International Financial Reporting Standards (IFRS) in UAE

International Financial Reporting Standards (IFRS) are the accounting framework required for most UAE companies. Understanding IFRS requirements and proper implementation is essential for regulatory compliance and financial credibility. For IFRS-compliant auditors, see our guide to top IFRS-certified audit firms in Dubai.

IFRS in UAE: Regulatory Framework

Who Must Use IFRS?

Mandatory IFRS Compliance:

• All UAE mainland companies (per Commercial Companies Law)
• Free zone companies (most free zones require IFRS)
• Banks and financial institutions (Central Bank requirement)
• Insurance companies (Insurance Authority requirement)
• Listed companies (Securities and Commodities Authority requirement)
• Large private companies (revenue/asset thresholds)

Permitted Alternatives:

• Very small businesses may use UAE GAAP (rarely)
• Some specific free zones permit local GAAP
• International subsidiaries may use parent company GAAP (with reconciliation)

IFRS vs. IFRS for SMEs

Full IFRS:

• Required for public interest entities
• Banks, insurance, listed companies
• Large private companies
• More comprehensive disclosures

IFRS for SMEs:

• Simplified standard for smaller entities
• Reduced disclosure requirements
• Not widely adopted in UAE (most use full IFRS)

Key IFRS Standards Impacting UAE Businesses

IFRS 15: Revenue from Contracts with Customers

Why It Matters: Fundamentally changed how companies recognize revenue. Replaced IAS 18 and affects virtually all industries.

Five-Step Model:

1. Identify contract with customer
2. Identify performance obligations
3. Determine transaction price
4. Allocate price to performance obligations
5. Recognize revenue when obligations satisfied

UAE Industry Impacts:

Construction & Real Estate:

• Recognize revenue over time (percentage of completion) vs. upon handover
• Separate land vs. construction obligations
• Variable consideration for penalties/bonuses

Software & Technology:

• Separate software licenses vs. implementation services
• Recognize SaaS revenue over subscription period
• Account for free trial periods

Telecommunications:

• Separate device sales vs. service plans
• Recognize revenue over contract term
• Account for loyalty programs

Common Challenges:

• Identifying separate performance obligations
• Estimating variable consideration
• Determining transfer of control timing
• System changes to track performance obligations

IFRS 16: Leases

Why It Matters: Requires lessees to recognize nearly all leases on balance sheet, significantly impacting financial ratios.

Key Requirements:

For Lessees:

• Recognize right-of-use asset and lease liability
• Applies to office leases, vehicle leases, equipment leases
• Limited exemptions (short-term <12 months, low-value assets)

For Lessors:

• Classify as finance or operating lease
• Lessor accounting largely unchanged

UAE Impact: Many UAE companies lease significant real estate (offices, warehouses, retail space). IFRS 16 brings billions in off-balance sheet leases onto balance sheets.

Financial Statement Impact:

• Assets increase (right-of-use asset)
• Liabilities increase (lease liability)
• EBITDA improves (rent becomes depreciation + interest)
• Debt ratios worsen (higher liabilities)

Practical Issues:

• Identifying all leases (embedded leases in service contracts)
• Determining lease term (renewal options)
• Calculating incremental borrowing rate
• System implementation for lease accounting

IFRS 9: Financial Instruments

Why It Matters: Changed classification, measurement, and impairment of financial assets. Replaced IAS 39.

Key Changes:

Classification:

• Financial assets classified by business model and cash flow characteristics
• Three categories: Amortized cost, FVOCI, FVTPL
• More instruments at fair value

Impairment:

• Expected credit loss model (forward-looking)
• Replaced incurred loss model
• Earlier recognition of credit losses

UAE Industry Impacts:

All Companies:

• Trade receivables: Impairment based on expected losses (not just past due)
• Investments: Reclassified based on business model
• Bank deposits: Assess ECL even if no default risk apparent

Financial Institutions:

• Significant increase in loan loss provisions
• Complex ECL modeling required
• Enhanced disclosures

Common Challenges:

• Determining appropriate business model
• Calculating expected credit losses
• Data requirements for ECL estimation
• Fair value measurement complexity

IFRS 3: Business Combinations

Why It Matters: Critical for M&A transactions. Governs accounting for acquisitions.

Key Requirements:

• Acquisition method mandatory
• Recognize identifiable assets and liabilities at fair value
• Goodwill = purchase price - net identifiable assets
• No pooling of interests allowed

UAE M&A Considerations:

• Valuation of intangible assets (customer lists, brands, technology)
• Contingent consideration measurement
• Acquisition-related costs (expensed, not capitalized)
• Step acquisitions and control changes

Common Issues:

• Fair value determination (purchase price allocation)
• Identifying all intangibles
• Deferred tax on fair value adjustments
• Integration and restructuring costs

IAS 36: Impairment of Assets

Why It Matters: Requires testing assets for impairment and recognizing losses when recoverable amount < carrying amount.

Key Requirements:

• Goodwill tested annually for impairment
• Other assets tested when indicators exist
• Impairment loss recognized immediately
• Reversals permitted (except goodwill)

UAE Context: Recent economic challenges require many companies to assess assets for impairment:

• Real estate values declined
• Retail struggling (e-commerce impact)
• Oil & gas price volatility
• COVID-19 impact on hospitality

Impairment Testing Process:

1. Identify indicators of impairment
2. Determine recoverable amount (higher of value in use or fair value less costs to sell)
3. Compare to carrying amount
4. Recognize impairment if carrying amount higher

IAS 12: Income Taxes

Why It Matters: Governs accounting for current and deferred taxes.

UAE Context (Post-Corporate Tax):

• UAE introduced 9% federal corporate tax (effective June 2023)
• Companies must now account for deferred taxes
• Significant impact on financial statements

Deferred Tax Basics:

• Temporary differences between book and tax basis
• Deferred tax asset: Future tax deduction
• Deferred tax liability: Future tax payment

Common Temporary Differences in UAE:

• Depreciation (tax vs. book differences)
• Provisions not yet deductible
• Revenue recognition timing
• Lease accounting (IFRS 16 creates large deferred tax)
• Fair value adjustments in acquisitions

IFRS Adoption Challenges in UAE

Challenge 1: Technical Complexity

Issue: IFRS standards are principles-based and require significant judgment.

Solutions:

• Invest in technical accounting training
• Engage IFRS specialists for complex transactions
• Develop accounting policies manual
• Join professional bodies (ACCA, ICAEW) for updates

Challenge 2: System Limitations

Issue: Legacy systems not designed for IFRS requirements (especially IFRS 15, 16).

Solutions:

• Assess system capabilities vs. IFRS requirements
• Implement modules for lease accounting, revenue recognition
• Consider cloud-based accounting platforms
• Build Excel-based trackers if system limitations exist

Challenge 3: Resource Constraints

Issue: Small finance teams lack bandwidth for IFRS complexity.

Solutions:

• Outsource technical accounting to advisors
• Use templates and tools for common transactions
• Prioritize significant areas (focus on material items)
• Leverage auditor knowledge

Challenge 4: Changing Standards

Issue: IFRS constantly evolving with new standards and amendments.

Solutions:

• Subscribe to IFRS updates (IASB website, professional bodies)
• Attend annual IFRS update training
• Engage with auditors on upcoming changes
• Plan early for new standard implementation

IFRS Implementation Best Practices

1. Establish Accounting Policies

Develop Comprehensive Policies Manual:

• Revenue recognition by product/service line
• Lease identification and measurement
• Impairment testing methodology
• Financial instruments classification
• Inventory valuation
• Property, plant, and equipment
• Provisions and contingencies

Review and Update Annually:

• New standards effective
• Business changes
• Auditor recommendations

2. Maintain Technical Capability

Training:

• Annual IFRS updates for finance team
• Specific training for new standards
• Industry-specific IFRS issues

Resources:

• IFRS Foundation materials
• Big 4 technical guides
• Professional qualification (ACCA, CA, CPA)

3. Engage Early with Auditors

Benefits:

• Technical accounting guidance
• Early identification of issues
• Smooth audit process
• Awareness of emerging standards

Best Practices:

• Technical accounting meetings quarterly
• Run significant transactions by auditors before completion
• Discuss draft accounting for complex issues

4. Document Significant Judgments

Key Judgments to Document:

• Revenue recognition: Performance obligations, transfer of control
• Lease accounting: Lease term, discount rate
• Impairment: Assumptions, cash flow projections
• Fair value: Valuation methodology
• Provisions: Probability, measurement

Documentation Benefits:

• Supports financial statement positions
• Facilitates auditor review
• Ensures consistency over time
• Demonstrates compliance

IFRS Compliance Requirements

Financial Statement Presentation

Required Statements:

1. Statement of Financial Position (Balance Sheet)
2. Statement of Profit or Loss and OCI
3. Statement of Changes in Equity
4. Statement of Cash Flows
5. Notes to Financial Statements

Notes Disclosures:

• Accounting policies
• Significant judgments and estimates
• Detailed breakdowns of line items
• Risk disclosures
• Related party transactions
• Commitments and contingencies

Audit Requirements

Who Needs Audit: All UAE companies must have annual statutory audit by Ministry-approved auditor.

Auditor Responsibilities:

• Express opinion on IFRS compliance
• Report on whether financial statements fairly presented
• Identify material misstatements
• Assess going concern

Modified Opinions:

• Qualified: Issue with specific item
• Adverse: Financial statements not IFRS compliant
• Disclaimer: Unable to obtain sufficient evidence

Upcoming IFRS Changes

IFRS 17: Insurance Contracts (Effective 2023)

Impact: Fundamental changes to insurance accounting. Affects insurance companies and takaful providers.

Key Changes:

• Measurement of insurance liabilities
• Revenue recognition changes
• Enhanced disclosures

IFRS Sustainability Disclosure Standards

Development: ISSB (International Sustainability Standards Board) developing climate-related disclosure standards.

Timeline: Voluntary initially, may become mandatory for large UAE companies.

Scope:

• Climate-related risks and opportunities
• Sustainability metrics
• Governance and strategy

Common IFRS Errors in UAE

1. Revenue Recognition: Incorrect timing, not identifying separate performance obligations
2. Lease Accounting: Not identifying all leases, incorrect lease term
3. Related Parties: Incomplete disclosure of related party transactions
4. Going Concern: Inadequate assessment and disclosure
5. Provisions: Not recognizing obligations or incorrect measurement
6. Deferred Tax: Errors in calculating temporary differences
7. Fair Value: Using inappropriate valuation methods

Conclusion

IFRS compliance is mandatory for UAE companies and essential for financial credibility. While complex, proper implementation provides benefits:

• Enhanced financial reporting quality
• Improved comparability with peers
• Better decision-making information
• Regulatory compliance
• Facilitates access to capital

At Farahat & Co, our IFRS specialists provide comprehensive support:

• IFRS conversion and implementation
• Technical accounting advisory
• Training and capacity building
• Audit readiness assessment
• Complex transaction accounting

Contact us for expert IFRS guidance tailored to your business.

Related Resources

• Top 10 Audit Firms in Dubai - IFRS-certified audit firms
• IFRS Implementation Services - Expert IFRS adoption support
• External Audit Services - IFRS-compliant statutory audit