Corporate Tax Accounting Standards in UAE: A Guide For Businesses

Understanding Corporate Tax Accounting Standards in UAE: A Guide for Businesses

The roll out of corporate tax regulations in the UAE represents a transformative shift in the UAE’s financial landscape. As part of the corporate tax requirement, businesses are now required to adhere to specific accounting standards, primarily the International Financial Reporting Standards (IFRS) and IFRS for Small and Medium-sized Entities (IFRS for SMEs). 

These standards are crucial for businesses to ensure accurate financial reporting and tax compliance in the UAE. Understanding the nuances of these standards and how they apply to businesses including small and medium businesses and larger corporations is crucial for maintaining transparency and avoiding potential penalties.

Most businesses rely on firms that provide the expert accounting services and corporate tax services in UAE, who ensure that the business adheres to the accounting standards and compliance with corporate tax regulations. 

Need help in adopting IFRS standards and navigating corporate tax regulations in UAE? Contact KGRN experts today!

What is IFRS? 

IFRS is a set of guidelines, devised by the International Accounting Standards Board (IASB) for businesses  to prepare and submit financial statements. In order to bring uniformity in accounting practices by businesses globally, these standards are expected to be adopted by businesses in the UAE. 

IFRS Vs IFRS for SMEs Under UAE Corporate Tax

As per corporate tax regulations in UAE, businesses must prepare their standalone financial statements using either IFRS or IFRS for SMEs, depending on their revenue. Non-compliance with these accounting standards can lead to administrative penalties, highlighting the importance of adherence. Most businesses rely on accounting services in UAE to ensure adherence to relevant accounting standards.

Entities with revenue exceeding AED 50 million are required to adopt IFRS, whereas small and medium enterprises with revenue below this threshold may adopt IFRS for SMEs. This distinction ensures that businesses of different sizes are not impacted by complex reporting requirements while maintaining consistent financial reporting standards. 

Accrual vs. Cash Basis of Accounting for Taxable Income Calculation

The UAE’s Corporate Tax Law focuses on two primary accounting methods: the accrual basis and the cash basis. The accrual basis of accounting recognizes revenue and expenses when they are earned or incurred, regardless of when cash transactions take place. This approach ensures that financial reporting reflects a business’s true financial position, even if the cash flow occurs later.

In contrast, the cash basis of accounting recognizes revenue and expenses when cash is actually received or paid. This method is applicable to businesses with revenue under AED 3 million or in exceptional cases where the business is allowed to use the cash method. The choice between these two methods has significant implications for how businesses report income and calculate taxable amounts, making it essential to choose the appropriate method based on the business’s size and specific circumstances.

The Concept of Realisation in Financial Reporting

Realised gains and losses refer to those that have been converted into cash or other consideration, resulting from completed transactions. Unrealised gains or losses, however, arise from fluctuations in market value that have not yet been realized through actual transactions.

Recognizing impairment, where assets are carried at values exceeding their recoverable amounts, is another essential aspect of the realisation process. This ensures that financial statements reflect the true value of assets, avoiding overstated financial positions.

Realisation Basis for Taxable Income

For taxable income calculations, businesses – excluding banks and insurance providers – may choose to account for gains and losses on a realisation basis. This means that unrealised gains and losses will not be recognized for tax purposes until they are actualized, i.e., when the gains or losses are realized through transactions such as sales or exchanges. The election to adopt the realisation basis must be made during the first tax period, which is generally at the time of filing the first corporate tax return.

This election offers businesses the flexibility to defer the tax implications of unrealised gains or losses, ensuring that they are not prematurely taxed on changes in market value that have not yet been realized. However, once made, this election binds the business to the realisation basis for the entire duration of the tax period, and it cannot be altered in future tax filings.

Adjustments Required for Taxable Income Calculation

When businesses elect to use the realisation basis for their taxable income calculations, certain adjustments must be made. These adjustments ensure that only realised gains and losses are included in the taxable income. Unrealised gains or losses must be disregarded, as they do not yet represent actual economic events that have been converted into cash or other assets.

Additionally, businesses must make specific adjustments related to assets and liabilities held in capital accounts or revenue accounts. These adjustments ensure that only relevant transactions are included in taxable income calculations, maintaining consistency with the chosen accounting method.

Capital and Revenue Accounts

To accurately apply the realisation basis, businesses must understand the distinction between capital and revenue accounts. Capital accounts typically include assets that are non-current, not traded regularly, and eligible for depreciation. These assets are typically held for long-term use in the business, such as property, equipment, or long-term investments.

On the other hand, revenue accounts consist of assets and liabilities that are part of the day-to-day operational activities of the business. These may include receivables, payables, and other short-term assets or liabilities that are regularly traded or expected to be converted into cash within the business’s normal operating cycle.

Understanding this distinction is vital for accurate financial reporting and tax calculations, as it determines how different assets and liabilities should be treated under the realisation basis.

Navigating Corporate Tax Standards in the UAE

Adopting the appropriate accounting standards and methods will not only ensure compliance but also enhance financial transparency, helping businesses build trust with stakeholders and avoid penalties. For businesses seeking assistance in adhering to these new tax regulations, consulting with the top accounting firm in UAE can help streamline the process and ensure accurate reporting.

Frequently Asked Questions (FAQs) 

1. What is the Corporate Tax Law in the UAE?

The Corporate Tax Law in the UAE requires businesses to adhere to specific accounting standards, including the use of IFRS or IFRS for SMEs, depending on their revenue. This law aims to ensure transparent financial reporting and tax compliance for businesses in the region.

2. What is the difference between IFRS and IFRS for SMEs?

IFRS is the full set of accounting standards applicable to larger businesses with revenue exceeding AED 50 million. IFRS for SMEs, however, is a simplified version of IFRS designed for smaller businesses with lower revenue, offering less complex financial reporting requirements.

3. Which businesses are required to adopt IFRS in the UAE?

Businesses with revenue exceeding AED 50 million are required to adopt IFRS for preparing their standalone financial statements. Businesses with revenue below this threshold may use IFRS for SMEs, offering more flexibility in financial reporting.

4. Can a business with revenue under AED 3 million use the accrual basis of accounting?

No, businesses with revenue below AED 3 million or in exceptional circumstances may use the cash basis of accounting, which recognizes revenue and expenses only when cash transactions occur, as opposed to the accrual basis, which recognizes revenue when earned and expenses when incurred.

5. What is the difference between the accrual basis and the cash basis of accounting?

The accrual basis of accounting recognizes revenue and expenses when they are earned or incurred, regardless of cash flow. The cash basis only recognizes revenue and expenses when actual cash transactions take place, which is generally used by smaller businesses with revenue below AED 3 million.

6. What does the term “realisation” mean in accounting?

In accounting, “realisation” refers to the process of recognizing gains or losses when an asset is sold or otherwise converted into cash or another form of consideration. Unrealised gains or losses, however, refer to changes in market value that have not yet been realized through a transaction.

7. Can businesses in the UAE elect the realisation basis for taxable income?

Yes, businesses (excluding banks and insurance providers) can elect to account for gains and losses on a realisation basis. This means that unrealised gains or losses will not be taxed or deducted until they are actualized, i.e., when they are realized through transactions.

8. When must businesses choose the realisation basis for tax purposes?

Businesses must elect to use the realisation basis during their first tax period, which is typically at the time of submitting their first corporate tax return. Once elected, this method must be used consistently throughout the entire tax period.

9. What adjustments are required when using the realisation basis for taxable income?

When using the realisation basis, businesses must disregard unrealised gains and losses for taxable income calculation. Adjustments are also required for assets and liabilities classified under capital or revenue accounts, ensuring that only actualised gains and losses are included in taxable income.

10. What is the difference between capital and revenue accounts in financial reporting?

Capital accounts include non-current assets, such as property and long-term investments, which are not regularly traded and are eligible for depreciation. Revenue accounts, on the other hand, include short-term assets and liabilities, such as receivables and payables, that are part of the day-to-day operations of the business. These distinctions are crucial for accurate tax reporting and financial accounting.

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