Preparation of Annual Financial Statements in UAE: Benefits and Importance

June 13, 2021Dated:  | |

Financial statements are formal records that reflect the activities of a company as it provides information on their financial positions, the volume of sales, and cash flows. A fair and impartial preparation of financial statements is very important for the companies in the UAE, not only because it reflects the financial health of a company but also helps take several economic decisions regarding future endeavors and expansions.

The companies that are limited by shares in the UAE are allowed to prepare their financial statements with any accepted structure but should follow IFRS for better transperancy and uniformity with International standards.Free zone businesses in the UAE are required to prepare the statements in agreement with International Financial Reporting Standards (IFRS). Financial statements also help the stakeholders to take appropriate decisions on the growth of the company and assists the management to communicate with interested outside parties.

The preparation of financial statements is important in the UAE because,

  • Almost all Free Zone authorities have made audited financial statements mandatory at the time of their license renewal.
  • The UAE Federal Law insists that joint-stock companies or limited liability companies audit their book of accounts annually.
  • The UAE Federal VAT law has made it mandatory for every taxable person to maintain books of accounts and required information for at least 5 years.
  • ESR (Economic Substance Regulations) requires companies to demonstrate an ‘economic presence’ by undertaking Economic Substance Test (EST) whereby the annual EST repost requires adequate financial details.
  • The Federal Bankruptcy Law requires a ‘balance sheet’ to determine whether the company will be able to cover its liabilities.

 

Furthermore, the preparation of annual financial statements for companies can assist business in many ways:

  • Monitoring the present performance of the company by comparing the past data.
  • Budgeting becomes easier due to the exact information being provided.
  • To determine the uncertainties in the cash flow.
  • Proper planning so as to successfully complete the activities.
  • To make future plans on investment, expansion, and overall performance.
  • To take decisions on Credits.
  • Creditors and Investors to monitor the financial conditions of the company and further data including assets, debt, and equity.
  • Authorities to take decisions on taxation based on the report submitted.

The reports thus issued for the annual financial statements in UAE must encompass:

  • The cash flow statement whereby the inflow and outflow based on different activities are disclosed
  • Income statement in which the Income and Expenses for the period is reflected
  • Balance sheets that depicts all assets, liabilities and Capital Fund of the company.
  • Equity statement to document the changes involving in equity accounts.
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