Saudi Kuwaiti Finance House and its Subsidiaries (A Saudi Closed Joint Stock Company)
CONSOLIDATED FINANCIAL STATEMENTS
31 DECEMBER 2019 Ernst & Young & Co. (Certified Public Accountants) Registration No. 45/11/323 General Partnership C.R. No. 1010383821 Head Office Al Faisaliah Office Tower, 14th Floor Tel: +966 11 215 9898 King Fahad Road +966 11 273 4740 P.O. Box 2732 Fax: +966 11 273 4730 Riyadh 11461 Kingdom of Saudi Arabia [email protected] ey.com/mena
INDEPENDENT AUDITOR’S REPORT To the Shareholders of Saudi Kuwaiti Finance House (A Saudi Closed Joint Stock Company)
Opinion We have audited the consolidated financial statements of Saudi Kuwaiti Finance House (the “Company”) and its subsidiaries (the “Group”), which comprise the consolidated statement of financial position as at 31 December 2019, and the consolidated statement of comprehensive income, consolidated statement of changes in shareholders’ equity and consolidated statement of cash flows for the year then ended, and notes to the consolidated financial statements, including a summary of significant accounting policies.
In our opinion, the accompanying consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Group as at 31 December 2019, and its consolidated financial performance and its consolidated cash flows for the year then ended in accordance with International Financial Reporting Standards that are endorsed in the Kingdom of Saudi Arabia and other standards and pronouncements that are endorsed by the Saudi Organization for Certified Public Accountants.
Basis for Opinion We conducted our audit in accordance with International Standards on Auditing that are endorsed in the Kingdom of Saudi Arabia. Our responsibilities under those standards are further described in the Auditor’s Responsibilities for the Audit of the Consolidated Financial Statements section of our report. We are independent of the Group in accordance with the professional code of conduct and ethics endorsed in the Kingdom of Saudi Arabia that are relevant to our audit of the consolidated financial statements, and we have fulfilled our other ethical responsibilities in accordance with these requirements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.
Responsibilities of Management and Board of Directors for the Consolidated Financial Statements Management is responsible for the preparation and fair presentation of the consolidated financial statements in accordance with International Financial Reporting Standards that are endorsed in the Kingdom of Saudi Arabia and other standards and pronouncements that are endorsed by the Saudi Organization for Certified Public Accountants and the provisions of Companies’ Law and Company’s By-laws, and for such internal control as management determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.
In preparing the consolidated financial statements, management is responsible for assessing the Group’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless management either intends to liquidate the Group or to cease operations, or has no realistic alternative but to do so.
The Board of Directors is responsible for overseeing the Group’s financial reporting process.
Auditor’s Responsibilities for the Audit of the Consolidated Financial Statements Our objectives are to obtain reasonable assurance about whether the consolidated financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with International Standards on Auditing that are endorsed in the Kingdom of Saudi Arabia will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these consolidated financial statements.
As part of an audit in accordance with International Standards on Auditing that are endorsed in the Kingdom of Saudi Arabia, we exercise professional judgment and maintain professional skepticism throughout the audit. We also:
Saudi Kuwaiti Finance House and its Subsidiaries (A Saudi Closed Joint Stock Company) CONSOLIDATED STATEMENT OF FINANCIAL POSITION As at 31 December 2019
31 December 2019 31 December 2018 Notes SR SR
ASSETS Property and equipment 7 1,242,645 1,633,612 Intangible assets 8 2,153,267 3,195,889 Right-of-use asset 27 1,701,985 - Investments in associates 9 76,395,490 75,147,054 Financial assets at fair value through profit or loss (FVTPL) 10 87,314,137 105,133,928 Financial assets at amortized cost 11 140,021,136 107,577,579 Trade and other receivables 13 12,251,940 10,113,529 Bank balances 14 118,763,306 127,646,412 TOTAL ASSETS 439,843,906 430,448,003
LIABILITIES Employee defined benefit liabilities 15 3,301,368 3,550,082 Zakat payable 16 14,244,528 14,078,704 Trade and other payables 17 14,235,837 7,126,443 Lease liability 27 1,182,865 - TOTAL LIABILITIES 32,964,598 24,755,229
EQUITY EQUITY ATTRIBUTABLE TO THE SHAREHOLDERS OF THE COMPANY Share capital 18 500,000,000 500,000,000 Statutory reserve 2,505,272 2,505,272 Actuarial valuation reserve 1,219,471 1,085,818 Accumulated losses (109,577,917) (117,030,766) TOTAL SHAREHOLDERS’ EQUITY 394,146,826 386,560,324 Non-controlling interest 12,732,482 19,132,450 TOTAL EQUITY 406,879,308 405,692,774 TOTAL LIABILITIES AND EQUITY 439,843,906 430,448,003
The attached notes 1 to 28 form part of these consolidated financial statements. 3 Saudi Kuwaiti Finance House and its Subsidiaries (A Saudi Closed Joint Stock Company) CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME For the year ended 31 December 2019
2019 2018 Notes SR SR REVENUE Income from corporate finance activities 2,550,000 5,145,000 Dividend income 3,399,082 3,655,960 Income from asset management activities 6,160,897 1,290,207 Commission income 9,329,170 7,718,713 Share in net results of associates 9 5,778,642 5,701,393 Net gains (losses) on financial assets FVTPL 10 3,703,944 (263,104) TOTAL REVENUE 30,921,735 23,248,169
EXPENSES Operating expenses 19 (10,515,895) (12,282,946) General and administrative expenses 20 (14,697,110) (13,528,934) TOTAL EXPENSES (25,213,005) (25,811,880)
OPERATING INCOME (LOSS) 5,708,730 (2,563,711) Other income, net 1,680,472 119,272 INCOME (LOSS) BEFORE ZAKAT 7,389,202 (2,444,439) Zakat expense 16 (3,179,858) (2,917,564) INCOME (LOSS) FOR THE YEAR 4,209,344 (5,362,003)
Other comprehensive income (loss) Items that will not be reclassified to profit or loss in subsequent periods Re-measurements: actuarial gains (losses) on employee defined benefit liabilities 15 133,653 (141,101) Total other comprehensive income (loss) 133,653 (141,101) TOTAL COMPREHENSIVE INCOME (LOSS) FOR THE YEAR 4,342,997 (5,503,104)
Attributable to: Equity holders of the Company 4,295,837 (5,250,590) Non-controlling interest 47,160 (252,514) 4,342,997 (5,503,104)
The attached notes 1 to 28 form part of these consolidated financial statements. 4 Saudi Kuwaiti Finance House and its Subsidiaries (A Saudi Closed Joint Stock Company) CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY For the year ended 31 December 2019
Attributable to the equity shareholders of the Company Non-controlling Actuarial interest Statutory valuation Accumulated Share Total reserve reserve losses Total capital SR SR SR SR SR SR SR
As at 1 January 2018 500,000,000 2,505,272 1,226,919 (111,921,277) 391,810,914 1,331,375 393,142,289 Net movement in non-controlling interest - - - - - 17,627,530 17,627,530 Dividends - - - - - 426,059 426,059 Loss for the year - - - (5,109,489) (5,109,489) (252,514) (5,362,003) Other comprehensive loss - - (141,101) - (141,101) - (141,101) Total comprehensive loss for the year - - (141,101) (5,109,489) (5,250,590) (252,514) (5,503,104) At 31 December 2018 500,000,000 2,505,272 1,085,818 (117,030,766) 386,560,324 19,132,450 405,692,774
As at 1 January 2019 500,000,000 2,505,272 1,085,818 (117,030,766) 386,560,324 19,132,450 405,692,774 Net movement in non-controlling interest - - - - - (18,072,451) (18,072,451) Dividends - - - - - 515,988 515,988 Income for the year - - - 4,162,184 4,162,184 47,160 4,209,344 Other comprehensive income - - 133,653 - 133,653 - 133,653 Total comprehensive income for the year - - 133,653 4,162,184 4,295,837 47,160 4,342,997 Disposal of a partial ownership in a subsidiary (note 2.2) - - - 3,290,665 3,290,665 11,109,335 14,400,000 At 31 December 2019 500,000,000 2,505,272 1,219,471 (109,577,917) 394,146,826 12,732,482 406,879,308
The attached notes 1 to 28 form part of these consolidated financial statements. 5 Saudi Kuwaiti Finance House and its Subsidiaries (A Saudi Closed Joint Stock Company) CONSOLIDATED STATEMENT OF CASH FLOWS For the year ended 31 December 2019
31 December 31 December 2019 2018 Notes SR SR OPERATING ACTIVITIES Income (loss) before zakat and non-controlling interest 7,389,202 (2,444,439) Adjustments for: Depreciation of property and equipment 7 480,405 908,933 Depreciation of right-of-use asset 27 561,076 - Amortization of intangible assets 8 1,042,622 1,105,402 Share in net results of associates 9 (5,778,642) (5,701,393) Finance charge on lease 27 113,224 - Unrealized gains on financial assets at FVTPL 10 (1,553,446) (208,387) Dividend income (3,399,082) (3,655,960) Interest income from financial assets at amortized cost, net 11 (7,974,235) (6,462,002) Provision for expected credit loss 20 498,123 871,841 Provision for employee defined benefit liabilities 15 837,047 799,782 (7,783,706) (14,786,223) Changes in operating assets and liabilities: Trade and other receivables 3,813,172 5,627,310 Trade and other payables (2,616,918) 1,651,280 Cash used in operations (6,587,452) (7,507,633)
Employee defined benefits paid 15 (952,108) (906,697) Zakat paid 16 (3,014,034) (2,123,980) Net cash used in operating activities (10,553,594) (10,538,310) INVESTING ACTIVITIES Purchase of property and equipment 7 (89,438) (523,918) Proceeds from partial disposal of a subsidiary 2.2 14,400,000 - Purchase of intangible assets 8 - (964,250) Disposal of investment in associates 9 - 1,071,940 Proceeds from disposal of financial assets at FVTPL 19,373,237 5,980,889 Purchase of financial assets at amortized cost 11 (83,059,021) (97,545,850) Proceeds from matured financial assets at amortized cost 11 50,736,083 99,020,647 Dividend received 2,292,914 2,553,325 Dividend from associate - 1,657,833 Interest income from financial assets at amortized cost 6,521,163 6,011,603 Net cash from investing activities 10,174,938 17,262,219 FINANCING ACTIVITIES Non-controlling interest (7,830,150) 18,053,589 Repayment of principal portion of lease liability 27 (674,300) - Net cash (used in) from financing activities (8,504,450) 18,053,589
(Decrease) increase in bank balances during the year (8,883,106) 24,777,498 Bank balances at the beginning of the year 14 127,646,412 102,868,914 Bank balances at the end of the year 14 118,763,306 127,646,412
Significant non-cash information: Right-of-use asset 27 2,263,061 - Lease liability 27 1,743,941 - Prepaid rent reclassified to right-of-use asset 27 (519,120) - Dividend receivable from an associate 13 4,530,206 3,303,723 Actuarial (losses) gains on employee defined benefit liabilities 15 133,653 (141,101)
The attached notes 1 to 28 form part of these consolidated financial statements. 6 Saudi Kuwaiti Finance House and its Subsidiaries (A Saudi Closed Joint Stock Company) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued) At 31 December 2019
1. CORPORATE INFORMATION AND ACTIVITIES Saudi Kuwaiti Finance House (the “Company") is a Saudi Closed Joint Stock Company incorporated under Ministry of Commerce resolution number 71/K dated 7 Rabi Awal 1430H (corresponding to 4 March 2009). The Company was initially registered in Al Khobar with commercial registration number 2051039562 dated 28 Rabi' I 1430H (corresponding to 25 March 2009). During 2011, the Company changed its head office location to Riyadh and a new commercial registration was issued in Riyadh with number 1010312522 with the same date. The previous commercial registration has been cancelled. The Company’s principal activities according to the Capital Market Authority license numbered 08124 37 and dated 7 Dhul- Qadah 1429H (corresponding to 5 November 2008) are summarized as follows:
1.1. Dealing as principal and underwriting in financial securities; 1.2. Establishment and management of mutual funds and portfolios; 1.3. Arranging transactions in debt and equity securities; and 1.4. Providing advisory services; and custody services for financial securities. The Company is owned by Saudi and Kuwaiti shareholders. The Company is a subsidiary of Kuwait Finance House, a company listed in Kuwait Stock Exchange, which represents as the main shareholder in the Company. 2. BASIS OF PREPARATION 2.1 Statement of compliance These consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (“IFRSs”) that are endorsed in the Kingdom of Saudi Arabia (“KSA”) and other standards and pronouncements that are endorsed by the Saudi Organization for Certified Public Accountants (“SOCPA”) (collectively referred to as “IFRSs as endorsed in KSA”). The Group presents its consolidated statement of financial position in order of liquidity. An analysis in respect of recovery or settlement within 12 months after the reporting date (current) and more than 12 months after the reporting date (non-current) is presented in note 21. 2.2 Basis of consolidation The consolidated financial statements comprise the financial statements of the Company and its subsidiaries as at 31 December 2019. Control is achieved when the Group is exposed, or has rights, to variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee. Specifically, the Group controls an investee if, and only if, the Group has: · Power over the investee (i.e., existing rights that give it the current ability to direct the relevant activities of the investee) · Exposure, or rights, to variable returns from its involvement with the investee · The ability to use its power over the investee to affect its returns Generally, there is a presumption that a majority of voting rights results in control. To support this presumption and when the Group has less than a majority of the voting or similar rights of an investee, the Group considers all relevant facts and circumstances in assessing whether it has power over an investee, including: · The contractual arrangement(s) with the other vote holders of the investee · Rights arising from other contractual arrangements · The Group’s voting rights and potential voting rights The Group reassesses whether or not it controls an investee if facts and circumstances indicate that there are changes to one or more of the three elements of control. Consolidation of a subsidiary begins when the Group obtains control over the subsidiary and ceases when the Group loses control of the subsidiary. Assets, liabilities, income and expenses of a subsidiary acquired or disposed of during the year are included in the consolidated financial statements from the date the Group gains control until the date the Group ceases to control the subsidiary.
7 Saudi Kuwaiti Finance House and its Subsidiaries (A Saudi Closed Joint Stock Company) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued) At 31 December 2019
2. BASIS OF PREPARATION (continued)
2.2 Basis of consolidation (continued) Profit or loss and each component of OCI are attributed to the equity holders of the parent of the Group and to the non- controlling interests, even if this results in the non-controlling interests having a deficit balance. When necessary, adjustments are made to the financial statements of subsidiaries to bring their accounting policies in line with the Group’s accounting policies. All intra-group assets and liabilities, equity, income, expenses and cash flows relating to transactions between members of the Group are eliminated in full on consolidation. A change in the ownership interest of a subsidiary, without a loss of control, is accounted for as an equity transaction.
If the Group loses control over a subsidiary, it derecognises the related assets (including goodwill), liabilities, non- controlling interest and other components of equity, while any resultant gain or loss is recognised in profit or loss. Any investment retained is recognised at fair value. The Group owns the below subsidiaries (“Subsidiaries”) incorporated in the Kingdom of Saudi Arabia.
Percentage of ownership 31 December Commercial Name of subsidiary registration number Country of incorporation 2019 2018 Food Acquisition Company 1010449918 Kingdom of Saudi Arabia 100% 100% Planning and Development Real Estate Company 1010377199 Kingdom of Saudi Arabia 95% 95% Takamul Food Investment Company 1010476576 Kingdom of Saudi Arabia 84% 100% Baitk Alwaed Saudi Equity Fund (*) - Kingdom of Saudi Arabia 88.21% 79.88% Baitk Liquidity Fund (*) - Kingdom of Saudi Arabia 49.47% 42.46% (*) During the year, the Company’s percentage of ownership in the funds have increased which is due to the redemption of other unitholders. During the year, the Company sold 16% of its holdings in Takamul Food Investment Company (subsidiary) to a third party. The total sale transaction amounted to SR 14,400,000 and resulted in SR 3,290,665 gains recognized directly in the consolidated statement of changes in shareholders' equity. 2.3 Basis of measurement
These consolidated financial statements are prepared under the historical cost convention except for financial assets through profit or loss, which are measured at fair value. 2.4 Functional and presentation currency The Group’s consolidated financial statements are presented in Saudi Riyals (“SR”) unless otherwise stated, which is also the Group’s functional currency.
3. SIGNIFICANT ACCOUNTING JUDGMENTS, ESTIMATES AND ASSUMPTIONS The preparation of the Group’s consolidated financial statements requires management to make judgments, estimates and assumptions that affect the reported amounts of revenues, expenses, assets and liabilities, and the accompanying disclosures, and the disclosure of contingent liabilities. However, uncertainty about these judgments, estimates and assumptions could result in outcomes that could require a material adjustment to the carrying amount of the asset or liability affected in the future periods. These judgments, estimates and assumptions are based upon experience and various other factors that are believed to be reasonable under the circumstances and are used to judge the carrying values of assets and liabilities that are not readily apparent from other sources. The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the period in which the estimates are revised or in the revision period and future periods if the changed estimates affect both current and future periods.
8 Saudi Kuwaiti Finance House and its Subsidiaries (A Saudi Closed Joint Stock Company) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued) At 31 December 2019
3. SIGNIFICANT ACCOUNTING JUDGMENTS, ESTIMATES AND ASSUMPTIONS (continued) The key judgments, estimates and assumptions that have a significant impact on the consolidated financial statements of the Group are discussed below: Judgments Consolidation of entities in which Group holds less than a majority of voting rights The Group only consolidates entities in which it holds less than a majority of voting rights, (i.e., 50%) if the aggregate exposure to returns along with the kick out rights exceed the determined limit. Going concern The Group’s management has made an assessment of its ability to continue as a going concern and is satisfied that it has the resources to continue in business for the foreseeable future. Furthermore, management is not aware of any material uncertainties that may cast significant doubt upon the Group’s ability to continue as a going concern. Therefore, these consolidated financial statements continue to be prepared on the going concern basis. Determining the lease term of contracts with renewal and termination options – Group as a lessee The Group determines the lease term as the non-cancellable term of the lease, together with any periods covered by an option to extend the lease if it is reasonably certain to be exercised, or any periods covered by an option to terminate the lease, if it is reasonably certain not to be exercised. The Group's lease contract includes extension and termination options. The Group applies judgment in evaluating whether it is reasonably certain whether or not to exercise the option to renew or terminate the lease. That is, it considers all relevant factors that create an economic incentive for it to exercise either the renewal or termination. After the commencement date, the Group reassesses the lease term if there is a significant event or change in circumstances that is within its control and affects its ability to exercise or not to exercise the option to renew or to terminate (e.g., significant leasehold improvements or significant customization to the leased asset). The Group included the renewal period as part of the lease term for lease of its office commercial space with shorter non-cancellable period (i.e., three to five years). Estimations and assumptions Impairment of assets The measurement of the expected credit loss allowance for financial assets measured at amortised cost is an area that requires the use of complex models and significant assumptions about future economic conditions and credit behavior (e.g. the likelihood of customers defaulting and the resulting losses). Further explanation is provided in note 4-6 Impairment of Financial assets. Useful lives of property and equipment The Group’s management determines the estimated useful lives of its property and equipment for calculating depreciation. This estimate is determined after considering the expected usage of the asset or physical wear and tear. The management periodically reviews estimated useful lives and the depreciation method to ensure that the method and period of depreciation are consistent with the expected pattern of economic benefits from these assets. Useful lives of intangible assets The useful life starts at the date that the intangible asset is available for use since this most closely reflects the expected pattern of consumption of the future economic benefits embodied in the asset. The estimated useful life of software is seven years. Useful lives are reviewed at each financial year-end and adjusted if appropriate. Defined benefit plans The cost of the defined benefit plan and the present value of the obligation are determined using actuarial valuations. An actuarial valuation involves making various assumptions that may differ from actual developments in the future. These include the determination of the discount rate, future salary increases, mortality rates and employees’ turnover rate. Due to the complexities involved in the valuation and its long-term nature, a defined benefit obligation is highly sensitive to changes in these assumptions. All assumptions are reviewed at each reporting date. The most sensitive parameters are discount rate and future salary increases. In determining the appropriate discount rate, management considers the market yield on high quality corporate bonds. Future salary increases are based on expected future inflation rates, seniority, promotion, demand and supply in the employment market. The mortality rate is based on publicly available mortality tables for the specific country. Those mortality tables tend to change only at intervals in response to demographic changes. Further details about employee benefits obligations are provided in note 15.
9 Saudi Kuwaiti Finance House and its Subsidiaries (A Saudi Closed Joint Stock Company) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued) At 31 December 2019
3. SIGNIFICANT ACCOUNTING JUDGMENTS, ESTIMATES AND ASSUMPTIONS (continued)
Estimations and assumptions (continued)
Fair value measurement of financial instruments When the fair values of financial assets and financial liabilities are recorded in the consolidated statement of financial position and cannot be measured based on quoted prices in active markets, their fair value is measured using valuation techniques including the discounted cash flow (DCF) model. The inputs to these models are taken from observable markets where possible, but where this is not feasible, a significant degree of judgement is required in establishing fair values.
Fair value of securities not quoted in an active market 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 Group also invests in redeemable units of unlisted mutual funds. The funds are open for subscriptions/redemptions on a periodic basis as mentioned in the terms and conditions. The value of the net assets of the funds for the purpose of the subscription/redemption of units is determined by dividing the net assets attributable to unitholders of the funds (fair value of the funds’ assets minus the liabilities) by the total number of the funds’ units outstanding on the relevant valuation day. The net asset values of these funds are provided by the relevant investment manager and may be based on unaudited financial information.
4. SIGNIFICANT ACCOUNTING POLICIES The following are the significant accounting policies applied by the Group in preparing its consolidated financial statements. 4-1 Foreign currency translation (i) Functional and presentation currency Items included in the consolidated financial statements are measured using the currency of the primary economic environment in which the entity operates (the “functional currency”) which is Saudi Riyals (“SR”).
(ii) Transactions and balances Foreign currency transactions are translated into the functional currency using the exchange rates at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation of monetary assets and liabilities denominated in foreign currencies at year end exchange rates are generally recognized in profit or loss. Non-monetary items that are measured in terms of historical cost in a foreign currency are translated using the exchange rates as at the dates of the initial transactions. Non-monetary items measured at fair value in a foreign currency are translated using the exchange rates at the date when the fair value is determined.
4-2 Property and equipment Property and equipment is stated at historical cost less accumulated depreciation and impairment loss, if any. Historical cost includes expenditure that is directly attributable to the acquisition of the items.
Subsequent costs are included in the asset’s carrying amount or recognized as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the Group and the cost of the item can be measured reliably. The carrying amount of any component accounted for as a separate asset is derecognized when replaced. All other repairs and maintenance are charged to profit or loss during the reporting period in which they are incurred.
Depreciation is calculated using the straight-line method to allocate their cost net of their residual values, over their estimated useful lives or, in the case of leasehold improvements and certain leased property and equipment, the shorter of their estimated useful lives and lease term.
10 Saudi Kuwaiti Finance House and its Subsidiaries (A Saudi Closed Joint Stock Company) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued) At 31 December 2019
4. SIGNIFICANT ACCOUNTING POLICIES (continued) 4-2 Property and equipment (continued) The estimated useful lives of the property and equipment for the calculation of depreciation are as follows: Description Number of years Leasehold improvements 3 to 5 Computers and equipment 3 to 7 Furniture and fixtures 4 Motor vehicles 4 The residual values, useful lives and methods of depreciation of property and equipment are reviewed at each financial year end and adjusted prospectively, as necessary. An asset’s carrying amount is written down immediately to its recoverable amount if the asset’s carrying amount is greater than its estimated recoverable amount. An item of property and equipment is derecognized upon disposal or when no future economic benefits are expected to arise from the continued use of the asset. Any gain or loss arising on the disposal or retirement of an item of property and equipment is determined as the difference between the net sales proceeds and the carrying amount of the asset and is recognized in the consolidated statement of comprehensive income when the asset is derecognized. 4-3 Intangible assets Intangible assets acquired separately are measured on initial recognition at cost and the useful lives of intangible assets are assessed as either finite or indefinite. Intangible assets with finite lives are amortized over the useful economic life and assessed for impairment whenever there is an indication that the intangible asset may be impaired. The amortization period and the amortization method for an intangible asset with a finite useful life are reviewed at least at the end of each reporting period. Changes in the expected useful life or the expected pattern of consumption of future economic benefits embodied in the asset are considered to modify the amortization period or method, as appropriate, and are treated as changes in accounting estimates. The amortization expense on intangible assets with finite lives is recognized in the consolidated statement of comprehensive income in the expense category that is consistent with the function of the intangible assets. The computer software is amortized over 7 years. An intangible asset is derecognized upon disposal (i.e., at the date the recipient obtains control) or when no future economic benefits are expected from its use or disposal. Any gain or loss arising upon derecognition of the asset (calculated as the difference between the net disposal proceeds and the carrying amount of the asset) is included in the consolidated statement of comprehensive income. 4-4 Investments in associates An associate is an entity over which the Group has significant influence. Significant influence is the power to participate in the financial and operating policy decisions of the investee, but is not control or joint control over those policies. The considerations made in determining significant influence are similar to those necessary to determine control over subsidiaries. The Group’s investment in associate is accounted for using the equity method. Under the equity method, the investment in associate is initially recognized at cost. The carrying amount of the investment is subsequently adjusted to recognize changes in the Group’s share of net assets of the associate since the acquisition date. The financial statements of the associates are prepared for the same period as the Group. Where necessary, adjustments are made to bring the accounting policies in line with those of the Group. After application of the equity method, the Group determines whether it is necessary to recognize an impairment loss on its investment in associates. The Group determines at each reporting date whether there is any objective evidence that the investment in associate is impaired. If this is the case, the Group calculates the amount of impairment as the difference between the recoverable amount of the associate and its carrying value and recognizes the loss as “Share of net results of associates” in the consolidated statement of comprehensive income. Upon loss of significant influence over the associate, the Group measures and recognizes any retained investment at fair value. Any difference between the carrying amount of the associate upon loss of significant influence or joint control and the fair value of the retaining investment and proceeds from disposal is recognized in the consolidated statement of comprehensive income.
11 Saudi Kuwaiti Finance House and its Subsidiaries (A Saudi Closed Joint Stock Company) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued) At 31 December 2019
4. SIGNIFICANT ACCOUNTING POLICIES (continued) 4-5 Impairment of non-financial assets Non-financial assets are tested for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognized for the amount by which the asset’s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of a CGU’s fair value less costs of disposal and value in use. For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash inflows which are largely independent of the cash inflows from other assets or groups of assets (cash-generating units). In assessing value-in-use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. In determining fair value less costs of disposal, recent market transactions are taken into account. If no such transactions can be identified, an appropriate valuation model is used. These calculations are corroborated by valuation multiples, quoted share prices for publicly traded companies or other available fair value indicators. The Group bases its impairment calculation on detailed budgets and forecast calculations, which are prepared separately for each of the Group’s CGUs to which the individual assets are allocated. These budgets and forecast calculations generally cover a period of five years. A long-term growth rate is calculated and applied to project future cash flows after the fifth year. For assets excluding goodwill, an assessment is made at each reporting date to determine whether there is an indication that previously recognized impairment losses no longer exist or have decreased. If such indication exists, the Group estimates the asset’s or CGU’s recoverable amount. A previously recognized impairment loss is reversed only if there has been a change in the assumptions used to determine the asset’s recoverable amount since the last impairment loss was recognized. The reversal is limited so that the carrying amount of the asset does not exceed its recoverable amount, nor exceed the carrying amount that would have been determined, net of depreciation, had no impairment loss been recognized for the asset in prior years. Such reversal is recognized in the consolidated statement of comprehensive income unless the asset is carried at a revalued amount, in which case, the reversal is treated as a revaluation increase. 4-6 Financial instruments
Initial recognition – financial assets and financial liabilities The Group recognizes a financial asset or a financial liability in its consolidated statement of financial position when, and only when, the Group becomes party to the contractual provisions of the instrument. Financial assets Initial measurement At initial recognition, except for the accounts receivables and other assets which do not contain a significant financing component, the Group measures a financial asset at its fair value plus, in the case of a financial asset not at fair value through profit or loss, transaction costs that are directly attributable to the acquisition of the financial asset. Transaction costs of financial assets at fair value through profit or loss are expensed in the consolidated statement of comprehensive income. The accounts receivables and other assets that do not contain a significant financing component or which have a maturity of less than 12 months are measured at the transaction price. Classification and subsequent measurement The Group classifies its financial assets in the following measurement categories: a) those to be measured subsequently at fair value (either through other comprehensive income or through profit or loss); and b) those to be measured subsequently at amortized cost.
The classification depends on the Group’s business model for managing its financial assets and the contractual terms of the cash flows.
12 Saudi Kuwaiti Finance House and its Subsidiaries (A Saudi Closed Joint Stock Company) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued) At 31 December 2019
4. SIGNIFICANT ACCOUNTING POLICIES (continued) 4-6 Financial instruments (continued) Financial assets at amortized cost A financial asset shall be measured at amortized cost if both of the following conditions are met: a) the financial asset is held within a business model whose objective is to hold financial assets in order to collect contractual cash flows; and b) 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. After initial measurement, such financial assets are subsequently measured at amortized cost using the Effective Interest Rate (“EIR”) method, less impairment (if any). Amortized cost is calculated by taking into account any discount or premium on acquisition and fees or costs that are an integral part of the EIR. The EIR amortization is included in commission income in the consolidated statement of comprehensive income. The losses arising from impairment are recognized in the consolidated statement of comprehensive income. The Group classifies bank balances, accounts receivable, amounts due from related parties and sukuks as financial assets at amortized cost. Financial assets at fair value through profit or loss (FVTPL) Financial assets that do not meet the criteria for subsequent recognition at amortised cost or FVOCI, are measured at fair value through profit or loss. A gain or loss on a debt investment that is subsequently measured at fair value through the consolidated statement of comprehensive income and which is not part of a hedging relationship is recognised and presented net in the consolidated statement of comprehensive income in the period in which it arises. Equity instruments The Group measures all equity investments which are not considered to be associates at fair value through profit or loss. Changes in the fair value of financial assets at fair value through profit or loss are recognised in profit or loss as applicable. Derecognition A financial asset (or, where applicable, a part of a financial asset or part of a group of similar financial assets) is primarily derecognized (i.e. removed from the Group’s consolidated statement of financial position) when: · The rights to receive cash flows from the asset have expired; or · The Group 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 Group has transferred substantially all the risks and rewards of the asset; or (b) the Group has neither transferred nor retained substantially all the risks and rewards of the asset, but has transferred control of the asset. Impairment of financial assets Impairment of financial assets is based on forward-looking expected credit loss (“ECL”) model. This requires considerable judgment about how changes in economic factors affects ECLs, which is determined on a probability- weighted basis. The impairment model applies to financial assets measured at amortized cost. Loss allowances are measured on either of the following bases: a) 12-month ECLs: these ECLs that result from possible default events within the 12 months after the reporting date; and b) Lifetime ECLs: these are ECLs that result from all possible default events over the expected lives of financial instruments. Lifetime ECLs measurement applies if the credit risk of a financial asset at the reporting date has increased significantly since initial recognition and the 12-month ECL measurement applies if it has not. An entity may determine that a financial asset's credit risk has not increased significantly if the asset has low credit risk at the reporting date. However, lifetime ECL measurement always applies for trade receivables and contract assets without a significant financing component. For financial assets at amortized cost, the Group either recognizes a 12-month ECL or life time ECLs, based on the increase in significant credit risk.
13 Saudi Kuwaiti Finance House and its Subsidiaries (A Saudi Closed Joint Stock Company) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued) At 31 December 2019
4. SIGNIFICANT ACCOUNTING POLICIES (continued)
4-6 Financial instruments (continued) Financial liabilities Initial measurement Financial liabilities are classified, at initial recognition, as financial liabilities at fair value through profit or loss or payables (measured at amortized cost), as appropriate. All financial liabilities are recognized initially at fair value net of directly attributable transaction costs. Classification and subsequent measurement An entity shall classify all financial liabilities as subsequently measured at amortized cost, except for: a) financial liabilities at fair value through profit or loss; b) financial liabilities that arise when a transfer of a financial asset does not qualify for derecognition or when the continuing involvement approach applies; c) financial guarantee contracts; d) commitments to provide a loan at a below-market interest rate; and e) contingent consideration recognized by an acquirer in a business combination to which IFRS 3 applies. Such contingent consideration shall subsequently be measured at fair value with changes recognized in the consolidated statement of comprehensive income. The Group’s financial liabilities include trade and other payables. All the Group’s financial liabilities are subsequently measured at amortized cost using the effective interest rate method. Gains and losses are recognized in the consolidated statement of comprehensive income when the liabilities are derecognized as well as through the EIR amortization process. Amortized cost is calculated by taking into account any discount or premium on acquisition and fees or costs that are an integral part of the EIR. The EIR amortization is included as finance costs in the consolidated statement of comprehensive income. Derecognition A financial liability is derecognized 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 recognized in the consolidated statement of comprehensive income. Offsetting of financial instruments Financial assets and financial liabilities are offset, and the net amount is reported in the consolidated statement of financial position if there is a currently enforceable legal right to offset the recognized amounts and there is an intention to settle on a net basis, to realize the assets and settle the liabilities simultaneously.
4-7 Fair value measurement 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. Underlying the definition of fair value is the presumption that the Group is a going concern and there is no intention or requirement to curtail materially the scale of its operations or to undertake a transaction on adverse terms. A financial instrument is regarded as quoted in an active market if quoted prices are readily and regularly available from an exchange dealer, broker, industry group, pricing service, or regulatory agency, and those prices represent actual and regularly occurring market transactions on an arm's length basis. When measuring the fair value, the Group uses market observable data as far as possible. Fair values are categorized into different levels in a fair value hierarchy based on the inputs used in the valuation techniques as follows: · Level 1: Quoted prices (unadjusted) in active markets for identical assets or liabilities that can be accessed at the measurement date. · Level 2: Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices). · Level 3: Inputs for the asset or liability that are not based on observable market data (unobservable inputs).
14 Saudi Kuwaiti Finance House and its Subsidiaries (A Saudi Closed Joint Stock Company) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued) At 31 December 2019
4. SIGNIFICANT ACCOUNTING POLICIES (continued) 4-7 Fair value measurement (continued) Valuation techniques When the fair values of items recorded in the consolidated statement of financial position cannot be derived from active markets, their fair value is determined using a variety of valuation techniques that include the use of valuation models. The inputs to these models are taken from observable markets where possible, but where this is not feasible, estimation is required in establishing fair values. The estimates include considerations of liquidity and model inputs related to items such as credit risk (both own and counterparty), correlation and volatility. Changes in assumptions about these factors could affect the reported fair value of items in the consolidated statement of financial position and the level where the items are disclosed in the fair value hierarchy. The models are tested for validity by calibrating to prices from any observable current market transactions in the same item (without modification or repackaging) when available. To assess the significance of a particular input to the entire measurement, the Group performs sensitivity analysis or stress testing techniques. Listed investments in equity securities and investment funds When fair values of publicly traded equity securities are based on quoted market prices in an active market for identical assets without any adjustments, the instruments are included within Level 1 of the hierarchy.
Non-listed investment The Group also invests in non-listed investment which it classifies as level 3 investment. 4-8 Trade and other payables Accounts payable are recognized once the goods are received and services are rendered. These are recorded at fair value less trade discounts (if any) and subsequently at the higher of cost or payment or settlement amounts. Where the time value of money is material, payables are carried at amortized cost. 4-9 Provisions Provisions are recognized when the Group has a present obligation (legal or constructive) as a result of a past event, it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate can be made of the amount of the obligation. Where the Group expects some or all of a provision to be reimbursed, for example under an insurance contract, the reimbursement is recognized as a separate asset but only when the reimbursement is virtually certain. The expense relating to a provision is presented in the consolidated statement of comprehensive income, net of any reimbursements.
If the effect of the time value of money is material, provisions are discounted using a risk-adjusted rate that reflects, when appropriate, the risks specific to the liability. When discounting is used, the increase in the provision due to the passage of time is recognized as a finance cost.
4-10 Zakat Zakat is provided for in accordance with Saudi Arabian fiscal regulations. The provision is recognized in the consolidated statement of comprehensive income.
4-11 Employee benefits
(i) Short-term employee benefits Short-term employee benefits are expensed as the related service is provided. A liability is recognized for the amount expected to be paid if the Group has a present legal or constructive obligation to pay this amount as a result of past service provided by the employee and the obligation can be estimated reliably.
(ii) Long-term employee benefits Defined benefit plans The Group operates a defined benefit plan under the Saudi Arabian Law applicable based on employees' accumulated periods of service at the consolidated statement of financial position date. The cost of providing benefits under the defined benefit plans is determined separately for each plan using the projected unit credit method as per IAS 19.
15 Saudi Kuwaiti Finance House and its Subsidiaries (A Saudi Closed Joint Stock Company) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued) At 31 December 2019
4. SIGNIFICANT ACCOUNTING POLICIES (continued)
4-11 Employee benefits (continued)
(ii) Long-term employee benefits (continued)
Defined benefit plans (continued) The cost of providing benefits under the Group’s defined benefit plans is determined using the projected unit credit method adopted by professionally qualified actuaries and arrived at using actuarial assumptions based on market expectations at the consolidated statement of financial position date. These valuations attribute entitlement benefits to the current period (to determine current service cost), and to the current and prior periods (to determine the present value of defined benefit obligations). Re-measurements, comprising of actuarial gains and losses and the return on plan assets (excluding net interest), are recognized immediately in the consolidated statement of financial position with a corresponding debit or credit to other reserves through other comprehensive income in the period in which these occur. Re-measurements are not reclassified to profit or loss in subsequent periods.
Past service costs are recognized in the consolidated statement of comprehensive income on the earlier of: · the date of the plan amendment or curtailment; and · the date that the Group recognizes restructuring-related costs.
Net interest is calculated by applying the discount rate to the net defined benefit liability or asset. When a settlement (eliminating all obligations for benefits already accrued) or a curtailment (reducing future obligations as a result of a material reduction in the scheme membership or a reduction in future entitlement) occurs, the obligation and related plan assets are remeasured using current actuarial assumptions and the resulting gain or loss is recognized in profit or loss during the period in which the settlement or curtailment occurs. The defined benefit pension asset or liability in the consolidated statement of financial position comprises the total of the present value of the defined benefit obligation (using a discount rate) less the fair value of plan assets out of which the obligations are to be settled directly. Fair value is based on market price information.
The value of a net defined benefit asset is the present value of any economic benefit the Group reasonably expects to recover by way of a refund of surplus from the plan at the end of the plan’s life or reduction in future contributions to the plan. (iii)Termination benefits Termination benefits are expensed at the earlier of when the Group can no longer withdraw the offer of those benefits and when the Group recognizes costs for a restructuring. If benefits are not expected to be settled wholly within 12 months of the reporting date, then they are discounted. 4-12 Statutory reserve As required by Saudi Arabian Regulations for Companies and the Company’s By-laws, the Company must transfer 10% of its annual net profit to the statutory reserve. The Company may resolve to discontinue such transfers when the reserve totals 30% of the share capital. The reserve is not available for distribution. 4-13 Revenue recognition The Group satisfies a performance obligation and recognizes revenue over time, if one of the following criteria is met: 1. The customer simultaneously receives and consumes the benefits provided by the Group’s performance as the Group performs; or 2. The Group’s performance creates or enhances an asset that the customer controls as the asset is created or enhanced; or 3. The Group’s performance does not create an asset with an alternative use to the Group and the Group has an enforceable right to payment for performance completed to date.
For performance obligations, where one of the above conditions are not met, revenue is recognized at the point in time at which the performance obligation is satisfied. Revenue is measured at the fair value of the consideration received or receivable, taking into account contractually defined terms of payment.
16 Saudi Kuwaiti Finance House and its Subsidiaries (A Saudi Closed Joint Stock Company) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued) At 31 December 2019
4. SIGNIFICANT ACCOUNTING POLICIES (continued)
4-13 Revenue recognition (continued) Revenue is recognized in the consolidated statement of comprehensive income to the extent that it is probable that the economic benefits will flow to the Group and the revenue and costs, if applicable, can be measured reliably.
Revenue should only be recognized for a performance obligation satisfied over time if the Group can reasonably measure its progress towards complete satisfaction. The Group must have reliable information that can be applied to an appropriate method of measuring progress to meet this objective. When the Group cannot reasonably measure the outcome of a performance obligation, but expects to recover the costs incurred, it recognises revenue only to the extent of the costs until a reliable measure of progress can be made. Dividends Dividends are recognized as revenue when the right to receive payment is established. Income from corporate financing activities Income from corporate financing activities is recognized in the consolidated statement of comprehensive income when the related services are rendered (i.e. related performance obligation is satisfied) and the income is earned. Income from asset management activities Income from asset management activities is recognized in the consolidated statement of comprehensive income when the respective services are rendered (i.e. related performance obligation is satisfied) to the customers. Commission income Commission income is recognized in the consolidated statement of comprehensive income based on EIR on a time proportionate basis, as the services are rendered. 4-14 Leases
The Group as a lessee The Group applies a single recognition and measurement approach for all leases, except for short- term leases and leases of low-value assets. The Group recognises lease liability to make lease payments and right-of-use asset representing the right to use the underlying assets. i) Right-of-use asset The Group recognises right-of-use asset at the commencement date of the lease (i.e., the date the underlying asset is available for use). Right-of-use asset is measured at cost, less any accumulated depreciation and impairment losses, and adjusted for any remeasurement of lease liability. The cost of right-of-use asset includes the amount of lease liability recognised, initial direct costs incurred, and lease payments made at or before the commencement date less any lease incentives received. Right-of-use asset is depreciated on a straight-line basis over the shorter of the lease term and the estimated useful lives of the asset.
If ownership of the leased asset transfers to the Group at the end of the lease term or the cost reflects the exercise of a purchase option, depreciation is calculated using the estimated useful life of the asset.
The right-of-use asset is also subject to impairment.
ii) Lease liability At the commencement date of the lease, the Group recognises lease liability measured at the present value of lease payments to be made over the lease term. The lease payments include fixed payments (including in-substance fixed payments) less any lease incentives receivable, variable lease payments that depend on an index or a rate, and amounts expected to be paid under residual value guarantees. The lease payments also include the exercise price of a purchase option reasonably certain to be exercised by the Group and payments of penalties for terminating the lease, if the lease term reflects the Group exercising the option to terminate.
Variable lease payments that do not depend on an index or a rate are recognised as expenses (unless they are incurred to produce inventories) in the period in which the event or condition that triggers the payment occurs.
17 Saudi Kuwaiti Finance House and its Subsidiaries (A Saudi Closed Joint Stock Company) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued) At 31 December 2019
4. SIGNIFICANT ACCOUNTING POLICIES (continued)
4-14 Leases (continued) In calculating the present value of lease payments, the Group uses its incremental borrowing rate at the lease commencement date because the interest rate implicit in the lease is not readily determinable. After the commencement date, the amount of lease liability is increased to reflect the accretion of interest and reduced for the lease payments made. In addition, the carrying amount of lease liability is remeasured if there is a modification, a change in the lease term, a change in the lease payments (e.g., changes to future payments resulting from a change in an index or rate used to determine such lease payments) or a change in the assessment of an option to purchase the underlying asset.
iii) Short-term leases and leases of low-value assets The Group applies the short-term lease recognition exemption to its short-term leases of machinery and equipment (i.e., those leases that have a lease term of 12 months or less from the commencement date and do not contain a purchase option). It also applies the lease of low-value assets recognition exemption to leases of office equipment that are considered to be low value. Lease payments on short-term leases and leases of low-value assets are recognised as expense on a straight-line basis over the lease term. 4-15 Expenses Expenses are allocated on a consistent basis to operating expenses and general and administrative expenses as appropriate.
5. FINANCIAL RISK MANAGEMENT
The Group’s objective in managing risk is the creation and protection of shareholder value. Risk is inherent in the Group’s activities, but it is managed through a process of ongoing identification, measurement and monitoring, subject to risk limits and other controls. The process of risk management is critical to the Group’s continuing profitability.
The Group's Board of Directors has overall responsibility for the establishment and oversight of the Group 's risk management framework. These risk management policies are established to identify and analyze the risks faced by the Group, to set appropriate risk limits and controls and to monitor risks and adherence to limits. Risk management policies and systems are reviewed regularly to reflect changes in market conditions and the Group’s activities. The Group, through its training and management standards and procedures, aims to maintain a disciplined and constructive control environment in which all employees understand their roles and obligations. The Group’s activities expose it to a variety of financial risks that include: · Credit risk; · Murabaha profit rate risk; · Liquidity risk; · Currency risk; and · Price risk. 5.1 Credit risk Credit risk is the risk of suffering financial loss, should any of the Group 's customers, clients or market counterparties fail to fulfil their contractual obligations to the Group. Credit risk arises mainly from bank balances, murabaha placements, trade receivables, amounts due from related parties and financial assets at amortized cost (Sukuk). (i) Risk management Credit risk is the single largest risk for the Group 's business, therefore, the management carefully manages its exposure to credit risk. The credit risk management and control are centralized in a credit management team which reports regularly to the Board of Directors and head of each business unit.
(ii) Impairment of financial assets The Group has the following types of financial instruments that are subject to expected credit loss: · Bank balances; · Trade and other receivables - receivable from corporate clients and amounts due from related parties; and · Financial assets at amortized cost (Sukuk).
18 Saudi Kuwaiti Finance House and its Subsidiaries (A Saudi Closed Joint Stock Company) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued) At 31 December 2019
5. FINANCIAL RISK MANAGEMENT (continued)
5.1 Credit risk (continued)
Trade receivables The Group applies the simplified approach for measuring ECL for trade receivables which uses a lifetime expected loss allowance. Financial assets at amortized cost The Group assesses on a forward looking basis the Expected Credit Losses (“ECL”) associated with its financial assets, carried at amortized cost, the ECL is based on a 12-month ECL and life time ECL. The 12-month ECL is the portion of lifetime ECLs that result from default events on a financial instrument that are possible within 12 months after the reporting date. However, when there has been a significant increase in credit risk since origination, the allowance increase in credit risk since origination, will be based on the lifetime ECL. For due from related parties, the Group applies the simplified approach.
The loss allowance for other financial assets at amortized cost as at 1 January 2019 reconciles to the closing loss allowance as at 31 December 2019 as follows:
Trade and other Financial assets receivables at amortized cost Bank balances (note 13) (note 11) (note 14) Total SR SR SR SR ECL under IFRS 9 as at 1 January 2019 1,096,841 431,374 42,900 1,571,115 Increase in the allowance recognized in profit or loss during 2019 525,000 (162) (26,715) 498,123 ECL as at 31 December 2019 1,621,841 431,212 16,185 2,069,238
5.2 Profit rate risk Profit rate risk is the risk that the profit rate change is not commensurate with the financing cost due to changes in the market commission rate. The Group has commission bearing murabaha investments and Sukuk which are subject to profit rate risk. The following table demonstrates the sensitivity of the Group’s profit or loss for the year to a reasonably possible change in interest rates, with all other variables held constant. There is no sensitivity effect on other comprehensive income (OCI) as the Group has no assets designated as hedging instruments or fair value through OCI. In practice, the actual trading results may differ from the below sensitivity analysis and the difference could be significant. Change in profit rate Impact on profit or loss 31 December 2019 31 December 2018 SR SR
Increase by 1% 1,400,211 1,340,860 Decrease by 1% (1,400,211) (1,340,860) 5.3 Liquidity risk Liquidity risk is the risk that the Group will encounter difficulty in raising funds to meet commitments associated with financial instruments. Deposits are generally placed for short periods to manage the Group's liquidity requirements.
All liabilities on the Group's consolidated statement of financial position, other than end of service benefits, are contractually payable on a current basis. Liquidity risk at an investment fund level is being managed through appropriate liquidity limits and is monitored for each fund.
19 Saudi Kuwaiti Finance House and its Subsidiaries (A Saudi Closed Joint Stock Company) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued) At 31 December 2019
5. FINANCIAL RISK MANAGEMENT (continued)
5.3 Liquidity risk (continued) The Group's liquidity management process is monitored by the Group's Risk Management Committee, including: a) Day-to-day funding managed by the finance department to ensure that requirements can be met and this includes replenishment of funds as they mature or are invested; b) Monitoring the consolidated statement of financial position liquidity ratios against internal and regulatory requirements; c) Managing the concentration and profile of debt maturities; and d) Liquidity management and asset and liability mismatching.
Exposure to liquidity risk Less than 3 3 to 12 Greater than No fixed 31 December 2019 months months 1 - 5 years 5 years maturity Total SR SR SR SR SR SR
Employee defined benefit liabilities - - - 3,301,368 - 3,301,368 Zakat payable - 3,179,858 11,064,670 - - 14,244,528 Trade and other payables 984,952 3,524,572 - - 9,726,313 14,235,837 Lease liability - 674,300 508,565 - - 1,182,865 984,952 7,378,730 11,573,235 3,301,368 9,726,313 32,964,598
Less than 3 3 to 12 Greater No fixed 31 December 2018 months months 1 - 5 years than 5 years maturity Total SR SR SR SR SR SR
Employee defined benefit liabilities - 906,696 - 2,643,386 - 3,550,082 Zakat payable - 2,920,724 11,157,980 - - 14,078,704 Trade and other payables 344,854 6,781,589 - - - 7,126,443 344,854 10,609,009 11,157,980 2,643,386 - 24,755,229
5.4 Currency risk Currency risk is the risk that the value of financial instruments will fluctuate due to changes in foreign exchange rates. The Group is not subject to fluctuations in foreign exchange rates in the normal course of its business. The Group did not undertake significant transactions in currencies other than Saudi Riyals and US Dollars during the year. As the Saudi Riyal is pegged to the US Dollar, balances in US Dollar are not considered to represent significant currency risk.
5.5 Price risk Price risk is the risk that the value of a financial instrument will fluctuate because of changes in market prices, whether those changes are caused by factors specific to the individual instrument or its issuer or factors affecting all instruments traded in the market.
The Group is exposed to market risk with respect to its investments. The Group limits price risks by diversification of its investments and monitoring continuously the developments in the stock and international funds markets. In addition, the key factors that affect the bond market movements are monitored including analysis of the operational and financial performance of investees.
Management’s best estimate of the effect on the consolidated statement of comprehensive income for a year due to a reasonably possible change in equity indices, with all other variables held constant is indicated in the table below. In practice, the actual trading results may differ from the sensitivity analysis below and the difference could be material. An equivalent decrease in each of the indices shown below would have resulted in an equivalent, but opposite, impact.
20 Saudi Kuwaiti Finance House and its Subsidiaries (A Saudi Closed Joint Stock Company) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued) At 31 December 2019
5. FINANCIAL RISK MANAGEMENT (continued)
5.5 Price risk (continued)
Effect on the consolidated statement of Change in equity comprehensive income the years ended Market index index 31 December 2019 31 December 2018 % SR SR
Tadawul +5 1,167,109 1,025,322 -5 (1,167,109) (1,025,322)
6. FAIR VALUE MEASUREMENT
The following table shows the carrying amounts and fair values of financial assets and financial liabilities, including their levels in the fair value hierarchy.
Fair Value 31 December 2019 Level 1 Level 2 Level 3 Total SR SR SR SR Financial assets Equity accounted investments: Investments in associates - 5,887,235 70,508,255 76,395,490 Classified at fair value through profit or loss: Investment funds - 36,255,697 - 36,255,697 Real estate funds - 27,716,253 - 27,716,253 Quoted equity securities 23,342,187 - - 23,342,187 Classified at amortized cost: Financial assets at amortized cost - 140,021,136 - 140,021,136 23,342,187 209,880,321 70,508,255 303,730,763
Fair Value 31 December 2018 Level 1 Level 2 Level 3 Total SR SR SR SR Financial assets Equity accounted investments: Investments in associates - 5,557,461 69,589,593 75,147,054 Classified at fair value through profit or loss: Investment funds - 31,880,121 - 31,880,121 Money market fund - 26,077,058 - 26,077,058 Real estate funds - 26,670,303 - 26,670,303 Quoted equity securities 20,506,446 - - 20,506,446 Classified at amortized cost: Financial assets at amortized cost - 107,577,579 - 107,577,579 20,506,446 197,762,522 69,589,593 287,858,561
There have been no transfers between level 1, level 2 and level 3 during the reporting periods.
21 Saudi Kuwaiti Finance House and its Subsidiaries (A Saudi Closed Joint Stock Company) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued) At 31 December 2019
7. PROPERTY AND EQUIPMENT
Leasehold Computers and Furniture and Motor 31 December 2019 improvements equipment fixtures vehicles Total SR SR SR SR SR Cost: At 1 January 2019 1,410,000 456,002 1,908,669 901,773 4,676,444 Additions - 89,438 - - 89,438 At 31 December 2019 1,410,000 545,440 1,908,669 901,773 4,765,882 Accumulated depreciation: At 1 January 2019 282,000 454,011 1,798,422 508,399 3,042,832 Charge for the year 282,000 13,419 59,923 125,063 480,405 At 31 December 2019 564,000 467,430 1,858,345 633,462 3,523,237 Net book amounts: At 31 December 2019 846,000 78,010 50,324 268,311 1,242,645
Leasehold Computers and Furniture and 31 December 2018 improvements equipment fixtures Motor vehicles Total SR SR SR SR SR Cost: At 1 January 2018 1,410,000 426,557 1,906,869 409,100 4,152,526 Additions - 29,445 1,800 492,673 523,918 At 31 December 2018 1,410,000 456,002 1,908,669 901,773 4,676,444 Accumulated depreciation: At 1 January 2018 - 387,604 1,350,630 395,665 2,133,899 Charge for the year 282,000 66,407 447,792 112,734 908,933 At 31 December 2018 282,000 454,011 1,798,422 508,399 3,042,832 Net book amounts: At 31 December 2018 1,128,000 1,991 110,247 393,374 1,633,612
8. 9INTANGIBLE ASSETS
Computer Computer software software 31 December 31 December 2019 2018 SR SR
Cost: At 1 January 10,861,414 9,897,164 Additions - 964,250 At 31 December 10,861,414 10,861,414 Accumulated amortization: At 1 January 7,665,525 6,560,123 Charge for the year 1,042,622 1,105,402 At 31 December 8,708,147 7,665,525 Net book amount: At 31 December 2,153,267 3,195,889
22 Saudi Kuwaiti Finance House and its Subsidiaries (A Saudi Closed Joint Stock Company) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued) At 31 December 2019
9. INVESTMENTS IN ASSOCIATES
Set out below is the percentage of ownership in associates:
Percentage of ownership 31 December 31 December 2019 2018 % % Al Nadeg Restaurants Company 30.00% 30.00% Baitk Freestyle Saudi Equity Fund (formerly known as Baitk IPO Fund) (i) 30.36% 22.03%
Set out below is the carrying amount of investments in associates:
31 December 31 December 2019 2018 SR SR Al Nadeg Restaurants Company 70,508,255 69,589,593 Baitk Freestyle Saudi Equity Fund 5,887,235 5,557,461 76,395,490 75,147,054
(i) This investment represents 958,645.61 units (31 December 2018: 958,645.61 units) in the fund. However, during the year, the Group’s percentage of ownership in the fund had increased due to the redemption of units by other unitholders. This fund is listed in Tadawul and is managed by the Group.
All of the above associates are accounted for using the equity method of accounting in these consolidated financial statements. The Group has concluded that it has significant influence over the entities but not control.
Movements in investment in associates are as follows:
31 December 31 December 2019 2018 SR SR At the beginning of the year 75,147,054 75,479,157 Disposals - (1,071,940) Share in results of the associates 5,778,642 5,701,393 Dividends (4,530,206) (4,961,556) At the end of the year 76,395,490 75,147,054
The following table illustrates the summarized aggregated financial information of the Group’s associates:
31 December 31 December 2019 2018 Statement of financial position SR SR Assets 157,881,274 103,170,662 Liabilities 82,816,380 38,556,960 Equity / net asset value 75,064,894 64,613,702
31 December 31 December 2019 2018 Statement of comprehensive income SR SR Revenue 269,198,706 198,300,521 Net income 17,671,575 14,695,274
23 Saudi Kuwaiti Finance House and its Subsidiaries (A Saudi Closed Joint Stock Company) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued) At 31 December 2019
10. FINANCIAL ASSETS AT FAIR VALUE THROUGH PROFIT OR LOSS
Financial assets at fair value through profit or loss comprises of the following:
31 December 31 December 2019 2018 SR SR
Investment funds (i) 36,255,697 31,880,121 Money market fund (ii) - 26,077,058 Real estate funds (iii) 27,716,253 26,670,303 Quoted equity securities (iv) 23,342,187 20,506,446 87,314,137 105,133,928
Set out below are the movements in the carrying value of financial assets at fair value through profit or loss:
31 December 31 December 2019 2018 SR SR
Cost: At the beginning of the year 102,733,218 108,242,616 Movement during the year - net (21,523,735) (5,509,398) At the end of the year 81,209,483 102,733,218
Valuation: At the beginning of the year 2,400,710 2,663,814 Net movement during the year (see below) 3,703,944 (263,104) At the end of the year 6,104,654 2,400,710 Net carrying value 87,314,137 105,133,928
Set out below are the movements in the net realized and unrealized (losses) gains on financial assets at fair value through profit or loss as presented in the consolidated statement of comprehensive income:
31 December 31 December 2019 2018 SR SR
Net movement during the year Unrealized gains on financial assets at FVTPL 1,553,446 208,387 Realized gains (losses) on financial assets at FVTPL 2,150,498 (471,491) 3,703,944 (263,104)
(i) These represent investments in 584,000 units (31 December 2018: 584,000 units), 47 units (31 December 2018: 97 units) and 100 units (31 December 2018: nil units) of KFH Capital Sukuk Fund, Baitk AlYusr Financing Fund 1 and Baitk AlYusr Financing Fund 2, respectively. (ii) During the year, the Group sold its entire holdings in Al-Sunbollah Money Market Fund (31 December 2018: 231,513.73 units). This fund is listed in Tadwul and is managed by Samba Capital.
(iii) This represents investments in the following real estate funds: a. During 2013, the Group invested SR 25,000,000 representing 250 units in a private closed real estate fund inside the Kingdom of Saudi Arabia, managed by a third party. In 2018, the fund has redeemed units amounting to SR 23,676,649. The fund initial term was 5 years starting from 1 January 2012 and is renewable for further periods upon approval. The investment earned a yield of 7.56% for the current year (31 December 2018: 7%). As at 31 December 2019, the carrying value and fair value of the investment are SR 1,323,351 and SR 1,662,661 (31 December 2018: carrying value SR 1,323,351 and fair value SR 1,674,174), respectively.
24 Saudi Kuwaiti Finance House and its Subsidiaries (A Saudi Closed Joint Stock Company) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued) At 31 December 2019
10. FINANCIAL ASSETS AT FAIR VALUE THROUGH PROFIT OR LOSS (continued)
b. During 2016, the Group invested SR 25,000,000 representing 250 units in a private closed real estate fund in the Kingdom of Saudi Arabia, managed by a third party. The fund term is 5 years starting from 22 December 2016 and earns an annual yield of 9.86% (31 December 2018: 8.3%). As at 31 December 2019, the fair value of the investment is SR 26,053,592 (31 December 2018: SR 24,996,129).
(iv) These represent investments in equity securities in various companies listed on the Saudi Stock Exchange (Tadawul).
11. FINANCIAL ASSETS AT AMORTIZED COST
The Group arranged through a financial institution to invest in certain Sukuks for long term periods. The maturity dates of those Sukuks fall between 2020 and 2025 and earnings yield to maturity varies from 4.25% to 6.50%.
Set out below are the movements of the financial assets at amortized cost:
31 December 31 December 2019 2018 SR SR
Cost: At the beginning of the year 112,675,453 114,150,250 Additions 83,059,021 97,545,850 Matured during the year (50,736,083) (99,020,647) At the end of the year 144,998,391 112,675,453
Amortization of (discount) premium: At the beginning of the year 4,666,500 4,408,473 Charge for the year (120,457) 258,027 At the end of the year 4,546,043 4,666,500
Gross carrying value 140,452,348 108,008,953 Less: allowance for expected credit losses (note 5.1) (431,212) (431,374) Net carrying value 140,021,136 107,577,579
Coupon income 7,853,778 6,720,029 Less: amortization for the year 120,457 (258,027) Net income from financial assets at amortized cost 7,974,235 6,462,002
Carrying amount of financial assets at amortized cost are as follows:
31 December 31 December 2019 2018 SR SR
Sukuk, US Dollars 113,619,583 70,818,626 Short-term murabaha placements 20,586,163 27,592,286 Sukuk, Saudi Riyals 5,815,390 9,166,667 Total carrying value 140,021,136 107,577,579
12. RELATED PARTY BALANCES AND TRANSACTIONS Related parties represent subsidiaries, associates, funds managed by the Group, shareholders, key personnel of the Group and entities controlled, jointly controlled or significantly influenced by such parties.
25 Saudi Kuwaiti Finance House and its Subsidiaries (A Saudi Closed Joint Stock Company) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued) At 31 December 2019
12. RELATED PARTY BALANCES AND TRANSACTIONS (continued) The following are the major related party transactions that have occurred during the year: Related Parties Type Nature of transactions Amounts of transactions 2019 2018 SR SR Kuwaiti Finance House Affiliate Income from corporate Capital - Kuwait finance activities 350,000 - Management fees expenses 107,431 - Kuwaiti Finance House - Affiliate Financial assets at amortized Bahrain cost (Sukuk) - 10,000,000 Sukuk income 4,334,375 4,346,250 Kuwaiti Finance House - Affiliate Financial assets at amortized Turkey cost (Sukuk) 7,435,881 - Baitk Freestyle Saudi Equity Associate Subscription, management and Fund custody fees earned from the associate 440,797 517,562 Baitk Transportation Private Affiliate Subscription, management and Fund custody fees 302,054 - Baitk AlYusr Financing Investment in financial asset at Fund 1 Affiliate FVPL - 9,700,000 Subscription, management and custody fees 1,059,026 - Disposal of investment 6,560,816 - Baitk AlYusr Financing Affiliate Investment in financial asset at Fund 2 FVPL 10,000,000 - Board of Directors (“BOD”) BOD Remuneration & rewards 1,695,857 1,581,422 Key management personnel Executive Remunerations & Short-term benefits 6,671,984 6,145,020 Loans provided 1,251,115 1,354,600 The following are the balances with related parties as at year end: Related Parties Type Nature of transactions 2019 2018 SR SR Kuwaiti Finance House - Bahrain Affiliate Bank balances 1,085,864 9,984,553 Kuwaiti Finance House - Kuwait Affiliate Bank balances 4,764 4,764 Kuwaiti Finance House Capital - Kuwait Affiliate Bank balances 3,379,569 - Prices and terms of these transactions are approved by the management of the Group and are considered to be within the normal course of the Group's business. Amounts due from related parties which are presented under trade and other receivables in the consolidated statement of financial position are as follows (note 13): 31 December 31 December 2019 2018 SR SR Baitk AlYusr Financing Fund 2 399,181 - Baitk Transportation Private Fund 302,054 - Baitk Freestyle Saudi Equity Fund 111,752 117,859 Baitk AlYusr Financing Fund 1 12,213 - 825,200 117,859
26 Saudi Kuwaiti Finance House and its Subsidiaries (A Saudi Closed Joint Stock Company) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued) At 31 December 2019
13. TRADE AND OTHER RECEIVABLES
31 December 31 December 2019 2018 SR SR
Dividend receivable from an associate 4,530,206 3,303,723 Prepayments 3,000,430 3,812,203 Receivable from corporate finance clients 1,316,174 697,724 Accrued interest income from financial assets at amortized cost 1,332,614 708,426 Accrued dividend income for financial assets at FVTPL 1,106,168 1,102,635 Accrued income from asset management activities 981,614 689,662 Amounts due from related parties (note 12) 825,200 117,859 Receivable from REIT funds 771,841 771,841 Other receivables 9,534 6,297 13,873,781 11,210,370 Less: provision for expected credit losses (note 5.1) (1,621,841) (1,096,841) 12,251,940 10,113,529
Set out below is the movement in the provision for expected credit losses of trade and other receivables: 31 December 31 December 2019 2018 SR SR
At the beginning of the year 1,096,841 225,000 Charge for the year 525,000 871,841 At the end of the year 1,621,841 1,096,841
14. BANK BALANCES
31 December 31 December 2019 2018 SR SR
Bank balances 118,779,491 127,689,312 Less: provision for expected credit losses (16,185) (42,900) 118,763,306 127,646,412
15. EMPLOYEE DEFINED BENEFIT LIABILITIES Movements in the employee defined benefit liabilities recognized in the consolidated statement of financial position and its components are as follows: 31 December 31 December 2019 2018 SR SR At the beginning of the year 3,550,082 3,515,896 Current service cost 702,261 688,781 Interest cost on defined benefit liabilities 134,786 111,001 Payments during the year (952,108) (906,697) Actuarial (gains) losses (133,653) 141,101 At the end of the year 3,301,368 3,550,082
27 Saudi Kuwaiti Finance House and its Subsidiaries (A Saudi Closed Joint Stock Company) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued) At 31 December 2019
15. EMPLOYEE DEFINED BENEFIT LIABILITIES (continued)
The amounts recognized in the consolidated statement of comprehensive income are as follows:
2019 2018 SR SR Profit or loss: Current service cost 702,261 688,781 Interest cost on defined benefit liabilities 134,786 111,001 837,047 799,782 Other comprehensive income (loss): Actuarial (gains) losses (133,653) 141,101
The significant assumptions used in determining employee defined benefit liabilities for the Group's plans are shown below:
31 December 31 December 2019 2018
Discount rate 3.00% 4.70% Future salary increases 5.00% 4.70% Turnover moderate moderate
A quantitative sensitivity analysis for significant assumptions on the defined benefit obligation are shown below:
31 December 31 December 2019 2018 SR SR Discount rate 0.5% increase (144,868) (137,421) 0.5% decrease 157,225 149,561 Future salary increases 0.5% increase 98,544 148,819 0.5% decrease (92,728) (138,053)
16. ZAKAT
Charge for the year The zakat charge for the year amounting to SR 3,179,858 consists of the provision for the current year (31 December 2018: SR 2,917,564).
Movements in provision The movement in the zakat provision is as follows:
31 December 31 December 2019 2018 SR SR At the beginning of the year 14,078,704 13,285,120 Provided during the year 3,062,815 2,917,564 Provision for the prior year 117,043 - Payments during the year (3,014,034) (2,123,980) At the end of the year 14,244,528 14,078,704
28 Saudi Kuwaiti Finance House and its Subsidiaries (A Saudi Closed Joint Stock Company) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued) At 31 December 2019
16. ZAKAT (continued)
Status of assessments
Saudi Kuwaiti Finance House The zakat declarations for the period ended 31 December 2010 and for the years from 31 December 2011 up to 2018 have been filed with the General Authority of Zakat and Tax (the "GAZT"). However, the assessments have not yet been raised by the GAZT.
Planning and Development Real Estate Company The zakat declarations for the years ended up to 31 December 2018 has been filed with the GAZT. However, the assessments have not yet been raised by the GAZT.
Takamul Food Investment Company The zakat declaration for the years ended up to 31 December 2018 has been filed with the GAZT. However, the assessments have not yet been raised by the GAZT.
Food acquisition Company The Company has yet to file the zakat declaration for first period ended 31 December 2018.
17. TRADE AND OTHER PAYABLES
31 December 31 December 2019 2018 SR SR
Payable to partners of a subsidiary (non-controlling interest) 9,726,313 - Employee related accruals 1,889,423 1,931,866 Accrued expenses 1,111,955 1,422,835 Trade payables 828,112 1,809,588 Other payables 680,034 1,962,154 14,235,837 7,126,443
Terms and conditions of the above financial liabilities are as follows: • Trade payables are non-interest bearing and are normally settled on 60-day terms. • Other payables are non-interest bearing and have an average payment term of six months.
18. 2SHARE CAPITAL
The share capital is divided into 50,000,000 shares of SR 10 each (31 December 2018: 50,000,000 shares of SR 10 each).
Capital management The Group’s objectives for managing capital are: · To invest the capital in investments meeting the description, risk exposure and expected return indicated in its prospectus; · To achieve consistent returns while safeguarding capital by investing in a diversified portfolio, by participating in derivative and other capital markets and by using various investment strategies; · To maintain sufficient liquidity to meet the expenses of the Group, and to meet redemption requests as they arise; and · To maintain sufficient size to make the operation of the Group cost-efficient.
29 Saudi Kuwaiti Finance House and its Subsidiaries (A Saudi Closed Joint Stock Company) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued) At 31 December 2019
19. OPERATING EXPENSES
2019 2018 SR SR
Employees’ costs 8,617,418 9,901,340 Depreciation and amortization (notes 7, 8 and 27) 559,350 1,235,370 Insurance 269,058 248,805 Travel 194,239 59,213 Rent - 297,228 Others 875,830 540,990 10,515,895 12,282,946
20. GENERAL AND ADMINISTRATION EXPENSES
2019 2018 SR SR
Employees’ costs 7,379,064 6,813,508 Board of Directors’ remuneration and expenses 1,695,857 1,581,422 Depreciation and amortization (notes 7, 8 and 27) 1,524,753 778,965 Professional fees 1,483,496 1,151,739 Provision for expected credit losses (notes 5.1) 498,123 871,841 Travel 219,517 84,363 Rent - 446,109 Others 1,896,300 1,800,987 14,697,110 13,528,934
21. MATURITY ANALYSIS OF ASSETS AND LIABILITIES
The tables below show an analysis of assets and liabilities according to when they are expected to be recovered or settled, respectively:
Within 12 After 12 As at 31 December 2019 months months Total SR SR SR ASSETS Property and equipment - 1,242,645 1,242,645 Intangible assets - 2,153,267 2,153,267 Right-of-use asset - 1,701,985 1,701,985 Investments in associates - 76,395,490 76,395,490 Financial assets at FVTPL - 87,314,137 87,314,137 Financial assets at amortized cost 91,768,709 48,252,427 140,021,136 Trade and other receivables 12,251,940 - 12,251,940 Bank balances 118,763,306 - 118,763,306 Total assets 222,783,955 217,059,951 439,843,906 LIABILITIES Employee defined benefit liabilities - 3,301,368 3,301,368 Zakat payable 3,179,858 11,064,670 14,244,528 Trade and other payables 4,509,524 9,726,313 14,235,837 Lease liability 674,300 508,565 1,182,865 Total liabilities 8,363,682 24,600,916 32,964,598
30 Saudi Kuwaiti Finance House and its Subsidiaries (A Saudi Closed Joint Stock Company) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued) At 31 December 2019
21. MATURITY ANALYSIS OF ASSETS AND LIABILITIES (continued)
Within 12 As at 31 December 2018 months After 12 months Total SR SR SR ASSETS Property and equipment - 1,633,612 1,633,612 Intangible assets - 3,195,889 3,195,889 Investments in associates - 75,147,054 75,147,054 Financial assets at FVTPL - 105,133,928 105,133,928 Financial assets at amortized cost 27,578,162 79,999,417 107,577,579 Trade and other receivables 10,113,529 - 10,113,529 Bank balances 127,646,412 - 127,646,412 Total assets 165,338,103 265,109,900 430,448,003 LIABILITIES Employee defined benefit liabilities - 3,550,082 3,550,082 Zakat payable 2,920,724 11,157,980 14,078,704 Trade and other payables 7,126,443 - 7,126,443 Total liabilities 10,047,167 14,708,062 24,755,229
22. CAPITAL ADEQUACY
CMA has prescribed the framework and guidance regarding the minimum regulatory capital requirement and its calculation methodology as prescribed under Pillar I. In accordance with this methodology, the Company has calculated its minimum capital required and capital adequacy ratios as follows:
31 December 31 December 2019 2018 SR’000 SR’000 Capital base Tier I 390,292 386,560 Tier II - - Total 390,292 386,560
Minimum capital Market risk 11,693 7,222 Credit risk 155,645 150,101 Operational risk 7,098 7,053 Total 174,436 164,376
Capital adequacy ratio (times) 2.24 2.35 Surplus 215,856 222,184
a) Capital Base of the Company comprises of: - Tier-1 capital consists of paid-up share capital, retained earnings, share premium (if any), reserves excluding revaluation reserves. - Tier-2 capital consists of subordinated loans, cumulative preference shares and revaluation reserves. b) The minimum capital requirements for market, credit and operational risk are calculated as per the requirements specified in part 3 of the Prudential Rules issued by the CMA. c) The Company’s business objectives when managing capital adequacy is to comply with the capital requirements set forth by the CMA to safeguard the Company’s ability to continue as a going concern, and to maintain a strong capital base.
31 Saudi Kuwaiti Finance House and its Subsidiaries (A Saudi Closed Joint Stock Company) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued) At 31 December 2019
23. ASSET UNDER MANAGEMENT The assets under management outstanding with the Group at the end of the year including mutual funds and discretionary portfolios amounted to SR 815,368,670 (31 December 2018: SR 267,773,223). 24. COMMITMENTS AND CONTINGENCIES The Group, in the normal course of business, has not committed any guarantees during the year and has no outstanding guarantees from prior years. As at 31 December 2019, The Group does not have any capital commitments (31 December 2018: nil). 25. EVENTS AFTER THE REPORTING PERIOD
The outbreak of Novel Coronavirus (COVID 19) continues to progress and evolve. Therefore, it is challenging now, to predict the full extent and duration of its business and economic impact. The extent and duration of such impacts remain uncertain and dependent on future developments that cannot be accurately predicted at this time, such as the transmission rate of the coronavirus and the extent and effectiveness of containment actions taken.
Given the ongoing economic uncertainty, a reliable estimate of the impact cannot be made at the date of authorization of these consolidated financial statements. These developments could impact our future financial results, cash flows and financial condition.
No other events have occurred subsequent to the reporting date and before the issuance of these consolidated financial statements, which require adjustments to or disclosure in these consolidated financial statements.
26. STANDARDS ISSUED BUT NOT YET EFFECTIVE
The new and amended standards and interpretations that are issued, but not yet effective, up to the date of issuance of the Group’s consolidated financial statements are disclosed below. The Group intends to adopt these new and amended standards and interpretations, if applicable, when they become effective.
Amendments to IFRS 3: Definition of a Business In October 2018, the IASB issued amendments to the definition of a business in IFRS 3 Business Combinations to help entities determine whether an acquired set of activities and assets is a business or not. They clarify the minimum requirements for a business, remove the assessment of whether market participants are capable of replacing any missing elements, add guidance to help entities assess whether an acquired process is substantive, narrow the definitions of a business and of outputs, and introduce an optional fair value concentration test. New illustrative examples were provided along with the amendments.
Since the amendments apply prospectively to transactions or other events that occur on or after the date of first application, the Group will not be affected by these amendments on the date of transition. Amendments to IAS 1 and IAS 8: Definition of Material In October 2018, the IASB issued amendments to IAS 1 Presentation of Financial Statements and IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors to align the definition of ‘material’ across the standards and to clarify certain aspects of the definition. The new definition states that, ’Information is material if omitting, misstating or obscuring it could reasonably be expected to influence decisions that the primary users of general purpose financial statements make on the basis of those financial statements, which provide financial information about a specific reporting entity.’ The amendments to the definition of material is not expected to have a significant impact on the Group’s consolidated financial statements.
32 Saudi Kuwaiti Finance House and its Subsidiaries (A Saudi Closed Joint Stock Company) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued) At 31 December 2019
27. NEW AND AMENDED STANDARDS AND INTERPRETATIONS The accounting policies adopted are consistent with those of the previous financial year except for the below: Effective 1 January 2019, the Group has adopted one new accounting standard issued by the International Accounting Standards Board (“IASB”) and the impact of the adoption of this standard is explained below: IFRS 16 Leases IFRS 16 supersedes IAS 17 Leases, IFRIC 4 Determining whether an Arrangement contains a Lease, SIC-15 Operating Leases-Incentives and SIC-27 Evaluating the Substance of Transactions Involving the Legal Form of a Lease. The standard sets out the principles for the recognition, measurement, presentation and disclosure of leases and requires lessees to recognize most leases on the balance sheet. Lessor accounting under IFRS 16 is substantially unchanged from IAS 17. Lessors will continue to classify leases as either operating or finance leases using similar principles as in IAS 17. Therefore, IFRS 16 does not have an impact for leases where the Group is the lessor. The Group adopted IFRS 16 using the modified retrospective method of adoption as permitted under the specific transition provision in the standard. The Group elected to use the transition practical expedient to not reassess whether a contract is, or contains, a lease at 1 January 2019. Instead, the Group applied the standard only to contracts that were previously identified as leases applying IAS 17 and IFRIC 4 at the date of initial application. Upon adoption of IFRS 16, the Group applied a single recognition and measurement approach for its lease for which it is the lessee. The Group recognized lease liability to make lease payments and right-of-use asset representing the right to use the underlying asset. In accordance with the modified retrospective method of adoption, the Group applied IFRS 16 retrospectively with the cumulative effect of initially applying the standard recognized as an adjustment to the opening balance of retained earnings. Impact on the consolidated statement of financial position are as follows:
As at 1 January 2019 SR ASSETS Right-of-use asset 1,743,941 Prepaid rent 519,120 2,263,061 LIABILITIES Lease liability 1,743,941 1,743,941
In adopting IFRS 16, the Group has applied the following practical expedients: · the use of a single discount rate to a portfolio leases with reasonably similar characteristics; · accounting for operating leases in accordance with IAS 17 as short-term leases with remaining lease term of less than 12 months as at 1 January 2019; · exclusion of initial direct costs for the measurement of right-of-use asset at the date of initial application; · the use of hindsight in determining the lease term where the contract contains options to extend or terminate the lease; and · the election, by class of underlying asset, not to separate non-lease components from lease components, and instead account for each lease component and any associated non-lease components as a single lease component.
33 Saudi Kuwaiti Finance House and its Subsidiaries (A Saudi Closed Joint Stock Company) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued) At 31 December 2019
27. NEW AND AMENDED STANDARDS AND INTERPRETATIONS (continued)
Set out below are the carrying amounts of right-of-use asset recognized and the movements during the year:
2019 SR
As at 1 January 2019 2,263,061 Depreciation (561,076) As at 31 December 2019 1,701,985
Set out below are the carrying amounts of lease liability and the movements during the year:
2019 SR
As at 1 January 2019 1,743,941 Finance charge on lease liability 113,224 Payment during the year (674,300) As at 31 December 2019 1,182,865
The maturity analysis of the Group's lease liability is disclosed in note 21.
The following are the amounts recognized in the consolidated statement of comprehensive income:
2019 SR
Depreciation expense on right-of-use asset 561,076 Finance charge on lease liability 113,224 Total amount recognized in the consolidated statement of comprehensive income 674,300
Several other amendments and interpretations apply for the first time in 2019, but do not have an impact on the consolidated financial statements of the Group.
28. APPROVAL OF THE CONSOLIDATED FINANCIAL STATEMENTS
These consolidated financial statements were approved and authorized for issue by the management on 29 Rajab 1441H (corresponding to 24 March 2020).
34