What are the principles of accounting?

We have decided to dive deep into the accounting world to compile a basic introduction to the UAE’s “Principles of Accounting.” With that in mind, what are the principles of accounting, exactly? Principles of Accounting are a set of guidelines that are issued by an accounting body for companies to follow. This is done to amplify transparency and accountability in business. That is because the rules standardize accounting data created by enterprises.

Overall, it is looked at as a country-wide standardization. There are multiple regulating accounting bodies around the world, with varying locations tending to opt for the same one. However, some countries have chosen to create their regulating bodies. India, for example, has created the Indian GAAP (Generally Accepted Accounting Principles).

Are they necessary?

The Principles of Accounting are enforced by organizations outside of the business arena, which means that they can be neutral. This is a highly important feature, as it allows people to follow its numbers easily and with more clarity. Further, businesses with investors and stakeholders are thus able to quickly relay the information. Moreover, it enables these organizations to share financial information with regulating bodies like the government with more ease.

So, what principles of accounting does the UAE follow?

Before we touch on that, we first need to understand some of the options available globally. As mentioned earlier, while some countries have opted to follow an internationally accepted accounting body’s rules and standards, others have chosen to create their own. Alternatively, there are sections of the world where many countries have jointly selected a single body to follow. For example, the European Union collectively follows the International Financial Reporting Standards (IFRS), as issued by the International Accounting Standards Board (IASB). The US, on the other hand, follows the GAAP (Generally Accepted Accounting Principles) system.

Similarly, the UAE follows the International Financial Reporting Standards (IFRS) set in place by the Central Bank of the UAE. This has been mandated by the Securities & Commodities Authority (SCA) since 2006. Given the context of being a corporation in this thriving Middle Eastern business hub, this was indeed a wise decision. This move by the UAE has qualified it to become a successful player in the global economy.

International vs Local Standards

As we just covered, the UAE is standardized by the principles of accounting set by IFRS. And it has leveraged that homogenization to skyrocket its position as a participant in global trade and business. This is because more than 100 nations worldwide have adopted IFRS. There are many benefits to this, including making financial reviews easier.

Application in the UAE: The Subtle Nuances of the Nation

The UAE is also a booming startup arena, with many thousands of fledgling young enterprises battling it out for success. Given the SCA mandate, the laws state that all trade license renewals should include a submission of the firm’s financial statements. Further, following these set principles of accounting also makes it easier for small businesses hoping for investors to find them. As those in the industry already know, the principles heavily impact the way that balance sheets are presented throughout the nation. It also impacts cash flow, equity, and income statements, amongst others.

Another feature for accounting hopefuls to consider is this; while following the “principles of accounting” can benefit SMEs, it is especially vital for companies on the stock market. Since all publicly traded companies are expected to be compliant with the standards, they have to maintain transparent, honest reports of their performances. This practice encourages stock trading as it adds a level of accountability and trust to the affair. This holds true in the UAE and on a global level.

As a result, businesses are encouraged to apply the IFRS principles of accounting from the get-go. It is recommended to build a strong accounting team in-house or get trained specialists to help maintain compliance.

Navigating as a Business

As mentioned above, many large corporations opt to develop strong in-house accounting teams to handle the recommended principles. However, SMEs tend to outsource the skills from auditing and accounting businesses, creating a robust market for the same.

Typically, the IFRS principles of accounting are applied to some necessary documents. Some of the key reports that should follow these principles of accounting include audit reports. Others are prospectus reports, reports from the governing board of directors, financial statement reports, etc. It even includes accounting notes that shed light on specific transactions! The level of detail with which the standard principles are followed has truly eased business in the UAE.

The Importance of Standardization

Perhaps the above has given you a tantalizing glimpse of what the growing accounting industry in the UAE looks like. We cannot deny the value that the IFRS “principles of accounting” bring. From increased transparency to ethical considerations, the unified practices have been a boon to the nation.

As a professional accountant, it is vital to stay abreast of these regulations. As you can imagine, the guidelines are in place to help you perform your role with ease, too. Moreover, it has strong compatibility with global business practices. Talented financial investors can now easily make informed decisions.

It is featured in the MBA in Global Banking and Finance course that LUBM offers in partnership with Geneva Business School. It is also covered in the UK-accredited MBA in Finance offered through York St John University. Explore a flexible MBA in your field today!