MERRILL LYNCH KINGDOM OF SAUDI ARABIA COMPANY (A … 2018 Financial Statements_English.pdf ·...

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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 2018

Transcript of MERRILL LYNCH KINGDOM OF SAUDI ARABIA COMPANY (A … 2018 Financial Statements_English.pdf ·...

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 2018

MERRILL LYNCH KINGDOM OF SAUDI ARABIA COMPANY (A Saudi Closed Joint Stock Company) Financial statements For the year ended 31 December 2018 Index Pages

Independent auditor's report

1 - 2

Statement of comprehensive income

3

Statement of financial position

4

Statement of changes in shareholders’ equity

5

Statement of cash flows

6

Notes to the financial statements

7 - 30

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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)

Note Share capital Statutory

reserve Retained earnings Total equity

At 1 January 2017 143,000,000 4,505,442 11,573,021 159,078,463 Impact of IFRS adoption 3 - - - - At 1 January 2017 (restated) 143,000,000 4,505,442 11,573,021 159,078,463 Net income for the year - - 5,413,547 5,413,547 Transfer to statutory reserve 541,355 (541,355) - Other comprehensive income - - - - At 31 December 2017 143,000,000 5,046,797 16,445,213 164,492,010 Changes on initial application of IFRS 9 2.6 - - (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 Transfer to statutory reserve - 1,182,081 (1,182,081) - Other comprehensive income - - - - At 31 December 2018 143,000,000 6,228,878 26,998,990 176,227,868 The notes on pages 7 to 30 form an integral part of these financial statements.

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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) Year ended 31 December Notes 2018 2017 Cash flows from operating activities Profit before taxation 14,897,576 6,747,954 Adjustments for:

Depreciation 8,12 312,962 344,084 Provision for employees' end of service benefits 15 1,034,830 423,348 Interest expense 58,152 47,495 Reversal of allowance for expected credit losses on cash at banks (7,635) -

Operating cash flows before movements in working capital : Trade and client receivables 10 4,925,267 (5,568,135) Due from related parties 18.1 1,104,302 1,154,466 Prepayments and other receivables (excluding advance income tax

payments) 11 (2,174,710) (276,349) Trade and client payables 10 (4,914,010) 5,552,896 Due to related parties 18.1 2,553,795 3,521,798 Accrued expenses and other payables 14 386,834 408,662

Income tax paid 13.2 - (1,986,929) Employees' end of service benefits paid 15 (59,247) (316,585) Cash generated from operations 18,118,116 10,052,705 Cash flows from investing activity Purchase of property and equipment 12 (347,843) (101,261) Net cash used in investing activity (347,843) (101,261) Cash flows from financing activity Interest paid (58,152) (47,495) Net cash used in financing activity (58,152) (47,495) Net increase in cash and cash equivalents 17,712,121 9,903,949 Cash and cash equivalents at the beginning of the year 166,370,209 156,466,260 Cash and cash equivalents at end of the year 9 184,082,330 166,370,209 The notes on pages 7 to 30 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 2018 (All amounts in Saudi Riyals unless otherwise stated)

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1. General information Merrill Lynch Kingdom of Saudi Arabia Company (the “Company”) is a Saudi Closed Joint Stock Company registered in the Kingdom of Saudi Arabia (“KSA”) under Commercial Registration No. 1010245128 issued in Riyadh on Safar 29, 1429H (corresponding to 7 March 2008). Its immediate holding company is Bank of America Global Holdings LLC, a company incorporated in the United States of America. The ultimate holding company is Bank of America Corporation ("BAC"), a listed company incorporated in the United States of America. The Company is licensed by the Capital Market Authority ("CMA") under license No. 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 20th 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 the International Financial Reporting Standards (“IFRS”), as endorsed by Saudi Organization for Certified Public Accountants (“SOCPA”) in the Kingdom of Saudi Arabia as well as other standards and pronouncements issued by SOCPA. For all periods up to and including the year ended 31 December 2017, the Company has prepared and presented its statutory financial statements in accordance with the generally accepted accounting standards in KSA issued by SOCPA (“previous GAAP”) and the requirements of the Saudi Arabian Regulations for Companies and the Company's By-laws in so far as they relate to the preparation and presentation of the financial statements. SOCPA’s Board of Directors in their meeting held on Thursday, July 18, 2013, (corresponding to Ramadan 10, 1434H), agreed to apply IFRS, after being endorsed by SOCPA, all at once. The required date for application for all entities (other than listed entities) is the financial periods starting from 1 January 2018. These are the Company’s first financial statements prepared in accordance with IFRS 1 First-time Adoption of International Financial Reporting Standards’. In preparing these financial statements, the Company's opening statement of financial position was prepared as at 1 January 2017 which is the Company's date of transition to IFRS, in compliance with IFRS 1 “First time adoption of International Financial Reporting Standards” (“IFRS 1”) that are endorsed in the Kingdom of Saudi Arabia and other standards and pronouncements issued by SOCPA. An explanation of how the transition to IFRSs has affected the reported financial position, statements of comprehensive income and cash flows of the Company is provided in note 3. 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 judgements that affect the reported amounts of assets and liabilities. It also requires management to exercise its judgement 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.

Merrill Lynch Kingdom of Saudi Arabia Company (A Saudi Closed Joint Stock Company) Notes to the financial statements for the year ended 31 December 2018 (All amounts in Saudi Riyals unless otherwise stated)

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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 2018, 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. Annual improvements to IFRS Standards 2014-2016 Cycle: amending IFRS 1 and IAS 28 IFRIC 22 “Foreign Currency Transactions and Advance Consideration”: The interpretation considers how to determine the date of transaction when applying the standard on applying the date of transactions, IAS 21. The date of transaction determines the exchange rate to be used on initial recognition to be used on an initial recognition of a related asset, expense or income. The interpretation provides guidance for when a single payment / receipt is made, as well as for situations where multiple payments / receipts are made. Amendments to IFRS 2 “Share Based Payment”: The amendment clarifies the measurement basis for cash-settled, share-based payments and the accounting for modifications that change an award from cash – settled to equity settled. It also introduces an exception to the principles in IFRS 2 that will require an award to be treated if it was wholly owned equity – settled, where an employer is obliged to withhold an amount for the employee’s tax obligation associated with a share based payment and pay that amount to the tax authority. IFRS 9, ‘Financial instruments’: The complete version of IFRS 9 replaces most of the guidance in IAS 39. IFRS 9 retains but simplifies the mixed measurement model and establishes three primary measurement categories for financial assets: amortised cost, fair value through other comprehensive income (FVTOCI) and fair value through profit and loss (FVTPL). The basis of classification depends on an entity’s business model and the contractual cash flow characteristics of the financial asset. Investments in equity instruments are required to be measured at fair value through profit or loss with the irrevocable option at inception to present changes in fair value in OCI. There is now a new expected credit losses model that replaces the incurred loss impairment model used in IAS 39. For financial liabilities, there were no changes to classification and measurement except for the recognition of changes in own credit risk in other comprehensive income, for liabilities designated at fair value through profit or loss. IFRS 9 relaxes the requirements for hedge effectiveness by replacing the bright line hedge effectiveness tests. It requires an economic relationship between the hedged item and hedging instrument and for the ‘hedged ratio’ to be the same as the one management actually uses for risk management purposes. Contemporaneous documentation is still required but is different to that currently prepared under IAS 39. The impact of IFRS 9 on the financial statements of the Company has been disclosed in note 2.6. IFRS 15 “Revenue from Contracts with Customers”: The standard replaces IAS 11, ‘Construction contracts’, IAS 18, ‘Revenue’ and related interpretations. Revenue is recognised when a customer obtains control of a good or service and thus has the ability to direct the use of and obtain the benefits from the good or service. The core principle of IFRS 15 is that an entity recognises revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. IFRS 15 also includes a cohesive set of disclosure requirements that will result in an entity providing users of financial statements with comprehensive information about the nature, amount, timing and uncertainty of revenue and cash flows arising from the entity’s contracts with customers. Amendments to IFRS 15 “Revenue from Contracts with Customers”: The amendments comprise clarifications on identifying performance obligations, accounting for licenses of intellectual property and the principal versus agent assessment (gross versus net revenue presentation). The IASB has also included additional practical expedients related to transition to the new revenue standard. The new standard does not impact the timing or measurement of the Company’s revenue recognition as it is consistent with the Company’s existing accounting for contracts within the scope of the standard. As such the adoption of IFRS 15 resulted in no change in assets, liabilities, or shareholders’ equity as at the date of initial application. 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: Amendment to IFRS 9, ‘Financial instrument’ (Effective for annual periods beginning on or after 1 January 2019): The amendment permits more assets to be measured at amortised cost than under the previous version of

Merrill Lynch Kingdom of Saudi Arabia Company (A Saudi Closed Joint Stock Company) Notes to the financial statements for the year ended 31 December 2018 (All amounts in Saudi Riyals unless otherwise stated)

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IFRS 9, in particular some prepayable financial assets. The amendment also confirms that modifications in financial liabilities will result in the immediate recognition of a gain or loss. Management does not anticipate that the adoption of above amendment on 1 January 2019 will have a material impact on the Company’s financial statements. IFRS 16, ‘Leases’ (Effective for annual periods beginning on or after 1 January 2019): This standard replaces the current guidance in IAS 17 and is a far reaching change in accounting by lessees in particular. Under IAS 17, lessees were required to make a distinction between a finance lease (on balance sheet) and an operating lease (off balance sheet). IFRS 16 now requires lessees to recognise a lease liability reflecting future lease payments and a ‘right-of-use asset’ for virtually all lease contracts. The IASB has included an optional exemption for certain short-term leases and leases of low-value assets; however, this exemption can only be applied by lessees. For lessors, the accounting stays remains mainly unchanged. However, as the IASB has updated the guidance on the definition of a lease (as well as the guidance on the combination and separation of contracts), lessors will also be affected by the new standard. At the very least, the new accounting model for lessees is expected to impact negotiations between lessors and lessees. Under IFRS 16, a contract is, or contains, a lease if the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration. For lease contracts where the Company is a lessee, the initial right of use asset and lease liability recorded on adoption of IFRS 16 is approximately Saudi Riyals 3 million. Lease expense previously presented within administrative expenses will be replaced by amortisation of the right of use asset and accrual of finance costs relating to the lease liability presented within interest expense. Whilst the recognition of finance costs on an effective interest rate basis will result in lease expenses being recognised earlier under the new standard, this is not expected to have a material impact on the Company’s financial statements. IFRIC 23 Uncertainty over Income Tax Treatments (Effective for annual periods beginning on or after 1 January 2019): 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 • Assumptions for taxation authorities • The determination of taxable profit (tax loss), tax bases, unused tax losses, and tax rates • The effect of changes in facts and circumstances Management does not anticipate that the adoption of above interpretation on 1 January 2019 will have a material impact on the Company’s financial statements. Annual improvements 2015-2017 (Effective for annual periods beginning on or after 1 January 2019): These amendments includes minor changes to the following standards: • IFRS 3, ‘Business combinations’, - a company remeasures its previously held interest in a joint operation

when it obtains control of the business. • IFRS 11, ‘Joint arrangements’, - a company does not remeasure its previously held interest in a joint operation

when it obtains joint control of the business. • IAS 12, ‘Income taxes’ - a company accounts for all income tax consequences of dividend payments in the

same way. • IAS 23, ‘Borrowing costs’ – a company treats as part of general borrowings any borrowing originally made to

develop an asset when the asset is ready for its intended use or sale. Management does not anticipate that the adoption of above amendments on 1 January 2019 will have a material impact on the Company’s financial statements. Amendments to IAS 19,‘Employee benefits’ on plan amendment, curtailment or settlement’ (Effective for annual periods beginning on or after 1 January 2019): 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. Management does not anticipate that the adoption of above amendments on 1 January 2019 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 2018 (All amounts in Saudi Riyals unless otherwise stated)

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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 above amendments on 1 January 2020 will have a material impact on the Company’s financial statements. There are no other relevant applicable new standards and amendments to published standards or IFRIC interpretations that have been issued but are not effective for the first time for the Company’s financial year beginning on 1 January 2018 that would be expected to have a material impact on the financial statements of the Company. 2.6. Changes in accounting policies The Company has adopted the requirements set out by IFRS 9 as issued by the IASB in July 2014 with a date of transition of 1 January 2018, which resulted in changes in accounting policies and classification of amounts presented in the financial statements. The measurement category and the carrying amount of financial assets and financial liabilities in accordance with the previous accounting policies under SOCPA and IFRS 9 as at 1 January 2018, are compared as follows:

Financial assets Previous classification under previous GAAP

New classification under IFRS 9

Carrying amount under previous GAAP

Carrying amount under

IFRS 9 Cash and cash equivalents Loans and receivables Amortised cost 166,370,209 166,285,262 Trade and client receivables Loans and receivables Amortised cost 5,568,135 5,568,135 Due from related parties Loans and receivables Amortised cost 3,422,175 3,422,175 Other receivables Loans and receivables Amortised cost 187,315 187,315 Total financial assets 175,547,834 175,462,887 There were no changes to the classification and measurement of financial liabilities. As permitted by the transitional provisions of IFRS 9, the Company elected not to restate comparative figures. Any adjustments to the carrying amounts of financial assets and liabilities at the date of transition have been recognised in the opening retained earnings and other reserves of the current period. Consequently, for note disclosures, the consequential amendments to IFRS 7 disclosures have also only been applied to the current period. The comparative period notes disclosures reflect those disclosures made in the prior period. The adoption of the impairment requirements of IFRS 9 has resulted in changes in accounting policies for impairment of financial assets. IFRS 9 also significantly amends other standards dealing with financial instruments such as IFRS 7 “Financial Instruments: Disclosures”. Set out below are disclosures relating to the impact of the adoption of IFRS 9 on the Company. The following table reconciles the prior year’s closing impairment allowance measured in accordance with the previous GAAP requirements to the new impairment allowance measured in accordance with the IFRS 9 requirements at 1 January 2018:

Loss allowance under previous

GAAP Remeasurements IFRS 9

impairment

Cash and cash equivalents measured at amortised cost - 84,947 84,947 Trade and client receivables measured at amortised cost - - - Due from related parties measured at amortised cost - - - Other receivables measured at amortised cost - - - - 84,947 84,947

Merrill Lynch Kingdom of Saudi Arabia Company (A Saudi Closed Joint Stock Company) Notes to the financial statements for the year ended 31 December 2018 (All amounts in Saudi Riyals unless otherwise stated)

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The total measurement loss of Saudi Riyals 84,947 was recognised in opening retained earnings as at 1 January 2018. 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 2018, 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 10 years or lease period if shorter 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 comprehensive income. Maintenance and normal repairs which do not materially extend the estimated useful life of an asset are charged to the statement of comprehensive 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. 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 other payables. (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.

Merrill Lynch Kingdom of Saudi Arabia Company (A Saudi Closed Joint Stock Company) Notes to the financial statements for the year ended 31 December 2018 (All amounts in Saudi Riyals unless otherwise stated)

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(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 (d.1) Policy applicable from January 1, 2018 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. IFRS 9 outlines a 'three stage' model for impairment based on changes in credit quality since initial recognition as summarised below: (i) A financial instrument that is not credit-impaired on initial recognition is classified in 'Stage 1' and has its credit

risk continuously monitored. (ii) If a significant increase in credit risk ('SICR') since initial recognition is identified, the financial instrument is

moved to 'Stage 2' but is not yet deemed to be credit-impaired. (iii) If the financial instrument is credit-impaired, the financial instrument is then moved to 'Stage 3'. (iv) Financial instrument in Stage 1 have their ECL measured at an amount equal to the portion of expected credit

losses that result from the default events possible within the next 12 months. Instruments in Stages 2 or 3 have their ECL measured based on expected credit losses on a lifetime basis.

(v) A pervasive concept in measuring ECL in accordance with IFRS 9 is that it should consider forward-looking information.

(vi) Purchase or originated credit-impaired financial assets are those financial assets that are credit-impaired on initial recognition. Their ECL is always measured on a lifetime basis (Stage 3).

Stage 1: (Initial recognition) 12-month expected credit losses Stage 2: (Significant increase in credit risk since initial recognition) Lifetime expected credit losses Stage 3: (Credit impaired assets) Lifetime expected credit losses The financial assets of the Company that are subjected to ECL review include cash and cash equivalents, due from related parties and trade and other clients 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 77,312 (2017: Saudi Riyals 84,947). As at December 31, 2018 and 2017, 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 December 31, 2018 and 2017, 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.

Merrill Lynch Kingdom of Saudi Arabia Company (A Saudi Closed Joint Stock Company) Notes to the financial statements for the year ended 31 December 2018 (All amounts in Saudi Riyals unless otherwise stated)

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Stages of impairment under IFRS 9 The impairment approach of IFRS 9 provides a framework for ECL where in, the assets have to be segmented into three stages. The three stages reflect the general pattern of credit deterioration of a financial asset. The three stages differ in terms of recognition of ECL and the presentation of interest revenue. Stage 1 - Performing financial assets Stage 1 assets are assessed based on Company’s existing credit risk management standards for acceptable credit quality. Overall the financial assets falling under this category have the following characteristics at minimum: • Adequate capacity to meet its contractual cash flow obligations in the near term; and • Adverse changes in economic and business conditions in the longer term may, but will not necessarily, reduce

the ability to fulfil its obligations. Stage 2 - Financial Assets with significant increase in credit risk These are financial assets whose credit quality has deteriorated significantly since origination but do not have objective evidence of impairment. Stage 3 - Credit impaired financial assets Financial assets classified under this category have exceeded either the objective thresholds set by the Company or have been subjectively considered as obligors which lack a capacity to repay their contractual obligations, on a timely basis. The nature of customers identified in this category is similar to the previous obligors that were classified as “defaulted” based on objective evidence of impairment. The Company considers “Default” event when the obligor is unlikely to pay for its credit obligations in full, without recourse by the Company to the actions such as realising security (if held). Transfer criterions The transfer criterions are based on customer grading in comparison to the original grade and past dues criteria. Also, the Company considers the margin and liquidation benchmarks to reflect the appropriate credit risk in each of the stages. Stage 1 to Stage 2 • Any significant increase in credit risk would trigger transfer of an asset from Stage 1 to stage 2 depending on

the level of deterioration in credit rating and past due. Stage 2 to Stage 3 • A significant deterioration in credit quality and past due by more than 90 days are indicators that the financial

asset would be moved to stage 3. 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 • the borrower is 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.

Merrill Lynch Kingdom of Saudi Arabia Company (A Saudi Closed Joint Stock Company) Notes to the financial statements for the year ended 31 December 2018 (All amounts in Saudi Riyals unless otherwise stated)

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The definition of default largely aligns with that applied by the Company for regulatory capital purposes. 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. The base case represents a most-likely outcome and is aligned with information used by the Parent Company for other purposes such as strategic planning and budgeting. The other scenarios represent more optimistic and more pessimistic outcomes. Periodically, the Parent Company carries out stress testing of more extreme shocks to calibrate its determination of these other representative scenarios. The Company has identified and documented key drivers of credit risk and credit losses for financial instruments and, using an analysis of historical data, has estimated relationships between macro-economic variables and credit risk and credit losses. The economic scenarios used as at December 31, 2018 included the following ranges of key indicators: • Unemployment rates • Interest rates • GDP growth Predicted relationships between the key indicators and default and loss rates on various portfolios of financial assets have been developed based on analysing historical data over the past 5 to 10 years. 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). These parameters are generally derived from internally developed statistical models and other historical data. They are adjusted to reflect forward-looking information as described below. PD estimates are estimates at a certain date, which are calculated based on statistical rating models, and assessed using rating tools tailored to the various categories of counterparties and exposures. These statistical models are based on internally compiled data comprising both quantitative and qualitative factors. Where it is available, market data may also be used to derive the PD for large corporate counterparties. If a counterparty or exposure migrates between rating classes, then this will lead to a change in the estimate of the associated PD. PDs are estimated considering the contractual maturities of exposures and estimated prepayment rates. LGD is the magnitude of the likely loss if there is a default. The Company estimates LGD parameters based on the history of recovery rates of claims against defaulted counterparties. The LGD models consider the structure, collateral, seniority of the claim, counterparty industry and recovery costs of any collateral that is integral to the financial asset. The Company has never suffered any loss on liquidations since incorporation by recovering the amounts fully. Given the nature and extent of the Company’s receivables, the management considers the credit risk of the exposures to be minimal. EAD represents the expected exposure in the event of a default. The Company derives the EAD from the current exposure to the counterparty and potential changes to the current amount allowed under the contract including amortisation. The EAD of a financial asset is its gross carrying amount. For some financial assets, EAD is determined by modelling the range of possible exposure outcomes at various points in time using scenario and statistical techniques. (d.2) Policy applicable before January 1, 2018 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

Merrill Lynch Kingdom of Saudi Arabia Company (A Saudi Closed Joint Stock Company) Notes to the financial statements for the year ended 31 December 2018 (All amounts in Saudi Riyals unless otherwise stated)

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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. 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. If there is objective evidence that an impairment loss on a financial asset exists, the impairment is determined as follows: • For assets carried at amortized cost, impairment is based on estimated future cash flows that are discounted

at the original effective commission rate. 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 Riyals. 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 recognized in the statement of comprehensive 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 comprehensive 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 2018 (All amounts in Saudi Riyals unless otherwise stated)

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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 taxes attributable to its foreign shareholders. Income tax expense comprises current and deferred tax which is recognised in the statement of comprehensive 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 the 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 post-employment benefit is recognized immediately in statement of comprehensive income. Remeasurement gains and losses arising from experience adjustments and changes in actuarial assumptions, if any, are recognized 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 2018 (All amounts in Saudi Riyals unless otherwise stated)

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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 or to reimburse the Company for expenditure incurred. Service fee income is recognised on an accruals basis when the transactions occur or as 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. Equity swaps, net Income from equity swaps is recognised on execution of the deals and net of brokerage expense paid to Tadawul. 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. 2.7.16. Operating leases Rental payments under operating leases are charged to the statement of comprehensive income on a straight line basis over the lease term. 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.

Merrill Lynch Kingdom of Saudi Arabia Company (A Saudi Closed Joint Stock Company) Notes to the financial statements for the year ended 31 December 2018 (All amounts in Saudi Riyals unless otherwise stated)

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(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.

3. First time adoption of IFRS As stated in note 2.1, the accompanying financial statements have been prepared in compliance with IFRS and IFRS1 and other standards and pronouncements as endorsed by SOCPA in the Kingdom of Saudi Arabia. The last financial statements under the previous GAAP were for the year ended 31 December 2017 and the date of transition to IFRS is 1 January 2017. In preparing the Company’s first IFRS financial statements, the Company’s opening statement of financial position was prepared as at 1 January 2017. There was no significant impact on the statements of financial position as at 1 January 2017 and 31 December 2017 or the statements of comprehensive income and cash flows for the year ended 31 December 2017.

4. 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 The seven key types of risk faced by BAC Businesses as defined in the Risk Framework are market, credit, operational, liquidity, reputational, strategic and compliance risks. Set out below is a summary of the Company's approach to each of the risk types. Market risk Market risk is the risk that changes in market conditions may adversely impact the values of assets and liabilities or otherwise negatively impact earnings. 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.

Merrill Lynch Kingdom of Saudi Arabia Company (A Saudi Closed Joint Stock Company) Notes to the financial statements for the year ended 31 December 2018 (All amounts in Saudi Riyals unless otherwise stated)

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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 front line units (“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 2018 and 2017, 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: 2018 2017 Cash and cash equivalents 184,005,018 166,370,209 Trade and client receivables 642,868 5,568,135 Due from related parties 2,317,873 3,422,175 Other receivables 2,414,342 187,315 189,380,101 175,547,834 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 2018, Moody’s rating of the Saudi British Bank and Bank of America in which cash at bank is held is P-1. Credit quality analysis The following table sets out the credit analysis for financial assets as at 31 December 2018.

Financial assets Investment

grade

Non-investment

grade 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 - - 2,414,342 2,414,342 184,005,018 - 5,375,083 189,380,101 The following table sets out the credit analysis for financial assets as at 31 December 2017.

Financial assets Investment

grade

Non-investment

grade Unrated Total Cash and cash equivalents 166,370,209 - - 166,370,209 Trade and client receivables - - 5,568,135 5,568,135 Due from related parties - - 3,422,175 3,422,175 Other receivables - - 187,315 187,315 166,370,209 - 9,177,625 175,547,834 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

Merrill Lynch Kingdom of Saudi Arabia Company (A Saudi Closed Joint Stock Company) Notes to the financial statements for the year ended 31 December 2018 (All amounts in Saudi Riyals unless otherwise stated)

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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; with • 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). Credit risk grades The Company allocates each exposure to a rating scale for individual risk assessment based on a variety of data that is determined to be predictive of the risk of default and applying experienced credit judgement. Further, a master scale is employed across all different rating scales used by the Company. Its main purpose is to make risk assessment comparable across various segments or products. A master scale is a scale of credit risk grades, typically denominated by a combination of numbers, letters or both, which represent the relative credit risk assigned to each class or grade. It typically composed of a quantitative and a qualitative component that are indicative of risk of default. Credit risk grades are defined and calibrated such that the risk of default occurring increases exponentially as the credit risk deteriorates so, for example, the difference in risk of default between credit risk grades 1 and 2 is smaller than the difference between credit risk grades 2 and 3. Each exposure is allocated to a credit risk grade at initial recognition based on available information about the borrower. Exposures are subject to ongoing monitoring, which may result in an exposure being moved to a different credit risk grade. The monitoring typically involves the periodic review of customers’ files, status of the industry, press articles, economic condition, changes in external credit ratings, and other internal and external information. Generating the term structure of PD Credit risk grades are a primary input into the determination of the term structure of PD for exposures. The Parent Company collects performance and default information about its credit risk exposures analysed by jurisdiction or region and by type of product and borrower as well as by credit risk grading. For some portfolios, information purchased from external credit reference agencies is also used. The Company employs statistical models to analyse the data collected and generate estimates of the remaining lifetime PD of exposures and how these are expected to change as a result of the passage of time. This analysis includes the identification and calibration of relationships between changes in default rates and changes in key macro-economic factors as well as in-depth analysis of the impact of certain other factors (e.g. forbearance experience) on the risk of default. For most exposures, key macro-economic indicators include - GDP, inflation, unemployment, oil prices, equity index, etc. Based on advice from the Parent Company, Risk Committee and economic experts and consideration of a variety of external actual and forecast information, the Parent 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 (see discussion below on incorporation of forward-looking information). The Parent Company then uses these forecasts to adjust its estimates of PDs. Determining whether credit risk has increased significantly The criteria for determining whether credit risk has increased significantly vary by portfolio and include quantitative changes in PDs and qualitative factors, including a backstop based on delinquency. The credit risk of a particular exposure is deemed to have increased significantly since initial recognition based on its credit risk grade downgrade as per impairment policy. Significant increase may be determined based on expert credit judgment considering qualitative and quantitative information where indicative of such and the effect may not otherwise fully reflected in its quantitative analysis on a timely basis. Days past due are determined by counting the number of days since the earliest elapsed due date in respect of which full payment has not been received. Due dates are determined without considering any grace period that might be available to the borrower.

Merrill Lynch Kingdom of Saudi Arabia Company (A Saudi Closed Joint Stock Company) Notes to the financial statements for the year ended 31 December 2018 (All amounts in Saudi Riyals unless otherwise stated)

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Low credit risk (LCR) financial assets are placed in Stage 1 without ongoing staging assessment. Once an instrument is no longer classified as LCR, a significant increase in credit risk assessment shall be done. Also refer note 2.7.5.(d). Where modelling of a parameter is carried out on a collective basis, the financial instruments are grouped on the basis of shared risk characteristics. The groupings are subject to regular review to ensure that exposures within a particular group remain appropriately homogeneous. Loss allowance 31 December 2018

Cash and cash equivalents 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. 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 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

Merrill Lynch Kingdom of Saudi Arabia Company (A Saudi Closed Joint Stock Company) Notes to the financial statements for the year ended 31 December 2018 (All amounts in Saudi Riyals unless otherwise stated)

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of the liquidity risk of FLU activities and assesses the effectiveness of the Company’s liquidity risk management processes. The Company’s Liquidity Risk Policy (“LRP”) establishes the overarching governance, controls and risk management practices to monitor and manage liquidity risk across the Company and is approved by the Company’s Board. The Company’s Board sets the liquidity risk appetite that is the minimum amount of liquidity that must be held to meet net modelled outflows under an internally-developed combined stress scenario and to comply with regulatory requirements. GRM is responsible for maintaining a liquidity risk limits framework to ensure that the entity is managed within its liquidity risk appetite. 2018 2017 Due within 1 year Trade and client payables 638,886 5,552,896 Due to related parties 6,983,957 4,430,162 Accrued expenses and other payables 3,873,713 3,486,879 Income tax payable 2,809,581 - 14,306,137 13,469,937 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. For the EMEA region, there is a dedicated committee, the EMEA Reputational Risk Committee, whose mandate includes consideration of Reputational Risk issues and to provide 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. Reputational Risk items relating to the Company are considered as part of the EMEA Reputational Risk Committee. 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 EMEA Regional Risk Committee and the EMEA Reputational Risk Committee, BAC has an appropriate organisational and governance structure in place to ensure strong oversight at the entity business level. The EMEA Reputational Risk Committee is a sub-committee of both the EMEA 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 EMEA Reputational Risk Committee to the Global Reputational Risk Committee as appropriate. Reporting of reputational risk issues is captured as part of management routines for the EMEA Reputational Risk Committee. Items presented to the EMEA Reputational Risk Committee are maintained through reporting which includes description of the reputational risk issue, geographical jurisdiction, reason for escalation and decision reached. A summary report of issues discussed at the EMEA Reputational Risk Committee is provided to the EMEA Regional Risk Committee. Strategic risk Strategic risk is the risk that results from incorrect assumptions about external and/or internal factors, inappropriate business plans, ineffective business strategy execution, or failure to respond in a timely manner to changes in the regulatory, macroeconomic and competitive environments.

Merrill Lynch Kingdom of Saudi Arabia Company (A Saudi Closed Joint Stock Company) Notes to the financial statements for the year ended 31 December 2018 (All amounts in Saudi Riyals unless otherwise stated)

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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 Company’s 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. During the planning process, the BAC Board provides credible challenge to management’s assumptions and recommendations, and approves the strategic plans after a comprehensive assessment of the risks. 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 the Company level. Any strategic decisions relating to the Company are presented and discussed at the Company’s board meetings. The executive management team provides the BAC Board with progress reports on the strategic plan, including timelines and objectives and recommendation of any additional or alternative actions to be implemented. Front line units provide updates to the Company’s 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 BAC arising from the failure of BAC to comply with requirements of applicable laws, rules and regulations and related self- regulatory organizations’ standards and codes of conduct. FLUs are responsible for the proactive identification, management and escalation of compliance risks across BAC. Global Compliance is responsible for setting BAC-wide policies and standards and provides independent challenge and oversight to the front line units. BAC’s approach to the management of compliance risk is further described in the Global Compliance Policy, which outlines the requirements of BAC’s global compliance program and defines roles and responsibilities related to the implementation, execution and management of the global compliance risk management program by Global Compliance. Global Compliance is a separate function with governance routines and executive reporting distinct from those of the front line units and other control functions. Global Compliance also collaborates with other control functions to provide additional support for specific remediation efforts and shares responsibility with the front line units, Global Risk Management and other control functions for mitigating reputational risk.

5. 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: 2018 2017 Capital Base: Tier 1 capital 174,025,391 162,283,162 Tier 2 capital - - Total Capital Base 174,025,391 162,283,162 Minimum capital requirement: Market risk 1,056,144 463,086 Credit risk 8,373,144 7,571,827 Operational risk 7,824,757 6,969,509 Total minimum capital required 17,254,045 15,004,422 Capital adequacy ratio: Total capital ratio (time) 10.09 10.82 Tier 1 capital ratio (time) 10.09 10.82 Surplus in capital 156,771,346 147,278,740 • 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.

Merrill Lynch Kingdom of Saudi Arabia Company (A Saudi Closed Joint Stock Company) Notes to the financial statements for the year ended 31 December 2018 (All amounts in Saudi Riyals unless otherwise stated)

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• 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.

6. Income from equity swaps and brokerage income

Income from equity swaps represents brokerage income from a related party (Merrill Lynch International), also see note 18.1. Income from equity swaps and brokerage income is net of brokerage expense paid to Tadawul as below: 6.1. Brokerage income, net

Gross Brokerage

expenses Net 2018 Related party 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 2017 Related party 16,014,480 (6,138,252) 9,876,228 Other 7,096,774 (2,989,240) 4,107,534 Total 23,111,254 (9,127,492) 13,983,762 6.2. Income from equity swaps, net

Gross Brokerage

expense Net 2018 Related party - - - 2017 Related party 2,493,198 (1,522,058) 971,140

7. Salaries and employee related benefits 2018 2017 Wages and salaries 11,052,818 11,758,218 Bonus and other staff costs 6,375,490 4,018,916 Provision for end of service benefits (note 15) 1,034,830 423,348 18,463,138 16,200,482

8. General and administrative expenses 2018 2017 Consultancy, legal and professional fees 2,954,485 3,648,557 Bank charges 2,405,153 307,550 Rental expense (note 17) 1,664,825 1,685,975 Communication 1,321,179 1,222,048 Market data services 1,021,242 981,477 Repairs and maintenance 726,209 796,188 Business continuity site charges 698,055 930,687 Travel expenses 644,709 705,507 Depreciation (note 12) 312,962 344,084 Insurance 218,846 203,752 Other 712,587 691,502 12,680,252 11,517,327

Merrill Lynch Kingdom of Saudi Arabia Company (A Saudi Closed Joint Stock Company) Notes to the financial statements for the year ended 31 December 2018 (All amounts in Saudi Riyals unless otherwise stated)

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9. Cash and cash equivalents 2018 2017 Cash at bank 184,082,330 166,370,209 Impairment allowance (77,312) - 184,005,018 166,370,209

10. Trade and client receivables / payables As at 31 December 2018, the Company has outstanding payable to client money account and corresponding receivable from Tadawul amounting to Saudi Riyals 0.6 million (2017: outstanding receivable from client money account and corresponding payable to Tadawul amounting to Saudi Riyals 5.6 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 2018 2017 Advisory fee receivable 2,053,939 - Prepaid expenses 1,573,582 1,625,899 Advance income tax payments - 260,819 Other receivables 360,403 187,315 3,987,924 2,074,033

12. Property and equipment, net

Leasehold

improvements Computer equipment

Fixtures and fittings

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 2017 Cost At the beginning of the year 11,264,073 6,764,145 881,230 - 18,909,448 Additions 101,261 - - - 101,261 At the end of the year 11,365,334 6,764,145 881,230 - 19,010,709 Accumulated depreciation At the beginning of the year 10,105,678 6,633,206 881,230 - 17,620,114 Depreciation charge (note 8) 261,386 82,698 - - 344,084 At the end of the year 10,367,064 6,715,904 881,230 - 17,964,198 Net book value At 31 December 2017 998,270 48,241 - - 1,046,511

Merrill Lynch Kingdom of Saudi Arabia Company (A Saudi Closed Joint Stock Company) Notes to the financial statements for the year ended 31 December 2018 (All amounts in Saudi Riyals unless otherwise stated)

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13. Income tax 13.1. The income tax components are as follows: 2018 2017 Profit before taxation 14,897,576 6,747,954 Adjustments:

Depreciation, net (1,119,973) (1,128,216) Employees’ end of service benefits 975,583 106,763 Other adjustments 575,219 950,516

Taxable income 15,328,405 6,677,017 Income tax at 20% 3,065,681 1,335,403 13.2. Movement in provision for income tax / (advance income tax payments) Note 2018 2017 Balance at the beginning of the year (260,819) 390,707 Charge for the year 13.1 3,065,681 1,335,403 Adjustment relating to prior periods 4,719 - 3,070,400 1,335,403 Payments made during the year - (1,986,929) Balance at the end of the year 2,809,581 (260,819) 13.3 Recognised deferred tax asset Recognised deferred income tax asset at 31 December relates to the following: 2018 2017 Property and equipment 1,461,767 1,663,255 Employees’ end of service benefits 740,709 545,592 2,202,476 2,208,847 The movement in deferred income tax asset during the year is as follows: 2018 2017 Balance at beginning of the year 2,208,847 2,207,851 Deferred tax (charge) / credit for the year (6,371) 996 Balance at end of the year 2,202,476 2,208,847 13.4 Income tax charge and deferred tax charge / (credit) for the year Note 2018 2017 Charge for the year 13.2 3,070,400 1,335,403 Deferred tax charge / (credit) for the year 13.3 6,371 (996) 3,076,771 1,334,407 13.5 Status of income tax assessments The Company had filed its tax returns for the years from 2008 to 2017. Tax assessments for the years 2008 to 2012 have been finalised by the GAZT, however, 2013 to 2017 are not yet assessed. The tax declaration of the Company for the year ended 31 December 2018 will be due for filing on 30 April 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.

Merrill Lynch Kingdom of Saudi Arabia Company (A Saudi Closed Joint Stock Company) Notes to the financial statements for the year ended 31 December 2018 (All amounts in Saudi Riyals unless otherwise stated)

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14. Accrued expenses and other payables 2018 2017 Accrued salaries and employee related benefits 3,215,354 2,561,609 Payable to service providers 348,626 699,370 Professional fees 235,238 215,000 Withholding tax payable - 10,336 Other accruals 74,495 564 3,873,713 3,486,879

15. Provision for employees' end of service benefits Note 2018 2017 At the beginning of the year 2,727,963 2,621,200 Charge for the year 7 1,034,830 423,348 Payments made during the year (59,247) (316,585) At the end of the year 3,703,546 2,727,963 In accordance with the provisions of IAS 19 “Employee Benefits”, management has carried out an exercise to assess the present value of its obligations as at 31 December 2018 and 2017, using the projected unit credit method, in respect of employees’ end of service benefits payable under the Labour Laws of KSA. The expected liability at the date of leaving the service has been discounted to net present value using a discount rate of 3.45% (2017: 3.08%). Under this method, an assessment has been made of an employee’s expected service life with the Company and the expected basic salary at the date of leaving the service. Management has assumed average increment / promotion costs of 1% (2017: 1%). The present value of the obligation as at 31 December 2018 is not materially different from the provision computed in accordance with the Labour Laws of the KSA.

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 2018 and 2017: 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

17. Operating lease The Company has operating leases for its office premises. Rental expenses for the year ended 31 December 2018 amounted to Saudi Riyals 1,664,825 (2017: Saudi Riyals 1,685,975). Future rental commitments under these lease arrangements, as of 31 December 2018 and 2017 were as follows: 2018 2017 Within one year 1,664,825 1,664,825 After one year and within five years 1,664,825 3,329,650 3,329,650 4,994,475

Merrill Lynch Kingdom of Saudi Arabia Company (A Saudi Closed Joint Stock Company) Notes to the financial statements for the year ended 31 December 2018 (All amounts in Saudi Riyals unless otherwise stated)

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18. 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. 18.1. Related parties balances At 31 December 2018 and 2017, the balances with related parties were as follows: Note 2018 2017 Due from related parties Merrill Lynch International (a) 749,304 1,946,645 Merrill Lynch International, LLC (a) 1,568,569 1,475,530 2,317,873 3,422,175 Due to related parties Merrill Lynch International (b) 6,728,508 4,124,129 Merrill Lynch International, LLC (c) 196,905 102,197 Bank of America Corporation (Ultimate parent entity) (c) 52,178 200,415 Bank of America Merrill Lynch International, DAC (d) 6,366 - Bank of America Merrill Lynch International, Ltd (d) - 3,421 6,983,957 4,430,162 Cash and cash equivalents Bank of America NA London Branch (e) 46,637,871 15,353,155 Compensation to key management personnel Salaries and short-term benefits payable 447,286 432,764 Provision for employees' end of service benefits 1,136,806 916,816 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) The recharge of BAC stock awards to the Company’s employees. d) Expenses charged by other group companies to the Company. e) 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 2018 (All amounts in Saudi Riyals unless otherwise stated)

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18.2. Related parties transactions The transactions with related parties during the years ended 31 December 2018 and 2017 were as follows: Note 2018 2017 Fee income Merrill Lynch International (a) 10,027,560 14,443,308 Merrill Lynch International, LLC (a) 5,585,774 5,291,206 15,613,334 19,734,514 Brokerage income Merrill Lynch International (note 6.1) (b) 37,246,678 16,014,480 Income from equity swaps Merrill Lynch International (note 6.2) (c) - 2,493,198 Operating expenses Merrill Lynch International (d) 15,189,776 14,108,312 Merrill Lynch International (e) 234,327 265,327 Merrill Lynch International, LLC (f) 473,294 280,856 Merrill Lynch International (g) 16,038 280 Merrill Lynch International, LLC (g) 88,318 299,599 Bank of America Corporation (Ultimate parent entity) (g) 63,110 652,971 Bank of America Merrill Lynch International, DAC (g) 29,191 - Bank of America Merrill Lynch International, Ltd (g) 47,294 29,311 Interest expense Merrill Lynch International (h) 58,152 47,060 Compensation to key management personnel Chairman remuneration and directors' fees 579,222 748,958 Salaries and short-term benefits 2,938,027 2,763,146 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) Income from equity swaps 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) Interest expense on intercompany funding.

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 2018, the Company holds cash as client money amounting to Saudi Riyals 0.03 million (2017: Saudi Riyals 9.3 million) which is kept with a local bank as a custodian of such funds. As at 31 December 2018, the Company has outstanding payables to the client money account from the Tadawul (2017: the Company had outstanding receivables from the client money account in favour of Tadawul) (note 10). Further, as at 31 December 2018, the Company holds equity securities amounting to Saudi Riyals 112 million (2017: Saudi Riyals 829 million) as a custodian of such securities.

Merrill Lynch Kingdom of Saudi Arabia Company (A Saudi Closed Joint Stock Company) Notes to the financial statements for the year ended 31 December 2018 (All amounts in Saudi Riyals unless otherwise stated)

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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 2018, 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 ( 2017: Saudi Riyals 150 million).

23. Events after the reporting period There are no material events that have occurred after the reporting date up to the date of approval of these financial statements.

24. Approval of financial statements The financial statements were approved by the Directors of the Company and signed on their behalf on 26 March 2019 (corresponding to 19 Rajab 1440H). The directors have the power to amend and reissue the financial statements.