UAE CT Update: Ministerial Decision clarifying the applicable Accounting Standards and Method of Accounting to be followed

The Ministry of Finance has issued Ministerial Decision No. 114 of 2023, clarifying the applicable Accounting Standards and the method of accounting to be followed for the purpose of preparing Financial Statements under the Federal Decree-Law No. 47 of 2022 (’the CT Law’) in the UAE.

• Applicable Accounting Standards

Article 20 of the CT Law provides that the Taxable Income of each Taxable Person shall be determined separately, on the basis of adequate, standalone financial statements prepared for financial reporting purposes in accordance with accounting standards accepted in the UAE.

• What would be applicable accounting standards in the UAE?

The said Decision specifies International Financial Reporting Standards (‘IFRS’) as the applicable accounting standards.

Without prejudice to the above, a Taxable Person who derives Revenue up to AED 50 million, may elect to apply International Financial Reporting Standards for small and medium-sized entities (‘IFRS for SMEs’) for the preparation of the financial statements.

• What is meant by Financial Statements?

Financial Statements have been defined as a complete set of statements as specified under the Accounting Standards applied by the Taxable Person, which includes but is not limited to, statements of income, statements of other comprehensive income, balance sheet, statement of changes in equity, and cash flow statement.

• Circumstances and conditions to prepare Financial Statements using Cash Basis of Accounting

Clause 5(a) of Article 20 of the CT Law provides that the Minister may prescribe the circumstances and conditions under which a person may prepare financial statements using the cash basis of accounting which have been stipulated in the said Decision as below:

1. The Person derives Revenue not exceeding AED 3 million; or
2. In exceptional circumstances, pursuant to an application submitted by the Person to the Federal Tax Authority.

Cash Basis of Accounting has been defined as – an accounting method under which the Taxable Person recognizes income and expenditure when cash payments are received and paid.

• Preparation of Consolidated Financial Statements of a Tax Group

Clause 11 of Article 42 provides that a Tax Group under the CT Law must prepare consolidated financial statements in accordance with accounting standards applied in the UAE.

The subject Decision clarifies that Consolidated Financial Statements of a Tax Group shall mean the preparation of standalone financial statements on the basis of aggregating the Standalone Financial Statements of the Parent Company and each Subsidiary Company that is a member of the Tax Group, eliminating the transactions between them.

MBG View

• The subject Ministerial Decision has clarified that for the purpose of calculation of Taxable Income of a Taxable Person, the Taxable Person shall prepare adequate financial statements based on IFRS - being the applicable accounting standards in the UAE;
• The Decision further provides an option to the taxpayers earning revenue up to AED 3 million to opt for a Cash basis of accounting for the preparation of Financial Statements.
• The Decision has further clarified that the consolidation of financial statements for a Tax Group should be made by aggregating the financial statements of the Parent Company and each Subsidiary to be a part of the Tax Group after eliminating transactions between the members of the Tax Group.

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