Modification of the Activity Result

A holding company provides services to some of its wholly-owned subsidiaries. The income statement of the company at the end of its Zakat year 2024 included a directly written-off bad debts expense related to one of its subsidiaries amounting to 1,160,000 SAR. After examining the company's data, the following was determined: The write-off was approved based on a report from a chartered accountant stating that the write-off was done with the approval of an authorized person in the company. The debt represents an accrued balance from the subsidiary due to the holding company executing one of the subsidiary's subcontracted contracts, and the holding company proved the revenue related to this contract when the service was performed. Example (20) Is this expense considered an acceptable expense for Zakat purposes? The Solution: No, this expense is not considered an acceptable expense for Zakat purposes, as the write-off of debts to parties related to the Zakat payer is not allowed according to what is stated in Article 65 of the regulations. 5.3. Depreciation The term "Asset Depreciation" refers to the process of the distribution of the asset’s cost over their useful life in order to identify the reduction in the value of the asset in each accounting period. The accumulated depreciation instalments over the years constitute the accumulated depreciation for that asset. The depreciated asset is presented in the statement of the financial position at its cost, in case of using the cost model, minus the accumulated depreciation. Depreciation methods vary according to the requirements of International Accounting Standard 16 (IAS 16) - Property, Machinery, and Equipment -. An entity may use any of the approved accounting depreciation methods, such as the straight-line method, declining balance method, or units of production method. However, the most common method is the straight-line method, which assumes that each year of an asset's life benefits equally from its services and should therefore be charged with an equal portion of its cost. Thus, the annual depreciation instalment remains constant throughout the asset's useful life. Regardless of the depreciation method used, the annual depreciation instalment for fixed assets is considered an acceptable expense to reach the adjusted net profit or adjusted net loss. The establishment typically specifies certain depreciation rates for their assets based on management's estimates, which take into account various factors and criteria. As a result, the annual depreciation instalment expense appears in the company's books according to the rates and considerations set by management. The deduction of the book depreciation charged on the income statement is accepted provided that the conditions for deducting depreciated fixed assets outlined in Article 48 of the regulations are met, which are as follows: A. It must be listed in the financial statements of the Zakat payer. Thus, depreciation cannot be deducted for any assets or properties not listed in the Zakat payer's financial statements.