satisfied.

When the terms of an equity-settled award are modified, the minimum expense recognized is the grant date fair

value of the unmodified award, provided the original terms of the award are met. An additional expense, measured

as at the date of modification, is recognized for any modification that increases the total fair value of the share-

based payment transaction, or is otherwise beneficial to the employee. Where an award is cancelled by the

Company or by the counterparty, any remaining element of the fair value of the award is expensed immediately

through statement of comprehensive income.

Offsetting of financial assets and financial liabilities Financial assets and financial liabilities are offset and the net amount reported in the statement of financial position

if, and only if there is a currently enforceable legal right to offset the recognised amounts and there is an intention to

settle on a net basis, or to realise the assets and settle the liabilities simultaneously.

Zakat The Company is subject to the regulations of the Department of Zakat and Income Tax (“DZIT”) in the Kingdom of

Saudi Arabia. Zakat is provided on an accrual basis. The zakat charge is computed on the zakat base. Any

difference in the estimate is recorded when the final assessment is approved.

Deferred finance expenses Deferred finance expenses which are related to bank facilities are amortised over the estimated period of benefit of

these facilities.





15


Dividends Final dividends are recognised as a liability at the time of their approval by the shareholders’ General Assembly

Operating lease Payments made under operating lease are recognised in statement of comprehensive income on a straight line basis

over the term of lease.

Expenses Selling and marketing expenses are those that specifically relate to salesmen and marketing expenses. All other

expenses are classified as general and administration expenses.

Segmental reporting A segment is a distinguishable component of the Company that is engaged either in providing products or services

(a business segment) or in providing products or services within a particular economic environment (a geographic

segment), which is subject to risks and rewards that are different from those of other segments.

5. PROSPECTIVE CHANGES IN THE INTERNATIONAL FINANCIAL REPORTING

FRAMEWORK

The Company has consistently applied the accounting policies set out in note 4 to all periods presented in these

financial statements. The Company has chosen not to early adopt any new standards and revisions to existing

standards which have been published and are not mandatory for compliance for the Company’s current accounting

year, including the standards which are relevant to the Company’s operations and are listed below:

IFRS 9 Financial Instruments In July 2014, the IASB issued the final version of IFRS 9 Financial Instruments which reflects all phases of the

financial instruments project and replaces IAS 39 Financial Instruments: Recognition and Measurement and all

previous versions of IFRS 9. The standard introduces new requirements for classification and measurement,

impairment, and hedge accounting. IFRS 9 is effective for annual periods beginning on or after 1 January 2018,

with early application permitted. Retrospective application is required, but comparative information is not

compulsory. Early application of previous versions of IFRS 9 (2009, 2010 and 2013) is permitted if the date of

initial application is before 1 February 2015. The adoption of IFRS 9 will have an effect on the classification and

measurement of the Company’s financial assets, but no impact on the classification and measurement of the

Company’s financial liabilities.

The Company plans to adopt the new standard on the required effective date. During 2015, the Company has

performed a high-level impact assessment of all three aspects of IFRS 9. This preliminary assessment is based on

currently available information and may be subject to changes arising from further detailed analyses or additional

reasonable and supportable information being made available to the Company in the future. Overall, the Company

expects an impact on the classification and measurement of the Company’s financial assets, but no impact on the

classification and measurement of the Company’s financial liabilities.

IFRS 15 Revenue from Contracts with Customers IFRS 15 was issued in May 2014 and establishes a new five-step model that will apply to revenue arising from

contracts with customers. Under IFRS 15, revenue is recognized at an amount that reflects the consideration to

which an entity expects to be entitled in exchange for transferring goods or services to a customer. The principles in

IFRS 15 provide a more structured approach to measuring and recognizing revenue. The new revenue standard is

applicable to all entities and will supersede all current revenue recognition requirements under IFRS. Either a full or

modified retrospective application is required for annual periods beginning on or after 1 January 2019 with early

adoption permitted. The Company is currently assessing the impact of IFRS 15 and plans to adopt the new standard

on the required effective date.





16

6. CASH AND CASH EQUIVALENTS

Cash and cash equivalents included in the statement of cash flows comprise the following:

31 December

2015 SR

31 December 2014 SR

1 January

2014 SR

Cash in hand 17,713 29,483 12,940

Cash at bank 100,105,181 53,229,261 146,903,266

───────── ───────── ─────────

Total 100,122,894 53,258,744 146,916,206

═════════ ═════════ ═════════

7. MURABAHA RECEIVABLES, NET

31 December 2015 SR

31 December 2014 SR

1 January 2014 SR

Gross Murabaha receivables 575,973,780 478,349,929 333,861,942

Less: Unearned income 108,663,125 59,841,600 45,600,747 ──────── ──────── ──────── Murabaha receivables, net 467,310,655 418,508,329 288,261,195

Less: Provision for credit losses 6,929,883 8,215,278 6,353,580 ──────── ──────── ──────── Murabaha receivables, net 460,380,772 410,293,051 281,907,615 ════════ ════════ ════════

Current portion of Murabaha receivables, net 154,336,270 268,052,606 169,618,684

Non-current portion of Murabaha receivables, net 306,044,502 142,240,445 112,288,931 ──────── ──────── ──────── Murabaha receivables, net 460,380,772 410,293,051 281,907,615 ════════ ════════ ════════

Movement in provision for credit losses: For the year ended 31 December

2015 SR

2014 SR

Balance at the beginning of the year 8,215,278 6,353,580

(Reversal of provision)/provision charge for the year (1,285,395) 1,861,698 ─────── ──────── Balance at the end of the year 6,929,883 8,215,278 ═══════ ════════





17

8. IJARA RECEIVABLES, NET

31 December 2015 SR

31 December 2014 SR

1 January 2014 SR

Gross Ijara receivables 560,883,954 766,460,358 660,680,402

Less: Unearned income 75,232,829 124,843,682 119,154,875 ───────── ───────── ───────── Ijara receivables, net 485,651,125 641,616,676 541,525,527

Less: Provision for credit losses 16,070,117 6,784,722 5,646,420 ───────── ───────── ───────── Ijara receivables, net 469,581,008 634,831,954 535,879,107 ═════════ ═════════ ═════════

Current portion of Ijara receivables, net 264,972,600 297,078,554 219,273,151

Non-current portion of Ijara receivables, net 204,608,408 337,753,400 316,605,956 ───────── ───────── ───────── Ijara receivables, net 469,581,008 634,831,954 535,879,107 ═════════ ═════════ ═════════

Movement in provision for credit losses: For the year ended 31 December

2015 SR

2014 SR

Balance at the beginning of the year 6,784,722 5,646,420

Charge for the year 9,285,395 1,138,302 ──────── ─────── Balance at the end of the year 16,070,117 6,784,722 ════════ ═══════





18

9. PROPERTY AND EQUIPMENT

2015

Land SR

Lease hold

improvements SR

Computer and

equipment SR

Furniture and fixture

SR

Motor vehicles

SR

Total SR

Cost

As at 1 January 3,413,250 8,309,051 4,346,093 2,368,577 866,401 19,303,372

Additions during the year - - 130,807 - - 130,807

Disposals during the year - - (4,999) (202,338) - (207,337)

──────── ──────── ──────── ──────── ──────── ────────

As at 31 December 3,413,250 8,309,051 4,471,901 2,166,239 866,401 19,226,842

──────── ──────── ──────── ──────── ──────── ────────

Accumulated depreciation

As at 1 January - 3,265,333 3,593,423 1,656,080 451,285 8,966,121

Depreciation charge for the year - 830,914 509,769 279,327 181,608 1,801,618

Relating to disposals during the year - - (2,288) (185,633) - (187,921)

──────── ──────── ──────── ──────── ──────── ────────

As at 31 December - 4,096,247 4,100,904 1,749,774 632,893 10,579,818

──────── ──────── ──────── ──────── ──────── ────────

Net book value

At 31 December 2015 3,413,250 4,212,804 370,997 416,465 233,508 8,647,024

═══════ ════════ ════════ ════════ ════════ ════════





19

9. PROPERTY AND EQUIPMENT (continued)

2014

Land SR

Lease hold

improvements SR

Computer and equipment

SR

Furniture and fixture

SR

Motor vehicles

SR

Total SR

Cost

As at 1 January 3,413,250 8,304,550 4,189,759 2,368,577 686,501 18,962,637

Additions during the year - 4,501 156,334 - 179,900 340,735

──────── ──────── ──────── ──────── ──────── ────────

As at 31 December 3,413,250 8,309,051 4,346,093 2,368,577 866,401 19,303,372

──────── ──────── ──────── ──────── ──────── ────────

Accumulated depreciation

As at 1 January - 2,434,798 2,869,405 1,251,196 291,840 6,847,239

Depreciation charge for the year - 830,535 724,018 404,884 159,445 2,118,882

──────── ──────── ──────── ──────── ──────── ────────

As at 31 December - 3,265,333 3,593,423 1,656,080 451,285 8,966,121

──────── ──────── ──────── ──────── ──────── ────────

Net book value

At 31 December 2014 3,413,250 5,043,718 752,670 712,497 415,116 10,337,251

════════ ════════ ════════ ════════ ════════ ════════





20

9. PROPERTY AND EQUIPMENT (continued)

The useful lives of property and equipment are as follows:

Leasehold improvements Shorter of 10 years or lease period

Computer and equipment 4 years

Furniture and fixture 4 to 10 years

Motor vehicles 3 to 5 years

10. INVESTMENT PROPERTIES

Investment properties consist of free hold lands located in Riyadh, Dammam and Jeddah. These investment

properties are registered in the name of a director on behalf of the Company.

There were no additions to investment properties during the current or prior year. There were no disposals of

investment properties during the current year. During the previous year, the Company disposed investment

properties with a carrying value of SR 9.42 million resulting in a gain of SR 6.94 million.

As at 31 December 2015, the fair value of these investment properties is SR 136.51 million (2014: SR 130.07

million).

11. ACCOUNTS RECEIVABLES, PREPAYMENTS AND OTHERS

31 December

2015

SR

31 December

2014

SR

1 January

2014

SR

Receivable from sale of investment properties 32,136,776 32,136,774 32,136,774

Margin deposits and guarantees 19,861,932 7,380,500 7,380,500

Prepaid expenses 917,292 678,412 582,362

Amounts due from related parties (note 18) 661,176 1,653,039 1,499,725

Deferred sales commission 546,945 1,122,406 1,002,775

Employees’ receivables 258,537 278,283 174,016

Cheques under collection - - 5,862,500

Other receivable 172,055 46,238 40,219

──────── ──────── ────────

54,554,713 43,295,652 48,678,871

════════ ════════ ════════

12. ACCOUNTS PAYABLE AND ACCRUALS

31 December

2015

SR

31 December

2014

SR

1 January

2014

SR

Accrued expenses 2,395,097 3,030,488 2,274,665

Deferred rent income and deferred staff loans income 855,554 964,710 771,407

Advance from customers 170,250 173,285 998,703

Trade accounts payable 144,534 155,124 648,923

──────── ──────── ────────

3,565,435 4,323,607 4,693,698

════════ ════════ ════════





21

13. PROVISION FOR ZAKAT

Charge for the year Zakat charge for the year amounted to SR 14.5 million (2014: SR 15.5 million) and is based on the following:

31 December

2015

SR

31 December

2014

SR

1 January

2014

SR

Equity 691,416,101 641,526,704 595,289,353

Opening provisions and other adjustments 399,900,917 553,535,706 482,320,892

Book value of long term assets (565,462,305) (646,880,951) (631,408,496)

───────── ───────── ──────────

525,854,713 548,181,459 446,201,749

Adjusted income for the year 55,471,136 72,635,220 62,741,224

───────── ───────── ──────────

Zakat base 581,325,849 620,816,679 508,942,973

═════════ ═════════ ══════════

The difference between the actual and the zakatable income is mainly due to provisions which are not allowed in

the calculation of the zakatable income.

Movement in zakat provision during the year Movement in the zakat provision by the year is as follows:

31 December

2015

SR

31 December

2014

SR

As at 1 January 16,715,208 13,091,804

Charge for the year 14,533,146 15,520,417

Payment made during the year (5,091,035) (11,897,013)

──────── ────────

As at 31 December 26,157,319 16,715,208

════════ ════════

Status of assessment The Company has filed its zakat returns with the Department of Zakat and Income tax (“DZIT”) for all prior

years up to 2014 and settled zakat dues accordingly. DZIT has raised the zakat assessments from years 2009 to

2014, which resulted in an aggregate difference due to disallowance of certain items included in the related

returns amounting to SR 55 million. The Company has filed appeals against these assessments raised by DZIT

and the management believes that the ultimate outcomes of these appeals will be in the favour of the Company.





22

14. BANK BORROWINGS, NET

Non-current portion

31 December

2015

SR

31 December

2014

SR

1 January

2014

SR

Secured bank loans 185,196,470 319,037,905 266,480,941

Deferred commission (5,318,406) (14,215,584) (12,561,248)

───────── ───────── ─────────

179,878,064 304,822,321 253,919,693

═════════ ═════════ ═════════

Current portion

31 December

2015

SR

31 December

2014

SR

1 January

2014

SR

Secured bank loans 197,590,208 218,791,951 207,786,691

Deferred commission (11,349,402) (16,546,010) (14,337,236)

───────── ───────── ─────────

186,240,806 202,245,941 193,449,455

═════════ ═════════ ═════════

The Company has Murabaha facilities from local commercial banks to finance working capital with a profit rate

ranging from 3.35% to 4.60% (2014: 3.35% to 4.55%) payable every quarter until 2018. These facilities are secured

by assignment of receivables.

15. EMPLOYEES’ TERMINAL BENEFITS

31 December

2015

SR

31 December

2014

SR

Opening balance 3,427,855 2,511,059

Charge for the year 877,015 957,180

Payments made during the year (374,384) (40,384)

────────── ──────────

Closing balance 3,930,486 3,427,855

══════════ ══════════

16. SHARE CAPITAL

Authorized share capital is divided into 60 million shares (31 December 2014: 60 million shares) of SR 10 each, of

which SR 510 million was paid by the founding shareholders as at 31 December 2014 and additional SR 30 million

was paid during April 2015 for issuance of 3 million shares at SR 10 par value per share.

In addition to the paid up capital, the founding shareholders have decided during 2011 to grant Mr. Ahmed bin

Rashid Abdullah Al-Ameer (“CEO”) and Mr. Hassan bin Musa Yousef (“GM”) 10% of the Company’s shares

which represents SR 60 million (6 million shares) against initiating the Company and managing it for a period of

five years from 2011. In this respect, a Management Agreement was signed on 5 Muharam 1433H (corresponding

10 December 2011).

During the first quarter of 2015, pursuant to the above mentioned Shareholders’ Resolution and a Management

Agreement entered into between the Company and the GM and the CEO of the Company, the Board of Directors of

the Company decided and approved to grant 10% of the paid up capital of the Company’s shares representing SR 54

million (5.4 million shares) (being SR 510 million paid up capital as at the end of first quarter of 2015 and SR 30

million capital paid subsequent to the first quarter of 2015) to CEO and GM (5% each) instead of SR 60 million (6

million shares) as equity settled share based compensation (see notes 3.5, 17, and 18)





23

16. SHARE CAPITAL (continued)

Subsequent to the year end, the CEO and GM of the Company together subscribed for the aforementioned 5.4

million shares of the Company. Further, subsequent to the year-end, the existing shareholders of the Company also

subscribed for additional paid up capital of SR 6 million thus increasing the paid up capital of the Company to SR

600 million (60 million shares of SR 10 each). All the legal formalities for these additional subscriptions have been

completed on 7 March 2016.

17. RESERVES

Statutory reserve In accordance with the Regulation for Companies, the Company is required to transfer 10% of its net profits to a

statutory reserve until such reserve equals 50% of its share capital. This reserve is not available for distribution to

the Company’s shareholders

Consensual reserve This comprise a voluntary reserve created based on a decision made by shareholder in prior years. The reserve is

available for distribution.

Other capital reserve This pertains to share-based payments reserve for recognising the value of equity-settled share-based payments

provided to the key management personnel, as part of their remuneration (see notes 3.5, 16, and 18).

18. RELATED PARTY TRANSACTIONS AND BALANCES

The related parties of the Company include the shareholders, their affiliated entities and certain key management

personnel. Key management personnel are those persons having authority and responsibility for planning, directing

and controlling the activities of the Company, directly or indirectly.

In the ordinary course of its activities, the Company transacts business with related parties on mutually agreed

terms.

The following are the details of major related party transactions/balances during the year:

Related party Nature of transactions

31 December

2015

SR

31 December

2014

SR

Key management personnel Income earned on financing 49,500 69,035

Salaries and benefits 5,546,004 5,551,404

Board attendance fees 400,000 400,000

In addition to above, key management personnel have been provided with certain share awards in prior years. An

amount of SR 10.8 million (2014: SR 10.8 million) was charged to statement of comprehensive income in respect of

such share awards. As at the end of 2015, all such share awards have been vested (see note 3.5, 16, and 17).





24

18. RELATED PARTY TRANSACTIONS AND BALANCES (continued)

The balances as at 31 December resulting from such transactions included in the financial statements are as

follows:

31 December

2015

SR

31 December

2014

SR

1 January

2014

SR

Key management personnel - Financing 661,176 1,653,039 1,499,725

All outstanding balance with these related parties are on normal commercial terms. None of the balance is secured.

All the balances with the related parties are considered good and no provision for credit losses have been recognised

for these balances in these financial statements.

19. FINANCIAL INSTRUMENTS AND FAIR VALUE

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction

between market participants at the measurement date. The fair value measurement is based on the presumption that

the transaction to sell the asset or transfer the liability takes place either:

- In the principal market for the asset or liability, or

- In the absence of a principal market, in the most advantageous market for the asset or liability

The principal or the most advantageous market must be accessible to by the Company.

Financial instruments comprise of financial assets and financial liabilities. Financial assets consist of bank balances

and cash, Murabaha and Ijara receivables, margin deposits, accounts and other receivables. Financial liabilities

consist of borrowings and accounts and other payables.

All financial liabilities are designated as financial liabilities held at amortised cost.

Fair value hierarchy The Company uses the following hierarchy for determining and disclosing the fair value of financial instruments by

valuation technique:

Level 1: quoted (unadjusted) prices in active markets for identical assets or liabilities

Level 2: other techniques for which all inputs which have a significant effect on the recorded fair value are

observable, either directly or indirectly

Level 3: techniques which use inputs which have a significant effect on the recorded fair value that are not based on

observable market data.

Management has classified all the financial assets and financial liabilities within level 2 of fair value hierarchy. For

the purpose of fair value disclosures, the Company has determined classes of assets and liabilities on the basis of the

nature, characteristics and risks of the asset or liability and the level of the fair value hierarchy as explained above.

For assets and liabilities that are recognized in the financial statements on a recurring basis, the Company

determines whether transfers have occurred between levels in the hierarchy by re-assessing categorisation (based on

the lowest level input that is significant to the fair value measurement as a whole) at the end of each reporting

period.

The Company’s management determines the policies and procedures for both recurring fair value measurement, and

for non-recurring measurement, such as assets held for distribution in discontinued operation.

The fair values of the financial assets and liabilities of the Company at the reporting date are not materially different

from their carrying values.

There have been no transfers to and from Level 2 during the year.





25

20. GENERAL AND ADMINISTRATION EXPENSES

31 December

2015

SR

31 December

2014

SR Salaries and other employees’ benefits 27,231,937 23,754,964

Rent 4,758,976 4,555,565

Consultancy and professional fee 2,095,656 2,098,169

Depreciation (note 9) 1,801,618 2,118,882

Board attendance fee 1,500,000 1,500,000

Insurance 616,494 684,583

Utilities 378,897 371,919

Travel 321,392 655,962

Subscription fees 193,579 179,205

Cleaning and hospitality 191,314 222,658

Maintenance expenses 148,706 104,273

Bank charges 45,756 19,326

Others 496,023 814,508 ────────── ────────── 39,780,348 37,080,014 ══════════ ══════════

21. SELLING AND MARKETING EXPENSES

31 December

2015

SR

31 December

2014

SR

Salaries and employees’ benefits 2,554,592 3,225,321

Advertising 22,000 9,100 ────────── ────────── 2,576,592 3,234,421 ══════════ ══════════





26

22. RISK MANAGEMENT

The Company’s activities expose it to a variety of financial risks: credit risk, market risk (including currency risk

and special commission rate risks) and liquidity risk. The Company’s overall risk management program focuses on

the unpredictability of financial markets and seeks to minimise potential adverse effects on the Company’s financial

statements. Risk management is carried out by senior management. The most important risks and their management

are summarised below

Credit risk The Company manages exposure to credit risk, which is the risk that one party to a financial instrument will fail to

discharge an obligation and cause the other party to incur a financial loss. Credit exposures arise principally in

lending activities that relate to Murabaha and Ijara receivables. There is also credit risk in certain other financial

instruments, including loan commitments.

The Company attempts to control credit risk by monitoring credit exposures, limiting transactions with specific

counter-parties, obtaining collaterals, and continually assessing the creditworthiness of counter-parties. The

Company’s risk management policies are designed to identify, set appropriate risk limits and monitor the risks and

adherence to limits. To control the level of credit risk taken, the Company assesses all counter-parties using the

same techniques as it does for its lending activities.

As at the year end, top 10 customers of the Company represent 22% (2014: 26%) of the total Murabaha and Ijara

receivables. No single customer balance as at year end is more than 3% (2014: 4%) of the total Murabaha and Ijara

receivables.

The Company’s maximum exposure to credit risk at the reporting date was on account of the following:

31 December 2015 SR

31 December 2014 SR

1 January 2014 SR

Cash at bank 100,105,181 53,229,261 146,903,266

Murabaha receivables, net 460,380,772 410,293,051 281,907,615

Ijara receivables, net 469,581,008 634,831,954 535,879,107

Accounts and other receivables 53,090,476 41,494,834 47,093,735

───────── ───────── ─────────

1,083,157,437 1,139,849,100 1,011,783,723

═════════ ═════════ ═════════

Credit quality of Murabaha and Ijara receivables The Company has categorised its Murabaha and Ijara receivables into three sub categories according to its internal

rating system. These are as follows:

Category 1: Contracts with no past due payments. All payments are due in the future.

Category 2: Contracts with past due payments outstanding, but not classified as impaired/non performing.

Category 3: Contracts deemed to be non-performing with the expectation that the contracts will be written off.





27

22. RISK MANAGEMENT (continued)

Credit risk (continued)

Following is the analysis of Murabaha and Ijara receivables in the above mentioned categories:

31 December 2015 Murabaha

receivables

SR

Ijara

receivables

SR

Total

SR

Category-1 329,479,964 162,811,779 492,288,743

Category-2 130,903,808 306,769,229 437,673,037

Category-3 - - -

───────── ───────── ─────────

Total 460,380,772 469,581,008 929,961,780

═════════ ═════════ ═════════

31 December 2014 Murabaha

receivables

SR

Ijara

receivables

SR

Total

SR

Category-1 210,747,437 262,391,019 473,138,456

Category-2 199,545,614 372,440,935 571,986,549

Category-3 - - -

───────── ───────── ─────────

Total 410,293,051 634,831,954 1,045,125,005

═════════ ═════════ ═════════

1 January 2014 Murabaha

receivables

SR

Ijara

receivables

SR

Total

SR

Category-1 78,234,551 203,079,270 281,313,821

Category-2 203,673,064 332,799,837 536,472,901

Category-3 - - -

───────── ───────── ─────────

Total 281,907,615 535,879,107 817,786,722

═════════ ═════════ ═════════





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Credit quality of Murabaha and Ijara receivables (continued)

Following are the details of past due but not impaired Muarabaha and Ijara receivables (Category 2):

31 December 2015

Murabaha

receivables

SR

Ijara

receivables

SR

Total

SR

From 1 day to 30 days overdue 17,722,774 12,446,940 30,169,714



> 180 days overdue 4,098,785 32,479,991 36,578,776

Future payments 93,216,316 233,877,841 327,094,157

───────── ───────── ─────────

Total 130,903,808 306,769,229 437,673,037

═════════ ═════════ ═════════

31 December 2014

Murabaha

receivables

SR

Ijara

receivables

SR

Total

SR




> 180 days overdue 35,593,010 29,084,249 64,677,259

Future payments * 122,822,489 292,145,858 414,968,347

───────── ───────── ─────────

Total 199,545,614 372,440,935 571,986,549

═════════ ═════════ ═════════

1 January 2014

Murabaha

receivables

SR

Ijara

receivables

SR

Total

SR




> 180 days overdue 21,499,950 9,073,429 30,573,379

Future payments * 142,447,965 288,104,819 430,552,783

───────── ───────── ─────────

Total 203,673,064 332,799,837 536,732,901

═════════ ═════════ ═════════

* These represent instalments relating to past due loans which are not yet due as at the reporting date.





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Credit quality of Murabaha and Ijara receivables (continued)

The Company obtains collaterals against all Murabaha and Ijara receivables in the form of real estate security,

vehicles, equipment (movable and non-movable) and third party guarantees. The Company does not annually

value the guarantees and hence does not include their collateral value in the security analysis. The value of such

collaterals backing, excluding consideration of 3rd party guarantees, is SR 1,065,010,479 (2014: SR

936,594,611).

Portfolio Sector Concentration

Sector Concentration 2015 2014 2013

Contracting 44.9% 42.0% 43.0%

Industrial 11.0% 3.8% 7.3%

Retail businesses 1.5% 1.8% 5.4%

Services 26.7% 33.6% 26.0%

Trading 15.9% 18.8% 18.3%

Total 100% 100% 100%

Commission rate risk Commission rate risk is the risk that the value of financial instruments will fluctuate due to changes in the market

commission rates. The Company is not subject to any commission rate risk on its Murabaha and Ijara receivables

and term loans as the receivables are priced by the Company at fixed rates and the term loans obtained by Company

also carry commission at fixed rates. None of the other assets and liabilities of the Company are commission

bearing.

Commission sensitivity of assets, liabilities and off statement of financial position items The Company manages exposure to the effects of various risks associated with fluctuations in the prevailing levels

of market commission rates on its financial position and cash flows. The Company is exposed to special

commission rate risk as a result of mismatches or gaps in the amounts of assets and liabilities that mature in a given

period. The Company manages this risk through diversification of funding resources.

Currency risk Currency risk is the risk that the value of financial instruments will fluctuate due to changes in foreign exchange

rates. The Company is not subject to fluctuations in foreign exchange rates in the normal course of its business as

all contracts are denominated in Saudi Riyals. There are some expenses incurred in foreign currencies while staff

are on training programs, but these expenses are settled when incurred. Since the Company does not have any

significant foreign currency denominated monetary assets and liabilities, management believes that the Company is

not exposed to any significant foreign currency risk.

Legal risk Title deeds of the real estate properties are registered either in the Company’s name or in the name of the CEO as a

Saudi Resident, with an undertaking executed verifying that the ownership of the real estate is being held by the

CEO solely for the benefit of the Company. The enforceability of any related rights and obligations are subject to

interpretation and enforceability in the relevant courts of law.





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Liquidity risk

Liquidity risk is the risk that the Company will encounter difficulty in meeting obligations associated with its

financial liabilities that are settled by delivering cash or other financial assets. The Company monitors and manages

the liquidity structure of its assets and liabilities to ensure that cash flows are sufficiently balanced and that

sufficient liquid funds are maintained to meet liquidity requirements.

i) Analysis of financial liabilities by remaining contractual maturities

The table below summarises the maturity profile of the Company’s financial liabilities at 31 December 2015, 31

December 2014 and 1 January 2014 based on contractual undiscounted repayment obligations.

31 December 2015 Less than 1

year 1 to 5 years

Total

SR SR SR

Accounts payable and accruals 2,709,881 - 2,709,881

Bank borrowings 197,590,208 185,196,470 382,786,678

─────── ─────── ────────

200,300,089 185,196,470 385,496,559

═══════ ═══════ ════════

31 December 2014 Less than 1

year 1 to 5 years

Total

SR SR SR Accounts payable and accruals 3,358,897 - 3,358,897

Bank borrowings 218,791,951 319,037,905 537,829,856

──────── ──────── ────────

222,150,848 319,037,905 541,188,753

════════ ════════ ════════

1 January 2014 Less than 1

year 1 to 5 years

Total

SR SR SR Accounts payable and accruals 3,922,291 - 3,922,291

Bank borrowings 207,786,691 266,480,941 474,267,632

──────── ──────── ────────

211,708,982 266,480,941 478,189,923

════════ ════════ ════════





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Liquidity risk (continued)

ii) Analysis of financial assets and liabilities by expected maturities

The table below shows an analysis of financial assets and liabilities, analysed according to when they are expected

to be recovered or settled. See previous tables for the analysis of maturity of contractual undiscounted financial

liabilities.

31 December 2015 No fixed

term

Less than 1 year

1 to 5 years

Total

Assets SR SR SR SR

Cash and cash equivalents 100,122,894 - - 100,122,894

Murabaha receivables, net - 154,336,270 306,044,502 460,380,772

Ijarah receivables, net - 264,972,600 204,608,408 469,581,008

Accounts receivable, prepayments and others - 54,554,713 - 54,554,713

Property and equipment 8,647,024 - - 8,647,024

Investment properties 71,137,158 - - 71,137,158

───────── ───────── ───────── ──────────

179,907,076 473,863,583 510,652,910 1,164,423,569

───────── ───────── ───────── ──────────

No fixed

term

Less than 1 year

1 to 5 years

Total

Liabilities SR SR SR SR

Accounts payable and accruals - 3,565,435 - 3,565,435

Provision for zakat - 26,157,319 - 26,157,319

Bank borrowings - 186,240,806 179,878,064 366,118,870

Provision for employees’ terminal benefits 3,930,486 - - 3,930,486

───────── ───────── ───────── ──────────

3,930,486 215,963,560 179,878,064 399,772,110

───────── ───────── ───────── ──────────

Gap 31 December 2015 175,976,590 257,900,023 330,774,846 764,651,459

═════════ ═════════ ════════ ═════════





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ii) Analysis of financial assets and liabilities by expected maturities (continued)

31 December 2014 No fixed

term

Less than 1 year

1 to 5 years

Total

Assets: SR SR SR SR

Cash and cash equivalents 53,258,744 - - 53,258,744



Accounts receivable, prepayments and others - 43,295,652 - 43,295,652



────────── ───────── ───────── ──────────

134,733,153 608,426,812 479,993,845 1,223,153,810

────────── ───────── ───────── ──────────

No fixed

term

Less than 1 year

1 to 5 years

Total




Bank borrowings - 202,245,941 304,822,321 507,068,262


───────── ───────── ───────── ──────────

3,427,855 223,284,756 304,822,321 531,534,932

───────── ───────── ───────── ──────────

Gap 31 December 2014 131,305,298 385,142,056 175,171,524 691,618,878

═════════ ═════════ ════════ ═════════

1 January 2014 No fixed

term

Less than 1 year

1 to 5 years

Total

SR SR SR SR Cash and cash equivalents 146,916,206 - - 146,916,206



Accounts receivable, prepayments and others - 41,298,372 7,380,500 48,678,872



───────── ───────── ───────── ──────────

239,585,792 430,190,207 436,275,387 1,106,051,386

───────── ───────── ───────── ──────────





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ii) Analysis of financial assets and liabilities by expected maturities (continued)

No fixed

term

Less than 1 year

1 to 5 years

Total




Bank borrowings - 193,449,455 253,919,693 447,369,148


───────── ───────── ───────── ──────────

2,511,059 211,234,957 253,919,693 467,665,709

───────── ───────── ───────── ──────────

Gap 1 January 2014 237,074,734 218,955,250 182,355,694 638,385,677

═════════ ═════════ ════════ ═════════

23. OPERATING LEASE

Company as lessee Non-cancellable operating lease rentals are payable as follows:

31 December 2015

31 December 2014

1 January 2014

SR SR SR Less than one year 4,138,138 4,138,138 4,138,138

Between one and five years 7,000,000 11,138,138 15,276,276

More than five years - - -

──────── ──────── ────────

11,138,138 15,276,276 19,414,414

════════ ════════ ════════

The Company has building under operating lease. During the year, an amount of SR 4,138,138 was recognised as

an expense in the statement of comprehensive income (2014: SR 4,138,138).

The Company has sublet office space in the building to 8 different tenants with leases due to expire up to 2018. Sub

lease payments of SR 1,996,200 (2014: SR 1,981,950) is expected to be received during the following financial

year.

24. CONTINGENCIES AND COMMITMENTS

Contingencies

The Company has no contingent assets or liabilities as at year end date (2014: Nil), other than the one disclosed in

note 13 to the financial statements.

Commitments The Company has no outstanding Murabaha and Ijara commitments for disbursements to customers in 2015 (2014:

SR Nil).





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25. CAPITAL ADEQUACY

The Company’s objectives when managing capital are to safeguard the Company’s ability to continue as a going

concern and to maintain a strong capital base. Capital adequacy ratios as monitored and measured by the

management below measure capital adequacy by comparing the Company’s eligible capital with its statement of

financial position, commitments and notional amount of derivatives, if any, at a weighted amount to reflect their

relative risk.

31 December 2015 31 December 2014 1 January 2014

Total

capital

ratio %

Tier I

capital

ratio %

Total

capital

ratio %

Tier I

capital

ratio %

Total

capital

ratio %

Tier I

capital

ratio %

Capital adequacy ratio 74.0% 71.8% 61.8% 60.5% 68.9% 67.7%

26. COMPARATIVE FIGURES

Certain of the prior year amounts have been re-classified to conform to the current year’s presentation.

aNNUAL FINANCIAL statements - kirnafco.com · Ijara receivables, net 8 469,581,008 634,831,954...

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