Importance of correct application of IFRS standards for all entities in UAE

International Financial Reporting Standards (IFRS) are a set of accounting standards that are developed by the International Accounting Standards Board (IASB). IFRS provides a globally consistent framework for financial reporting by companies. It aims to enhance transparency, comparability, and reliability of financial statements across different countries, making it easier for investors, analysts, and other stakeholders to understand and assess the financial performance of companies on an international scale. Since July 2015, the UAE law requires all the companies to provide their audited financial statements using IFRS.

To give a brief background, UAE is a hub for international business and has a diverse business environment with companies operating across various sectors and regions. On 25 March 2015, UAE Commercial Companies Law named ‘UAE Federal Law No. 2 of 2015’ was issued. This new law was published in the Official Gazette on 31 March 2015 (issue number 577) and came into force three months later, on 1 July 2015. This law requires all companies with public accountability to use full IFRS as issued by the International Accounting Standard Board (IASB). On September 20^th, 2021, a new Commercial Companies Law was introduced in the UA.E named ‘UAE federal Law No (32) of 2021’ and this law overrides the previous Law. Additionally, in January 2022, the Ministry of Finance announced that Federal Corporate Tax shall be introduced which shall be applicable on June 01, 2023. The calculations of Corporate Tax as per ‘Federal Decree-Law No. 47 of 2022’, lays emphasis on taxable income as per the audited financial statements.

What happens if Companies are reluctant to adopt IFRS for financial years ending December 2022 and beyond?

The introduction of Federal Corporate Tax in UAE has enhanced the need adoption of IFRS. Corporate tax is computed on the taxable income which is derived from the net profits obtained from audited financial statements. As per the Corporate Tax law regulations, a taxable person is required to use either IFRS or IFRS for SME to calculate its Taxable Income and the failure to do so may result in breach of law and administrative penalties. Inaccurate application of IFRS may lead to incorrect calculation of Taxable Income resulting in potential tax risks. These risks include disputes with tax authorities, increase in audit and scrutiny by the tax department, loss of reputation stemming from non-compliance of tax laws or the possibilities of paying higher taxes.

What makes IFRS so important, that adoption of the standard is mandated by Law?

Since the adoption of the International Financial Reporting Standards (IFRS), there have been several challenges in its practical application across diverse industries. Notable difficulties include the intricacies associated with IFRS adoption, the need for qualified professionals, and the integration of Generally Accepted Accounting Policies (GAAP) with IFRS.

Despite these challenges, the adoption of IFRS offers significant advantages. Investors, government authorities, and various stakeholders rely on financial statements prepared in accordance with IFRS for decision-making. Moreover, IFRS contributes to reducing the risk of errors in financial statements by providing clear rules and guidelines for accounting and disclosure of specific events and transactions. One key benefit is the assurance and confidence it instills in financial statement readers. The information disclosed in financial statements prepared under IFRS is deemed accurate and reliable. IFRS also acts as a unifying force, standardizing financial records globally. This standardization facilitates the consolidation of books of accounts for reporting and compliance purposes across various regions.

Additionally, IFRS creates an environment conducive to international business expansion and investment opportunities by transcending geographic barriers. Its implementation serves as a bridge, fostering seamless financial communication and enhancing global business prospects.

To conclude, the correct application of IFRS standards is not merely a matter of legal compliance but it’s a strategic choice that resonates with the essence of global business success.

How can MBG assist you?

The Statutory Audit team at MBG Corporate Services is dedicated to delivering service excellence that surpasses regulatory requirements. Our objective is to enhance transparency and foster stakeholder confidence in your organization. We adhere to globally recognized, risk-based audit practices in accordance with the International Financial Reporting Standards (IFRS). Our audit services are adaptable, tailored to match your unique needs. The quality of our audits is upheld by a team of qualified professionals boasting extensive experience, continuously benefiting from the best ongoing personal and professional development opportunities. Our approach integrates stringent standards of professional independence and objectivity. Employing a well-refined methodology, we prioritize crucial risk areas, leveraging both technical expertise and practical insights, combined with a comprehensive understanding of your organization and the financial services industry in the execution of every Statutory Audit assignment.

By- Karan Bhagnani & Shailja Shah