Accounting standards and principles applied by Dubai businesses
Accounting standards vs. principles
There lie significant differences between standards and principles of accounting. Accounting standards are detailed rules and regulations introduced by any accounting or other regulatory bodies to make financial reporting transparent, accurate and fair.
The regulations of International Financial Reporting Standards (considering global uniformity of accounting practices) or Generally Accepted Accounting Principles proposed by IASB and FASB respectively are examples of accounting standards. These standards must be followed strictly by businesses.
On the flip side, accounting principles are some generalized and traditional concepts that help businesses to record and present transactions in a unique and correct order. Businesses in Dubai, UAE do not require to maintain all of the accounting principles. Rather they can choose accounting principles that are in contingent with their business practices and objectives.
Accounting standards followed by businesses of Dubai
UAE has no GAAP of their own. In 2015, new regulations were imposed by “The UAE Commercial Companies Law” regarding accounting standards stating that public limited companies listed in NASDAQ Dubai, Dubai Financial Market PJSC, Dubai Financial Services Authority (DFSA) and Abu Dhabi Securities Exchange must follow IFRS standards. The same goes for foreign companies that are running businesses in the UAE. As a state of UAE, Dubai has to follow IFRS accounting standards as per the instruction of the UAE.
Other companies listed in other securities exchange or companies can either follow IFRS or the accounting standards prescribed by their respective securities exchange.
Private companies must follow international accounting rules if they are formed based on “The UAE Commercial Companies Law”.
The Central Bank of UAE as a regulator of banking industry demanded that all of the banks located in all the 7 states of UAE must follow IFRS rules for maintaining their financial reporting.
Most popular accounting principles practised by businesses of Dubai
There are some common accounting principles that all business organizations have to follow. But how they will implement those principles in their operation rely on whether they use IFRS or GAAP framework. Here accounting principles are presented as per the guidelines of IFRS as it is more relevant for businesses of Dubai.
Principles of revenue recognition: According to IFRS-18, the transfer of offerings or products to the customer in exchange of agreed price will allow businesses to recognize sales revenue. Here the precondition is that costs for the recording revenue item must be identified. If the costs of an item cannot be traced for a particular period, then there will be no revenue of that item in that period. IFRS-15 states that business firms have to follow the “percentage of completion” method while recognizing revenue from contracts.
Matching principles: Businesses require considering expenses for preparing income statement in a period against which associated revenue items have been recognized. This is the reason businesses operating in Dubai do not consider the cost of ending inventory in calculation gross profit as these inventories have not been sold yet and therefore have not contributed to generating revenues. The same principle requires firms to record depreciation expense of an asset periodically in contingence with the economic benefits the asset is assumed to provide in a particular period.
Principles of full disclosure: All public limited companies of Dubai are bound to publish annual reports about financial statements at least once a year. According to IFRS, notes to the financial statements is an indispensable component of the report. Due to the presence of full disclosure principle, firms have to present relevant non-financial information, items not included in financial reporting such as contingent assets and liabilities, derivatives, etc. in the notes along with detail breakdown of reported accounts. It helps general investors to decide on their next approach based on the right information.
Going concern principle: Companies of Dubai have to prepare financial statements in Dubai, UAE presuming that their businesses will continue for indefinite periods. This is the basis why expenses are categorized into current and non-current. Though in GAAP, the next 1 year is referred to as the going concern period, under IFRS, foreseeable periods are assumed to be going concern period.
Principles of economic entity: Dubai business firms are required to record ordinary business transactions on behalf o the business not the owner. This principle allows firms to separate owners’ transaction from the businesses’ transactions supporting the fact that business organizations are a separate entity from their owners.
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