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Saudi Arabia issues circular on accounting treatment for zakat in financial statements of banking company

Executive summary

The Saudi Arabian Monetary Authority (SAMA) issued a circular on 14 December 2016 (the circular), to all the banks in Saudi Arabia, clarifying the accounting treatment of zakat1 in their financial statements.

According to the circular, SAMA has decided to continue following the accounting for Zakat as set out in accounting standards as issued by SAMA in 1994 (SAMA accounting standards). Further, the circular has set out certain changes in the SAMA accounting standards.

SAMA has sought views in this regard from reporting banking companies.

Detailed discussion


The Saudi Organization for Certified Public Accountants (SOCPA) recently amended its existing zakat accounting standard to bring it into line with the requirements of International Financial Reporting Standards (IFRS). As per the amended standard of SOCPA, all entities in Saudi Arabia will be reporting zakat in their statement of income.

Banks in Saudi Arabia have been preparing financial statements under IFRS and SAMA accounting standards. While the amendment in zakat is a standard of SOCPA, which is applicable now to all entities in Saudi Arabia including banks, the circular reiaterates that banking companies shall continue to follow accounting treatment of zakat as set out by the SAMA accounting standards.

Under SAMA accounting standards, banking companies were reporting zakat as a deduction from dividends payable instead of reporting it in the statement of income or statement of changes in equity.

Changes as set out in the circular

The circular sets out the following changes to the SAMA accounting standard:

  • Zakat and income tax should be recorded as a deduction from gross dividends payable rather than a deduction from “other reserves” for all Saudi and mixed ownership banks and finance companies. If there are no sufficient retained earnings then zakat and income tax should be charged to the equity.
  • In case of loss or non-declaration of dividends by Saudi and mixed ownership banks and finance companies, zakat and income tax for the current period should be treated as a deduction from retained earnings. If there is insufficient retained earnings available, zakat and income tax shall be recorded as due from respective shareholders (Saudi or non-Saudi shareholders).

Implications of the circular

The following are implications of the Circular, subject to any changes based on comments from banking companies:

  • In normal circumstances, where the banks report a profit for the year and have sufficient retained earnings, the banks shall continue to report the zakat and income tax as a deduction from dividends.

There will not be any change in the presentation of zakat and income tax in the ”statement of income” nor in the “statement of changes in equity.”

  • In case of a loss or non-declaration of dividends, zakat and income tax charge will appear in the statement of changes in equity as a charge to the “retained earnings.”

In a case where the retained earnings are not sufficient enough to sustain the charge of zakat and income tax, then such zakat and income tax will be recorded as a receivable from shareholders.


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.

EYG no. 04508-161Gbl

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