Businesses are booming like never before, and the United Arab Emirates stands tall amidst this entrepreneurial wave. As new ventures flood the country, each corner of the globe brings its own playbook for financial management. In the UAE, where dreams become reality, business advisory services must be up-to-date to help companies abide by the International Financial Reporting Standards (IFRS) or the Generally Accepted Accounting Principles (GAAP). Why? Because these rules play a significant role in helping us understand financial information in an obvious way. They make things clear for both investors and people who care about the company's financial health. This blog lets us learn the differences between IFRS and GAAP in the UAE's business arena.
Standards for IFRS - A Guide by Top Business Advisory Services
The International Financial Reporting Rules (IFRS) were developed by the International Accounting Standards Board (IASB). It is a single set of clear and enforceable accounting standards and rules recognised globally. The IFRS provides accountants with an extensive procedure to follow to maintain their records. The set of guidelines aims to ensure that accounting firms and company executives all over the world communicate easily. The following are some IFRS financial reporting components used in the UAE:
- Equity Statement
- Income statement
- Cash Flow Statement
- Balance Sheet
Every UAE-based business must account in accordance with the most recent international accounting standards. Financial data is documented, evaluated, categorised, and confirmed as part of the accounting process. Accounting also allows you to comprehend the nature and value of your organisation's financial realities and where and when you utilise company money. The best method to have accurate financial reporting for your company is to follow IFRS standards. 167 nations are implementing the IFRS principle, including UAE, India, China, Japan, Netherlands, Italy, and Germany.
A Detailed Insight on GAAP Accounting Principles
The Security and Exchange Commission (SEC) in the USA and the Financial Accounting Standards Board (FASB) have both adopted a set of rules known as GAAP. In order to manage corporate accounting, GAAP covers the fundamental norms required to deal with ambiguity, difficulties, and accounting rights.
GAAP governs a few accounting issues of revenue, assets, expenses, liabilities, fair value, financial statement presentation, industry-specific accounting, foreign currency, business combinations, leases, equity, non-monetary transactions, and derivatives, including hedging. Investors should be cautious if an accounting document is not produced per GAAP.
Some businesses may report financial performance using both non-GAAP and GAAP-compliant measurements. A comprehensive financial statement created in accordance with GAAP serves as a basis for comparative analysis of businesses. Furthermore, it assists investors in analysing financial reports of businesses and choosing how to proceed with their investments.
Elaborating on the Differences Between GAAP & IFRS
Rule-based vs principle-based
- IFRS is built on principles and it gives businesses a set of rules to adhere to when they present their financial statements. Rather than only considering a transaction or event's legal form, IFRS concentrates on its content.
- GAAP is rule-based, meaning that it stipulates particular guidelines and instructions that businesses must adhere to while creating their financial statements. Instead of emphasising the content of transactions, it concentrates on their legal form.
- IFRS expressly forbids the use of the LIFO approach and only permits FIFO. IFRS does not accept this practice because it is impossible to establish proper inventory flow with LIFO. This could lead to an incorrect income figure that does not accurately depict the situation.
- If you're utilising GAAP, you can determine inventory using the FIFO (First in, First out) or LIFO (Last in, First out) technique. Organisations are free to select the most practical way, thanks to the GAAP standard.
- The definition of assets under IFRS is broader, enabling businesses to account for intangible assets like goodwill, trademarks and patents.
- GAAP has a more stringent definition of assets, allowing only physical assets, including buildings, land and machinery, to be recognised.
The transmission of risks and profits is the main focus of IFRS, while the change of ownership is the main subject of UAE GAAP. The revenue recognition may vary as a result of this variance, which may also have an impact on profit margins.
- The IFRS permits the value of an asset to be reversed when its price rises.
- GAAP regulations mandate that businesses write down the value of fixed or inventory assets; once written down, the asset's market value cannot be recovered, even if it rises over time. As a result, contrary to IFRS, the GAAP regulation may result in inaccuracies because it doesn't account for increases in asset market value.
Cost of development
- The flexibility provided by IFRS allows organisations to categorise costs as capitalised and amortised as time passes. This strategy is advantageous since it results in cost deferments that businesses can report as expenses.
- GAAP requires businesses to record development costs as actual expenses.
Cash flow statement
- IFRS allows organisations to categorise interest however they see fit.
- Interest collected and paid should be included in operational activities under GAAP.
Keeping track of leases
- IFRS mandates that businesses record the majority of leases on the balance sheets, regardless of the length or kind of the asset.
- Due to the relaxed nature of GAAP in the UAE, businesses can categorise certain leases as operating agreements, which are not recorded on their financial documents or balance sheets.
Recognising the variations between IFRS and GAAP is crucial for business in the UAE. Because GAAP is more rule-based than IFRS and is less flexible and open to interpretation, some people believe that GAAP provides a better framework. Organisations must abide by laws that control their sector of the economy under GAAP. In comparison, IFRS gives firms the liberty to draw their own conclusions. Therefore, businesses must carefully weigh their alternatives and pick the standards of accounting that best meet their needs and goals. Contact Fortius Consulting Services for professional business consulting & CFO services in the UAE.