musharaka capital company (a saudi closed joint stock ... · zakat payable 9 1,338,655 1,203,115...

MUSHARAKA CAPITAL COMPANY

(A Saudi Closed Joint Stock Company)

FINANCIAL STATEMENTS

FOR THE YEAR ENDED 31 DECEMBER 2017

AND INDEPENDENT AUDITOR'S REPORT



FINANCIAL STATEMENTS


INDEX PAGE

Independent auditor's report 1-2

Balance sheet 3

Statement of income 4

Statement of cash flows 5

Statement of changes in shareholders’ equity 6

Notes to the financial statements 7-18


BALANCE SHEET

AS AT 31 DECEMBER 2017

Note 2017 2016

ASSETS SR SR

Current assets

Cash and cash equivalents 4,881,470 21,877,772

Held-for-trading investments 3 2,375,064 5,140,540

Prepayments and other assets 4 1,172,762 756,081

Due from related parties X 11 4,016,812 175,287

Total current assets 12,446,108 27,949,680

Non-current assets

Investment in associates 5 44,461,904 21,709,958

Investment in unconsolidated subsidiaries 6 15,000 -

Property and equipment 7 1,247,396 671,374

Total non-current assets 45,724,300 22,381,332

TOTAL ASSETS 58,170,408 50,331,012

LIABILITIES AND SHAREHOLDERS’ EQUITY

Current liabilities

Accrued expenses and other liabilities 8 950,954 645,469

Zakat payable 9 1,338,655 1,203,115

Total current liabilities 2,289,609 1,848,584

Non-current liabilities

End of service indemnities 10 638,766 395,638

Total liabilities 2,928,375 2,244,222

Shareholders’ equity

Share capital 1 65,000,000 65,000,000

Accumulated losses (9,757,967) (16,913,210)

Total shareholders' equity 55,242,033 48,086,790

TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY 58,170,408 50,331,012


The accompanying notes form an integral part of these financial statements

3


STATEMENT OF INCOME


Note 2017 2016

SR SR

Revenues

Services rendered 13 13,605,571 1,873,622

Unrealized loss on held-for-trading investments 3 (594,286) (214,389)

Realized loss from sale of held-for-trading investments 3 (95,718) (84,567)

Dividends income 154,664 220,800

13,070,231 1,795,466

Operating expenses

Marketing expenses (102,602) (1,098,020)

General and administrative expenses 14 (10,870,040) (8,423,009)

Income (loss) from operations 2,097,589 (7,725,563)

Share of results of associates, net 5 (1,212,346) 740,753

Other income 11, 15 7,670,000 -

Income (loss) before zakat 8,555,243 (6,984,810)

Zakat 9 (1,400,000) (1,233,897)

Net income (loss) for the year 7,155,243 (8,218,707)

Earnings (loss) per share

Basic (SR) 1.10 (1.26)

Diluted (SR) 1.10 (1.26)

Earnings (loss) per share for operations

Basic (SR) 0.32 (1.19)

Diluted (SR) 0.32 (1.19)

Weighted average number of shares outstanding:

Basic shares 6,500,000 6,500,000

Diluted shares 6,500,000 6,500,000



Earnings (loss) per share from net income (loss) for the year attributed to the shareholders of the Company:

Earnings (loss) per share from income (loss) from operations attributed to the shareholders of the Company:

4


STATEMENT OF CASH FLOWS


2017 2016

SR SR

OPERATING ACTIVITIES

Net income (loss) before zakat 8,555,243 (6,984,810)

Adjustments for:

Depreciation 303,779 221,348

Unrealized loss on held-for-trading investments 594,286 214,389

Realized loss from sale of held-for-trading investments 95,718 84,567

Share of results of associates, net 1,212,346 (740,753)

End of service indemnities 246,503 185,638

Changes in operating assets and liabilities:

Prepayments and other assets (416,681) (160,425)

Due from related parties (3,841,525) -

Accrued expenses and other liabilities 305,485 163,674

7,055,154 (7,016,372)

Zakat paid (1,264,460) -

End of service indemnities paid (3,375) (20,250)

Net cash from (used in) operating activities 5,787,319 (7,036,622)

INVESTING ACTIVITIES

Investment in unconsolidated subsidiaries (15,000) -

Additions to held-for-trading investments (1,090,619) (27,544,198)

Proceeds from sale of held-for-trading investments 3,166,091 24,593,592

Additions to investment in associates (32,354,499) (5,000,000)

Proceed from disposal of associates 8,390,207 19,756,895

Purchase of property and equipment (879,801) (435,767)

Net cash (used in) from investing activities (22,783,621) 11,370,522

Net change in cash and cash equivalents (16,996,302) 4,333,900

Cash and cash equivalents, 1 January 21,877,772 73,981,729

Decrease in cash and cash equivalents on de consolidation of a subsidiary - (56,437,857)

CASH AND CASH EQUIVALENTS, 31 DECEMBER 4,881,470 21,877,772



.

5


STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY


Accumulated

Share capital losses Total

SR SR SR

1 January 2016 65,000,000 (8,694,503) 56,305,497

Net loss for the year - (8,218,707) (8,218,707)

31 December 2016 65,000,000 (16,913,210) 48,086,790

Net income for the year - 7,155,243 7,155,243

31 December 2017 65,000,000 (9,757,967) 55,242,033



6


NOTES TO THE FINANCIAL STATEMENTS


1-

Number of

shares

Value per

share Amount Percentage

SR SR %

Al Rajhi Ekhwan Group Company 1,820,000 10 18,200,000 28%

Mahafez Trading Company 1,690,000 10 16,900,000 26%

Abdullah M. Al Shaikh Trading Company 1,300,000 10 13,000,000 20%

1,300,000 10 13,000,000 20%

390,000 10 3,900,000 6%

6,500,000 65,000,000 100%

2-

Basis of preparation

Name of shareholder

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The share capital of the Company amounting to SR 65,000,000 consists of 6,500,000 shares of SR 10 each.

The shareholders of the Company along with their shareholdings as at 31 December 2017 and 2016 are as

follows:

Mr. Mohammad Bin Abbood Bin

Talib Bamardoof Al Amoudi

These financial statements were approved by the Board of Directers On 14 March 2018.

These financial statements have been prepared in according with standers generally accepted in the

Kingdom of Sandi Arabia using accrual basis under the historical cost convention, modified to include the

measurement of held-for-trading investments at fair value.


ORGANIZATION AND ACTIVITIES

Mr. Ebrahim Bin Fahad Bin

Mohammad Al Assaf

Effective 1 January 2018, the Company’s financial statements will be prepared under International

Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board

(“IASB”) and endorsed by the Saudi Organization for Certified Public Accountants (“SOCPA”). Upon

adoption of IFRS, the Company will be required to comply with the requirements of IFRS 1 – First time

Adoption of International Financial Reporting Standards for the reporting periods commencing from 1

January 2018. In preparing the opening financial statements under IFRS, the Company will analyze the

impact and incorporate certain adjustments due to the first-time adoption of IFRS. Accordingly, these

financial statements are the last set of financial statements to be prepared under accounting standards

issued by SOCPA.

Musharaka Capital Company (the “Company”) is engaged in dealing as a principal, managing mutual

funds and providing consulting, arranging and safe keeping services for securities business under license

No. 13169-27 dated 2 Dhul-Hijjah, 1434 H (October 7, 2013) issued by the Capital Market Authority

(“CMA”). The Company’s operations are conducted principally in Saudi Arabia.

The Company is a closed Saudi Joint Stock Company incorporated under Ministry of Commerce and

Investment resolution number 73/K dated 29 Rabi’ I, 1435 H (January 30, 2014). The Company is

registered in Kingdom of Saudi Arabia, operating under commercial registration (“CR”) No. 2051056409

issued in Al Khobar on 23 Rabi’ II, 1435 H (February 20, 2014). The registered address of the Company is

P.O. Box 712, Al Khobar 31952, Kingdom of Saudi Arabia.

7

2-

Use of estimates and judgments

Cash and cash equivalents

Accounts receivable

Held-for-trading investments

Investment in associates


Cash and cash equivalents consist of bank balances, cash on hand, and investments that are readily

convertible into known amounts of cash and have a maturity of three months or less when purchased.

The preparation of financial statements in conformity with generally accepted accounting standards

requires the use of certain critical estimates and assumptions that affect the reported amounts of assets and

liabilities and disclosure of contingent assets and liabilities at the reporting date and the reported amounts

of revenues and expenses during the reporting period. Estimates and judgments are continually evaluated

and are based on historical experience and other factors, including expectations of future events that are

believed to be reasonable under the circumstances. The Company makes estimates and assumptions

concerning the future. The resulting accounting estimates will, by definition, seldom equal the related

actual results.



NOTES TO THE FINANCIAL STATEMENTS (Continued)

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Accounts receivable are carried at their original invoice amount less a provision for any uncollectable

amounts. A provision for doubtful debts is made when collection of the full amount is no longer probable.

Bad debts are written off when there is no possibility for recovery.

An associate is accounted for using the equity method from the date on which the investee becomes an

associate. On acquisition of the investment in an associate, any excess of the cost of the investment over

the Company’s share of the net fair value of the identifiable assets and liabilities of the investee is

recognized as goodwill, which is included within the carrying amount of the investment. Any excess of the

Company’s share of the net fair value of associate's identifiable assets and liabilities over the cost of the

investment, after reassessment, is recognized immediately in the statement of income in the period in

which the investment is acquired.

Held-for-trading investments are investments in readily marketable securities which are bought for trading

purposes. These investments are initially recognized at cost. After initial recognition, investments in

marketable securities are valued at fair value at the balance sheet date. Changes in fair values, comprising

of realized and unrealized gains and losses, are included in the statement of income.

An associate is an entity over which the Company 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 results and assets and liabilities of associates are incorporated in these financial statements using the

equity method of accounting. Under the equity method, an investment in an associate is initially recognized

at cost and adjusted thereafter to recognize the Company’s share of the profit or loss of the associate. When

the Company’s share of losses of an associate exceeds the its interest in that associate, the Company

discontinues recognizing its share of further losses. Additional losses are recognized only to the extent that

the Company has incurred legal or constructive obligations or made payments on behalf of the associate. If

the associate subsequently reports profits, the Company resumes recognizing its share of those profits only

after its share of the profits equals the share of losses not recognized.

8

2-

Property and equipment

Asset category Rates

Leasehold improvements 25%

Furniture, fixtures and office equipment 25%

Vehicles 25%

Impairment of non-current assets

Accounts payable and accrual

Provisions

Subsequent expenditure is capitalized only when it increases the future economic benefits embodied in the

property and equipment. All other expenditure is recognized in the statement of income when incurred.

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

proceeds from disposal with the carrying amount of property and equipment at the time of disposal and are

recognized net within “other income” in the statement of income.






Property and equipment are stated at cost less accumulated depreciation and accumulated impairment

losses, if any, and are depreciated over the estimated useful lives of the applicable assets using the straight-

line method as follows:

If the recoverable amount of an asset (or cash-generating unit) is estimated to be less than its carrying

amount, the carrying amount of the asset (or cash-generating unit) is reduced to its recoverable amount. An

impairment loss is recognized immediately in the statement of income.

At the end of each reporting period, the Company reviews the carrying amounts of its non-current assets, to

determine whether there is any indication that those assets have suffered an impairment loss. If any such

indication exists, the recoverable amount of the asset is estimated in order to determine the extent of the

impairment loss (if any). When it is not possible to estimate the recoverable amount of an individual asset,

the Company estimates the recoverable amount of the cash-generating unit to which the asset belongs.

When an impairment loss subsequently reverses, the carrying amount of the asset (or a cash-generating

unit) is increased to the revised estimate of its recoverable amount, but so that the increased carrying

amount does not exceed the carrying amount that would have been determined had no impairment loss

been recognized for the asset (or cash-generating unit) in prior years. A reversal of an impairment loss is

recognized immediately in the statement of income.

Liabilities are recognized for amounts to be paid in the future for goods or services received, whether or

not billed to the Company.

A provision is recognized when the Company has an obligation (legal or constructive) arising from a past

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

When a reasonable and consistent basis of allocation can be identified, corporate assets are also allocated

to individual cash-generating units, or otherwise they are allocated to the smallest group of cash-generating

units for which a reasonable and consistent allocation basis can be identified.

Recoverable amount is the higher of fair value less costs to sell and value in use. In assessing value in use,

the estimated future cash flows are discounted to their present value using a discount rate that reflects

current market assessments of the time value of money and the risks specific to the asset for which the

estimates of future cash flows have not been adjusted.

9

2-

Zakat

End of services indemnity

Revenue Recognition

Revenue is recognized to the extent of the following recognition requirements:

• Fee from subscription is recognized upon subscription to the fund.

• Custody fee is recognized upfront and amortized over the period of the service.

Segment reporting

Business segment

A business segment is group of assets, operations or entities:

(i) Engaged in revenue producing activities;

(iii) Financial information is separately available.

Geographical segment

Expenses

Foreign currency transactions

A geographical segment is group of assets, operations or entities engaged in revenue producing activities

within a particular economic environment that are subject to risks and returns different from those

operating in other economic environments. The Company's operations are conducted principally in the

Kingdom of Saudi Arabia.

General, administrative and marketing expenses are treated as period costs.

Transactions in foreign currencies are recorded in Saudi Riyals at the rate of exchange ruling at the date of

the transaction. Monetary assets and liabilities denominated in foreign currencies are retranslated at the

rate of exchange ruling at the balance sheet date. All differences are taken to the statement of income.

The Company is primarily engaged in providing assets management, arranging, and advising and custodian

services.



(ii) Results of its operations are continuously analyzed by management in order to make decisions

related to resource allocation and performance assessment; and



• Dividends income is recognized when the right to receive dividends is established.

End of services indemnity required by Saudi Labor and Workman Law are accrued by the Company and

charged to the statement of income. The liability is calculated; as the current value of the vested benefits to

which the employee is entitled, should the employee leave at the balance sheet date. Termination payments

are based on employees' final salaries and allowances and their cumulative years of service, as stated in the

laws of Saudi Arabia.

Zakat is provided for the Company and in accordance with Saudi Arabian fiscal regulations. The provision

is charged to the statement of income. Additional amounts, if any, that may become due on finalization of

an assessment are accounted for in the year in which assessment is finalized.

• Fee from assets management services (including mutual funds) is recognized when such services

are rendered.


10

2-

Leases

3- HELD-FOR-TRADING INVESTMENTS

Movement in held-for-trading investments is as follows:

2017 2016

SR SR

1 January 5,140,540 27,915,598

Change due to de-consolidation of a subsidiary - (25,426,708)

Additions 1,090,619 27,544,198

Disposals (3,261,809) (24,678,159)

Unrealized loss on held-for-trading investments (594,286) (214,389)

31 December 2,375,064 5,140,540

4- PREPAYMENTS AND OTHER ASSETS

2017 2016

SR SR

Prepaid expenses 854,949 689,198

Others 317,813 66,883

1,172,762 756,081

5- INVESTMENT IN ASSOCIATES

2017 2016 2017 2016

% % SR SR

Musharaka REIT Fund (A) 3.74 - 33,358,309 -

Musharaka IPO Fund (B) 18.49 30.60 6,828,595 16,709,958

ARMAS (C) 25 - 4,275,000 -

Musharaka Real Estate Income Fund (D) - 13.75 - 5,000,000

44,461,904 21,709,958

Ownership interest

(A) Musharaka REIT Fund ("the REIT"), is a closed-end public real estate investment fund, managed by

the Company. The primary investment objective is to invest in developed real estates qualified to generate

periodic and rental income. The REIT is listed and publicly traded in TADAWUL in compliance with real

estate investment funds regulations and real estate investment traded funds instructions issued by the CMA

and in compliance with Shari'a. The number of units of the REIT is 88,000,000 units of which musharaka

owns 3.29 million units.





Rental expenses under operating leases are charged to the statement of income over the period of the

respective lease.

Investments classified as held for trading are acquired principally for the purpose of selling or repurchasing

in short term.

(B) Musharaka IPO Fund ("the Fund"), is an open ended public investment fund, managed by the

Company. The Fund investment objective is to invest in the shares of companies listed on Saudi Capital

Market ("TADAWUL") during the initial public offering phase. During the year the Company sold 800

thousands units of its units in the Fund (12.11% of its unitholding) which decreased it is ownership to

18.49% (2016: 30.60%).


11




5- INVESTMENT IN ASSOCIATES (Continued)

Movement in investments in associates is as following:

2017 2016

SR SR

1 January 21,709,958 -

Changes due to de-consolidation of a subsidiary - 35,726,100

Additions 32,354,499 5,000,000

Disposals (8,390,207) (19,756,895)

Share in results (1,212,346) 740,753

31 December 44,461,904 21,709,958

6- INVESTMENT IN UNCONSOLIDATED SUBSIDIARIES

Effective

ownership

interest 2017 2016

% SR SR

Tansseq (A) 100 10,000 -

Alintifaa Alawwal (B) 100 5,000 -

15,000 -

(A) Tanseeq Al-Ola Trading Company (A Saudi Limited Liability Company) (“Tanseeq”) is registered in Al

Khobar under commercial registration number (2051213542) dated 3 Ramadan 1438H corresponding to 28

May 2017. The main activities of the Tanseeq are to purchase, sale and lease of land and real estate, real

estate development and investment activities, building construction, and export, commercial and marketing

commitments on behalf of others. The company has received a waiver letter from Mr. Ibrahim Al Assaf

waiving his ownership intrest of 5% to the Company.

(B) Alintifaa Alawwal Investment Company (A One Person Company Limited) ("Alintifaa") is registered in

Al Khobar under commercial registration number (2051174260) dated 17 Rabi'II 1438H corresponding to

15 January 2017. The main activities of Alintifaa are management and rental of owned or leased properties

(residential or non-residential), real estate development, investment activities, general construction of non-

residential buildings, export, commercial and marketing commitments on behalf of others.

The above mentioned subsidiaries are still under formation and did not carry out any commercial activities,

accordingly, were not consolidated in these financial statements.

(D) During 2016, the Company invested SR 5 million in Musharaka Real Estate Income Fund as its seeding

capital. The Fund was terminated during the year and the associated funding was utilized as an investment

in Musharaka REIT.


(C) ARMAS Company Limited (A Saudi Limited Liability Company) ("ARMAS") is registered in Al

Dammam under commercial registration number (2050028436) dated 7 Rabi I 1415H corresponding to 13

August 1994. ARMAS is engaged in the wholesale and retail trade in marble, industrial granite, wooden

pallets, and wooden and metal furniture. During the year the Company acquired a 25% stake of ARMAS for

SR. 4,275,000 which included a premium of SR. 1,775,000.

12





7- PROPERTY AND EQUIPMENT

Leasehold

improvements

Furniture,

fixtures and

office

equipment Vehicles

Capital work

in progress Total

SR SR SR SR SR

Cost

1 January 2017 172,392 900,665 90,836 - 1,163,893

Additions 4,700 194,731 - 680,370 879,801

31 December 2017 177,092 1,095,396 90,836 680,370 2,043,694

Accumulated depreciation

1 January 2017 47,037 434,127 11,355 - 492,519

Charge for the year 44,082 236,988 22,709 303,779

31 December 2017 91,119 671,115 34,064 - 796,298

Net book value

31 December 2017 85,973 424,281 56,772 680,370 1,247,396

31 December 2016 125,355 466,538 79,481 - 671,374

8- ACCRUED EXPENSES AND OTHER LIABILITIES

2017 2016

SR SR

Accrued expenses 921,347 583,570

Others 29,607 61,899

950,954 645,469

9- ZAKAT PAYABLE

The significant components of Zakat base are as follows:

2017 2016

SR SR

Non-current assets 45,724,300 22,381,332

Non-current liabilities 638,766 395,638

Opening shareholders’ equity 48,086,790 56,305,497

Net income (loss) before zakat 8,555,243 (6,984,810)

The movement in the zakat provision was as follows:

2017 2016

SR SR

1 January 1,203,115 (30,782)

Provision for the year 1,338,655 1,233,897

Under provision for prior year 61,345 -

Paid during the year (1,264,460) -

31 December 1,338,655 1,203,115

Some of these amounts have been adjusted in arriving at the zakat charge for the year.

Capital work in progress represents mainly the cost incurred in respect of new administration offices.

13





9- ZAKAT PAYABLE (Continued)

The Zakat charged to the income statement is follows:

2017 2016

SR SR

Provision for the year 1,338,655 1,233,897

Under provision for prior year 61,345 -

31 December 1,400,000 1,233,897

10- END OF SERVICE INDEMNITIES

2017 2016

SR SR

1 January 395,638 230,250

Provision for the year 246,503 185,638

Payments during the year (3,375) (20,250)

31 December 638,766 395,638

11- RELATED PARTY TRANSACTIONS AND BALANCES

Name Relationship

Musharaka IPO Fund Associate

Musharaka REIT Fund Associate

Armas Associate

Tanami Holding Company Affiliate

Mr. Ibrahim Al Assaf

2017 2016

SR SR

Management fees (4,743,932) (1,086,603)

Transaction fees (7,670,000) -

Custody fees (112,798) (155,537)

Key management personnel remuneration 2,124,000 1,830,059

Rent - 442,230

The Company has filed its Zakat returns and obtained Zakat certificates up to the year ended 31 December

2015. The Company has made Zakat payment for the year ended 31 December 2016 but has not received its

Zakat certificate due to some pending queries by the General Authority for Zakat and Tax ("GAZT"). The

Company has not received any final assessment since inception as these are still under review by the GAZT.

During the year, the Company transacted with the following related parties:

Following are the significant related party transactions:

Related parties include the Company’s shareholders, managed funds, associates and affiliated companies,

directors and key personnel of the Company. Terms and conditions of these transactions are approved by the

Company’s management.

Shareholder /

CEO

14





11- RELATED PARTY TRANSACTIONS AND BALANCES (Continued)

Due from related parties:

2017 2016

Name of the party SR SR

Musharaka REIT Fund 3,954,329 -

Musharaka IPO Fund 62,483 96,857

Musharaka Real Estate Income Fund - 78,430

4,016,812 175,287

12- STATUTORY RESRVE

13- SERVICES RENDERED

2017 2016

SR SR

Mutual funds subscription fee 8,523,841 631,482

Mutual funds management fee 4,743,932 1,086,603

Mutual funds custody fee 112,798 155,537

Advisory services 225,000 -

13,605,571 1,873,622

14- GENERAL AND ADMINISTRATIVE EXPENSES

2017 2016

SR SR

Salaries and other benefits 6,618,200 5,419,884

Legal and professional fees 677,319 1,062,972

Rent 698,832 465,536

Bonus 995,754 38,850

Travel 232,066 250,042

Depreciation 303,779 221,348

Government expenses 238,608 185,702

Utilities 180,300 159,341

Printing and stationary 121,853 71,161

Bad debt expenses 106,000 -

Others 697,329 548,173

10,870,040 8,423,009

15- OTHER INCOME

The above transactions resulted in the following balances with related parties at 31 December:

During the year the Company has received transaction fees for an amount of SR 7,670,000 from Musharaka

REIT Fund (Note 11)

As required by the Company’s bylaws, the Company transfers 10% of the net income for the year to the

statutory reserve. The Company may resolve to discontinue such transfers when the reserve equals 30% of

the share capital. The reserve is not available for distribution. The company has not made any transfer to the

statutory reserve since inception due to the accumulated losses incurred.

15





16- EARING (LOSS) PER SHARE

17- OPERATING LEASES ARRANGMENT

2017 2016

SR SR

Payments under operating leases recognized as expenses 698,832 465,536

698,832 465,536

18- ASSETS UNDER MANAGEMENT

Operating lease payments represent rentals payable by the Company for its offices. The lease arrangement is

negotiated for an average term of one year and rentals are fixed over the lease term.

Assets under management outstanding at the end of the year in respect of mutual funds amounted to SR 930

million (2016: SR. 91 million). Consistent with its accounting policy, such balances are not included in the

Company's financial statements as these are held by the Company in fiduciary capacity.

Earing (loss) per share for the year ended December 31, 2017 and 2016 has been computed by dividing the

income (loss) from operations and net income (loss) for such year by the weighted average number of

outstanding shares.

16





19- CAPITAL ADEQUACY

2017 2016

Capital Base: SR '000 SR '000

Tier 1 Capital 54,648 48,087

Tier 2 Capital - -

Total Capital Base 54,648 48,087

2017 2016

Minimum Capital Requirements: SR '000 SR '000

Market Risk 427 925

Credit Risk 23,144 6,545

Operational Risk 3,078 2,714

Total Minimum Capital Requirement 26,649 10,184

Capital Adequacy Ratio:

Total Capital Ratio (times) 2.05 4.72

Tier 1 Capital Ratio (times) 2.05 4.72

Surplus in Capital 27,999 37,903

a)

b)

c)

d)

e)

20- FINANCIAL INSTRUMENTS AND RISK MANAGEMENT

The above information has been extracted from the Company's annual Capital Adequacy Model for the

year ended 31 December 2017 to be submitted to CMA and for the year ended 31 December 2016 as was

submitted to CMA.

In accordance with Article 74(b) of the Prudential Rules issued by the CMA (the "Rules"), given below are

the disclosures of the capital base, minimum capital requirement and total capital ratio as at December 31,

2017 and 2016:

The Capital Base consists of Tier 1 Capital and Tier 2 Capital calculated as per Article 4 and 5 of the

Rules, respectively. The minimum capital requirements for market, credit and operational risks are

calculated as per the requirements specified in Part 3 of the Rules.

Certain information as required by Pillar Ill of the Prudential Rules will be made available to the public

on the Company's website (www.musharakacapital.com), however, this information is not subject to

review or audit by the external auditors of the Company.

The Company is required to maintain adequate capital as specified in the Rules. The capital adequacy

ratio shall not be less than 1.

Financial instruments carried on the balance sheet principally include cash and cash equivalents, held-for-

trading investments, prepayments and other assets, amounts due to/from related parties, accrued expenses

and other liabilities.

The Company's objectives when managing capital are, to comply with the capital requirements set by the

CMA to safeguard the Company's ability to continue as a going concern; and to maintain a strong capital

base.

17





20- FINANCIAL INSTRUMENTS AND RISK MANAGEMENT (Continued)

Interest rate risks

Price risk

Credit risk

Liquidity risk

Currency risk

Fair value

Liquidity risk is the risk that the Company will encounter difficulty in raising funds to meet commitments

associated with financial instruments. Liquidity risk may result from an inability to sell a financial asset

quickly at an amount close to its fair value. The Company manages its liquidity risk by monitoring investing

activities and cash flows on regular basis.

Interest rate risks is the exposures to various risks associated with the effect of fluctuations in the prevailing

interest rates on the Company's financial positions and cash flows. The Company's results of operations and

operating cash flows are substantially independent of changes in market interest rates as the Company has

no interest-bearing assets and liabilities. Management monitors the changes in interest rates and believes

that interest rate risks to the Company are not significant.

Fair value is the amount for which an asset could be exchanged, or a liability settled between knowledgeable

willing parties in an arm's length transaction. As the accompanying financial statements are prepared under

the historical cost convention except for held-for-trading investments which are carried at the fair value,

differences may arise between the book values and the fair value estimates. Management believes that fair

values of the Company's financial assets and liabilities are not materially different from their carrying values.

The risk that the value of a financial instrument will fluctuate as a result 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 Company is exposed to equity securities price risk

because of investments held by the Company and classified on the balance sheet as held-for-trading

investments. The Company diversifies its portfolio, to manage its price risk arising from investments in

equity securities.

Credit risk is the risk that one party to a financial instrument will fail to discharge an obligation and cause

the other party to incur a financial loss. The Company has no significant concentration of credit risk. Cash is

placed with banks with sound credit ratings.

Is the risk that the value of a financial instrument will fluctuate due to changes in foreign exchange rates.

Management monitors fluctuations in foreign currency exchange rates, and manages its effect on the

financial statements accordingly.

18

musharaka capital company (a saudi closed joint stock ... · zakat payable 9 1,338,655 1,203,115...

Documents