Is IFRS adoption mandatory in UAE? All you need to know about IFRS implementation?
With the corporate tax laws getting implemented, the need for International Financial Reporting Standards (IFRS) adoption in UAE is rising. In this article, we try to understand what IFRS is, the legal and regulatory requirements to adopt, and the advantages and challenges of implementing IFRS.
What are International Financial Reporting Standards (IFRS)? Why do we need them?
One of the most important characteristics of financial reports is comparability and full disclosure. A standard reporting norm is needed to achieve this across entities, firms, and even between reporting periods. Accounting bodies across the world have developed these common norms as Accounting Standards. The IFRS, issued by the IFRS Foundation and the International Accounting Standards Board, is the most widely adopted global standard.
IFRS Applicability in UAE
The Accountants and Auditors Association of UAE, the body that takes leadership concerning matters relating to accounting, financial reporting and auditing in UAE, has endorsed using IFRS for financial reporting. Users of financial statements, including banks and investors, insist that the financial statements be prepared following IFRS. Further, multi-national companies in UAE have adopted IFRS to align global cross-border reporting and ease consolidation.
From a regulatory perspective, free zones, including Dubai Multi Commodity Center (DMCC), Jebel Ali Free Zone Authority (JAFZA) and all Free Zones under TECOM, have made it obligatory that the annual reports submitted to them should contain financial statements prepared following IFRS.
The latest development in the reporting front is due to corporate tax implementation in the UAE. Under the regime, the Tax is calculated on the accounting profit, reported following IFRS, making IFRS adoption need of the hour.
From a regulatory perspective, free zones, including Dubai Multi Commodity Center (DMCC), Jebel Ali Free Zone Authority (JAFZA) and all Free Zones under TECOM, have made it obligatory that the annual reports submitted to them should contain financial statements prepared following IFRS.
The latest development in the reporting front is due to corporate tax implementation in the UAE. Under the regime, the Tax is calculated on the accounting profit, reported following IFRS, making IFRS adoption need of the hour.
To what extent are IFRS applicable for SMEs?
Financial reporting under IFRS significantly burdens Small and Medium Entities (SMEs), which face a scarcity of resources. To address this challenge, a smaller version of IFRS known as IFRS for SMEs can be adopted by such companies for their general-purpose financial reporting purposes, provided they do not have public accountability. It is a modification and simplification of full IFRS aimed at meeting the needs of small and medium company financial reporting users and easing the reporting burden through a cost-benefit approach.
Under the IASB’s definition, an entity has public accountability if it files, or is in the process of filing, its financial statements with a securities commission or other regulatory organisation for the purpose of issuing any class of instruments in a public market; or it holds assets in a fiduciary capacity for a broad group of outsiders.
The good news is that most companies in UAE will fall within the scope of SME organisation as per the above definition triggering a reduced reporting burden.
Further, the Tax Authority in UAE announced that it would consider a simplified reporting framework for small and medium licenses in UAE for tax purposes. Hence, financial reporting may not be a huge burden for SMEs.
Under the IASB’s definition, an entity has public accountability if it files, or is in the process of filing, its financial statements with a securities commission or other regulatory organisation for the purpose of issuing any class of instruments in a public market; or it holds assets in a fiduciary capacity for a broad group of outsiders.
The good news is that most companies in UAE will fall within the scope of SME organisation as per the above definition triggering a reduced reporting burden.
Further, the Tax Authority in UAE announced that it would consider a simplified reporting framework for small and medium licenses in UAE for tax purposes. Hence, financial reporting may not be a huge burden for SMEs.
What is the impact of IFRS adoption? What do companies need to do now?
In general, accountants in UAE have been following principles aligned with the IFRS. However, every organisation must ensure that the accountants are aware of the reporting standards and requirements. Companies can review accounting policies and processes with the help of a specilised IFRS Consultant and see that the system is aligned with standard reporting requirements. This is important at the moment because corporate Tax is calculated based on accounting profits reported under IFRS.
Companies that adopt the standard for the following can do the following
- Review current accounting and financial reporting functions. Align recording and reporting with IFRS. An IFRS Consultant’s help can be sought for expertise.
- List the areas that need to change. Assess the impact on financials, and resulting consequences from banks, investors and other stakeholders.
- Assess the impact of deviations from IFRS in the previous periods, and assess the required prospective changes.
- Seek favorable and unfavorable factors, and build an action plan to take advantage and protect from risks.
- Align internal processes and software to adapt to changes. Communicate and train people.
- Practice standardised reporting and align managerial thought processes.
