Accounting and Bookkeeping

Understanding Small Business Relief Under UAE Corporate Tax Law

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UAE corporate tax compliance and small business relief.

In 2022, the UAE introduced the Corporate Tax Law to enhance its fiscal framework, requiring businesses to pay taxes on their profits. However, recognising the unique challenges faced by smaller enterprises, the government introduced a relief to support these businesses, known as the Small Business Relief.

This relief is a measure to ease compliance and tax obligations during the early stages of the Corporate Tax regime for eligible small businesses. If the conditions of the relief are fulfilled, it can significantly reduce tax liabilities. At the same time, it requires accurate bookkeeping and documentation.

What is Small Business Relief?

Small Business Relief is a provision designed to support small enterprises during the implementation of the Corporate Tax regime. It simplifies tax compliance and reduces financial burdens by exempting eligible businesses from calculating taxable income or paying Corporate Tax for qualifying periods.

Who is Eligible?

To benefit from Small Business Relief, businesses must:

Any eligible Taxable Person (a Resident Taxable Person either a Natural Person or a Juridical Person): This includes individuals or entities conducting business within the UAE.

Have Revenue ≤ AED 3 million: Revenue should not exceed AED 3 million for the current and all prior tax periods that end on or before December 31, 2026.

Who is Not Eligible?

Small Business Relief is unavailable to:

Members of Multinational Enterprise Groups (MNEs): Companies with global operations and consolidated revenue exceeding AED 3.15 billion.

Qualifying Free Zone Persons: Free Zone persons that already enjoy a 0% Corporate Tax rate on qualifying income.

Artificially Separated Entities: Businesses attempting to split operations to qualify for relief will be disqualified.

Key Benefits

  1. Administrative Relief
    Eligible businesses can:

    • File simplified tax returns.
    • Prepare financial statements on a cash basis.
    • Avoid complex record-keeping requirements.
  2. Tax Exemption
    No Corporate Tax is payable for periods when Small Business Relief is elected.

How to Apply

Eligible businesses must:

  • Register for Corporate Tax: Obtain a Tax Registration Number (TRN) from the Federal Tax Authority (FTA).
  • Elect for Relief in the Tax Return: This election must be made annually for the relevant tax period.

Revenue Considerations

  • What Counts as Revenue? All income generated during a tax period, including sales, asset disposals, and other gross income.
  • Exclusions: VAT collected from sales is not included in revenue calculations.
  • Certain types of income, referred to as Exempt Income, are not subject to taxation. However, this differentiation is only applicable to businesses that are required to calculate their Taxable Income. Consequently, the rules governing Exempt Income do not apply to businesses that opt for Small Business Relief.

Compliance and Restrictions

Electing for Small Business Relief comes with specific conditions:

  • Losses and Deductions: Businesses cannot accrue, utilize or transfer tax losses or interest expenditure during the relief period.
  • Exclusions from Other Reliefs: Provisions like intra-group asset transfers and restructuring relief are unavailable.
  • Transfer Pricing Documentation: Not required for entities benefiting from the relief.

Examples of Eligibility

Example 1: Eligible Business

Mr. X operates a business with AED 2 million in revenue in 2025. He can elect for Small Business Relief, provided his revenue remains under AED 3 million.

Example 2: Exceeding Revenue Threshold

Ms. Y’s business earned AED 1.9 million in 2026 but exceeded AED 3 million in 2025. She is no longer eligible for relief, even if her revenue drops below the threshold in subsequent periods.

Important Considerations

One-Time Revenue Spike: Even a single tax period with revenue exceeding AED 3 million disqualifies a business permanently from the relief.

Impact on Future Benefits: Businesses lose eligibility for other Corporate Tax provisions during the relief period.

Conclusion

Small Business Relief offers valuable support to UAE-based small businesses by simplifying tax compliance and reducing financial obligations. However, businesses must carefully assess their eligibility and long-term benefits before opting for this relief. From compliance to optimisation, Affiniax Partners helps you navigate UAE Corporate Tax Laws.

For more information, please get in touch with us at mail@affiniax.com.

How to Open a Corporate Bank Account in the UAE: A Comprehensive Guide

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Opening a corporate bank account in the UAE is a crucial step for any business operating in the region. The UAE’s strategic location, business-friendly environment, and robust banking sector make it an attractive destination for entrepreneurs and companies.

Here’s a step-by-step guide to help you navigate the process of opening a corporate bank account in the UAE.

1. Understand the Requirements

Before you start the process, it’s essential to understand the basic requirements. While these can vary slightly depending on the bank, most UAE banks will require:

  • A valid UAE trade license
  • Certificate of incorporation
  • Memorandum and Articles of Association
  • Board resolution authorizing the opening of the account and naming the signatories
  • Passport copies of shareholders and authorized signatories
  • Proof of address for shareholders and signatories
  • Business plan or a summary of business activities

2. Choosing the Right Bank

The UAE has a variety of banks, both local and international, each offering different services tailored to various business needs. Research and choose a bank that aligns with your business requirements. Consider factors such as:

  • Bank fees and charges
  • Minimum balance requirements
  • Online banking facilities
  • Branch and ATM network
  • Specialised services for businesses

3. Prepare Your Documents

Gather all the required documents before approaching the bank. Ensure that all documents are up-to-date, translated into Arabic if necessary, and notarised. Here’s a checklist of typical documents you might need:

  • Trade License
  • Certificate of Incorporation
  • Memorandum and Articles of Association
  • Board Resolution
  • Passport copies of shareholders and authorized signatories
  • Proof of address
  • Business plan

4. Due Diligence and Verification

After submitting your application, the bank will conduct a due diligence process. This might include:

  •  Verification of documents
  •  Background checks on shareholders and directors
  •  Assessment of your business activities and financial health

This process can take anywhere from a few days to a few weeks, depending on the complexity of your business and the bank’s procedures.

5. Approval and Account Activation

Once the due diligence process is completed, and the bank is satisfied with the provided information, your account will be approved and activated. You will receive your:

  • Account number
  • IBAN
  • Online banking access

At this point, you can start using your corporate bank account for your business transactions.

6. Maintain Compliance

After opening your account, ensure you comply with the bank’s terms and conditions, such as maintaining the minimum balance and providing any additional information the bank may require periodically. Failure to comply can result in account closure or penalties.

Tips for a Smooth Process

  • Be Transparent: Provide accurate and complete information to avoid delays.
  • Consider Professional Assistance: Engage experts who can help you with opening your UAE corporate bank account and provide guidance on UAE banking and corporate laws.
  • Stay Updated: Banking regulations can change, so stay informed about any updates that might affect your account.

Opening a corporate bank account in the UAE can seem daunting, but with proper preparation and guidance from an expert, the process can be smooth and efficient.

For more information contact us at narisah@affiniax.com.

Automated Reconciliations: A Game-Changer for Accounting

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Modern technology in automated accounting reconciliations showing efficiency and accuracy

Reconciliation is a process that verifies the accuracy of financial records by comparing them with external or internal data sources. It is essential for any business that wants to ensure its financial integrity and compliance. However, reconciliation can be time-consuming, tedious, and prone to human error, especially when done manually. That’s why more and more businesses are turning to automated reconciliations, which use technology to streamline and simplify the process. In this blog, we will explore what automated reconciliations are, how they work, and what benefits they offer.

What is Account Reconciliation?

Account reconciliation compares the transactions recorded by an organization’s accounting system with the information provided by banks, customers, suppliers, and other internal groups. The purpose of account reconciliation is to identify and resolve any discrepancies, errors, or frauds that may affect the accuracy and completeness of the financial statements. Account reconciliation can be performed for different accounts, such as bank accounts, accounts receivable, accounts payable, inventory, and fixed assets.

Benefits of Account Reconciliation

Account reconciliation has several benefits for businesses, such as:

  1. Catching banking issues quickly: Account reconciliation can help detect and correct any banking errors, such as duplicate charges, incorrect fees, or unauthorized transactions, that may affect the cash flow and profitability of the business.
  2. Making informed decisions: Account reconciliation can provide reliable and up-to-date financial data to help the business make better decisions and forecasts based on its actual performance and situation.
  3. Protecting against fraud: Account reconciliation can help prevent and detect any fraudulent activities, such as embezzlement, theft, or money laundering, that may harm the reputation and assets of the business.
  4. Freeing up time and resources: Account reconciliation can reduce the workload and stress of the accounting staff, who can spend less time on manual and repetitive tasks and more time on value-added and strategic activities.
  5. Reducing human error: Account reconciliation can minimize the risk of mistakes, omissions, or inconsistencies when handling large volumes of data manually.
  6. Maintaining consistency at scale: Account reconciliation can ensure that the quality and accuracy of the financial records are maintained regardless of the size and complexity of the business and its transactions.
  7. Optimizing accounting processes: Account reconciliation can help identify and improve any bottlenecks or inefficiencies in the accounting system and procedures, leading to better performance and compliance.

Applications: Areas where Automated Reconciliations can be implemented

Automated reconciliations can be implemented in any area where reconciliation is required, such as:

  1. Bank reconciliation: This is the most common form of reconciliation, which compares the transactions recorded by the accounting system with the information in the bank statements. Automated bank reconciliation can match and reconcile the transactions automatically, saving time and effort for the accounting staff.
  2. Accounts receivable reconciliation: This is the process of verifying the payments received from customers against the invoices issued by the business. Automated accounts receivable reconciliation can track and reconcile the payments faster and more accurately, improving the business’s cash flow and customer satisfaction.
  3. Accounts payable reconciliation: This is the process of verifying the payments made to suppliers against the bills received from them. Automated accounts payable reconciliation can ensure that the payments are made on time and in the correct amount, avoiding penalties, disputes, or overpayments.
  4. Inventory reconciliation: This is the process of verifying the physical inventory of the business against the inventory records in the accounting system. Automated inventory reconciliation can help maintain the accuracy and availability of the inventory, reducing waste, theft, or loss.
  5. Fixed assets reconciliation: This is the process of verifying the existence, condition, and value of the fixed assets of the business, such as machinery, equipment, or property, against the accounting records. Automated fixed assets reconciliation can help monitor and manage the depreciation, maintenance, and disposal of fixed assets, enhancing their efficiency and utilization.

Importance, Benefits and Value of Automated Reconciliations

Automated reconciliations are essential for businesses because they can provide several benefits and value, such as:

  1. Saving time and money: Automated reconciliations can reduce the time and cost of reconciliation by eliminating the need for manual intervention and data entry.
  2. Improving accuracy and quality: Automated reconciliations can improve the accuracy and quality of financial data by minimizing the errors and discrepancies that may arise from manual processes.
  3. Enhancing security and compliance: Automated reconciliations can improve the security and compliance of financial records by providing audit trails, controls, and validations that can prevent and detect any unauthorized or fraudulent transactions.
  4. Increasing productivity and efficiency: Automated reconciliations can increase the productivity and efficiency of the accounting staff by freeing them from tedious and repetitive tasks and allowing them to focus on more value-added and strategic activities.
  5. Providing insights and analytics: Automated reconciliations can provide insights and analytics that can help the business better understand its financial performance and situation and make informed decisions and actions.

Automated reconciliations are a game-changer for accounting, as they can streamline and simplify the reconciliation process and provide several benefits and value for the business. By using technology to automate reconciliations, companies can save time and money, improve accuracy and quality, enhance security and compliance, increase productivity and efficiency, and provide insights and analytics. Automated reconciliations can help businesses achieve financial integrity, compliance, and excellence and gain a competitive edge in the market.

At Affiniax Partners, we can help you pull all that data you need, match transactions rapidly and only alert your employees when an exception or variance is present. To know more, please contact Mr. Nihar Kothari, Co-founder and Partner, at nihar@affiniax.com.

Optimising Cash Flow for Sustainable Growth: A Guide for UAE SMEs

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Cash flow optimisation, a short guide for SME's for sustainable growth.

In the dynamic business landscape of the United Arab Emirates, Small and Medium Enterprises (SMEs) play a pivotal role in driving economic growth. However, amidst ambitious plans for expansion, the importance of effective cash flow management often takes a back seat. In this blog, we delve into the intricacies of cash flow management, its manifold benefits, and how our seasoned team at Affiniax can be your strategic partner in navigating these financial waters.

Benefits of Effective Cash Flow Management

Liquidity Preservation

Maintaining a healthy cash flow ensures your business possesses sufficient liquid assets to meet its short-term obligations. This fosters operational continuity and positions your SME to seize new opportunities as they arise.

Financial Stability

Consistent positive cash flow contributes to the financial stability of SMEs. A stable financial foundation becomes the bedrock for sustained success in a landscape where economic uncertainties are omnipresent.

Strategic Planning

Understanding your cash flow patterns is akin to having a compass for strategic decision-making. It facilitates informed choices regarding investments, expansions, and resource allocations, aligning your actions with long-term goals.

Credibility with Stakeholders

Positive cash flow enhances your SME’s credibility with suppliers, creditors, and potential investors. This credibility becomes valuable, opening doors to favourable credit terms and potential partnerships.

Case Study: Navigating Cash Flow Challenges

Consider the case of XYZ Ltd., an SME in the UAE facing cash flow challenges. Despite a robust business model, delayed client payments and unpredictable market conditions hindered their growth. Our team at Affiniax conducted a comprehensive cash flow analysis, identifying bottlenecks and implementing tailored solutions with short, medium and long-term goals.

By restructuring payment terms, optimising inventory management, and negotiating vendor agreements, we stabilised their cash flow and positioned them for sustainable growth. This case exemplifies the tangible impact of effective cash flow management on an SME’s trajectory.

How Can We Help?

Cash Flow Analysis

Our approach begins with a meticulous analysis of your cash flow dynamics. We delve into your financial data, identifying trends and pinpointing areas for improvement.

Tailored Solutions

Recognising that each SME is unique, we craft customised solutions tailored to your needs. Whether you’re in manufacturing, retail, or services, our strategies are designed to align with your industry nuances.

Implementation Support

Our commitment goes beyond recommendations. We provide hands-on support in implementing the identified strategies, ensuring a seamless integration into your day-to-day operations.

Regular Monitoring and Reporting

Cash flow management is an ongoing process. We offer regular monitoring and reporting to track the effectiveness of implemented strategies, making adjustments as needed to keep your financial ship sailing smoothly.

Why Affiniax?

Effective cash flow management is not just a financial exercise; it’s a strategic imperative for SMEs in the UAE. By partnering with Affiniax, you gain more than financial expertise; you gain a dedicated ally invested in your success.

As we navigate the complex waters of business finance, we remember that a proactive approach to cash flow management can be the differentiator between mere survival and thriving in the competitive UAE business landscape.

For personalised assistance in optimising your cash flow, please contact Mr. Nihar Kothari, Partner at nihar@ affiniax.com.

Mastering the Art of Budgeting: A Guide for Business Owners and CFOs

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Master the art of budgeting, a practical guide for business owners and CFOs.

The beginning of a new year often marks when CFOs, financial managers, and accountants worldwide meticulously craft and fine-tune their annual budgets. As experienced professionals in the field, we’ve witnessed numerous companies diligently prepare these budgets year after year. However, it’s essential to ask ourselves: Are we truly doing justice to the hard work invested in this process? In this blog, we’ll explore why budgeting is far more than a mere formality and why overlooking certain aspects can significantly affect your business.

Understanding Cashflows in Uncertain Times

One key role of budgeting is providing a financial roadmap for your company. Take, for instance, a recent experience where we assisted a client whose business was abruptly impacted by government regulations. By implementing a robust budgeting tool, we helped them gain a clear understanding of their cashflows in the short to medium term. This allowed them to make informed decisions and take immediate action steps to navigate the challenging times effectively. The lesson here is clear: budgeting isn’t just about numbers; it’s about preparing for the unexpected and having a plan in place to respond swiftly.

Value Over Cost

A common misconception in business is that the cheapest supplier is always the best choice. However, we’ve learned through experience that this is only sometimes the case. Periodically, business owners must evaluate their specific needs and choose vendors based on value, even if it comes at a higher cost. The lowest fee quote or vendor matching the budget might offer a different quality, reliability, or expertise than your business requires. Instead, consider implementing a Value-pricing Matrix to select vendors that align with your business’s long-term goals and standards.

The Continuous Review Process

Budgeting is not a one-time task that ends when the figures are set. It’s a dynamic process that requires continuous review, comparison, updates, and monitoring. Unfortunately, many businesses treat it as a mere formality when, in reality, it serves as the backbone of financial performance and key performance indicators for the upcoming year. Regularly assessing the alignment of budget figures with actual numbers is essential. Significant deviations should prompt an immediate review, and explanations should be readily available. Establishing a robust budget review process ensures that your financial goals remain on track.

Conclusion

Budgeting is a critical aspect of managing your business’s financial health. Whether you’re a business owner, CFO, or financial manager, understanding the importance of budgeting and its multifaceted nature is critical to achieving long-term success. It’s not just about numbers on a spreadsheet; it’s about being prepared, making value-driven decisions, and continuously monitoring your financial performance. As we enter the new year, let’s reevaluate our approach to budgeting and ensure it becomes a dynamic tool for achieving our business goals.

How can Affiniax help?

Affiniax has a team of finance and technical experts who can understand your requirements in detail and recommend a strategy to help achieve the desired business objectives. For more information, please contact Mr. Nihar Kothari, Partner, at nihar@affiniax.com.

Automation of Payment Process

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Payment process is a critical part of any business, but it can also be a time-consuming and error prone. By automating the payment process, businesses can save time and money, improve accuracy, and reduce fraud.

There are a few key steps involved in automating the payment processing process:

1. Choose a payment processing solution. There are many different payment processing solutions available, so it’s important to choose one that meets your specific needs. Some factors to consider include the types of payments you want to accept, the fees charged by the solution, and the level of security it offers. Alternatively, the entity can continue to have their banking channel as main mode of payments.

2. Integrate your payment processing solution with your accounting system. Once you’ve chosen a payment processing solution, you need to integrate it with your accounting system. This will allow you to track payments and reconcile your accounts. A solution can be created to reconcile your banking transactions too.

3. Create a workflow for payment processing. Once your payment processing solution and accounting system are integrated, you need to create a workflow for payment processing.

This workflow should include the following steps:

  • Invoices are created and sent to customers.
  • Customers pay invoices through the payment processing solution.
  • Payments are automatically reconciled with the accounting system.
  • Vendors are notified of payments.

4. Automate the payment approval process. If you need to get approval for payments before they’re sent, you can automate the approval process. This can be done by integrating your payment processing solution with your approval system.

By automating the process of payment processing, you can save time and money, improve accuracy, and reduce fraud. Here are some of the benefits of automating payment processing:

  • Save time and money. Automate to save time and money on manual tasks.
  • Improve accuracy. Automate to reduce errors and increase accuracy.
  • Reduce fraud. Automate to make it harder for fraudsters to steal money.
  • Improve customer satisfaction. Automate to make it easier for customers to pay.
  • Increase compliance. Automate to help you stay in compliance with regulations.
  • Gain insights. Automate to track payments and identify trends.

Overall, automating payment processing can offer several benefits for businesses.

For more information, please feel free to contact Nihar Kothari, Partner at Affiniax at nihar@affiniax.com.

Expense reimbursement process and automation

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We understand that managing employee expenses can be a tedious and error-prone process. That’s why we are excited to introduce our expense management solution, which can help streamline this process for you. Our solution automates the process of approving and reimbursing employee expenses by:

  • Creating a workflow that captures and validates expenses
  • Routing expenses to the appropriate approver
  • Automatically updating the accounting system

Our expense management solution is:

  1. Easy to use and fully customizable to fit the unique needs of your organization
  2. Configurable to automatically validate expenses based on predefined rules, such as expense type, amount, and date
  3. Provides visibility into your organization’s expenses, providing insights into spending patterns and areas where cost-saving measures can be implemented.
  4. By implementing our expense management solution, your organization can expect:
  5. Improved productivity and efficiency
  6. Reduced errors
  7. Better control over expenses

How can Affiniax Partners help?

We have a team of finance and technical experts who can understand your requirements in detail and recommend a workflow which will help in achieving the desired customised results. For more information, please get in touch with Mr. Nihar Kothari, Partner at nihar@affiniax.com.

Invoice Automation and Data Extraction

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Invoicing is an integral part of every business, and it involves the process of creating, sending, and receiving payment for goods or services. However, manual invoicing can be a tedious and error-prone process that takes up a lot of time and effort. Automation of invoices can make this process much more efficient and streamlined. In this blog, we will explore the benefits of automating the process of processing invoices.

1. Saves Time: Automating the invoicing process can save a considerable amount of time that would otherwise be spent on manual data entry, data validation, and invoice creation. Automation can be done by extracting data from excel sheets, invoicing platforms, or emails, and automatically creating or updating the corresponding records in your accounting system.

2. Reduces Errors: Manual invoicing can be prone to errors, such as incorrect data entry, misplaced documents, or delayed payments. Automating the process reduces the chances of errors and provides a more accurate and efficient system. This also helps to avoid the need for manual correction, which can be time-consuming.

3. Improves Cash Flow: Automated invoicing can improve cash flow by reducing the time taken to send invoices and receive payments. By automating the process of invoicing, you can send invoices quickly, and your customers can make payments easily and promptly. This ensures that your business always has a steady flow of cash.

4. Increases Productivity: Automating the invoicing process can free up time for your employees, allowing them to focus on other critical tasks. This can increase productivity and allow your business to operate more efficiently.

5. Enhances Customer Experience: Automated invoicing can also improve the customer experience. By sending invoices promptly, you can ensure that your customers have enough time to make their payments, reducing the chances of late payments or missed deadlines. This creates a positive impression of your business and can lead to increased customer satisfaction. In conclusion, automation of invoices can bring many benefits to businesses, such as increased efficiency, reduced errors, improved cash flow, increased productivity, and enhanced customer experience. By automating the invoicing process, businesses can save time and money, increase accuracy, and improve customer relationships. With the right tools and software, businesses can streamline their invoicing process and enjoy the benefits of automation.

How can Affiniax Partners help?
We have a team of finance and technical experts who can understand your requirements in detail and recommend a workflow which will help in achieving the desired customized results. For more information, please get in touch with Mr. Nihar Kothari, Partner at nihar@affiniax.com.

Landmark VAT legislation update since 2018; amendments effective 1 January 2023

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While UAE VAT legislation is about complete its 5th year since its implementation back in 2018, the Ministry of Finance introduced a major revision to the original VAT legislation (by issuance of Federal Decree-Law No. 18 of 2022). The proposed changes are effective 1 January 2023. The revised legislation have minor amends to various articles among further additions of articles. Some of the major updates in the legislation are as under:

  1. 100% Exporters (eligible to avail VAT registration exceptions)

The current provisions of the VAT legislation did allow an exception from VAT registration and compliance where the supplies are only subject to the zero-rated. Under the new amendment the same benefit has been extended to the business e who registered previously for VAT and were unaware of such benefit. Effective from 1 January 2023 the registered business will also be eligible to apply for the exception and avail of this benefit.

  1. Statute of Limitation

Generally, the FTA can conduct a Tax Audit or issue a Tax Assessment within 5 years timeframe from the end of the relevant Tax Period (monthly/quarterly)., Under the amended  legislation the condition of 5 years  have been overruled and the FTA can conduct a tax audit or issue a Tax Assessment even after 5 years from the end of the relevant tax period subject to the taxpayer has been notified before the expiration of the 5-year period and the such audit shall be concluded within 4 years from the date of the notification.

  1. Limitation to filing Voluntary Disclosure

The legislation now restricts a Taxable Person to file for Voluntary Disclosure after the lapse of 5 years from the end of the relevant Tax Period.

  1. Extension to Statue of Limitation attached to Voluntary Disclosure

Upon the submission of Voluntary Disclosure by Taxable Person in the 5th year (from the end of the relevant Tax Period) the timeframe to conduct a tax audit will be extended to an additional 1 year.

  1. Tax Evasion / non-registration

The authority may conduct Tax Audit and/or issue Tax assessments within 15 years from the end of the Tax Period in which the tax evasion occurred or if the person failed to complete VAT registration (as required in the legislation).

  1. Tax Invoice and Tax Credit Note Issuance timeline

The legislation now mandates that the Registrant must issue a Tax invoice (continues or non-continuous supplies) and Tax Credit Note within 14 days from the date of supply or required.

Previously the 14 days rule was appliable only for non-continuous supplies (Article 25 of the Decree-Law)

  1. Additional compliance for input credit on import of service

Many businesses pay for services to overseas service providers on the basis of agreements without requiring the service providers to issue an invoice. As per the recent changes in the VAT laws, for import of services, input credit could only be recovered if the taxpayer receives and retains invoices in accordance with the VAT laws.

Further to learn how the amendment in legislation affects your VAT compliance reach us as: taxation@affiniax.com

Written by Jilal Ahmed

Principles to keep in mind while preparing a Combined Financial Statement or Consolidated Financial Statement

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How to prepare combined financial statement and consolidated financial statement

If you are an owner of multiple businesses or the majority shareholder of a Company which is part of a group and is under a parent / subsidiary relationship, it’s important to understand your options when it comes to preparation of financial statements and reporting for stakeholders. Being an owner of the Company / group, you need to know what the financial statements show about the financial health of your business and the subsidiary / associate companies. The more you know about financial statements, the more likely you’ll be an informed and discerning owner / shareholder of the business.

A Brief understanding of financial statements

Financial statements are reports that summarise important financial accounting information about your business. According to IAS 1 Presentation of Financial Statements, there are four main types of financial statements: the statement of financial position or ‘balance sheet’, the statement of comprehensive income or ‘income statement’, statement of changes in equity and statement of cash flow.
In layman terms, the financial statement is like a report card for a Company to measure its performance through the Statement of Comprehensive Income, and Statement of Financial Position is used to ascertain its Grade. The following Grades provide confidence to the stakeholders, who decide to what extent they have to rely on the entity.

Types of financial statements

Being an owner of multiple businesses, whether owning a Parent company or owning and holding control in various entities or groups of companies, it is required to prepare the financial statements of the entity to disclose their financial results. The commonly used financial statements are:

  1. Single entity financial statement;
  2. Consolidated financial statements; and
  3. Combined financial statements.

In this article, we will further explore the above, keeping the owners’ mindset in mind and will briefly provide an understanding of the meaning of all these financial statements, their purpose, and their usefulness.

a)Single Entity Financial Statements

Single Entity financial statements, or Standalone financial statements, represent the financial position and the performance of the company as a single entity without taking into account the financial position and the performance of its subsidiaries, etc. The financial statements of the entity are written records that convey the business activities and the financial performance of a company.

b)Consolidated Financial Statements

In a consolidated financial statement, the financial results of the subsidiaries are included in a single financial statement with the parent company, as if the parent company and the subsidiaries were one entity. While the subsidiaries operate separately from the parent company, a consolidated financial statement reports on the group, with the parent company and subsidiaries together making up the financial picture of the group.

As per the guidelines from International Financial Reporting Standards on Consolidated financial statements (FRS 10), a few key factors to keep in mind are that a consolidated financial statement must be prepared, rather than a combined financial statement, when the parent has:

  1. Power over (controlling rights) the subsidiary – rights that give the parent the ability to direct the relevant activities of the subsidiary;
  2. Exposure/rights to (variable) return – rights to returns that aren’t fixed and may vary based on the performance of the subsidiary; and
  3. Ability to use its power – to affect the amount of returns.

Keep in mind that there is additional application guidance in which assessment of control is difficult.

C)Combined Financial Statements

On the other end of the spectrum, combined financial statements are, simplistically, when two or more entities/segments report their finances in a combined document. Within the document, financial statements presenting the historical financial information of a circumscribed area of economic activities for which consolidated financial statements are not prepared in order to present the financial position of the combined economic activities, as well as their financial performance and cash flows.

Combined financial statements are prepared where a reporting objective exists for two or more legal entities who are all commonly owned or controlled by an individual or group of individuals who wanted to see the financial results for these subject entities as a single unit. Further, they do not by themselves meet the definition of a group under IFRS 10.

In many cases, it is not just entities that are included when preparing combined financial statements but also parts of entities. This can be the case when the parts of entities are sufficiently identifiable and, from a financial reporting perspective, separable from the entity which they are part of.

To prepare a combined financial statement, all entities/segments are under common control during the reporting period. Common control can be:

  1. A Common Control / Management Approach – A common person or entity or part(s) of entities may be combined, if they were under common control as per the respective reporting framework. This approach reflects the control principle currently allowed for the preparation of financial statements for economic activities, which were, for the respective reporting period, part of a larger group or commonly controlled by the same individual(s).
  2. A Common Ownership Approach – Entities or parts of entities may be combined if all combined entities or parts of entities were under common ownership. It can be a case where entities are jointly owned, but not commonly managed by the same management. It further allows the preparation of combined financial statements regardless of any changes in the Management structures and enables those preparing the statements to show the historical track record of economic activity for every period during which this economic activity is commonly managed.

A Comparison of Consolidated Financial Statements vs. Combined Financial Statements

# Description Key features of Combined Financial Statements Key features of Consolidated Financial Statements
1 Ownership, relationship and its use Combined financial statements are used where the entities are under common control but do not have parent-subsidiary relationships. One of the examples which we can use here is, combined financial statements based on Investor Interest. In addition, combined financial statements, equity of the entities which are being combined (may or may not be subsidiaries) are added. Consolidated financial statements are presented where there is a parent-subsidiary relationship, which means one (parent) is owning and controlling the other company (subsidiary) by way of exercising control either by holding shares of the subsidiary or right to direct the profits towards the parent company.
2 Accounting Treatment of Intercompany Transactions Accounting treatment for combined financial statements eliminates intercompany transactions and balances, but rarely emphasises, the unrealized gain or loss on inventories or assets unless identical and material in value/nature. Accounting treatment of consolidated financial statements eliminates intercompany transactions. These are transactions that occur between the parent and subsidiary company. These transactions must be eliminated in order to avoid double-counting, once on the books of the subsidiary and again on the parent’s books. This avoids misrepresenting transactions that distort the actual results of the parent company and subsidiary.
3 Similarities on the Income Statement Both combined and consolidated financial statements add the subsidiary companies’ income and expenses to the parent company. This creates a total income and expenses for the entire group of companies, including the parent.
4 Differences in the Reporting of Stockholders Equity In combination, the equity for all the entities is totalled and presented accordingly, whereas in consolidation only the Parent share capital is disclosed, while the retained earnings are accumulated after necessary adjustments e.g. unrealized gain and loss and then split into parent and NCI portions.
Combined financial statements add the stockholder’s equity to that of the parent. This is because the parent has a controlling interest in the subsidiary group of companies.		 Consolidated financial statements simply eliminate the stockholder’s equity section of the subsidiary. Therefore, there are no changes to shareholder equity accounts, such as stock and retained earnings.
5 Non-controlling Interest In Combined financial statements, there is no non-controlling interest separately shown and the financial results are combined based on common ownership and control. In consolidated financial statements, accountants must keep track of the non-controlling interest relationship between the parent and subsidiary. This creates an account called non-controlling interest or minority interest, which tracks the part of the subsidiary not owned by the parent.

Which type of Financial Statement to use?

When the parent has power over the subsidiary, rights to variable return from its involvement with a subsidiary, and the ability to use its power over a subsidiary to affect the amount of return, you must file a consolidated financial statement as per IFRS 10.

Whereas a combined statement can be prepared in the situation when two or more entities are under common control, but there is no actual parent company relationship that exists. The combined statement is much easier to prepare since it simply requires a set of separate financial statements for each entity.

It is more important to be able to assess each entity on its own merits instead of as part of the unified whole, then the combined financial statement may be more suitable.

As with much of the reporting that is done specific to a business, which is the end goal, Assessing the parent and subsidiaries as a whole vs. assessing the individual components—will help you determine which financial statement structure is better for presenting your financial information.

How can we help you professionally?

With our well-diversified professional services, we can support in the preparation of different types of financial statements according to the ownership structure and set financial reporting standards and can assist you in evaluating the relationship between different entities of the Group.

In case you have any questions regarding your reporting obligations for your organization, please contact us at mail@affiniax.com or call us on +971 4 425 6616.

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