The Saudi Arabian Monetary Authority (SAMA) has issued a circular setting out the accounting treatment of zakat1 and income tax in the financial statements of banks, insurance and finance companies (collectively referred to as financial institutions). The circular, no. 381000074519 dated 10 April 2017 (14 Rajab1438H) is effective as of 1 January 2017. The circular supplements the earlier guidance provided by SAMA in circular no. 381000029499 dated 14 December 2016 (15 Rabi Al Awal 1438H).
SAMA recognizes that since the accounting for zakat is not covered by the International Financial Reporting Standards (IFRS), there is a need to provide guidance for the uniform accounting treatment of zakat and related matters in the presentation of financial statements.
Clarification provided by SAMA in its latest circular
The circular sets out the following:
- SAMA Accounting Standards for commercial banks will not be applicable from 1 January 2017.
- All financial institutions should prepare their financial statements in accordance with the IFRS, except for IAS12 and IFRIC 21, so far as they relate to the accounting of Zakat (IFRS as adopted by SAMA).
- This guidance has been issued for accounting treatment of zakat and income tax, which is applicable from 1 January 2017. This treatment should be applied consistently to all the three sectors – banking, insurance and finance companies.
Accounting treatment of Zakat and Income Tax
Zakat and Income Tax charge for the current period
- Zakat and income tax for the current period should be charged directly to the retained earnings of financial institutions (including foreign subsidiaries and branches) irrespective of their ownership structure.
- If the retained earnings are insufficient to cover the zakat and tax for the current year, such charge will result in accumulated losses of the entity, which is adjustable against future profits.
Zakat and Tax charge in case of accumulated losses
If a financial institution has accumulated losses at the end of the current period, the current period zakat and income tax should be added to the accumulated losses which may be adjusted against future profits.
Zakat and income tax charge for prior period
- Any zakat or income tax related to prior year(s) shall be charged to the retained earnings.
- In prior years, if there is no liability of zakat and income tax been recognized on account of it being charged to the gross dividends then the proposed dividend amount has to be adjusted to recognize the liability for the zakat and income tax amount.
Disclosures in the financial statements
The total amount of zakat and income tax shall be disclosed in the financial statements under the ”Statement of changes in Shareholders’ Equity” and detailed as follows:
- Zakat for the current year
- Zakat for the prior year(s)
- Income tax for the current year
- Income tax for the prior year(s)
- Accounting policy on zakat and income tax
A financial institutions is required to disclose its accounting policy for accounting treatment of zakat and income tax in the notes to the financial statements.
The mixed owned entities shall disclose their shareholding details in the financial statements as at the end of the year as follows:
- Shareholding percentage, subject to zakat
- Shareholding percentage, subject to income tax
- All contingencies disclosures related to the zakat and tax assessment, including current and prior years
All accruals for zakat and tax are to be made on a quarterly basis from the effective date of this circular.
Any changes to the accounting for zakat and tax as a result of these requirements would be accounted for in accordance with the requirements of IAS 8.
1. Zakat is an obligatory payment made by Muslims annually under Islamic law on certain kinds of assets and for charitable purposes. It is considered a religious obligation.
See EY Alert, Saudi Arabia issues circular on accounting treatment for zakat in financial statements of banking company, dated 21 December 2016, to read the Global Alert in relation to Saudi Arabia issues circular on accounting treatment for zakat in financial statements of banking company.
EYG no. 01754-171Gbl