Understanding IFRS 9 Implementation in Saudi Arabia:

The adoption of International Financial Reporting Standard 9 (IFRS 9) – Financial Instruments marks a significant transformation in the financial reporting landscape of the Kingdom of Saudi Arabia (KSA). Mandatory for listed banks, insurance companies, and many corporates, IFRS 9 replaces the older IAS 39 and introduces a more forward-looking approach to classifying financial assets, accounting for impairment, and applying hedge accounting. This shift is crucial for enhancing the transparency and comparability of financial statements, aligning KSA’s financial sector with global best practices, and supporting the goals of Saudi Vision 2030.

The Three Pillars of IFRS 9

IFRS 9 is built upon three core components that fundamentally change how financial instruments are treated:

1. Classification and Measurement: This pillar dictates how financial assets and liabilities are categorized (e.g., at amortized cost, Fair Value through Other Comprehensive Income (FVOCI), or Fair Value through Profit or Loss (FVTPL)). The classification depends on the entity’s business model for managing the assets and their contractual cash flow characteristics.
2. Impairment (Expected Credit Loss – ECL Model): This is arguably the most impactful change for financial institutions. It replaces the “incurred loss” model of IAS 39 with a proactive Expected Credit Loss (ECL) model. Entities must now set aside provisions for potential credit losses before an actual default occurs, based on forward-looking information, macroeconomic forecasts, and historical data. This generally leads to higher and earlier recognition of credit loss provisions.
3. Hedge Accounting: IFRS 9 introduces a more principles-based approach to hedge accounting, aligning the accounting treatment more closely with an entity’s risk management activities.

Impact and Challenges in the Saudi Market

The implementation of IFRS 9 has had a notable impact on financial institutions and companies in Saudi Arabia, presenting both benefits and challenges:

Key Impacts

Higher Provisions:

• Saudi banks, in particular, have reported an increase in provisioning for expected credit losses, leading to initial adjustments in retained earnings and a decline in shareholders’ equity upon transition.

Enhanced Risk Management:

• The ECL model requires financial institutions to significantly upgrade their data infrastructure, risk modeling capabilities, and governance frameworks to accurately calculate forward-looking credit losses.

Increased Transparency:

• Adoption improves the quality and comparability of financial reports, which boosts investor confidence and facilitates access to global capital markets.

Regulatory Alignment:

• The Saudi Central Bank (SAMA) plays a pivotal role, issuing specific circulars and guidance to ensure consistent application and alignment with national regulatory expectations, especially for banks and insurance companies.

Implementation Challenges

• Data and Systems: Developing robust systems to gather high-quality historical and forward-looking data required for the complex ECL models is a major undertaking.
• Expertise and Training: A scarcity of local professionals with deep technical expertise in IFRS 9 implementation, credit risk modeling, and the required IT system changes poses a significant challenge.
• Model Complexity: The inherent complexity of the ECL model, involving sophisticated calculations (PD, LGD, EAD), macroeconomic scenarios, and judgmental overlays, demands strong governance and documentation.
• Cost of Transition: The investment in new technology, human capital, and consulting services for the successful transition is substantial for many entities.

Conclusion:

For Saudi businesses, mastering IFRS 9 is more than a compliance exercise; it is a step toward building a more resilient, transparent, and globally integrated financial system. Success depends on continued investment in technology, strong internal controls, detailed documentation, and ongoing collaboration with regulators and auditors to ensure that the spirit and the letter of the new standard are met.

At Fineit, we specialize in supporting financial institutions and corporates across Saudi Arabia in achieving seamless IFRS 9 implementation and compliance. Our expertise spans the full spectrum — from ECL model development and validation to data readiness assessment, system integration, and regulatory alignment in accordance with SAMA’s guidelines.

Whether you are a bank, insurance company, or corporate entity navigating IFRS 9 complexities, Fineit provides tailored consulting, technology-driven solutions, and hands-on training to ensure accurate, efficient, and compliant financial reporting.

Get in touch with our experts to learn how we can help your organization enhance its financial reporting and risk management capabilities under IFRS 9.