1 General information

AXA Cooperative Insurance Company (a Joint Stock Company incorporated in the Kingdom of Saudi Arabia), (the “Company”), was formed pursuant to Royal Decree No. M/36 dated 27 Jumada II 1429H. (1 July 2008) (date of inception). The Company was incorporated vide Ministerial Order number Q/192, dated 10 Jumada II 1430H, (3 June 2009) (date of incorporation). The Company is registered in the Kingdom of Saudi Arabia under commercial registration number 1010271203 issued in Riyadh on Rajab 20, 1430H (13 July 2009). The Company’s registered address is P.O. Box 753, Riyadh 11421, Kingdom of Saudi Arabia.

The purpose of the Company is to engage in cooperative insurance operations and all related activities including reinsurance activities. Its principal lines of business include health, motor, property insurance.

The principal activities of the Company are to engage in cooperative insurance operations and related activities including reinsurance activities in accordance with the Law on Supervision of Cooperative Insurance (the “Law”), the Company’s by-laws and other regulations promulgated in the Kingdom of Saudi Arabia. The Company obtained licence from the Saudi Arabian Monetary Agency (“SAMA”) to practice general and health insurance and reinsurance business in the Kingdom of Saudi Arabia vide licence number TMN/25/20101, dated Safar 11, 1431H (corresponding to January 26, 2010). The Company has commenced insurance operations on 4 Rabi’ I 1431H (corresponding to February 18, 2010) after obtaining full product approval for certain products and temporary approval for the remaining products. During 2016, the Company obtained approval for the remaining products.

On 16 December 2019 (corresponding to Rabi’ II 1441H), the Company increased its share capital from Saudi Riyals 450 million to Saudi Riyals 500 million through the issuance of 5 million bonus shares (one bonus share for every nine shares held).

The accompanying financial statements include the accounts of the Company and its following branches:

2 Basis of preparation (continued)

2.1 Statement of compliance (continued)

In preparing the Company’s financial statements in compliance with IFRS as endorsed in KSA, the balances and transactions of the insurance operations are amalgamated and combined with those of the shareholders’ operations. Interoperation balances, transactions and unrealized gains or losses, if any, are eliminated in full during amalgamation. The accounting policies adopted for the insurance operations and shareholders’ operations are uniform for like transactions and events in similar circumstances.

2.2 Basis of measurement

The Company has prepared the accompanying financial statements under the going concern basis and the historical cost convention, except as described in Note 3.

2.3 Basis of presentation

The Company’s statement of financial position is not presented using a current/non-current classification. However, the following balances would generally be classified as non-current: long-term deposits, deferred policy acquisition costs, investments, right-of-use assets, property and equipment, intangible assets, goodwill, statutory deposit and employee benefit obligations. All other financial statements line items would generally be classified as current.

2.2 Basis of measurement

The Company has prepared the accompanying financial statements under the going concern basis and the historical cost convention, except as described in Note 3.

2.3 Basis of presentation

The Company’s statement of financial position is not presented using a current/non-current classification. However, the following balances would generally be classified as non-current: long-term deposits, deferred policy acquisition costs, investments, right-of-use assets, property and equipment, intangible assets, goodwill, statutory deposit and employee benefit obligations. All other financial statements line items would generally be classified as current.

2 Basis of preparation (continued)

2.1 Statement of compliance (continued)

In preparing the Company’s financial statements in compliance with IFRS as endorsed in KSA, the balances and transactions of the insurance operations are amalgamated and combined with those of the shareholders’ operations. Interoperation balances, transactions and unrealized gains or losses, if any, are eliminated in full during amalgamation. The accounting policies adopted for the insurance operations and shareholders’ operations are uniform for like transactions and events in similar circumstances.

3 Summary of significant accounting policies (continued)

3.1 New and amended standards adopted by the Company (continued)

IFRS 16, ‘Leases’ (continued)

The Company elected to apply the standard to contracts that were not previously identified as containing a lease applying IAS 17 and IFRIC 4. The Company elected to use the exemptions proposed by the standard on lease contracts for which the lease terms end within 12 months as of the date of initial application. The Company set up a project team that has reviewed various leasing and non-leasing arrangements during 2018 in light of the new lease accounting guidance in IFRS 16. The standard affects primarily the accounting for the Company’s operating leases. Based on the impact assessment performed by the Company, the identified impact from the adoption of IFRS 16 was not material and, hence, no adjustments were recognised by management on the date of transition i.e. 1 January 2019.

Annual improvements 2015-2017

These improvements include minor changes to IFRS 3 ‘Business combination’, IFRS 11 ‘Joint arrangements’, IAS 12 ‘Income taxes’ and IAS 23 ‘Borrowing costs’.

Amendments to IAS 19, ‘Employee benefit obligations’

The amendments require an entity to determine current service cost and net interest for the reminder of the period after a plan amendment, curtailment or settlement, and recognise in profit or loss as part of past service cost, or a gain or loss on settlement, any reduction in a surplus, even if that surplus was not previously recognised because of the impact of the asset ceiling.

IFRIC 23, ‘Uncertainty over income tax treatments’

This IFRIC clarifies how the recognition and measurement requirements of IAS 12 ‘Income taxes’, are applied where there is uncertainty over income tax treatments.

3.2 New standards, amendments and interpretations not yet applied by the Company

IFRS 9, ‘Financial Instruments’

This standard was published on 24 July 2014 and has replaced IAS 39 ‘Financial Instruments: Recognition and Measurement’. The new standard addresses the following items related to the financial statements:

a) Classification and measurement:

IFRS 9 uses a single approach to determine whether a financial asset is measured at amortized cost, at fair value through other comprehensive income (“FVOCI”) or at fair value through profit or loss (“FVTPL”). A financial asset is measured at amortized cost if both:

i) the asset is held within a business model whose objective is to hold assets in order to collect contractual cash flows; and

ii) the contractual terms of the financial asset give rise on specified dates to cash flows that are solely payments of principal and interest (“SPPI”) on the principal amount outstanding.

The financial asset is measured at FVOCI, and realized gains or losses are recycled through profit or loss upon sale, if both of the following conditions are met:

3 Summary of significant accounting policies (continued)

3.2 New standards, amendments and interpretations not yet applied by the Company (continued)

IFRS 9, ‘Financial Instruments’ (continued)

i) the asset is held within a business model whose objective is to hold assets in order to collect contractual cash flows and for sale; and

ii) the contractual terms of cash flows are SPPI.

Assets not meeting either of these categories are measured at FVTPL. Additionally, at initial recognition, an entity can use the option to designate a financial asset at FVTPL if doing so eliminates or significantly reduces an accounting mismatch.

For equity instruments that are not held for trading, an entity can also make an irrevocable election to present in other comprehensive income subsequent changes in the fair value of the instruments (including realized gains and losses), dividends being recognised in profit or loss.

Additionally, for financial liabilities that are designated as FVTPL, the amount of change in the fair value of the financial liability that is attributable to changes in the credit risk of that liability is recognised in other comprehensive income, unless the recognition of the effects of changes in the liability’s credit risk in other comprehensive income would create or enlarge an accounting mismatch in profit or loss.

b) Impairment:

The impairment model under IFRS 9 reflects expected credit losses, as opposed to incurred credit losses under IAS 39. Under the IFRS 9 approach, it is no longer necessary for a credit event to have occurred before credit losses are recognised. Instead, an entity always accounts for expected credit losses and changes in those expected credit losses. The amount of expected credit losses is updated at each reporting date to reflect changes in credit risk since initial recognition.

c) Hedge accounting:

IFRS 9 introduced new requirements for hedge accounting that align hedge accounting more closely with risk management. The requirements establish a more principles-based approach to the general hedge accounting model.

The amendments apply to all hedge accounting with the exception of portfolio fair value hedges of interest rate risk (commonly referred to as “fair value macro hedges”). For these, an entity may continue to apply the hedge accounting requirements currently in IAS 39. This exception was granted largely because the IASB is addressing macro hedge accounting as a separate project.

Effective date

The published effective of IFRS 9 was 1 January 2018. However, amendments to IFRS 4 ‘Insurance Contracts’ published on 12 September 2016, changes the existing IFRS 4 to allow entities issuing insurance contracts within the scope of IFRS 4 to mitigate certain effects of applying IFRS 9 before the IASB’s new insurance contract standard, IFRS 17 ‘Insurance Contracts’, becomes effective. The amendments introduce two alternative options:

i) apply a temporary exemption from implementing IFRS 9 until the earlier of:

a) the effective date of a new insurance contract standard; or

3 Summary of significant accounting policies (continued)

3.2 New standards, amendments and interpretations not yet applied by the Company (continued)

IFRS 9, ‘Financial Instruments’ (continued)

b) annual reporting periods beginning on or after 1 January 2021 (the IASB is proposing to extend the effective date of IFRS 17 and the IFRS 9 temporary exemption in IFRS 4 to 1 January 2022). Additional disclosures related to financial assets are required during the deferral period. This option is only available to entities whose activities are predominantly connected with insurance and have not applied IFRS 9 previously; or

ii) adopt IFRS 9 but, for designated financial assets, remove from profit or loss the effects of some of the accounting mismatches that may occur before the new insurance contract standard is implemented. During the interim period, additional disclosures are required.

The Company has performed a detailed assessment starting in 2019:

i) the carrying amount of the Company’s liabilities arising from contracts within the scope of IFRS 4 (including deposit components or embedded derivatives unbundled from insurance contracts) were compared to the total carrying amount of all its liabilities; and

ii) the total carrying amount of the Company’s liabilities connected with insurance were compared to the carrying amount of all its liabilities. Based on these assessments, the Company determined that it is eligible for the temporary exemption Consequently, the Company has decided to defer the implementation of IFRS 9 until the effective date of IFRS 17. Disclosures related to financial assets required during the deferral period are included in the Company’s financial statements.

Impact assessment

As at 31 December 2019, the Company has total financial assets and insurance related assets amounting to Saudi Riyals 2.3 billion and Saudi Riyals 274.9 million, respectively. Currently, financial assets held at amortized cost consist of cash and cash equivalents, deposits, held-to-maturity investments, premiums and reinsurers’ balances receivable - net, reinsurers’ share of outstanding claims, certain other assets and accrued income on statutory deposit amounting to Saudi Riyals 1.6 billion (31 December 2018: Saudi Riyals 1.4 billion).

The fair value of unit linked investments held at FVTPL as at 31 December 2019 is Nil (31 December 2018: Nil).

Other financial assets consist of available-for-sale investments measured at fair value of Saudi Riyals 667.3 million (31 December 2018: Saudi Riyals 593.4 million) with net increase in fair value during the year of Saudi Riyals 33.2 million (2018: net decrease of Saudi Riyals 12.5 million). The Company expects to use the FVOCI classification for these financial assets based on the business model of the Company for debt securities and strategic nature of equity investments. However, the Company is yet to perform a detailed assessment to determine whether the debt securities meet the SPPI test as required by IFRS 9.

Management expects that investments in funds classified under available-for-sale investments will be at FVTPL under IFRS 9.

Credit risk exposure, concentration of credit risk and credit quality of the above financial assets are mentioned in Note 27.9.

3 Summary of significant accounting policies (continued)

3.2 New standards, amendments and interpretations not yet applied by the Company (continued)

IFRS 9, ‘Financial Instruments’ (continued)

The Company’s financial assets have low credit risk as at 31 December 2019 and 2018. The above is based on a high-level impact assessment of IFRS 9. This preliminary assessment is based on currently available information and may be subject to changes arising from further detailed analyses or additional reasonable and supportable information being made available to the Company in the future. Overall, the Company expects some effect of applying the impairment requirements of IFRS 9. However, the impact of the impairment requirements of IFRS 9 are not expected to be significant. At present, it is not possible to provide a reasonable estimate of the effects of application of IFRS 9 as the Company is yet to perform a detailed review.

IFRS 17, ‘Insurance Contracts’

Overview

This standard was published in May 2017. It establishes the principles for the recognition, measurement, presentation and disclosure of insurance contracts and supersedes IFRS 4.

The new standard applies to insurance contracts issued, all reinsurance contracts and to investment contracts with discretionary participating features, provided the entity also issues insurance contracts. It requires to separate the following components from insurance contracts:

i) embedded derivatives, if they meet certain specified criteria;

ii) distinct investment components; and

iii) any promise to transfer distinct goods or non-insurance services.

These components should be accounted for separately in accordance with the related standards (IFRS 9 and IFRS 15 ‘Revenue from contracts with customers’).

Measurement

In contrast to the requirements of IFRS 4, which permitted insurers to continue to use the accounting policies for measurement purposes that existed prior to January 2015, IFRS 17 provides the following different measurement models:

The General Measurement Model (“GMM”)

GMM is based on the following “building blocks”:

a) the fulfillment cash flows (“FCF”), which comprise:

probability-weighted estimates of future cashflows;

an adjustment to reflect the time value of money (i.e. discounting) and the financial risks associated with those future cash flows; and

a risk adjustment for non-financial risk.

b) The Contractual Service Margin (“CSM”) represents the unearned profit for a group of insurance contracts and will be recognised as the entity provides services in the future. The CSM cannot be negative at inception. Any negative amount of the FCF at inceptions will be recorded in profit or loss immediately.

3 Summary of significant accounting policies (continued)

3.2 New standards, amendments and interpretations not yet applied by the Company (continued)

IFRS 17, ‘Insurance Contracts’ (continued)

At the end of each subsequent reporting period, the carrying amount of a group of insurance contracts is remeasured to be the sum of:

the liability for remaining coverage, which comprises the FCF related to future services and the CSM of the group of insurance contracts at that date; and

the liability for incurred claims, which is measured as the FCF related to past services allocated to the group of insurance contracts at that date.

The CSM is adjusted subsequently for changes in cash flows related to future services. Since the CSM cannot be negative, changes in future cash flows that are greater than the remaining CSM are recognised in profit or loss.

The effect of changes in discount rates will be reported in either profit or loss or other comprehensive income, determined by an accounting policy choice.

The Variable Fee Approach (“VFA”)

VFA is a mandatory model for measuring contracts with direct participation features (also referred to as ‘direct participating contracts’). This assessment of whether the contract meets these criteria is made at inception of the contract and not reassessed subsequently. For these contracts, in addition to the adjustment under GMM, the CSM is also adjusted for:

i) the entity’s share of the changes in the fair value of underlying items; and

ii) the effect of changes in the time value of money and in financial risks not relating to the underlying items.

Premium Allocation Approach (“PAA”)

PAA, a simplified approach, is permitted for the measurement of the liability for remaining coverage if it provides a measurement that is not materially difference from the GMM for a group of contracts or of the coverage period for each contract in the group is one year or less. With the PAA, the liability for remaining coverage corresponds to premiums received at initial recognition less insurance acquisition cash flows. The GMM remains applicable for the measurement of the liability for incurred claims. However, the entity is not required to adjust future cash flows for the time value of money and the effect of financial risk if those cash flows are expected to be paid / received in one year or less from the date the claims are incurred.

Effective date

The IASB issued an Exposure Draft Amendments to IFRS 17 proposing certain amendments to IFRS 17 during June 2019 and received comments from various stakeholders. The IASB is currently re-deliberating issues raised by stakeholders. For any proposed amendments to IFRS 17, the IASB will follow its normal due process for standard-setting. The effective date of IFRS 17 and the deferral of IFRS 9 temporary exemption in IFRS 4 is currently 1 January 2021. Under the current exposure draft, it is proposed to amend the IFRS 17 effective date to reporting periods beginning on or after 1 January 2022. This is a deferral of 1 year compared to the previous date of 1 January 2021. Earlier application is permitted if both IFRS 15 and IFRS 9 have also been applied. The Company intends to apply IFRS 17 on its effective date.

3 Summary of significant accounting policies (continued)

3.2 New standards, amendments and interpretations not yet applied by the Company (continued)

IFRS 17, ‘Insurance Contracts’ (continued)

Applicable for the period beginning on or after 1 January 2022, and will supersede IFRS 4 ‘Insurance Contracts’. Earlier adoption is permitted if IFRS 9 has also been applied. The Company expects a material impact on measurement and disclosure of insurance and reinsurance that will affect the statements of financial position, income and comprehensive income. The Company has decided not to early adopt this new standard.

Transition

Retrospective application is required. However, if full retrospective application for a group of insurance contracts is impracticable, then the entity is required to choose either a modified retrospective approach or a fair value approach.

Presentation and disclosures

The Company expects that the new standard will result in a change to the accounting policies for insurance contracts and reinsurance, together with amendments to presentation and disclosures.

Impact

The Company is currently assessing the impact of the application and implementation of IFRS 17. As of the date of the publication of these financial statements, the financial impact of adopting the standard has yet to be fully assessed by the Company. The Company has undertaken a gap analysis and the key gaps and their impact are as follows:

3 Summary of significant accounting policies (continued)

3.2 New standards, amendments and interpretations not yet applied by the Company (continued)

IFRS 3, ‘Business combination’.

Amendments effective 1 January 2020. These amendments contained a revised definition of business.

IAS 1, ‘Presentation of financial statements’ and IAS 8 ‘Accounting Policies, Changes in Accounting Estimates and Errors’

Amendments effective 1 January 2020. These amendments contain guidance on use of a consistent definition of materiality throughout IFRSs and the Conceptual Framework for Financial Reporting, clarify the explanation of the definition of material and incorporate some of the guidance in IAS 1 about immaterial information.

Fiscal year

The Company follows a fiscal year ending 31 December.

3.4 Use of estimates in the preparation of financial statements

The preparation of financial statements in conformity with IFRS as endorsed in KSA requires the use of certain critical accounting estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. It also requires management to exercise its judgment in the process of applying the Company’s accounting policies. Changes in assumptions may have a significant impact on the financial statements in the period the assumptions changed. Management believes that the underlying assumptions are appropriate and the Company’s financial statements present fairly, in all material respects, the financial position and results of operations. The areas involving a higher degree of judgment or complexity, or areas where assumptions and estimates are significant to the financial statements are disclosed in Note 4.

2.2 Basis of measurement

The Company has prepared the accompanying financial statements under the going concern basis and the historical cost convention, except as described in Note 3.

3.6 Functional and presentation currency

The Company’s books of account are maintained in Saudi Riyals, which is also the functional and presentation currency of the Company. Transactions denominated in foreign currencies are translated into Saudi Riyals at rates prevailing on the dates of such transactions. Monetary assets and liabilities denominated in foreign currencies are translated into Saudi Riyals at rates prevailing on the reporting date. All differences are taken to the statements of income. Foreign exchange differences are not significant and have not been disclosed separately.

3.17 Salvage and subrogation reimbursement

Some insurance contracts permit the Company to sell (usually damaged) assets acquired in settling a claim (for example, salvage). The Company may also have the right to pursue third parties for payment of some or all costs (for example, subrogation).

Estimates of salvage recoveries are included as an allowance in the measurement of the outstanding claims liability. The allowance is the amount that can reasonably be recovered from the disposal of damaged assets.

Subrogation reimbursements are also considered as an allowance in the measurement of the outstanding claims liability. The allowance is the assessment of the amount that can be recovered from the action against the liable third party.

3Summary of significant accounting policies

The significant accounting policies used in the preparation of these financial statements are consistently applied for all years presented, unless otherwise stated.

3.3 Changes in accounting policies

3.3.1 Change in accounting for zakat and income tax

As mentioned in Note 2.1 above, the basis of preparation has been changed for the year ended 31 December 2019 based on the latest instructions from SAMA during July 2019. Previously, zakat and income tax was recognised in the statement of changes in equity as per SAMA circular number 381000074519 dated 11 April 2017. As per SAMA instructions in July 2019, the zakat and income tax shall be recognised in the statement of income. The Company has accounted for this change in the accounting for zakat and income tax retrospectively (the effects of the above change are disclosed in Note 32 to the financial statements). The change has resulted in a reduction of reported income of the Company for the year ended 31 December 2018 by Saudi Riyals 17.4 million. The change had no impact on the statement of cash flows for the year ended 31 December 2018.

a) Zakat

The Company is subject to zakat in accordance with the regulations of the General Authority of Zakat and Income Tax (“GAZT”). Zakat is calculated based on higher of approximate zakat base and adjusted profit and charged to profit or loss. Additional zakat, if any, is accounted for when determined to be required for payment.

Amounts accrued for zakat expense in one year may have to be adjusted in a subsequent year if the estimate of the annual charge changes.

b) Income tax

The income tax expense or credit for the period is the tax payable on the current period’s taxable income, based on the applicable income tax rate for each jurisdiction, adjusted by changes in deferred tax assets and liabilities attributable to temporary differences and to unused tax losses, and is charged to the statement of income.

The current income tax charge is calculated on the basis of the tax laws enacted or substantively enacted at the end of the reporting period the Company operates and generates taxable income. Management periodically evaluates positions taken in tax returns with respect to situations in which applicable tax regulation is subject to interpretation. It establishes provisions, where appropriate, on the basis of amounts expected to be paid to the tax authorities.

3 Summary of significant accounting policies (continued)

3.3 Changes in accounting policies (continued)

3.3.1 Change in accounting for zakat and income tax (continued)

Additional current income tax, if any, is accounted for when determined to be required for payment.

c) Deferred tax

Deferred income tax is recognised using the liability method on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts, and for the carry forward losses in the financial statements, if any. The amount of deferred tax recognised is based on the expected manner of realization or settlement of the carrying amounts of assets and liabilities using the tax rates enacted or substantively enacted at the reporting date. A deferred tax asset is recognised only to the extent that it is probable that future taxable profits will be available against which the deductible temporary differences and the tax credits can be utilized. Deferred tax asset is reduced to the extent that it is no longer probable that the related tax benefits will be realized.

Deferred tax assets and liabilities are offset where there is a legally enforceable right to offset current tax assets and liabilities and where the deferred tax balances relate to the same taxation authority. Current tax assets and tax liabilities are offset where the entity has a legally enforceable right to offset and intends either to settle on a net basis, or to realise the asset and settle the liability simultaneously.

Current and deferred tax is recognised in profit or loss, except to the extent that it relates to items recognised in other comprehensive income or directly in equity. In this case, the tax is also recognised in other comprehensive income or directly in equity.

3.3.2 Right-of-use assets and lease liabilities

Until 2018, all leases of the Company were assessed to be operating leases and payments made under such leases were charged to profit or loss on a straight-line basis over the period of the lease.

Starting 1 January 2019, the Company assesses whether a contract is or contains a lease, at inception of a contract. The Company recognises a right-of-use asset and a corresponding lease liability with respect to all lease agreements in which it is the lessee, except for short-term leases (defined as leases with a lease term of twelve months or less) and leases of low value assets. For these leases, the Company recognises the lease payments as an operating expense on a straight-line basis over the term of the lease unless another systematic basis is more representative of the time pattern in which economic benefits from the leased asset are consumed.

The lease liability is initially measured at the present value of the lease payments that are not paid at the commencement date, discounted by using the rate implicit in the lease. If this rate cannot be readily determined, the Company uses its incremental borrowing rate.

Lease payments included in the measurement of the lease liability comprise:

- fixed lease payments, less any lease incentives;

- variable lease payments that depend on an index or rate, initially measured using the index or rate at the commencement date;

- the amount expected to be payable by the lessee under residual value guarantees;

- the exercise price of purchase options, if the lessee is reasonably certain to exercise the options; and

- payments of penalties for terminating the lease, if the lease term reflects the exercise of an option to terminate the lease.

3 Summary of significant accounting policies (continued)

3.3 Changes in accounting policies (continued)

3.3.2 Right-of-use assets and lease liabilities (continued)

The lease liability is presented as a separate line in the statement of financial position.

The lease liability is subsequently measured by increasing the carrying amount to reflect interest on the lease liability (using the effective interest rate method) and by reducing the carrying amount to reflect the lease payments made.

The Company remeasures the lease liability (and makes a corresponding adjustment to the related right-of-use asset) whenever:

- the lease term has changed or there is a change in the assessment of exercise of a purchase option, in which case the lease liability is remeasured by discounting the revised lease payments using a revised discount rate;

- the lease payments change due to changes in an index or rate or a change in expected payment under a guaranteed residual value, in which case the lease liability is remeasured by discounting the revised lease payments using the initial discount rate (unless the lease payments change is due to a change in a floating interest rate, in which case a revised discount rate is used); and

- a lease contract is modified, and the lease modification is not accounted for as a separate lease, in which case the lease liability is remeasured by discounting the revised lease payments using a revised discount rate.

The right-of-use assets comprise the initial measurement of the corresponding lease liability, lease payments made at or before the commencement day and any initial direct costs. They are subsequently measured at cost less accumulated depreciation and impairment losses.

Whenever the Company incurs an obligation for costs to dismantle and remove a leased asset, restore the site on which it is located or restore the underlying asset to the condition required by the terms and conditions of the lease, a provision is recognised and measured under IAS 37, ‘Provisions, contingent liabilities and contingent assets’. The costs are included in the related right-of-use asset, unless those costs are incurred to produce inventories.

Right-of-use assets are depreciated over the shorter period of lease term or the economic useful life of the underlying asset. If a lease transfers ownership of the underlying asset or the cost of the right-of-use asset reflects that the Company expects to exercise a purchase option, the related right-of-use asset is depreciated over the useful life of the underlying asset. The depreciation starts at the commencement date of the lease.

The right-of-use assets are presented as a separate line in the statement of financial position.

The Company applies IAS 36 ’Impairment of Assets’ to determine whether a right-of-use asset is impaired and accounts for any identified impairment loss.

3.10 Cash and cash equivalents

Cash and cash equivalents include cash in hand and with banks and other short-term highly liquid investments, if any, with less than three months maturity from the date of acquisition.

3.12 Premiums receivable

Premiums receivable are recognised when insurance contract is made and measured on initial recognition at the fair value of the considerations received or receivable. The carrying value of premiums receivable is reviewed for impairment whenever events or circumstances indicate that the carrying amount may not be recoverable, with the impairment loss recorded in the statement of income. Premiums receivable are derecognised when the de-recognition criteria for financial assets have been met.

3.15 Deferred policy acquisition costs

Commissions paid to intermediaries and other incremental direct costs incurred in relation to the acquisition and renewal of insurance contracts are deferred and amortized over the terms of the insurance contacts to which they relate, similar to premium earned.

3.13 Unearned reinsurance commission income

Reinsurance commission income on outwards reinsurance contracts are deferred and amortized over the terms of the insurance contracts to which they relate, similar to premiums earned. Amortisation is recorded in the statement of income.

3.22 Intangible assets

a) Goodwill

Goodwill represents excess of the fair value of the purchase consideration payable, as per SAMA’s instructions, over the net identifiable assets acquired from AXA Saudi Arabia Holding W.L.L. (formerly AXA Insurance Saudi Arabia B.S.c). The recoverability of goodwill is tested at each statement of financial position date for impairment or more frequently when changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognised as the amount by which the asset’s carrying amount exceeds its recoverable amount. The recoverable amount for goodwill is the value in use.

b) Other intangible assets

Other intangible assets, including software, and are measured at cost less accumulated amortisation and impairment losses. Those with a finite useful life are amortised over their estimated useful life in accordance with the pattern of expected consumption of economic benefits using straight-line method. Estimated useful life of software is 4 years. Intangible assets with an infinite useful life are not subject to amortisation but are tested for impairment each statement of financial position date or more often if there is an indication of impairment. Intangible assets with a finite life are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable.

3 Summary of significant accounting policies (continued)

3.21 Property and equipment (continued)

The assets’ useful lives are reviewed at the end of each statement of financial position date and adjusted, if appropriate. 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. Gains and losses on disposals are determined by comparing the proceeds with the carrying amount. These are included in the statement of income under other income.

Assets in the course of construction or development are capitalised in the capital work-in-progress account. The asset under construction or development is transferred to the appropriate category in property and equipment, once the asset is in a location and / or condition necessary for it to be capable of operating in the manner intended by management. The cost of an item of capital work-in-progress comprises its purchase price, construction / development costs and any other directly attributable costs to the construction or acquisition of an item of capital work-in-progress intended by management. Capital work-in-progress is not depreciated.

3.19 Liability adequacy test

At each statement of financial position date, the Company assesses whether its recognised insurance liabilities are adequate using current estimates of future cash flows under its insurance contracts. If that assessment shows that the carrying amount of its insurance liabilities (less related deferred policy acquisition costs) is inadequate in the light of estimated future cash flows, the entire deficiency is immediately recognised in the statement of income and an unexpired risk provision is created.

3.24 Payables

Payables are recognised initially at fair value and measured at amortized cost using effective interest rate method.

3.28 Trade date accounting

All regular way purchases and sales of financial assets are recognised / derecognised on the trade date (i.e. the date that the Company commits to purchase or sell the assets). Regular way purchases or sales of financial assets are transactions that require settlement of assets within the time frame generally established by regulation or convention in the market place.

3.23 Provisions, claims payable, accrued expenses and other liabilities

Liabilities are recognised for amounts to be paid for goods and services received, whether or not billed to the Company.

Provisions are recognised 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 able to be reliably measured.

24 Statutory reserve

In accordance with By-laws of the Company and Article 70(2)(g) of the Insurance Implementing Regulations issued by SAMA, the Company is required to transfer not less than 20% of its total income for the year, after adjusting accumulated losses, to a statutory reserve until such reserve amounts to 100% of the paid-up share capital of the Company. This reserve is not available for distribution to the shareholders until the liquidation of the Company.

3.25 Employee benefit obligations

The Company operates a single post-employment benefit scheme of defined benefit plan driven by the labor laws and workman laws of the Kingdom of Saudi Arabia which is based on most recent salary and number of service years.

The post-employment benefits plans is not funded. Accordingly, valuations of the obligations under the plan are carried out by an independent actuary based on the projected unit credit method. The costs relating to such plans primarily consist of the present value of the benefits attributed on an equal basis to each year of service and the interest on this obligation in respect of employee service in previous years.

Current and past service costs related to post-employment benefits are recognised immediately in the statement of income and while unwinding of the liability at discount rates used are recorded in the statement of income. Any changes in net liability due to actuarial valuations and changes in assumptions are taken as re-measurement in the statement of comprehensive income.

Re-measurement gains and losses arising from experience adjustments and changes in actuarial assumptions are recognised directly in the statement of comprehensive income and transferred to retained earnings in the statement of changes in equity in the period in which they occur.

Changes in the present value of the defined benefit obligations resulting from plan amendments or curtailments are recognised immediately in statement of income as past service costs. End of service payments are based on employees’ final salaries and allowances and their cumulative years of service, as stated in the labor law of Saudi Arabia.

3.7.4 Impairment of financial assets

The Company assesses, at each reporting date, whether there is objective evidence that a financial asset or a group of financial assets is impaired. An impairment exists if one or more events that has occurred since the initial recognition of the asset (an incurred ‘loss event’), has an impact on the estimated future cash flows of the financial asset or the group of financial assets that can be reliably estimated.

3.7.4 Impairment of financial assets (continued)

Evidence of impairment may include:

- Significant financial difficulty of the issuer or debtor;

- A breach of contract, such as a default or delinquency in payments;

- It becoming probable that the issuer or debtor will enter bankruptcy or other financial reorganization;

- The disappearance of an active market for that financial asset because of financial difficulties; or

- Observable data indicating that there is a measurable decrease in the estimated future cash flow from a group of financial assets since the initial recognition of those assets, although the decrease cannot yet be identified with the individual financial assets in the Company, including:

adverse changes in the payment status of issuers or debtors in the Company; or

national or local economic conditions at the country of the issuers that correlate with defaults on the assets.

For available-for-sale financial assets, the Company assesses at each reporting date whether there is objective evidence that an investment or a group of investments is impaired.

In the case of debt instruments classified as available for sale, the Company assesses individually whether there is an objective evidence of impairment. Objective evidence may include indications that the borrower is experiencing significant financial difficulty, default or delinquency in special commission income or principal payments, the probability that it will enter bankruptcy or other financial reorganization and where observable data indicates that there is a measurable decrease in the estimated future cash flows, such as changes in economic conditions that correlate with defaults. However, the amount recorded for impairment is the cumulative loss measured as the difference between the amortized cost and the current fair value, less any impairment loss on that investment previously recognised in the statement of income. If, in a subsequent period, the fair value of a debt instrument increases and the increase can be objectively related to credit event occurring after the impairment loss was recognised in the statement of income, the impairment loss is reversed through the statement of income.

For equity investments held as available-for-sale, a significant or prolonged decline in fair value below its cost represents objective evidence of impairment. The impairment loss cannot be reversed through statement of income as long as the asset continues to be recognised i.e. any increase in fair value after impairment has been recorded can only be recognised in other comprehensive income. On derecognition, any cumulative gain or loss previously recognised in other comprehensive income is included in the statement of income for the year. The determination of what is ‘significant’ or ‘prolonged’ requires judgement. A period of 12 months or longer is considered to be prolonged and a decline of 30% from original cost is considered significant as per Company policy. In making this judgement, the Company evaluates, among other factors, the duration or extent to which the fair value of an investment is less than its cost.

In making an assessment of whether an investment in debt instrument is impaired, the Company considers the factors such as market’s assessment of creditworthiness as reflected in the bond yields, rating agencies’ assessment of creditworthiness, country’s ability to access the capital markets for new debt issuance and probability of debt being restructured, resulting in holders suffering losses through voluntary or mandatory debt forgiveness. The amount recorded for impairment is the cumulative loss measured as the difference between the amortised cost and the current fair value, less any impairment loss on that investment previously recognised in the statement of income.