Introduction to Accounting Standards
The United Arab Emirates (UAE) has recently introduced significant updates to its Corporate Tax law, aiming to enhance transparency, standardize accounting practices, and promote economic growth. These changes have a profound impact on businesses operating in the UAE and require a comprehensive understanding of accounting standards.
Preparation of Financial Statements using Cash Basis of Accounting
For determining Taxable Income, entities are permitted to prepare their Financial Statements using the Cash Basis of Accounting in any of these cases:
- If their revenue does not exceed AED 3 million.
- Exceptional Circumstances and on an application submitted to FTA.
What is Cash Basis of Accounting?
The cash basis of accounting is a method where a Taxable Person recognizes expenditure and income only when the cash is paid or received.
Financial Statement for Tax Group
For the preparation of the consolidated Financial Statement of a Tax Group will be the preparation of standalone Financial Statements of the Parent Company and each subsidiary that is a member of the Tax Group. This is after removing the transactions between them under Article 42(1) of the UAE Corporate Tax Law.
Applicable Accounting Standards
The UAE Ministerial Decision specifies the accounting standards that Taxable Persons must apply when preparing financial statements.
- Application of International Financial Reporting Standards (IFRS): Clause 1 of Article 20 in the UAE Corporate Tax Law mandates that Taxable Persons must apply the International Financial Reporting Standards (IFRS) when preparing their financial statements. IFRS is a globally recognized set of accounting standards that ensures consistency and comparability in financial reporting across different jurisdictions.
- International Financial Reporting Standards for Small and Medium-sized Entities (IFRS for SMEs): If a Taxable Person doesn’t exceed the revenue threshold of AED 50 million, then, they can apply the International Financial Reporting Standards for Small and medium-sized entities (IFRS for SMEs). This accounting standard is specifically designed to meet the needs of smaller businesses and offers simplified reporting requirements.
Implications of IFRS
By adhering to IFRS, Taxable Persons can ensure that their financial statements meet global reporting standards. These standards enhance transparency and comparability, enabling better decision-making by investors and stakeholders. Compliance with IFRS also facilitates the preparation of consolidated financial statements for multinational entities operating in the UAE.
Benefits of IFRS for SMEs
Taxable Persons with revenue below AED 50,000,000 can opt for the IFRS for SMEs. This accounting standard provides a tailored approach for small and medium-sized entities, recognizing their specific reporting needs and resource constraints. By applying IFRS for SMEs, businesses can simplify their financial reporting processes, reduce compliance costs, and streamline their reporting obligations.
Conclusion to Accounting Standards in the UAE
The accounting standards update on UAE corporate tax law represents a major shift towards international best practices. It aims to enhance transparency, foster fair taxation, and attract investment.
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FAQs
1. When can a Taxable Person prepare Financial Statements as per Cash Basis of Accounting?
A Taxable Person can prepare Financial Statements as the Cash Basis of Accounting in case he derives Revenue that does not exceed AED 3 million or in exceptional circumstances on the application submitted to FTA.
2. Which accounting standards are applicable in the UAE under CT law?
In the UAE, the accounting standards applicable under CT law are primarily based on the International Financial Reporting Standards (IFRS). The UAE has adopted IFRS as the foundation for its accounting framework, with certain modifications and any other requirements specific to the local business environment.
3. When can a Taxable Person apply for IFRS for SMEs?
A Taxable Person whose revenue doesn’t exceed AED 50 million can apply for IFRS for SMEs.
