There has been a considerable increase in the number of companies in the UAE, and the number of incorporations is still increasing. This increase is because of the tax-free business environment and the state of the art infrastructure that the UAE provides to the companies. The various tax benefits and the advantages from the side of the government make setting up a business in UAE a very beneficial option.
As we all know that any company cannot imagine its existence without the use of accountancy and bookkeeping services. These services have specific Standards which act as benchmarks for the companies. By meeting the said benchmarks, a company avoids certain fines and penalties. Following these standards also help in increasing the goodwill of the company as the shareholders and the potential investors get to know that the company is following an internationally renowned method of accounting.
Companies in different industries follow different accounting standards, and developing these standards to the letter will help the company to keep clear of any problems in the future. In this blog, we will focus on the most used Accounting Standard in the UAE, which is the International Financial Reporting Standard (IFRS).
International Financial Reporting Standard (IFRS)
International Financial Reporting Standards are accounting standards that need to be followed by a company. Issued by the International Accounting Standards Board (IASB) and the IFRS Foundation, these accounting standards help make the financial statements of the company understandable across various countries. The IFRS also allows the financial statements of different countries to be compared with each other to find out new and better avenues of investments.
The IFRS stipulates the various methods and techniques of defining, recording, maintaining and reporting and strives to create an accounting language which is used all over the world and will provide consistency to the various business across the various businesses.
Around 120 countries of the world and various jurisdictions utilize International Financial Reporting Standards (IFRS), out of which 90 nations utilize IFRS for all their accounting requirements. The companies in the country even mention that they utilize the IFRS accounting standard in all the reports they prepare. Currently, the IFRS is not being used in the USA and Canada. USA follows Generally Accepted Accounting Principles (GAAP), and Canada has their own version of accounting standard.
IFRS in the United Arab Emirates
In the case of the United Arab Emirates, following IFRS is a mandate stipulated by the Securities and Commodities Authority (SCA) and the Central bank of the UAE. The various non-regulated entities operating in the UAE also need to follow IFRS and all the companies that are listed in any of the exchanges such as the Abu Dhabi Securities Exchange (ADX), Dubai Financial Market (DFM) or NASDAQ Dubai (Formerly known as DIFX) need to prepare their accounts according to the International Financial Reporting Standard (IFRS).
It is even necessary for all the banks, as stipulated by the Central Bank of UAE, also need to present and publish financial statements according to IFRS. Though IFRS is not required for the companies that have not been listed in the various exchanges, other than banks, implementing such standards in the accounting reporting of the company is considered a good practice.
Difference between IFRS and GAAP
In the future, the USA may look into the implementation of IFRS, but currently, it is quite happy with adhering to GAAP. Due to the fact that not all countries follow IFRS, an accountant of a trading company needs to have knowledge of both IFRS and GAAP. Some of the major differences between GAAP and IFRS are provided in the table below:
This is a financial reporting technique that is followed by many countries
This can be defined as a set of guidelines that were made for the financial accounting of a company
These are developed by International Accounting Standard Board (IASB)
These are developed by Financial Accounting Standard Board (FASB)
IFRS allows inventory reversal under certain conditions
Any reversal of inventory is prohibited under GAAP
Any development cost is usually capitalized
The development cost is treated as an expense
IFRS does not use the last in first out (LIFO) method
GAAP allows the use of the LIFO method
Many companies which are just starting up prefer to prepare their financial statements on a cash basis and do not comply with IFRS as sometimes this becomes a bit overwhelming for a single person, and the company will have to dedicate two accountants so that they can understand each and every aspect of both the accounting standards. This creates duplication of work which leads to wastage of resources.
If you are looking for accounting and auditing services in the UAE, you should look into the services provided by JAXA Chartered Accountants. We will take care of the accounts of your company and will ensure that the company complies with all the rules and regulation of the industry. JAXA Chartered Accountants also provides services such as management consultancy services and audit services and will also help in filing your taxes at the right time. For details about the service provided by JAXA, please contact us – We would be glad to help.