The UAE Commercial Companies Law No. 2 of 2015 which came into force on July 1, 2015 requires all companies to apply international accounting standards and practices when preparing their accounts. This is interpreted as the need to apply IFRS when preparing their financial statements. This law does not govern entities incorporated in the Dubai International Financial Centre (“DIFC”) and various free zones in the UAE. Entities incorporated in DIFC are required to prepare their financial statements in accordance with IFRS. Many of the free zones are silent on the accounting standards to be followed. However, certain free zone companies are required to follow the UAE Commercial Companies Law in cases where the law that governs them is silent on certain matters. Entities in the DIFC regulated by the Dubai Financial Services Authority (“DFSA”), may use other acceptable accounting frameworks other than IFRS, provided a waiver is obtained from the DFSA to use other acceptable frameworks.
IFRS apply to all domestic companies whose securities trade in a public market. IFRS Standards are required for companies listed on NASDAQ Dubai, Dubai Financial Services Authority (DFSA), and Abu Dhabi Securities Exchange. IFRS Standards are required for companies listed on Dubai Financial Market. The IFRS for SMEs Standard is permitted but not required.
All banks in the United Arab Emirates are required by the Central Bank of UAE to publish IFRS financial statements. Although IFRS is not required for unlisted companies other than banks, it is a considered best practice for these companies to adopt IFRS.
For companies whose securities do not trade in a public market, IFRS Standards are required by the UAE Commercial Companies Law No 2 of 2015.
If the jurisdiction currently does not require or permit the use of IFRS Standards for domestic companies whose securities trade in a public market then it is not mandatory to apply IFRS for business in such jurisdiction
Foreign companies whose securities trade in a public market required to use IFRS Standards in their consolidated financial statements.
Since most of the companies are required to prepare their accounts as per IFRS, it is always advisable to apply international financial reporting standards (IFRS) while preparing your accounts and financial statements.
Consolidated Financial Statements (IFRS- 10)
Consolidated financial statements are financial statements of an entity with multiple divisions or subsidiaries. Consolidated financial statements are mandatory to prepare for a group of businesses that are owned by the same parent company. These statements provide information about the overall health of the parent company when all majority or wholly-owned businesses are taken together. A consolidated financial statement includes all the subsidiary businesses where the owner has a controlling interest and also the subsidiaries that are wholly-owned.
Consolidated financial statements include the same elements as the individual financial statement, except in consolidated form. For example, the consolidated balance sheet reports the assets, liabilities and capital of all the businesses taken together and the consolidated income statement reports the combined revenue of all businesses taken together.
Intra-company transactions are transactions that occur between the parent company and its subsidiaries or when subsidiaries do business with each other. An example of an intra-company transaction would be a retailer that owns a packaging company paying for boxes it receives from that company. Another example would be a struggling subsidiary getting a loan from another subsidiary or the parent company.
A parent which presents consolidated financial statements should present these statements in addition to its separate financial statements.
The purpose of consolidated statements is to present, primarily for the benefit of the shareholders and creditors of the parent company, the results of operations and the financial position of a parent company and its subsidiaries essentially as if the group were a single company with one or more branches or divisions.
Consolidated financial statements
- combine like items of assets, liabilities, equity, income, expenses and cash flows of the parent with those of its subsidiaries
- offset (eliminate) the carrying amount of the parent’s investment in each subsidiary and the parent’s portion of equity of each subsidiary
- eliminate in full intragroup assets and liabilities, equity, income, expenses and cash flows relating to transactions between entities of the group
- Enter minority stockholders – stockholders or members of a subsidiary undertaking of a group of companies, which are neither stockholders nor members or members of the parent undertaking of the group of companies.
The parent and subsidiaries are required to have the same reporting dates, or consolidation based on additional financial information prepared by subsidiary, unless impracticable. Where impracticable, the most recent financial statements of the subsidiary are used, adjusted for the effects of significant transactions or events between the reporting dates of the subsidiary and consolidated financial statements. The difference between the date of the subsidiary’s financial statements and that of the consolidated financial statements shall be no more than three months.
As per IFRS 10 when an investor with less than 50 percent of the voting rights has rights that are sufficient to give it power. These rights might arise from the investor’s voting rights, contractual agreements with other vote holders, other contractual arrangements, potential voting rights or a combination of these.
An investor controls an investee if and only if the investor has all of the following elements:
- power over the investee,
- exposure, or rights, to variable returns from its involvement with the investee
- The ability to use its power over the investee to affect the amount of the investor’s returns.
There are no disclosures specified in IFRS 10. Instead, IFRS 12 Disclosure of Interests in Other Entities outlines the disclosures required.
Consolidated Financial Statements (IAS-28)
Associated Undertaking – an undertaking in which another undertaking has participating interest and over whose operating and financial policies that other undertaking exercises significant influence that is ensured with no less than 20 and no more than 50 percent of stockholders’ or members’ voting rights.
Significant influence means power to participate in the financial and operating policy decisions but not control them.
Accounting for associates
Associates are accounted by using the ‘equity method,’ whereby the investment is initially recorded at cost and adjusted thereafter for the post-acquisition change in the investor’s share of net assets of the associate.
- Fair value of investments in associates
- Summarized financial information of associates, including the aggregated amounts of assets, liabilities, revenues, and profit or loss.
- Reporting date of the financial statements of an associate that is different from that of the investor
- Explanation of any associate is not accounted for using the equity method
- Explanations when investments of less than 20% are accounted for by the equity method or when investments of more than 20% are not accounted for by the equity method
Consolidated Financial Statements (IFRS- 11)
Joint Arrangements refers entities that jointly control an arrangement. Joint control involves the contractually agreed sharing of control and arrangements subject to joint control are classified as either a joint venture (representing a share of net assets and equity accounted) or a joint operation (representing rights to assets and obligations for liabilities, accounted for accordingly).
Joint control is the contractually agreed sharing of control of an arrangement, which exists only when decisions about the relevant activities require the unanimous consent of the parties sharing control.
A joint operator recognizes in relation to its interest in a joint operation
- its assets, including its share of any assets held jointly;
- its liabilities, including its share of any liabilities incurred jointly;
- its revenue from the sale of its share of the output of the joint operation;
- its share of the revenue from the sale of the output by the joint operation; and
- Its expenses, including its share of any expenses incurred jointly.
A joint operator accounts for the assets, liabilities, revenues and expenses relating to its involvement in a joint operation in accordance with the relevant IFRS.
IFRS 3 Business Combinations, is required to apply all of the principles on business combinations accounting in IFRS 3 and other IFRSs with the exception of those principles that conflict with the guidance in IFRS 11
The acquirer of an interest in a joint operation in which the activity constitutes a business, as defined in IFRS 3 Business Combinations, is required to apply all of the principles on business combinations accounting in IFRS 3 and other IFRSs with the exception of those principles that conflict with the guidance in IFRS 11.
A joint venture recognizes its interest in a joint venture as an investment and shall account for that investment using the equity method in accordance with IAS 28.
IFRS 12 Disclosure of Interests in Other Entities outlines the disclosures required.
There are no disclosures specified in IFRS 11. Instead, IFRS 12 Disclosure of Interests in Other Entities outlines the disclosures required.