A company’s accurate bookkeeping and accounting process reflects the conciseness of its Financial Reporting. Accounting is the function that verifies, records, and communicates the financial and non-financial data of the company. On the other hand, financial reporting is a step further than accounting. Financial and management accounting is what one makes of the accounting information. Financial Reporting is the systematic presentation of accounting data to the government, shareholders, investors, and other interested parties. In UAE, it is mandatory to follow the International Financial Reporting Standards or the IFRS accounting standards.
What is the Accounting Standard Followed in UAE?
Companies operating in UAE, including companies that come under the Dubai International Financial Centre (DIFC), follow the IFRS regulations for accounting services in UAE. Earlier in 2012, IFI, or the Islamic Financial Institutions that operated under DIFC, followed the F.A.S. ( Financial Accounting Standards) report, which was audited by the AAOIFI ( Accounting and Auditing Organisation for Islamic Financial Institutions). However, after providing two years of the grant requests, IFRS is now a regulated accounting standard used in the UAE.
What Are the Components of IFRS Financial Reporting in the UAE?
Under the IFRS, the management prepares the financial statements based on the accrual basis of accounting. Since both income statement and balance sheet have accrual-based accounting, the cash flow statement, on the other hand, begins with the firm’s net income, calculates the economic activity, and translates it to a cash basis. Hence, a cash flow statement is not prepared using the accrual basis of accounting.
1. Statement of Financial Position or the Balance Sheet
A balance sheet represents an entity’s financial position at a point in time. The balance sheet is divided into assets, liabilities, and equity. Plant, machinery, property, tangible and intangible investments, and cash and cash equivalents are some of the essential categories under the assets section. Liabilities include payables, tax liabilities, financial liabilities, etc. Assets and liabilities are divided into two which are current and long-term categories.
Equity is the share of the invested capital and reserves by the owner or partner and non-controlling interests.
2. Income Statement
An income statement measures the company’s performance over time if it has been performing in profit or loss. The income statement can be reported in two different reports, where the components of profit and loss are mentioned in one statement. In contrast, the total income or loss is shown in the comprehensive income statement.
- The income statement starts with the Revenue, calculated separately using the effective interest method.
- Gains and loss collated on the de-recognition of the financial assets based on their amortization costs.
- Finance costs and impairment losses
- Determination of profit and loss of associates and joint ventures
- Assets reclassification
- Tax Expenses
- Tax Profit or loss from discontinued operations, sale or disposal of assets of discontinued operations
- The Other comprehensive statement shows the net profit or loss of the entity. Any final amendments to the components mentioned above in the income statement are discussed here.
3. Statement of Changes in Equity
The equity reconciliation is the difference in the change in the equity from the beginning to the end of the period. It discloses the value from the data taken from the Profit and loss statement, other comprehensive income statements, and transactions related to the owners in terms of contribution or distribution without affecting the loss of ownership or control. The dividends per share are decided and then announced.
A simple way to calculate the change in equity is as follows.
Beginning Equity + Net income – Dividends +/- Other changes = Ending Equity
4. Statement of cash flow
The cash flow statement gets all its data from the income statement. A cash flow statement helps determine how easily a company can produce cash for its operations, regarding working capital, or even decisions like purchasing equipment.
All cash flow statements are segmented into three categories.
- The cash flow from Operating Activities
- The cash flow from investing Activities
- The cash flow from Financing Activities
What is Financial Reporting?
An accurate financial reporting is generated from the sturdy and efficient accounting process of a company. Financial reporting helps the external parties to make better decisions regarding investments, mergers, acquisitions, etc. IFRS format is followed by all companies in the U.A.E., including government organizations.
Types of Financial Reporting
There are 7 types of financial reports, they are financial statements, Board of Directors reports, Management Decisions & Analysis reports, Audit reports, Corporate Governance reports, Notes to accounts, and Prospectus.
1. Financial Statements
Financial statements include the balance sheet, income statement, statement of cash flow and the statement of shareholder equity. These are the standard reports required to be prepared during a statutory audit in the U.A.E.
2. Board of Directors Report
The companies with a management hierarchy prepare a report for the Board of Directors. This report presents a deep understanding and analysis of the entity’s performance and critical decision-making.
3. Management Decisions & Analysis report
The performance evidence reports the company’s historical decisions, competition analysis and market research.
4. Audit Report
An Audit company in Dubai must comply with all the guidelines for the statutory audit and are filled as per the government requirements. An audit report is independent and works under the regulations of S.A.I. ( The Supreme Audit Institution), affiliated with the Federal National Council.
5. Corporate Governance Report
Under the accounting and auditing standards, the C.G.R. provides accountability for the company’s decisions, employees, and management.
6. Notes to accounts
Each report, whether internal or external audit report, provides additional information about the accounting policies and procedures followed by the company
A financial analysis report is presented in the company prospectus, where the information is explicitly presented to investors, shareholders, and stakeholders of the company.
Financial Reporting brings transparency to the way a firm conducts its accounting practices. It allows the intervention of the government and investors to investigate the financials and eliminate any probable cause of fraud or irregularities in managing the entity’s finance.
Farahat and Co are one of the leading Audit firms in Dubai. With decades of experience providing financial reporting and accounting services in UAE to its clients across the UAE., We have been well known for presenting crucial findings and helping companies mitigate potential risks. Navigating through changes in Tax and Federal Regulations, Financial Reporting for companies will not only get more complex in the UAE. but also strict guidelines will ensure accountability from companies. Clients are always assured of quality work as Farahat and Co has a competent audit and accounting team, both local and expats.