MERRILL LYNCH KINGDOM OF SAUDI ARABIA COMPANY
(A Saudi Closed Joint Stock Company)
FINANCIAL STATEMENTS
AND INDEPENDENT AUDITOR’S REPORT
FOR THE YEAR ENDED 31 DECEMBER 2019
MERRILL LYNCH KINGDOM OF SAUDI ARABIA COMPANY
(A Saudi Closed Joint Stock Company)
FINANCIAL STATEMENTS
AND INDEPENDENT AUDITOR’S REPORT
FOR THE YEAR ENDED 31 DECEMBER 2019
Index Pages
Independent auditor's report
1 - 2
Statement of income
3
Statement of comprehensive income 4
Statement of financial position
5
Statement of changes in shareholders’ equity
6
Statement of cash flows
7
Notes to the financial statements
8 – 28
PricewaterhouseCoopers, License No. 25,
Kingdom Tower, P.O. Box 8282, Riyadh 11482, Kingdom of Saudi Arabia
T: +966 (11) 211-0400, F: +966 (11) 211-0401, www.pwc.com/middle-east
Independent auditor’s report to the shareholders of Merrill Lynch Kingdom of Saudi Arabia Company (A Saudi Closed Joint Stock Company)
Our opinion In our opinion, the financial statements present fairly, in all material respects, the financial position of Merrill Lynch Kingdom of Saudi Arabia Company (the “Company”) as at December 31, 2019, and its financial performance and its cash flows for the year then ended in accordance with International Financial Reporting Standards, that are endorsed in the Kingdom of Saudi Arabia, and other standards and pronouncements issued by the Saudi Organization for Certified Public Accountants (“SOCPA”). What we have audited The Company’s financial statements comprise:
• the statement of income for the year ended December 31, 2019;
• the statement of comprehensive income for the year then ended;
• the statement of financial position as at that date;
• the statement of changes in shareholders’ equity for the year then ended;
• the statement of cash flows for the year then ended; and
• the notes to the financial statements, which include a summary of significant accounting policies.
Basis for opinion We conducted our audit in accordance with International Standards on Auditing, that are endorsed in the Kingdom of Saudi Arabia. Our responsibilities under those standards are further described in the Auditor’s Responsibilities for the Audit of the Financial Statements section of our report.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.
Independence We are independent of the Company in accordance with the code of professional conduct and ethics, endorsed in the Kingdom of Saudi Arabia, that are relevant to our audit of the financial statements and we have fulfilled our other ethical responsibilities in accordance with these requirements.
Responsibilities of the management and those charged with governance for the financial statements Management is responsible for the preparation and fair presentation of the financial statements in accordance with International Financial Reporting Standards, that are endorsed in the Kingdom of Saudi Arabia and other standards and pronouncements issued by SOCPA, and the applicable requirements of the Regulations for Companies and the Company’s By-Laws, and for such internal control as management determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error.
In preparing the financial statements, management is responsible for assessing the Company’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless management either intends to liquidate the Company or to cease operations, or has no realistic alternative but to do so.
The board of directors are responsible for overseeing the Company’s financial reporting process.
Merrill Lynch Kingdom of Saudi Arabia Company
(A Saudi Closed Joint Stock Company) Statement of changes in shareholders’ equity (All amounts in Saudi Riyals unless otherwise stated)
6
Share
capital
Statutory
reserve
Retained
earnings
Total
equity
At 1 January 2018 143,000,000 5,046,797 16,445,213 164,492,010
Changes on initial application of IFRS 9 - - (84,947) (84,947)
At 1 January 2018 (restated) 143,000,000 5,046,797 16,360,266 164,407,063
Net income for the year - - 11,820,805 11,820,805
Other comprehensive income - - - -
Total comprehensive income - - 11,820,805 11,820,805
Transfer to statutory reserve - 1,182,081 (1,182,081) -
At 31 December 2018 143,000,000 6,228,878 26,998,990 176,227,868
Net income for the year - - 39,864,868 39,864,868
Other comprehensive income - - (485,524) (485,524)
Total comprehensive income - - 39,379,344 39,379,344
Transfer to statutory reserve - 3,986,487 (3,986,487) -
At 31 December 2019 143,000,000 10,215,365 62,391,847 215,607,212
The notes on pages 8 to 28 form an integral part of these financial statements.
Merrill Lynch Kingdom of Saudi Arabia Company
(A Saudi Closed Joint Stock Company)
Statement of cash flows
(All amounts in Saudi Riyals unless otherwise stated)
7
Year ended 31 December
Notes 2019 2018 Cash flows from operating activities Profit before taxation 50,695,091 14,897,576 Adjustments for:
Depreciation 8,12 1,886,390 312,962 Provision for employees' end of service benefits 15 647,390 1,034,830 Interest expense 18 6,102,293 58,152 Reversal of allowance for expected credit losses on cash
at banks
(9,985)
(7,635) Loss of disposal of property and equipment 21,174 -
Movements in working capital: Trade and client receivables (323,817) 4,925,267 Due from related parties (3,723,189) 1,104,302 Prepayments and other receivables (1,013,405) (2,174,710)
Trade and client payables 321,493 (4,914,010) Due to related parties 9,346,306 2,553,795 Accrued expenses and other payables 4,185,643 386,834
Income tax paid 13.2 (5,362,610) - Employees' end of service benefits paid 15 (129,435) (59,247)
Net cash generated from operating activities 62,643,338 18,118,116
Cash flows from investing activity Purchase of property and equipment 12 (4,970,155) (347,843)
Net cash outflow from investing activity (4,970,155) (347,843)
Cash flows from financing activities Interest expense
(6,046,340) (58,152)
Principal payments (864,977) -
Net cash outflow from financing activities (6,911,316) (58,152)
Net increase in cash and cash equivalents 50,761,867 17,712,121 Cash and cash equivalents at the beginning of the year 184,082,330 166,370,209
Cash and cash equivalents at end of the year 9 234,844,197 184,082,330
During the year ended 31 December 2019, the principal non-cash transactions relates to the recognition of lease liability
and right-of-use asset amounting to SAR 846,563 and SAR 1,465,425 respectively following the adoption of IFRS 16.
The notes on pages 8 to 28 form an integral part of these financial statements.
Merrill Lynch Kingdom of Saudi Arabia Company (A Saudi Closed Joint Stock Company) Notes to the financial statements for the year ended 31 December 2019 (All amounts in Saudi Riyals unless otherwise stated)
8
1. General information
Merrill Lynch Kingdom of Saudi Arabia Company (the “Company” or “MLKSA”) is a Saudi Closed Joint Stock Company
registered in the Kingdom of Saudi Arabia (“KSA”) under Commercial Registration number 1010245128 issued in Riyadh
on Safar 29, 1429H (corresponding to 7 March 2008). Its immediate holding company is Bank of America Global Holdings
LLC (Parent Company), a company incorporated in the United States of America. The ultimate holding company is Bank
of America Corporation ("BAC"), a company organised and existing under the laws of the State of Delaware in the United
States of America.
The Company is licensed by the Capital Market Authority ("CMA") under license number 07066-37 dated 26 Jumadah Al-
Awwal 1428H (corresponding to 12 June 2007) and is a participant in the Tadawul. The registered office of the Company
is located at Kingdom Tower 22nd floor, P.O. Box 90534, Riyadh 11623, Kingdom of Saudi Arabia.
The principal activities of the Company are to engage in dealing activities in its capacity as an agent and principal and to
undertake underwriting, arranging, advisory and custody services for securities.
2. Basis of preparation
2.1. Statement of compliance
The financial statements have been prepared in accordance with International Financial Reporting Standards (“IFRS”),
that are endorsed in the Kingdom of Saudi Arabia, and other standards and pronouncements issued by the Saudi
Organization for Certified Public Accountants (“SOCPA”).
2.2. Basis of measurement
The financial statements have been prepared on the historical cost basis using the accrual basis of accounting and the
going concern concept except for the provision for employees' end of service benefits which is carried at present value
computed using actuarial techniques.
2.3. Functional and presentation currency
The financial statements have been presented in Saudi Riyals (“SAR”) as this is the functional and presentational currency
of the Company. Foreign currency transactions are translated into the functional currency using the exchange rates
prevailing at the dates of the transactions. All financial information presented in Saudi Riyals has been rounded to the
nearest Saudi Riyal.
2.4. Critical accounting estimates and judgments
The preparation of financial statements in conformity with IFRS requires the use of certain critical estimates and judgments
that affect the reported amounts of assets and liabilities. It also requires management to exercise its judgment in the
process of applying the Company’s accounting policies. Such 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, vary from the related actual results. There are no areas involving a higher degree
of judgment or complexity, or areas where assumptions and estimates are significant to the financial statements.
2.5. Application of new and revised International Financial Reporting Standards (“IFRS”)
2.5.1. New and revised IFRS applied on the financial statements
The following new and revised IFRS, which became effective for annual periods beginning on or after 1 January 2019,
have been adopted in these financial statements. The application of these revised IFRSs, except where stated, have not
had any material impact on the amounts reported for the current and prior years.
IFRS 16 Leases:
The Company has applied IFRS 16 Leases for the first time with a date of initial application of 1 January 2019. IFRS 16
addresses the definition of a lease, and sets out the principles for the recognition, measurement, presentation and
disclosure of leases for both parties to a contract. The standard replaces IAS 17 - Leases, and related interpretations.
IFRS 16 introduces significant changes to the lessee accounting by removing the distinction between operating and
finance leases and requiring the recognition of a right-of-use asset and a lease liability at the lease commencement.
Merrill Lynch Kingdom of Saudi Arabia Company
(A Saudi Closed Joint Stock Company) Notes to the financial statements for the year ended 31 December 2019 (continued) (All amounts in Saudi Riyals unless otherwise stated)
9
2. Basis of preparation (continued)
2.5 Application of new and revised International Financial Reporting Standards (“IFRS”) (continued)
2.5.1 New and revised IFRS applied on the financial statements (continued)
IFRS 16 Leases (continued):
In accordance with the transition provisions in IFRS 16 the new rules have been adopted using simplified approach without
any impact on retained earnings as at 1 January 2019. Comparatives for the 2018 financial year have not been restated.
The impact of adoption of the leasing standard and the new accounting policies affected by this new standard is disclosed
in Note 2.6.
Amendments to IAS 19, ‘Employee benefits’ on plan amendment, curtailment or settlement: These amendments require an entity to:
• use updated assumptions 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.
There is no material impact on the financial statements of the Company from the adoption of this new standard on 1
January 2019.
Amendments to IFRS 9, ‘Financial instrument’: This amendment confirmed two points:
• reasonable compensation for prepayments can be both negative or positive cash flows when considering whether a financial asset solely has cash flows that are principal and interest
• when a financial liability measured at amortised cost is modified without resulting in de-recognition, a gain or loss should be recognised immediately in profit or loss. The gain or loss is calculated as the difference between the original contractual cash flows and the modified cash flows discounted at the original effective interest rate. This means that the difference cannot be spread over the remaining life of the instrument which may be a change in practice from IAS 39.
There is no material impact on the financial statements of the Company from the adoption of above amendment on 1 January 2019. IFRIC 23, ‘Uncertainty over Income Tax Treatments’: The interpretation address the determination of taxable profit (tax loss) tax bases, unused tax credits and tax rates, when there is uncertainty over income tax treatments under IAS 12. It specifically considers:
• Whether tax treatments should be considered collectively or separately;
• Assumptions for taxation authorities;
• The determination of taxable profit (tax loss), tax bases, unused tax losses, and tax rates; and
• The effect of changes in facts and circumstances. There is no material impact on the financial statements of the Company from the adoption of above interpretation on 1 January 2019. 2.5.2. New and revised IFRS issued but not yet effective and not early adopted
The Company has not yet applied the following new standards, amendments and interpretations that have been issued
but are not yet effective:
Amendments to IAS 1 and IAS 8 on the definition of material (Effective for annual periods beginning on or after
1 January 2020):
These amendments to IAS 1, ‘Presentation of financial statements’, and IAS 8, ‘Accounting policies, changes in accounting estimates and errors’, and consequential amendments to other IFRSs:
• use 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.
Management does not anticipate that the adoption of the above amendments on 1 January 2020 will have a material
impact on the Company’s financial statements.
Merrill Lynch Kingdom of Saudi Arabia Company
(A Saudi Closed Joint Stock Company) Notes to the financial statements for the year ended 31 December 2019 (continued) (All amounts in Saudi Riyals unless otherwise stated)
10
2. Basis of preparation (continued)
2.6. Changes in accounting policies
As indicated in Note 2.5.1 above, the Company has adopted IFRS 16 Leases from 1 January 2019 and has not restated
comparatives for 2018 reporting period, as permitted under the specific transition provisions in the standard. The
reclassifications and the adjustments arising from the new leasing rules are therefore recognised in the opening balance
sheet on 1 January 2019. The Company’s lease exposure relate to premises building.
From 1 January 2019, leases are recognised as a right-of-use asset and corresponding liability at the date of which the
leased asset is available for use by the Company. Each lease payment is allocated between the liability and finance cost.
The finance cost is charged to statement of income over the lease period so as to produce a constant periodic rate of
interest on the remaining balance of the liability for each period. The right-of-use asset is depreciated over the shorter of
the asset's useful life or the lease term on a straight-line basis.
Assets and liabilities arising from a lease are initially measured on a present value basis. Lease liabilities include the net
present value of the following lease payments:
(i) fixed payments (including in-substance fixed payments), less any lease incentives receivable
(ii) amounts expected to be payable by the lessee under residual value guarantees
(iii) payments of penalties for terminating the lease, if the lease term reflects the lessee exercising that option.
The lease payments are discounted based on the incremental borrowing rate determined by the Company, being the rate
that the lessee would have to borrow the funds necessary to obtain an asset of similar value in a similar economic
environment with similar terms and conditions.
Right-of-use assets are measured at cost comprising the following:
(i) the amount of the initial measurement of lease liability;
(ii) lease payments made at or before the commencement date less any lease incentives received;
(iii) initial direct costs.
On adoption of IFRS 16, the Company recognised lease liability within “Accrued expense and other payables” in relation
to leases which had previously been classified as ‘operating leases’ under the principles of IAS 17 Leases. This liability
was measured at the present value of the remaining lease payments, discounted using the Company’s incremental
borrowing rate as of 1 January 2019. The weighted average lessee’s incremental borrowing rate applied to the lease
liability on 1 January was 3.87%.
Adjustments recognised on adoption of IFRS 16 1 January 2019
Operating lease commitments disclosed as at 31 December 2018 3,329,650
(Less): short-term leases recognised on a straight-line basis as expense (1,593,883)
Long-term operating lease commitments 1,735,767
Discounted using the Company’s incremental borrowing rate of 3.87% (80,180)
Lease liability recognised as at 1 January 2019 1,655,587
The associated right-of-use asset was recognised within “Property and equipment, net” and measured at the amount
equal to the lease liability, adjusted by the amount of any prepaid or accrued lease payments relating to that lease
recognised in the balance sheet as at 31 December 2018.The prepayments were reduced by SAR 647,224. There is no
impact on retained earnings on 1 January 2019 as a result of the IFRS 16 adoption.
Practical expedients applied
In applying IFRS 16 for the first time, the Company has used the following practical expedients permitted by the standard;
(i) the use of a single discount rate to a portfolio of leases with reasonably similar characteristics;
(ii) the accounting for operating leases with a remaining lease term of less than 12 months as at 1 January 2019 as
short-term leases;
(iii) the exclusion of initial direct costs for the measurement of the right-of-use asset at the date of initial application;
(iv) the use of hindsight in determining the lease term where the contract contains options to extend or terminate the
lease; and
(v) reliance on previous assessment on whether these are onerous.
Merrill Lynch Kingdom of Saudi Arabia Company
(A Saudi Closed Joint Stock Company) Notes to the financial statements for the year ended 31 December 2019 (continued) (All amounts in Saudi Riyals unless otherwise stated)
11
2. Basis of preparation (continued)
2.6 Changes in accounting policies (continued)
The change in accounting policy affected the following items in the balance sheet on 1 January 2019
Increase / (Decrease)
Property and equipment, net 2,302,811
Prepayments, deposit and other receivables (647,224)
Accruals, provisions and other payables 1,655,587
2.7. Summary of significant accounting policies
The significant accounting policies adopted in the preparation of these financial statements are set out below. Where
policies are applicable only after or before 1 January 2019, those policies have been particularly specified.
2.7.1. Property and equipment, net
Property and equipment are stated at cost less accumulated depreciation and accumulated impairment, if any. Historical
cost includes expenditure that are directly attributable to the acquisition of assets. Depreciation is provided on a straight
line basis at rates considered appropriate to reduce the cost of the assets to net realisable value over their estimated
economic lives, which are as follows:
Leasehold improvements shorter of assets useful life or lease term of the assets
Furniture and fittings 2 years
Computer equipment 2 years
Gains and losses on disposals are determined by comparing proceeds with carrying amounts and are included in the
statement of income. Maintenance and normal repairs which do not materially extend the estimated useful life of an asset
are charged to the statement of income as and when incurred. Major renewals and improvements, if any, are capitalised
and the assets so replaced are retired.
Capital work in progress is carried at cost, less any recognised impairment loss. These assets are classified to the
appropriate categories of property and equipment when completed and ready for their intended use. Depreciation of these
assets, on the same basis as other property and equipment, commences when the assets are ready for their intended
use.
With the implementation of IFRS 16, the detailed impact from the adoption of the standard on the financial statements
has been disclosed in Note 2.6.
2.7.2. Trade and client receivables and payables
Trade and client receivables and payables represent amounts owed to or by the Company relating to executed
transactions on behalf of clients over a two day settlement period. The amount represents the value of the executed
transaction and are stated net of commissions.
2.7.3. Accrued expenses and other payables
Liabilities are recognised for amounts to be paid for goods purchased and services received, whether or not billed to the
Company.
2.7.4. Provisions
Provisions are recognised when the Company has a present legal or constructive obligation as a result of a past event; it
is probable that an outflow of resources embodying economic benefits will be required to settle the obligation; and the
amount can be reliably estimated.
2.7.5. Financial instruments
(a) Classification
Financial assets of the Company consist of cash and cash equivalents, trade and client receivables, due from related
parties and other receivables. Financial liabilities consist of trade and client payables, due to related parties and accrued
expenses and other payables.
Merrill Lynch Kingdom of Saudi Arabia Company
(A Saudi Closed Joint Stock Company) Notes to the financial statements for the year ended 31 December 2019 (continued) (All amounts in Saudi Riyals unless otherwise stated)
12
2. Basis of preparation (continued)
2.7. Summary of significant accounting policies (continued)
2.7.5 Financial instruments (continued)
(b) Recognition
All financial assets are recognised and derecognised on trade date when the purchase or sale of a financial asset is under
a contract whose terms require delivery of the financial asset within the timeframe established by the market concerned.
Financial assets are initially measured at fair value net of transaction costs incurred. All recognised financial assets are
subsequently measured in their entirety at amortised cost. Financial liabilities are recognised initially at fair value net of
transaction costs incurred and are subsequently stated at amortised cost, using the effective interest rate method.
(c) Derecognition
The Company derecognises a financial asset when contractual rights to the cash flows from the asset expire, or it transfers
the rights to receive the contractual cash flows on the financial asset in a transaction in which substantially all the risks
and rewards of ownership of the financial asset are transferred. Any interest in transferred financial assets that is created
or retained by the Company is recognised as a separate asset or liability.
The Company derecognises a financial liability when its contractual obligations are discharged or cancelled or expired.
(d) Impairment
The Company assesses on a forward-looking basis the expected credit losses (“ECL”) associated with its financial assets
carried at amortised cost. The Company recognises a loss allowance for such losses at each reporting date. The
measurement of ECL reflects:
• An unbiased and probability-weighted amount that is determined by evaluating a range of possible outcomes;
• The time value of resources; and
• Reasonable and supportable information that is available without undue cost or effort at the reporting date about past events, current conditions and forecasts of future economic conditions.
The financial assets of the Company that are subjected to ECL review include cash and cash equivalents, due from
related parties and other receivables. ECL on cash and cash equivalents and due from related parties are assessed
based on the above staging criteria.
ECL on cash and cash equivalents is Saudi Riyals 67,327 (2018: Saudi Riyals 77,312). As at December 31, 2019 and
2018, there is no ECL provision required on due from related parties.
For trade and client receivables, the Company applied the simplified approach permitted by IFRS 9, which requires
expected lifetime losses to be recognised from initial recognition of the receivables. Under this approach, the Company
measures the loss allowance for accounts receivable at an amount equal to lifetime ECL. The ECL on accounts receivable
are estimated using a provision matrix by reference to past default experience of the debtor and an analysis of the debtor’s
current financial position, adjusted for factors that are specific to the debtors, general economic conditions of the industry
in which the debtors operate, and an assessment of both the current as well as the forecast direction of conditions at the
reporting date. As at 31 December 2019 and 2018, there is no ECL provision required on receivable balances.
The Company writes off an account receivable when there is information indicating that the debtor is in severe financial
difficulty and when there is no realistic prospect of recovery.
Expected credit loss (ECL) measurement
Definition of default:
The Company considers a financial asset to be in default when:
• the borrower is unlikely to pay its credit obligations to the Company in full, without recourse by the Company to actions such as realising security (if any is held); or
• past due more than 90 days on any material credit obligation to the Company.
In assessing whether a borrower is in default, the Company considers indicators that are:
• qualitative - e.g. breaches of covenant;
• quantitative - e.g. overdue status and non-payment on another obligation of the same issuer to the Company; and
• based on data developed internally and obtained from external sources.
Inputs into the assessment of whether a financial instrument is in default and their significance may vary over time to
reflect changes in circumstances.
The definition of default largely aligns with that applied by the Company for regulatory capital purposes.
Merrill Lynch Kingdom of Saudi Arabia Company
(A Saudi Closed Joint Stock Company) Notes to the financial statements for the year ended 31 December 2019 (continued) (All amounts in Saudi Riyals unless otherwise stated)
13
2. Basis of preparation (continued)
2.7. Summary of significant accounting policies (continued)
2.7.5 Financial instruments (continued)
(d) Impairment (continued)
Incorporation of forward looking information
The Company incorporates forward-looking information into both its assessment of whether the credit risk of an instrument
has increased significantly since its initial recognition and its measurement of ECL. Based on advice from the Risk
Committee of Parent Company and economic experts and consideration of a variety of external actual and forecast
information, the Company formulates a ‘base case’ view of the future direction of relevant economic variables as well as
a representative range of other possible forecast scenarios. This process involves developing additional economic
scenarios and considering the relative probabilities of each outcome. External information includes economic data and
forecasts published by governmental bodies, monetary authorities, supranational organisations, and selected private-
sector and academic forecasters.
Measurement of ECL:
The key inputs into the measurement of ECL are the term structure of the following variables:
• probability of default (PD);
• loss given default (LGD);
• exposure at default (EAD). 2.7.6. Offsetting
Financial assets and liabilities are offset and are reported net in the statement of financial position when there is a legally
enforceable right to set off the recognised amounts and when the Company intends to settle on a net basis, or to realise
the asset and settle the liability simultaneously.
2.7.7. Foreign currency translations
(a) Reporting currency
The functional and presentational currency of the Company is Saudi Riyal. The financial statements values are presented
in Saudi Riyals, unless otherwise indicated.
(b) Transactions and balances
Foreign currency transactions are translated into Saudi Riyals using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at the year-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in the statement of income.
2.7.8. Impairment of non-current assets Non-current assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognised for the amount by which the carrying amount of the asset exceeds its recoverable amount which is the higher of an asset’s fair value less cost to sell and value in use. Non-current assets, other than goodwill, that suffered impairment are reviewed for possible reversal of impairment at each reporting date. Where an impairment loss subsequently reverses, the carrying amount of the asset is increased to the revised estimate of its recoverable amount, but the increased carrying amount should not exceed the carrying amount that would have been determined, had no impairment loss been recognised for the asset in prior years. A reversal of an impairment loss is recognised as income immediately in the statement of income. Impairment losses recognised on goodwill are not reversible.
2.7.9. Cash and cash equivalents
Cash and cash equivalents comprise demand deposits with banks that are readily convertible into known amounts of
cash; which are subject to an insignificant risk of changes in value and which have a maturity of three months or less at
acquisition, which are available to the Company without any restrictions.
2.7.10. Assets held in a trust or in a fiduciary capacity
Assets held in trust or in a fiduciary capacity are not treated as assets of the Company and are accordingly treated as off-
balance sheet items.
Merrill Lynch Kingdom of Saudi Arabia Company
(A Saudi Closed Joint Stock Company) Notes to the financial statements for the year ended 31 December 2019 (continued) (All amounts in Saudi Riyals unless otherwise stated)
14
2. Basis of preparation (continued)
2.7. Summary of significant accounting policies (continued)
2.7.11. Income and deferred tax
In accordance with the regulations of the General Authority of Zakat and Tax ("GAZT"), the Company is subject to income
tax. Income tax expense comprises current and deferred tax which is recognised in the statement of income.
Current tax is the expected tax payable on the taxable income for the year, using tax rates enacted or substantively
enacted at the reporting date, and any adjustment to tax payable in respect of previous years.
Deferred taxation is recognised in respect of temporary differences between the carrying amounts of assets and liabilities
for financial reporting purposes and the amounts used for taxation purposes. Deferred tax is measured at the tax rates
that are expected to be applied to temporary differences when they reverse, based on laws that have been enacted or
substantively enacted by the reporting date.
Deferred tax assets are recognised for all deductible temporary differences and unused tax losses, to the extent that it is
probable that future taxable profits will be available against which they can be utilised. Deferred tax assets are reviewed
at each reporting date and are reduced to the extent it is no longer probable that the related tax benefit will be utilised.
2.7.12. Withholding tax
The Company withholds taxes on transactions with non-resident parties and on dividends paid to foreign shareholders in
accordance with GAZT regulations.
2.7.13. Employees' end of service benefits
The Company operates an end of service benefit plan as required by KSA Labour Law which, amongst other factors, is
based on most recent salary and allowances, and number of service years. The valuation of the Company’s obligations
under the plan are based on the projected unit credit method. The cost of the employment benefit is recognized
immediately in statement of income. Remeasurement gains and losses arising from experience adjustments and changes
in actuarial assumptions, if any, are recognised in the period in which they occur directly in other comprehensive income.
End of service payments are based on the employees’ final salaries and allowances and their cumulative years of service,
in compliance with KSA Labour law.
2.7.14. Share-based payments
BAC grants equity based payment awards to employees of the Company under various incentive schemes. For most
awards, expense is generally recognised proportionately over the vesting period net of estimated forfeitures, unless the
employee meets certain retirement eligibility criteria. For awards to employees that meet retirement eligibility criteria, BAC
accrues the expense in the year prior to grant. For employees that become retirement eligible during the vesting period,
BAC recognises expense from the grant date to the date on which the employee becomes retirement eligible, net of
estimated forfeitures.
As this is a group share based payment arrangement, all awards are treated by the Company as equity settled share
based payment plans and are measured based on the fair value of those awards at grant date.
The fair value determined at the grant date is expensed over the vesting period, based on the Company’s estimate of the
number of shares that will eventually vest. The Company has entered into a chargeback agreement with BAC under which
it is committed to pay BAC the market value at grant date as well as subsequent movements in fair value of those awards
to BAC at the time of delivery to its employees.
Merrill Lynch Kingdom of Saudi Arabia Company
(A Saudi Closed Joint Stock Company) Notes to the financial statements for the year ended 31 December 2019 (continued) (All amounts in Saudi Riyals unless otherwise stated)
15
2. Basis of preparation (continued)
2.7. Summary of significant accounting policies (continued)
2.7.15. Revenues
The Company recognises revenue under IFRS 15 using the following five steps model:
Step 1: Identify the
contract with customer
A contract is defined as an agreement between two or more parties that creates enforceable
rights and obligations and sets out the criteria for every contract that must be met.
Step 2: Identify the
performance obligations
A performance obligation is a promise in a contract with a customer to transfer a good or
service to the customer.
Step 3: Determine the
transaction price
The transaction price is the amount of consideration to which the Company expects to be
entitled in exchange for transferring promised goods or services to a customer, excluding
amounts collected on behalf of third parties.
Step 4: Allocate the
transaction price
For a contract that has more than one performance obligation, the Company allocates the
transaction price to each performance obligation in an amount that depicts the amount of
consideration to which the Company expects to be entitled in exchange for satisfying each
performance obligation.
Step 5: Recognise
revenue
The Company recognises revenue (or as) it satisfies a performance obligation by
transferring a promised good or service to the customer under a contract.
Based on the above five steps the revenue recognition policies for the various revenue stream are as follow:
Fee income
Fee income consists of charges made to remunerate the Company for services provided. Service fee income is
recognised on an accruals basis when the service is provided.
Brokerage income, net
Brokerage income is recognised when the related transactions are executed by the customers at the price agreed in the
contract with the customers, net of discounts and rebates and fees. The performance obligation of the Company is
satisfied when the customer carries out the transaction, which triggers immediate recognition of the revenue, as the
Company will have no further commitments.
Advisory fee income
Advisory fee income includes retainer fees which are recognised on a straight-line basis over the period of the underlying
contractual agreement with the customer and represent a stand-ready obligation to provide unlimited services during the
period of the agreement as and when requested by the client. During the year 2019, the advisory fee income is netted off
with sub-underwriting fee based on the underwriting agreement with Merrill Lynch International. Refer to Note 6.
2.7.16. Lease liability
Accounting policy applied until 31 December 2018
Rental payments under operating leases are charged to the statement of income on a straight line basis over the lease
term.
Accounting policy applied from 1 January 2019
The Company accounting policies are disclosed in Note 2.6.
Merrill Lynch Kingdom of Saudi Arabia Company
(A Saudi Closed Joint Stock Company) Notes to the financial statements for the year ended 31 December 2019 (continued) (All amounts in Saudi Riyals unless otherwise stated)
16
2. Basis of preparation (continued)
2.7. Summary of significant accounting policies (continued)
2.7.17. Contingent liabilities
(a) Contingent liabilities
These are possible obligations arising from past events whose existence will be confirmed only on the occurrence or non-
occurrence of one or more uncertain future events not wholly within the control of the Company; or all present obligations
arising from past events but not recognised because: (i) it is not probable that an outflow of resources embodying
economic benefits will be required to settle the obligation, or (ii) the amount of the obligation cannot be measured with
sufficient reliability. These are assessed at each reporting date and disclosed in the Company's financial statements under
contingent liabilities.
(b) Contingent assets
These are possible assets arising from past events and whose existence will be confirmed only by the occurrence or non-
occurrence of one or more uncertain future events not wholly within the control of the Company. These are assessed at
each reporting date and disclosed in the financial statements under contingent assets.
2.7.18 Value added tax
The Company is subject to VAT in accordance with the regulations in the Kingdom of Saudi Arabia. Output VAT related
to revenue is payable to tax authorities on the earlier of (a) collection of receivables from customers or (b) delivery of
services to customers. Input VAT is generally recoverable against output VAT upon receipt of the VAT invoice. The tax
authorities permit the settlement of VAT on a net basis. VAT related to sales/services and purchases is recognised in the
statement of financial position on a gross basis and disclosed separately as an asset and a liability. Where provision has
been made for ECL of receivables, the impairment loss is recorded for the gross amount of the debtor, including VAT.
VAT that is not recoverable is charged to the statement of income as expense.
3. Risk management
Legal entity governance
BAC has established a risk governance framework (the “Risk Framework”) which serves as the foundation for consistent
and effective management of risks facing BAC and its subsidiaries (including the Company). The Risk Framework applies
to all the employees. It provides an understanding of the Company’s approach to risk management and each employee’s
responsibilities for managing risk. All employees must take ownership for managing risk well and are accountable for
identifying, escalating and debating risks facing the Company.
The following are the five components of the Company’s risk management approach:
• Culture of Managing Risk Well;
• Risk Appetite and Risk Limits;
• Risk Management Processes;
• Risk Data Management, Aggregation and Reporting; and
• Risk Governance
Focusing on these five components allows effective management of risks across the seven key types of risk faced by
MLKSA, namely market, credit, liquidity, reputational, strategic, compliance and operational risk.
Set out below is a summary of the Company's approach to each of the risk types.
Market risk
Market Risk Definition
Market risk is the risk that changes in market conditions may negatively impact earnings, including adversely impacting
the value of assets or liabilities. MLKSA offers access to Tadawul on a predominantly agency basis to local clients
domiciled within the Gulf Co-operation Council as well as stock execution for Merrill Lynch International and Bank of
America, National Association. MLKSA also provides underwriting on primary issuances executed on the Tadawul
exchange, where any risk will be sub-underwritten by Merrill Lynch International.
Market Risk Management
The Global Markets division of BAC seeks to run its business on a globally consistent basis. This means that the market
risks assumed by Global Markets are identified, measured and controlled on a consistent basis irrespective of the location
in which they are taken and booked. Market Risk Management in MLKSA is a decentralized process with centralized
oversight. To be effective, all personnel involved in risk related activities are an active part of the risk management process
and regular reporting provides transparency across front line units (“FLU”), management and Board.
Merrill Lynch Kingdom of Saudi Arabia Company
(A Saudi Closed Joint Stock Company) Notes to the financial statements for the year ended 31 December 2019 (continued) (All amounts in Saudi Riyals unless otherwise stated)
17
3. Risk management (continued)
Market risk (continued)
Market risk is composed of commission rate risk and currency risk.
Commission rate risk: Commission rate risk is the exposure to various risks associated with the effect of fluctuations in
the prevailing commission rates on the Company's financial position and cash flows. The commission rates are fixed as
per the agreement with the customers and thus the Company does not have any significant commission rate risk.
Currency risk: Currency risk arises from the possibility that fluctuations in foreign exchange rates will affect the value of
financial instruments and cash flows. The Company's foreign currency transactions are primarily denominated in US
Dollars for which the exchange rate is pegged to the Saudi Riyal and exposures in other foreign currencies are not
significant.
Credit risk
Credit risk is the risk of loss arising from the inability or failure of a borrower or counterparty to meet its obligations.
Credit risk management: The Company manages credit risk to a counterparty based on their risk profile, which includes
assessing repayment sources, underlying collateral (if any), and the expected effects of the current and forward-looking
economic environment on the borrowers or counterparties. Underwriting, credit management and credit risk limits are
proactively reassessed as a counterparty’s risk profile changes.
Credit risk management includes the following processes:
• Credit origination
• Portfolio management
• Loss mitigation activities
These processes create a comprehensive and consolidated view of the Company’s credit risks, thus providing executive
management with the information required to guide or redirect FLU and certain legal entity strategic plans, if necessary.
As BAC’s exclusive broker/dealer in Saudi Arabia, the Company is focused on its securities activities which account for
the majority of its credit exposure.
Securities activities: In the normal course of business, the Company executes and settles various client securities transactions. This activity may expose the Company to counterparty default risk arising from the failure of customers or counterparties to satisfy their obligations giving rise to counterparty credit exposure. As at 31 December 2019 and 2018, cash and cash equivalents, trade and client receivables, due from related parties and other receivables are recoverable in the ordinary course of business. Cash is placed with local and foreign banks with sound credit ratings. The table below shows the maximum exposure to credit risk for the relevant components of the statement of financial position:
Notes 2019 2018
Cash and cash equivalents 9 234,776,870 184,005,018 Trade and client receivables 10 966,685 642,868 Due from related parties 17.1 6,041,062 2,317,873 Other receivables (excluding prepayments) 11 4,047,535 2,414,342 245,832,152 189,380,101
Trade receivables, due from related parties and other receivables were neither past due nor impaired at the statement of financial position date and are monitored by management. At 31 December 2019, Moody’s rating of the Saudi British Bank and Bank of America NA London Branch in which cash at bank is held is P-1 (2018: P-1). Credit quality analysis
The following table sets out the credit analysis for financial assets as at 31 December 2019.
Financial assets Investment
grade
Non-investment rated Unrated Total
Cash and cash equivalents 234,776,870 - - 234,776,870 Trade and client receivables - - 966,685 966,685 Due from related parties 3,968,895 - 2,072,167 6,041,062 Other receivables (excluding prepayments) 3,887,711 - 159,824 4,047,535
242,633,476 - 3,198,676 245,832,152
Merrill Lynch Kingdom of Saudi Arabia Company
(A Saudi Closed Joint Stock Company) Notes to the financial statements for the year ended 31 December 2019 (continued) (All amounts in Saudi Riyals unless otherwise stated)
18
3. Risk management (continued) Credit Risk (continued) The following table sets out the credit analysis for financial assets as at 31 December 2018.
Financial assets Investment
grade
Non-investment rated
Non-investment unrated Total
Cash and cash equivalents 184,005,018
-
-
184,005,018 Trade and client receivables -
-
642,868
642,868
Due from related parties -
-
2,317,873
2,317,873 Other receivables (excluding prepayments) - - 2,414,342 2,414,342
184,005,018
-
5,375,083
189,380,101
Inputs, assumptions and techniques used for estimating impairment
When determining whether the risk of default on a financial instrument has increased significantly since initial recognition, the Company considers reasonable and supportable information that is relevant and available without undue cost or effort. This includes both quantitative and qualitative information and analysis, based on the Company’s historical experience and expert credit assessment and including forward-looking information. The objective of the assessment is to identify whether a significant increase in credit risk has occurred for an exposure by comparing: • the remaining lifetime probability of default (PD) as at the reporting date; • the remaining lifetime PD for this point in time that was estimated at the time of initial recognition of the exposure
(adjusted where relevant for changes in prepayment expectations). Loss allowance
Cash and cash equivalents 31 December 2019
12 month ECL
Life time ECL
not credit
impaired
Lifetime ECL
credit impaired Total
Carrying amount 234,844,197 - - 234,844,197
Expected Credit Loss (67,327) - - (67,327)
234,776,870 - - 234,776,870
Cash and cash equivalents 31 December 2018
12 month ECL
Life time ECL not
credit impaired
Lifetime ECL
credit impaired Total
Carrying amount 184,082,330
-
-
184,082,330
Expected Credit Loss (77,312)
-
-
(77,312)
184,005,018
-
-
184,005,018
Operational risk
Operational risk is the risk of loss resulting from inadequate or failed internal processes, people and systems, or from external events.
Process risk is the risk that a predetermined process necessary to conduct business does not function properly or leads
to undesired results. People risk is the risk that business objectives will not be met due to human resource deficiencies
(e.g., improper conduct, inadequate staffing). Systems risk is the risk that arises from systems and / or tools that are
deficient, unstable or overly complex for the intended use and are key to conducting BAC’s activities. External events risk
is the risk that arises from factors outside of BAC’s span of control.
Operational risks are associated with the following seven operational loss event categories: internal fraud; external fraud;
employment practices and workplace safety; clients, products and business practices; damage to physical assets;
business disruption and systems failures; and execution, delivery and process management.
Merrill Lynch Kingdom of Saudi Arabia Company
(A Saudi Closed Joint Stock Company) Notes to the financial statements for the year ended 31 December 2019 (continued) (All amounts in Saudi Riyals unless otherwise stated)
19
3. Risk management (continued) Operational Risk (continued)
Operational risk management: Since operational risk is inherent in every activity across the enterprise, BAC relies on
all employees to conduct themselves properly, contribute to an effective internal control environment and manage
operational risk within their roles.
Operational risk must be managed by all employees as part of their day-to-day activities. FLU and Control Functions
("CF") are responsible for monitoring, assessing and testing the effectiveness of controls, while continuing to identify,
escalate, debate and report operational risks. Independent risk management teams actively oversee the FLUs / CFs to
monitor adherence to the program and identify, advise and challenge operational risks. Consistent operational risk
management across all legal entities within BAC globally is supported through the implementation of the Operational Risk
Management - Enterprise policy and the supporting standards, and adherence to the operational risk management
program.
A key element of the program is the Company’s Risk Self-Assessment (“RSA”) which captures the operational exposures
faced by the Company, and entails: ongoing identification, measurement, mitigation, monitoring, reporting and escalation
of applicable current and emerging operational risk and causes. In addition, other operational risk management processes
are in place such as review and reporting of internal and external operational loss data and the execution of scenario
analysis. Scenarios are targeted to identify plausible, low-frequency, high-severity operational loss events. Risk reduction
and mitigation activities are developed and enacted when potential operational risk losses are assessed or control gaps
identified.
Liquidity risk
Liquidity risk is the inability to meet expected or unexpected cash flow and collateral needs while continuing to support
the businesses and customers, under a range of economic conditions.
Liquidity risk management: Each of the FLU’s are accountable for managing liquidity risk by establishing appropriate
processes to identify, measure, monitor and control the risks associated with their activities. Global Risk Management
(“GRM”) provides independent oversight and supervision of FLU activities, an independent view of the liquidity risk of FLU
activities and assesses the effectiveness of the MLKSA’s liquidity risk management processes.
The MLKSA Liquidity Risk Policy is owned by the MLKSA Board and establishes the overarching governance, controls
and risk management practices to monitor and manage liquidity risk across MLKSA. In certain jurisdictions, such as Saudi
Arabia, liquidity management responsibilities are undertaken by local finance and management teams, who consult with
Corporate Treasury and GRM. MLKSA has an uncommitted funding line with Merrill Lynch International that it may draw
down on to prevent liquidity risk and a Guarantee Letter from Saudi British Bank to further support MLKSA’s trading
activity. Regular liquidity risk reports are sent to the MLKSA Board and Senior Management.
Notes 2019 2018 Due within 1 year
Trade and client payables 10 960,379 638,886 Due to related parties 17.1 16,330,263 6,983,957 Accrued expenses and other payables 14 8,905,919 3,873,713 Income tax payable 13.2 7,942,968 2,809,581
34,139,529 14,306,137
Reputational risk
Reputational risk is the potential that negative perceptions of BAC’s conduct or business practices will adversely affect its
profitability or operations through an inability to establish new or maintain existing customer / client relationships or
otherwise impact relationships with key stakeholders, such as investors, regulators, employees and the community.
Reputational risk can stem from many of BAC’s activities, including those related to the management of the strategic,
operational or other risks, as well as the overall financial position. As a result, BAC evaluates the potential impact to its
reputation within all risk categories and throughout the risk management process.
BAC manages reputational risk through established policies and controls in the business and risk management processes
to mitigate reputational risks in a timely manner and through proactive monitoring and identification of potential
reputational risk events.
Reputational risk items relating to MLKSA are considered as part of the EU/UK & CEEMEA Reputational Risk Committee,
whose mandate includes consideration of reputational risk issues and provision of guidance and approvals for activities
that represent specific reputational risks which have been referred for discussion by other current control frameworks or
lines of business.
Merrill Lynch Kingdom of Saudi Arabia Company
(A Saudi Closed Joint Stock Company) Notes to the financial statements for the year ended 31 December 2019 (continued) (All amounts in Saudi Riyals unless otherwise stated)
20
3. Risk management (continued)
Reputational risk (continued)
Ultimately, to ensure that reputational risk is mitigated through regular business activity, awareness of Reputational Risk
is integrated into the overall governance process, as well as incorporated into the roles and responsibilities for employees.
Given the nature of Reputational Risk, BAC does not set quantitative limits for the level of acceptable risk. Through
proactive risk management, BAC seeks to minimise both the frequency and impact of reputational events.
Through the EU/UK & CEEMEA Regional Risk Committee and the EU/UK & CEEMEA Reputational Risk Committee,
BAC has an appropriate organisational and governance structure in place to ensure strong oversight at the entity business
level. The EU/UK & CEEMEA Reputational Risk Committee is a sub-committee of both the EU/UK & CEEMEA Regional
Risk Committee and the Global Reputational Risk Committee and is applicable to all key legal operating entities in the
region. Items requiring increased attention may be escalated from the EU/UK & CEEMEA Reputational Risk Committee
to the Global Reputational Risk Committee as appropriate.
Reporting of MLKSA reputational risk issues is captured as part of management routines for the EU/UK & CEEMEA
Reputational Risk Committee. Tracking of items presented to the EU/UK & CEEMEA Reputational Risk Committee is
maintained through reporting which provides detail such as the description of the reputational risk issue, the geographical
jurisdiction of the issues, the reason for escalation and the decision reached by the EU/UK & CEEMEA Reputational Risk
Committee. A summary report of issues discussed at the EU/UK & CEEMEA Reputational Risk Committee is provided to
the EU/UK & CEEMEA Regional Risk Committee.
Strategic risk
Strategic risk is the risk that results from incorrect assumptions about external and/or internal factors, inappropriate
business plans (e.g. too aggressive, wrong focus, ambiguous), ineffective business strategy execution, or failure to
respond in a timely manner to changes in the regulatory, macroeconomic and competitive environments in the geographic
locations in which BAC operates (such as competitor actions, changing customer preferences, product obsolescence,
and technology developments).
Strategic risk is managed through the assessment of effective delivery of strategy and business performance is monitored
by the executive management team to assess strategic risk and find early warning signals so that risks can be proactively
managed. The MLKSA strategic execution and risk management processes are aligned to the overall BAC strategic plans
through a formal planning and approval process and are set within the context of overall risk appetite. The BAC Board is
responsible for overseeing the strategic planning process and management’s implementation of the resulting strategic
plan. BAC’s strategic plan is reviewed and approved annually by the BAC Board. Strategic planning at BAC level is
representative of more detailed planning undertaken at the business unit, regional and MLKSA level. MLKSA’s strategy
is reviewed by MLKSA Board on an annual basis. Strategic decisions relating to MLKSA are presented and discussed at
MLKSA Board. FLUs provide updates to MLKSA Board on their business performance and management of strategic risk.
Updates take into account analyses of performance relative to the strategic plan, financial operating plan, risk appetite
and performance relative to peers.
Compliance risk
Compliance risk is the risk of legal or regulatory sanctions, material financial loss or damage to the reputation of the
Company arising from the failure of the Company to comply with the requirements of applicable laws, rules, regulations,
and our internal policies and procedures (collectively, "applicable laws, rules and regulations").
Front line units and control functions are, first and foremost, responsible for identifying, managing and escalating
compliance risk related to their activities. Global Compliance and Operational Risk and CFO Compliance and Operational
Risk (hereinafter collectively referred to as GC&OR) independently assesses compliance risk and oversees front line unit
and control function adherence to applicable laws, rules and regulations, including identifying compliance Issues and
Risks, performing Compliance Monitoring, determining and developing tests to be conducted by the Enterprise
Independent Testing unit and reporting on the state of compliance activities across the Company. Additionally, GC&OR
works with front line units and control functions so that day to day activities operate in a compliant manner.
Corporate Audit provides independent assessment and validation through testing of key processes and controls across
the Company. Global Compliance and Operational Risk uses a set of clearly defined management routines, decision
processes and organizational structures (e.g., committees) to provide effective management of the key compliance risks
Global Compliance and Operational Risk also provides transparency to the Board of Directors ("Board") (or appropriate
committee) and senior management into critical compliance issues, as appropriate.
Global Compliance and Operational Risk evaluates and reports on the adequacy and effectiveness of the CRM Program.
Corporate Audit performs an annual CRM Program assessment that includes independent testing to evaluate the
effectiveness of the overall program. The assessment is reported to the Audit Committee of the Board
Merrill Lynch Kingdom of Saudi Arabia Company
(A Saudi Closed Joint Stock Company) Notes to the financial statements for the year ended 31 December 2019 (continued) (All amounts in Saudi Riyals unless otherwise stated)
21
4. Regulatory requirements for capital and capital adequacy
The CMA had issued Prudential Rules (the "Rules") dated 30 December 2012 (corresponding to 17 Safar 1434H).
According to these Rules, the CMA had prescribed the framework and guidance regarding the minimum regulatory capital
requirement and its calculation methodology as prescribed under these Rules. In accordance with this methodology, the
Company had calculated its minimum capital required and capital adequacy ratios as follows:
The composition of the Company’s regulatory capital as at 31 December is as follows:
2019 2018 Capital Base: Tier 1 capital 213,738,960 174,025,391 Tier 2 capital - -
Total Capital Base 213,738,960 174,025,391
Minimum capital requirement: Market risk 2,278,697 1,056,144 Credit risk 14,990,671 8,373,144 Operational risk 10,169,341 7,824,757
Total minimum capital required 27,438,709 17,254,045
Capital adequacy ratio: Total capital ratio (time) 7.79 10.09 Tier 1 capital ratio (time) 7.79 10.09
Surplus in capital 186,300,251 156,771,346
• Tier 1 capital consists of paid-up share capital, accumulated profits, share premium (if any), reserves excluding
revaluation reserves, with certain deductions as per the Rules.
• Tier 2 capital consists of subordinated loans, cumulative preference shares and revaluation reserves, with certain
deductions as per the Rules.
• The minimum capital requirements for market, credit and operational risks are calculated as per the requirements
specified in the Rules
• The Company's business objectives when managing capital adequacy are to comply with the capital requirements
set forth by the CMA to safeguard the Company's ability to continue as a going concern and to maintain a strong
capital base.
5. Brokerage income, net
Income from brokerage is net of brokerage expense paid to Tadawul as below:
Gross
Brokerage expenses Net
2019 Related party (Note 17.2) 98,706,076 (33,271,288) 65,434,788 Other 2,781,542 (1,394,366) 1,387,176
Total 101,487,618 (34,665,654) 66,821,964 2018 Related party (Note 17.2) 37,246,678 (12,886,432) 24,360,246 Other 7,145,526 (2,900,160) 4,245,366
Total 44,392,204 (15,786,592) 28,605,612
6. Advisory fee income, net
2019 2018
Gross advisory fee 16,258,480 1,970,022
Sub-underwriting fee (Note 17.2) (14,403,185) -
1,855,295 1,970,022
7. Salaries and employee related benefits
2019 2018
Wages and salaries 11,532,000 11,052,818
Bonus and other staff costs 6,509,538 6,375,490
Provision of employees’ end of service benefits (Note 15) 647,390 1,034,830
18,688,928 18,463,138
Merrill Lynch Kingdom of Saudi Arabia Company
(A Saudi Closed Joint Stock Company) Notes to the financial statements for the year ended 31 December 2019 (continued) (All amounts in Saudi Riyals unless otherwise stated)
22
8. Other general and administrative expenses
2019 2018
Bank charges 4,050,410 2,405,153 Consultancy, legal and professional fees 2,029,451 2,954,485 Depreciation (Note 12) 1,886,390 312,961 Business continuity site charges 1,379,520 698,055 Communication 1,317,888 1,321,179 Repairs and maintenance 1,174,371 726,209
Shared support services 1,097,233 -
Market data services 960,045 1,021,242
Travel expenses 493,350 644,709
Rental expense 423,624 1,664,825
Other 980,914 931,433
15,793,196 12,680,252
9. Cash and cash equivalents
2019 2018
Cash at bank 234,844,197 184,082,330
Allowance for expected credit losses (67,327) (77,312) 234,776,870 184,005,018
10. Trade and client receivables / payables
As at 31 December 2019, the Company has outstanding payable to Tadawul and corresponding receivable from client
money account amounting to Saudi Riyals 1.0 million (2018: outstanding payable to client money account and
corresponding receivable from Tadawul amounting to Saudi Riyals 0.6 million) as a result of brokerage transactions
executed near the year end. These transactions were settled within two days post year end (Note 19).
11. Prepayments and other receivables
2019 2018
Advisory fee receivable 3,887,711 2,053,939
Prepaid expenses 306,570 1,573,582
Other receivables 159,824 360,403
4,354,105 3,987,924
12. Property and equipment, net
Leasehold improvements
Computer equipment
Fixtures and fittings
Right-of-use asset
Capital work in progress
Total
2019
Cost
At the beginning of the year 11,365,334 6,764,145 881,230 - 347,843 19,358,552
Initial application of IFRS 16 - - - 2,302,811 - 2,302,811
Additions 1,462,119 2,836,357 - - 671,679 4,970,155
Disposals in the year (237,458) - - - - (237,458)
At the end of the year 12,589,995 9,600,502 881,230 2,302,811 1,019,522 26,394,060 Accumulated depreciation At the beginning of the year 10,631,785 6,764,145 881,230 - - 18,277,160
Depreciation charge (Note 8) 648,862 400,142 - 837,386 - 1,886,390
Disposals in the year (216,284) - - - - (216,284)
At the end of the year 11,064,363 7,164,287 881,230 837,386 - 19,947,266 Net book value At 31 December 2019 1,525,632 2,436,215 - 1,465,425 1,019,522 6,446,794
Capital work in progress mainly includes the leasehold improvements and computer equipment.
Merrill Lynch Kingdom of Saudi Arabia Company
(A Saudi Closed Joint Stock Company) Notes to the financial statements for the year ended 31 December 2019 (continued) (All amounts in Saudi Riyals unless otherwise stated)
23
12. Property and equipment, net (continued)
Leasehold improvements
Computer equipment
Fixtures and fittings
Right-of-use of asset
Capital work in progress
Total
2018
Cost
At the beginning of the year 11,365,334 6,764,145 881,230 - - 19,010,709
Additions - - - - 347,843 347,843
At the end of the year 11,365,334 6,764,145 881,230 - 347,843 19,358,552
Accumulated depreciation
At the beginning of the year 10,367,064 6,715,904 881,230 - - 17,964,198
Depreciation charge (Note 8) 264,721 48,241 - - - 312,962
At the end of the year 10,631,785 6,764,145 881,230 - - 18,277,160
Net book value
At 31 December 2018 733,549 - - - 347,843 1,081,392
13. Income tax
13.1. The income tax components are as follows:
2019 2018
Profit before taxation 50,695,091 14,897,576
Adjustments: Depreciation, net 247,094 (1,119,973)
Employees’ end of service benefits 517,955 975,583
Other adjustments 1,019,841 575,219
Taxable income 52,479,981 15,328,405
Income tax at 20% 10,495,997 3,065,681
13.2. Movement in provision for income tax / (Advance income tax payments)
2019 2018
Balance at the beginning of the year 2,809,581 (260,819)
Charge for the year (Note 13.1) 10,495,997 3,065,681
Adjustment relating to prior periods - 4,719 10,495,997 3,070,400
Payments made during the year (5,362,610) -
Balance at the end of the year 7,942,968 2,809,581
13.3 Recognised deferred tax asset
Recognised deferred income tax asset at 31 December relates to the following:
2019 2018
Property and equipment 1,023,950 1,461,767
Employees’ end of service benefits 844,300 740,709
1,868,250 2,202,476
The movement in deferred income tax asset during the year is as follows: 2019 2018
Balance at beginning of the year 2,202,476 2,208,847
Deferred tax charge for the year (334,226) (6,371)
Balance at end of the year 1,868,250 2,202,476
13.4 Income tax charge and deferred tax charge for the year
2019 2018
Charge for the year (Note 13.2) 10,495,997 3,070,400
Deferred tax charge for the year (Note 13.3) 334,226 6,371
10,830,223 3,076,771
Merrill Lynch Kingdom of Saudi Arabia Company
(A Saudi Closed Joint Stock Company) Notes to the financial statements for the year ended 31 December 2019 (continued) (All amounts in Saudi Riyals unless otherwise stated)
24
13. Income tax (continued)
13.5 Numerical reconciliation of income tax expense to prima facie tax payable 2019 2018
Profit from continuing operations before income tax expense 50,695,091 14,897,576
Income Tax of 20% 10,139,018 2,979,515
Tax effect of amounts which are not deductible (taxable) in calculating taxable income:
Depreciation, net 49,419 (223,995)
Employees’ end of service benefits 103,591 195,117
Other adjustments 203,969 115,044
10,495,997 3,065,681
13.6 Status of income tax assessments
The Company had filed its tax returns for the years from 2008 to 2018. Tax assessments for the years 2008 to 2012 have
been finalised by the GAZT. No assessments have been raised for the years 2013 to 2017. GAZT also raised corporate
tax and withholding tax assessments for the year 31 December 2018 amounting to SAR 4,455,387 and SAR 99,583,
respectively, the Company has filed an appeal against the above assessment. As at 31 December 2019, management
believes that the finalisation of tax assessments of the mentioned years is not expected to have any material impact on
the financial statements of the Company. Based on the advice of the Company’s tax advisor, the Company is confident
of a favourable outcome and accordingly, no provision has been made in these financial statements. The Company is in
the process of filing tax return for the year ended 31 December 2019 with GAZT.
14. Accrued expenses and other payables
2019 2018
Accrued salaries and employee related benefits 3,310,682 3,215,354
Payable to service providers 1,111,025 348,626
Professional fees 405,250 235,238
Lease liability 846,563 -
Withholding tax payable 2,327,542 -
Other accruals 904,857 74,495
8,905,919 3,873,713
14.1 Lease liability
Maturity analysis of lease liabilities is as follows:
2019 1 January 2019
Current 846,563 809,024
Non-current - 846,563
846,563 1,655,587
15. Provision for employees' end of service benefits 2019 2018
At the beginning of the year 3,703,546 2,727,963
Charge for the year (Note 7) 647,390 1,034,830
Remeasurements of post-employment benefit obligations 485,524 -
Payments made during the year (129,435) (59,247)
At the end of the year 4,707,025 3,703,546
The Company operates a defined benefit plan in line with the Labor Law requirements in the Kingdom of Saudi Arabia.
The end-of-service benefit payments are based on the employees' final salaries and allowances and their cumulative
years of service at the date of their termination of employment, as defined by the conditions stated in the Labor Law of
the Kingdom of Saudi Arabia. Employees’ end-of-service benefit plans are unfunded plans and the benefit payment
obligation are met when they fall due upon termination of employment.
Merrill Lynch Kingdom of Saudi Arabia Company
(A Saudi Closed Joint Stock Company) Notes to the financial statements for the year ended 31 December 2019 (continued) (All amounts in Saudi Riyals unless otherwise stated)
25
15. Provision for employees' end of service benefits (continued)
The amounts recognized in the statement of financial position and movement in the obligation during the year based on
its present value are as follows:
2019 2018
Present value of defined benefit obligation 4,707,025 3,703,546
Movement of defined benefit obligation
2019 2018
Opening balance 3,703,546 2,727,963 Charge to statement of income 647,390 1,034,830 Charge to statement of comprehensive income 485,524 - Payment of benefits during the year (129,435) (59,247)
Closing balance 4,707,025 3,703,546
Reconciliation of present value of defined benefit obligation
2019 2018 Present value of defined benefit obligation as at 1 January 3,703,546 2,727,963 Current service costs 523,831 1,034,830 Interest cost 123,559 - Actuarial loss from experience adjustments 485,524 - Benefits paid during the year (129,435) (59,247)
Present value of defined benefit obligation as at 31 December 4,707,025 3,703,546
Principal actuarial assumptions
The following range of significant actuarial assumptions was used by the Company for the valuation of post-employment
benefit liability:
2019 2018
Valuation discount rate 2.90% 3.45% Expected rate of increase in salary level 4.00% 1.00% Mortality and withdrawal rate 10.00% 10.00%
Sensitivity analysis for actuarial assumptions
Change in assumption
Impact on employee benefit
obligations
Increase in
assumption
Decrease in
assumption
Increase in
assumption
Decrease in
assumption
At 31 December 2019
Discount rate 3.40% 2.40% (161,580) 172,519
Salary growth rate 4.50% 3.50% 169,792 (160,672)
The sensitivity analysis is based on a change in an assumption while holding all other assumptions constant. In practice,
this is unlikely to occur, and changes in some of the assumptions may be correlated. When calculating the sensitivity of
the defined benefit obligation to significant actuarial assumptions the same method (present value of defined benefit
obligation calculated with projected unit credit method at the end of the reporting period) has been applied when
calculating the employee termination.
16. Share capital
The subscribed and fully paid up share capital of the Company consists of 14.3 million shares of Saudi Riyals 10 each
and held as follows as of 31 December 2019 and 2018:
Shareholder Country of origin Percentage Shareholding
Bank of America Global Holdings L.L.C. USA 96% 137,280,000
Merrill Lynch Group Holdings I L.L.C. USA 1% 1,430,000
Merrill Lynch Group Holdings II L.L.C. USA 1% 1,430,000
Merrill Lynch Group Holdings III L.L.C. USA 1% 1,430,000
Merrill Lynch International L.L.C. USA 1% 1,430,000 100% 143,000,000
Merrill Lynch Kingdom of Saudi Arabia Company
(A Saudi Closed Joint Stock Company) Notes to the financial statements for the year ended 31 December 2019 (continued) (All amounts in Saudi Riyals unless otherwise stated)
26
17. Related parties balances and transactions
In the ordinary course of its activities, the Company transacts with various related parties. The Company has entered into
agreements with certain affiliated companies, which provide for an agreed basis for sharing costs (along with a margin)
incurred in respect of certain services provided under the agreements. The affiliate companies also make payments on
behalf of the Company.
17.1. Related parties balances
At 31 December 2019 and 2018, the balances with related parties were as follows:
Notes 2019 2018 Due from related parties
Merrill Lynch International (a) 3,968,895 749,304 Merrill Lynch International, LLC (a) 2,072,167 1,568,569
6,041,062 2,317,873
Due to related parties
Merrill Lynch International (b),(c) 15,859,495 6,728,508 Merrill Lynch International, LLC (d) 422,184 196,905 Bank of America Corporation (Ultimate parent entity) (d) 44,757 52,178 Bank of America Merrill Lynch International, DAC (e) - 6,366 Bank of America NA London Branch (e) 3,827 -
16,330,263 6,983,957
Cash and cash equivalents
Bank of America NA London Branch (f) 124,404,509 46,637,871
Compensation to key management personnel Salaries and short-term benefits payable 595,585 447,286
Provision for employees' end of service benefits 1,390,819 1,136,806
All amounts are unsecured, non-interest bearing and payable on demand, and mainly relate to:
a) Service fee income receivable for the provision of services to other group companies.
b) Funding provided by other group companies.
c) Payable towards advisory fee based on sub-underwriting agreement.
d) The recharge of BAC stock awards to the Company’s employees.
e) Expenses charged by other group companies to the Company.
f) Demand deposits.
Merrill Lynch Kingdom of Saudi Arabia Company
(A Saudi Closed Joint Stock Company) Notes to the financial statements for the year ended 31 December 2019 (continued) (All amounts in Saudi Riyals unless otherwise stated)
27
17. Related parties balances and transactions (continued)
17.2. Related parties transactions
The transactions with related parties during the years ended 31 December 2019 and 2018 were as follows:
Notes 2019 2018
Fee income Merrill Lynch International (a) 17,774,244 10,027,560
Merrill Lynch International, LLC (a) 4,910,965 5,585,774
22,685,209 15,613,334
Brokerage income
Merrill Lynch International (Note 5) (b) 98,706,076 37,246,678
Advisory fee income Merrill Lynch International (Note 6) (c) (14,403,185) - Operating expenses Merrill Lynch International (d) 16,553,056 15,189,776
Merrill Lynch International (e) 234,338 234,327
Merrill Lynch International, LLC (f) 876,767 473,294
Merrill Lynch International (g) 5,814 16,038
Merrill Lynch International, LLC (g) 89,154 88,318
Bank of America Corporation (Ultimate parent entity) (g) 609,396 63,110
Bank of America Merrill Lynch International, DAC (g) 29,874 29,191
Bank of America Merrill Lynch International, Ltd (g) - 47,294
Bank of America N.A - London Branch (g) 3,712 -
Merrill Lynch International (h) 1,097,233 -
Interest expense Merrill Lynch International (Note 18) (i) 6,046,340 58,152
Compensation to key management personnel Chairman remuneration and directors' fees 310,584 579,222 Salaries and short-term benefits 2,980,891 2,938,027
a) Service fee income, being income received and receivable from supporting services provided to group companies.
Service fees are calculated in accordance with BAC Global Transfer Pricing Policy and are generally documented in
service level agreements entered into between the Company and other group companies.
b) Gross brokerage income, inclusive of brokerage expense settled by the Company in an agency capacity, in relation
to brokerage services provided.
c) Sub underwriting agreement for advisory fee.
d) The intercompany funding associated to the Company’s monthly payroll cycle.
e) Service fees expenses for intercompany support services provided to the Company.
f) The amount recharged for the Company's participation in employee stock compensation plans.
g) Intercompany expenses incurred on behalf of the Company and then recharged to the Company.
h) Advisory fee related expenses incurred on behalf of the Company.
i) Interest expense on intercompany funding.
18. Interest expense
2019 2018
Finance cost (Note 17.2) 6,046,340 58,152
Finance cost on lease liabilities 55,953 - 6,102,293 58,152
The interest rates ranges from 2.12% to 2.95% (2018: 1.85% to 2.84%) per annum for the funding received during the
year.
Merrill Lynch Kingdom of Saudi Arabia Company
(A Saudi Closed Joint Stock Company) Notes to the financial statements for the year ended 31 December 2019 (continued) (All amounts in Saudi Riyals unless otherwise stated)
28
19. Assets held in a fiduciary capacity
In connection with its brokerage business, the Company stands ready to meet the obligations of its clients with respect to
securities transactions. The Company’s obligations in this respect are secured by the assets in the clients’ accounts as
well as by any proceeds received from the transactions cleared and settled by the firm on behalf of clients or their
customers. The Company's maximum potential exposure under these arrangements is difficult to estimate; however, the
potential for the Company to incur material losses pursuant to these arrangements is remote.
As at 31 December 2019, the Company holds no cash in client money (2018: Saudi Riyals 0.03 million). As at 31
December 2019, the Company has outstanding payables to the Tadawul (2018: the Company has outstanding payables
to the client money account to the Tadawul) (Note 10).
20. Statutory reserve
In accordance with Saudi Arabian Regulations for Companies and its By-Laws, the Company is required to transfer 10%
of its net income annually to a statutory reserve until such reserve equals 30% of the paid up capital as a minimum. This
reserve is not available for distribution to the shareholders.
21. Fair value of financial instruments
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between
market participants at the measurement date. Underlying the definition of fair value is the presumption that the Company
is a going concern and there is no intention or requirement to curtail materially the scale of its operations or to undertake
a transaction on adverse terms.
A financial instrument is regarded as quoted in an active market if quoted prices are readily and regularly available from
an exchange dealer, broker, industry group, pricing service, or regulatory agency, and those prices represent actual and
regularly occurring market transactions on an arm's length basis.
When measuring the fair value the Company uses market observable data as far as possible. Fair values are categorized
into different levels in a fair value hierarchy based on the inputs used in the valuation techniques as follows.
Level 1: quoted prices in active markets for the same instrument (i.e. without modification or repackaging)
Level 2: quoted prices in active markets for similar assets and liabilities or other valuation techniques for which all
significant inputs are based on observable market data: and
Level 3: valuation techniques for which any significant input is not based on observable market data.
The carrying value of all financial assets and liabilities reflected in the financial statements approximates their fair value.
An active market for these instruments is not available and the Company intends to realize the carrying value of these
financial instruments through settlement with the counter party at the time of their respective maturities and accordingly
these are considered as Level 3 financial assets.
22. Contingent liabilities
At 31 December 2019, the Company had contingent liabilities in respect of bank guarantees in favour of Tadawul arising
in the ordinary course of business amounting to Saudi Riyals 1,000 million (2018: Saudi Riyals 1,000 million).
23. Events after the reporting period
Direct and indirect effects of the coronavirus outbreak are impacting the global economy, markets, and MLKSA’s
counterparties and clients. MLKSA cannot predict the coronavirus’s potential future direct or indirect effects; however,
MLKSA is taking actions to mitigate the impacts on MLKSA. The coronavirus’s effects could have a material impact on
MLKSA’s future results of operations.
24. Approval of financial statements
The financial statements were approved by the Directors of the Company and signed on their behalf on 17 March 2020
(corresponding to 22-Rajab-1441H).