Complete Guide to Preparing Financial Statements in the UAE

Core Components of Financial Statements

Five Essential Statements

A complete set of financial statements prepared under IFRS consists of five core financial statements that provide insights into a company’s financial performance and position:

1. Statement of Financial Position (Balance Sheet)

The balance sheet provides a snapshot of your company’s financial position, showing assets, liabilities, and equity at a specific point in time. It answers the fundamental question: “What is my company’s net worth?” The balance sheet must clearly distinguish between current and non-current items:

• Current Assets: Cash, accounts receivable, inventory, and prepaid expenses
• Non-Current Assets: Property, equipment, intangible assets, and long-term investments
• Current Liabilities: Accounts payable, short-term loans, and accrued expenses
• Non-Current Liabilities: Long-term debt and deferred tax liabilities
• Shareholders’ Equity: Share capital, retained earnings, and reserves

The fundamental accounting equation must always hold true: Assets = Liabilities + Equity. This balance ensures that your financial statements provide an accurate representation of your company’s financial structure.

2. Statement of Profit or Loss and Other Comprehensive Income (Income Statement)

The income statement (also known as the profit and loss statement) summarizes your company’s revenues, expenses, and profit or loss over a specific period. It answers: “Is my business profitable?” This statement reflects your company’s financial activities and includes:

• Revenue/Sales: Total income from primary business operations
• Cost of Goods Sold (COGS): Direct costs of producing goods or services
• Gross Profit: Revenue minus COGS
• Operating Expenses: Salaries, rent, utilities, and administrative costs
• Operating Income: Gross profit minus operating expenses
• Finance Costs and Other Income: Interest expenses and non-operating items
• Net Profit or Loss: Final profit or loss after all expenses and taxes

3. Statement of Cash Flows

Unlike the income statement which uses accrual accounting, the cash flow statement shows actual cash inflows and outflows. The cash flow statement helps stakeholders understand how the company generates and uses cash. It is divided into three categories:

• Operating Activities: Cash from core business operations, including customer receipts, supplier payments, and salary payments
• Investing Activities: Cash from asset purchases or sales, such as equipment or property transactions
• Financing Activities: Cash from funding sources, including bank loans, capital injections, and dividend payments

The ending cash balance from the cash flow statement must match the cash balance shown on the balance sheet—this is a critical reconciliation point that ensures that your financial statements are internally consistent.

4. Statement of Changes in Equity

This statement (sometimes called the statement of retained earnings) reconciles the opening and closing balances of shareholders’ equity. It shows:

• Beginning equity balance
• Movements during the period (profit or loss, dividends paid, new capital contributions)
• Ending equity balance

This provides transparency into how the company’s financial position changed during the reporting period.

5. Notes to the Financial Statements

Notes are essential for IFRS compliance and provide additional context and detail regarding:

• Accounting policies applied
• Critical accounting estimates and judgments
• Significant transactions and events
• Details supporting the figures presented in the primary statements
• Disclosure of related party transactions
• Segment information (for larger entities)
• Financial instrument disclosures

Well-documented financial reports simplifies the audit process and enhances transparency for stakeholders.

Step-by-Step Preparation Process

Phase 1: Preparation and Organization

1. Gather Financial Documentation

Begin the process of preparing financial statements by collecting all necessary financial records and supporting documents:

• Bank statements and credit card statements
• Sales invoices and receipts
• Supplier bills and purchase orders
• Payroll records and benefits documentation
• Loan agreements and repayment schedules
• Expense receipts
• Fixed asset registers and depreciation schedules
• Inventory records

Reconciling bank statements with your accounting records is a critical first step to ensure that financial records are accurate.

2. Establish a Chart of Accounts

The chart of accounts is the foundational framework of your accounting system. It must be structured to:

• Organize transactions into meaningful categories
• Align with local accounting standards and IFRS requirements
• Facilitate accurate VAT calculations (with separate accounts for each VAT category: standard-rated at 5%, zero-rated at 0%, exempt, and out-of-scope supplies)
• Support corporate tax compliance
• Reflect your business operations and cost centers

A well-designed chart of accounts typically includes accounts for assets (1000-1999), liabilities (2000-2999), equity (3000-3999), revenues (4000-4999), and expenses (5000-9999). This organization improves financial planning and analysis capabilities.

Phase 2: Recording and Reconciliation

3. Record Transactions Throughout the Year

Maintain accurate daily entries of all business transactions in your general ledger using the double-entry bookkeeping method. This ensures that every transaction is recorded in at least two accounts, maintaining the accounting equation balance. Proper recording throughout the year ensures compliance with UAE financial reporting requirements.

4. Perform Account Reconciliations

At month-end and year-end financial reporting periods, reconcile all major accounts to ensure accuracy:

• Bank Accounts: Cross-check bank statements with the general ledger to identify discrepancies
• Accounts Receivable: Verify outstanding invoices and address overdue payments
• Accounts Payable: Confirm all vendor payments and liabilities are accurately reflected
• Fixed Assets: Reconcile asset registers with balance sheet figures
• Inventory: Conduct a physical inventory count and adjust for discrepancies

Reconciliation is one of the most important steps in the year-end financial reports process, as it ensures all balances match external records and that statements reflect the true financial position.

Phase 3: Adjustments and Valuations

5. Make Year-End Adjustments

After reconciliations are complete, make necessary adjusting entries to reflect accruals, deferrals, and other adjustments:

• Accruals: Record expenses incurred but not yet paid (e.g., accrued wages, utilities)
• Prepayments: Adjust for expenses paid in advance that apply to future periods
• Depreciation and Amortization: Calculate and record current year depreciation on fixed assets
• Inventory Adjustments: Adjust for any differences between book and physical inventory counts
• Allowances: Record allowances for doubtful debts and inventory obsolescence

These adjustments ensure that your financial statements must accurately represent the company’s financial performance and position.

6. Address Depreciation and Asset Valuation

Depreciation must be calculated for all tangible assets based on their useful life. The UAE recognizes several depreciation methods:

• Straight-Line Method: Allocates cost evenly over useful life
• Declining Balance Method: Results in larger charges in early years, decreasing over time
• Units of Production Method: Links depreciation to asset usage or production levels
• Sum-of-the-Years’ Digits Method: An accelerated approach with larger early expenses

Document depreciation schedules showing the annual depreciation expense for each asset category. This ensures accurate financial reporting and that statements reflect current asset values.

7. Review Revenue Recognition

Ensure compliance with IFRS 15 revenue recognition standards:

• Revenue should be recognized when performance obligations are satisfied (when goods or services are transferred to the customer)
• Adjust for deferred or unearned revenue (advance payments for future services)
• Verify that revenue recognition corresponds to completed performance obligations, not when cash is received
• Document significant judgments and estimates applied

Proper revenue recognition provides transparency about the company’s financial activities and ensures accurate financial statements.

Phase 4: Financial Statement Preparation

8. Prepare the Primary Financial Statements

Once all adjustments are completed, prepare the five core statements in the following order to maintain consistency:

• Balance Sheet: Present assets, liabilities, and equity as of the reporting date
  
• Income Statement: Show revenues, expenses, and profit or loss for the period
  
• Statement of Comprehensive Income: Include items of other comprehensive income not recognized in profit or loss
  
• Statement of Changes in Equity: Reconcile opening and closing equity balances
  
• Cash Flow Statement: Detail cash movements from operating, investing, and financing activities

Well-prepared financial statements give stakeholders a clear and complete view of the business’s overall condition and performance.

9. Verify the Balance Sheet Balances

The most critical check is ensuring that your balance sheet mathematically balances: Assets = Liabilities + Equity. If it does not balance, trace errors by:

• Verifying that the net income from the income statement has been correctly added to beginning retained earnings
• Checking that all journal entries have been properly posted
• Reconciling subsidiary ledgers to the general ledger
• Reviewing recent transactions and adjustments

A balance sheet that does not balance is a serious integrity issue that must be resolved before finalizing statements. This verification ensures that your financial statements provide an accurate representation of your overall financial position.

10. Verify Cash Flow Statement Reconciliation

The ending cash balance shown in the cash flow statement must match the amount reported on the balance sheet. If the figures differ, review the following:

• Calculations within each cash flow category
  
• Accuracy of operating, investing, and financing activity summaries
  
• Completeness of all cash movements
  

This reconciliation ensures the different financial statements remain aligned and that the reported position is accurate.

Phase 5: Disclosures and Notes

11. Prepare Comprehensive Notes to Financial Statements

Notes are required by IFRS and must include:

• Accounting Policies: Summary of significant accounting policies, measurement bases (historical cost, fair value), and estimates used
• Critical Judgments: Details of areas requiring management judgment
• Changes in Policies: Description and impact of any changes to accounting policies
• Asset Details: Information supporting balance sheet items (depreciation methods, asset composition, impairments)
• Liability Details: Details of debt, including maturity dates and interest rates
• Related Party Transactions: Nature, amounts, and business rationale for transactions with related parties
• Financial Risk Disclosures: Information about credit risk, liquidity risk, and market risk
• Segment Information: For larger entities, revenue and profit by operating segment
• Contingencies: Description of any contingent liabilities or assets
• Post-Balance Sheet Events: Significant events occurring after the reporting date

These notes enhance transparency and accountability while providing stakeholders with additional financial information they need to understand the company’s financial performance.

12. Document Accounting Estimates and Assumptions

Disclose in the notes:

• Key assumptions used in revenue recognition
• Estimated useful lives of fixed assets
• Allowance for doubtful debts methodology
• Inventory valuation methods
• Fair value measurement approaches
• Any other significant estimates

This documentation demonstrates compliance with reporting standards and provides insights into a company’s financial judgment and methodology.

Common Errors and How to Avoid Them

1. Incorrect VAT Calculations and Filings

Many businesses misclassify transactions or fail to maintain proper VAT invoices, leading to penalties from the Federal Tax Authority.

Solution: Implement VAT-compliant accounting software that automatically categorizes transactions and conduct quarterly internal VAT reviews

Prevention: Maintain detailed records distinguishing between standard-rated (5%), zero-rated (0%), and exempt supplies

2. Poor Record Keeping and Organization

Inconsistent entries, unreconciled bank statements, and missing documentation create compliance risks and audit challenges.

Solution: Use cloud-based accounting tools and schedule monthly reconciliations throughout the year, not just at year-end

Prevention: Establish backup systems and maintain organized files accessible for audits

3. Improper Revenue and Expense Classification

Inaccurate categorization distorts financial reports and affects tax calculations, potentially resulting in inaccurate financial statements.

Solution: Use detailed account codes in your chart of accounts to ensure consistent classification

Prevention: Train staff on proper transaction coding and perform quarterly reviews for accuracy

4. Missing or Incomplete Documentation

Failure to retain necessary financial documents leads to penalties during an audit in the UAE.

Solution: Maintain a document retention policy that stores all invoices, receipts, and supporting records for the required period (5-7 years)

Prevention: Implement a filing system (physical or digital) organized by transaction type and date to ensure that financial records remain accessible

5. Failure to File or Pay on Time

The corporate tax filing deadline is nine months after the end of the financial year; missing this deadline triggers penalties from the UAE Federal Tax Authority.

Solution: Establish a tax calendar with key deadlines (monthly management reports, quarterly VAT, annual financial statements annually)

Prevention: Set reminders and engage with certified tax consultants to ensure timely compliance and submit financial statements on schedule

6. Ignoring Year-End Closing Procedures

Skipping or rushing through adjustments leads to inaccurate statements and audit findings, compromising the quality of audited financial statements.

Solution: Create a comprehensive year-end closing checklist covering reconciliations, adjustments, asset reviews, and revenue validation

Prevention: Begin year-end procedures well in advance; do not leave all adjustments for the final week of the financial year

7. Depreciation Errors

Incorrect calculation or recording of depreciation affects asset valuation and expense recognition, distorting the company’s financial strength.

Solution: Document depreciation schedules showing cost, accumulated depreciation, and net book value for each asset

Prevention: Maintain a fixed asset register tracking acquisition dates, costs, useful lives, and disposal dates

8. Inventory Valuation Issues

Improper inventory counts or valuation methods lead to misstated assets and cost of goods sold, affecting the accuracy of the income statement.

Solution: Conduct physical inventory counts at year-end and reconcile with book balances

Prevention: Use inventory management software to track stock levels and maintain perpetual inventory records

Audit Requirements and Filing Deadlines

Mainland Companies

Mainland companies in the UAE must complete annual external audits. Auditors verify that statements are prepared in accordance with IFRS and that the company registered in Dubai or other emirates meets tax and regulatory requirements. The review must be carried out by a licensed external auditor, and the resulting report must be presented at the annual general meeting and submitted to the appropriate authorities. These audited financial statements reassure stakeholders about the company’s overall stability.

Free Zone Companies

Audit requirements vary by free zone:

Companies must submit audited financial statements in the form of financial statements required by their specific free zone authority to maintain their license and demonstrate financial stability.

Corporate Tax Filing Timeline

Filing Deadline: Nine months after the end of the financial year

Example: For a company with year-end December 31, 2024, the tax return is due by September 30, 2025

Submission Method: File electronically via the EmaraTax portal (FTA’s online system)

Payment: UAE Corporate Tax must be paid at the time of filing; filing returns and paying tax are treated as a single obligation

Meeting this deadline ensures compliance with UAE government requirements and avoids penalties from the Federal Tax Authority.

Internal Controls and Financial Reporting Quality

Establishing strong internal controls over reporting enhances the accuracy and reliability of statements. Key components include:

• Control Environment: Define governance policies and procedures that create a disciplined structure for oversight.
  
• Risk Assessment: Identify and evaluate risks of material misstatement across all reporting areas.
  
• Control Activities: Apply preventive and detective measures at both the entity and process levels to reduce errors.
  
• Information Systems: Maintain systems that properly record, process, and report transactions with consistency and integrity.
  
• Monitoring: Use ongoing and periodic reviews to confirm that controls function as intended and that deficiencies are resolved promptly.

Well-designed controls result in more accurate and compliant reporting and strengthen stakeholder trust.

Compliance Considerations for Tax Groups

If your company is part of a tax group (parent company owning 95% or more of subsidiaries), the UAE has specific requirements that apply:

• Must prepare financial statements using line-by-line aggregation (consolidated financial statements) of group members’ financial statements
• All group members must apply uniform accounting policies
• Eliminate intra-group transactions
• Present aggregated statements without reflecting business combination accounting or consolidation adjustments
• Include disclosures covering the aggregation framework, accounting policies, estimates, and judgments

These consolidated financial statements provide a comprehensive view of the group’s overall financial position and performance.

Best Practices for Statement Preparation

1. Start Early: Begin closing procedures at least two weeks before the filing deadline to allow sufficient time for reviews and corrections of annual statements.
2. Use Accounting Software: Implement reliable systems that support IFRS, automate reconciliations, and generate reports in the required format for financial reporting needs.
3. Document Everything: Maintain clear notes explaining accounting policies, significant judgments, estimates, and unusual transactions to support the statement preparation process.
4. Perform Regular Reconciliations: Reconcile accounts monthly to identify discrepancies early and keep records current throughout the year.
5. Engage Professional Services: Work with external accountants or auditors early in the year to ensure compliance and submit statements that meet all reporting standards.
6. Review Prior Year Audit Findings: Address previous audit remarks to show continuous improvement in reporting practices.
7. Stay Current with Regulations: Monitor updates to IFRS and UAE tax rules that may influence financial reporting requirements.
8. Train Your Team: Ensure staff understand IFRS principles, the chart of accounts, and proper transaction coding to produce accurate financial statements.
9. Maintain an Audit Trail: Keep all adjusting entries, documentation, and approvals organized for auditor review.
10. Review for Reasonableness: Before finalizing, perform a high-level assessment to confirm figures are consistent with prior periods and that statements reflect the company’s financial position accurately.

Conclusion

Preparing statements in the UAE requires accurate records, timely reconciliations, proper year-end adjustments, and clear disclosures aligned with IFRS. A structured approach helps businesses present a true and complete view of operations while meeting regulatory expectations for auditors and tax authorities.

Well-prepared reports give stakeholders transparency, strengthen confidence among investors and lenders, and support effective planning and analysis. Early preparation is essential, as companies have nine months to file corporate tax returns and must ensure all submissions are complete and compliant.

Whether operating on the mainland or in a free zone, companies that follow these guidelines maintain strong reporting standards and deliver the financial clarity needed for reliable decision-making and full regulatory compliance.