Financial Reporting in the UAE - Case Study Example

Financial Reporting in the UAE Introduction Various laws and legislations govern the operations of entities, especially those registered and trading on the security markets. This ranges from those issued by the government, Company laws, and governmental agencies to those issued by the national and international accounting bodies. This essay aims at identifying a company that trades on the Abu Dhabi Securities Exchange as well as the Dubai Financial Market and study on how it has complied with IAS 1 and any IFRS. This essay, therefore, purposely and conveniently selected Abu Dhabi National Energy Company PJSC. Overview of Abu Dhabi National Energy Company PJSC Being founded in 2005 and headquartered in Abu Dhabi, Abu Dhabi National Energy Company PJSC with its subsidiaries run energy and water company. It operates through six segments namely: Power Generation – Others, Power and Water Generation – UAE, Oil and Gas – UK, Oil and Gas – Netherlands, Oil and Gas – North America, and Oil and Gas – Atrush (Bloomberg L.P., 2015). Abu Dhabi National Energy Company PJSC generates electricity from natural gas, wind, coal and lignite in Ghana, India, United Arab Emirates, Morocco, Saudi Arabia, Oman, and the United States. In addition, it produces and supplies desalinated water. Abu Dhabi National Energy Company PJSC is also engaged in the business of exploring, developing and producing crude oil, natural gas liquid, and natural gas. Other activities include the oil and gas processing, natural gas storage, and transport activities. Its water desalination capacity is 887 million imperial gallons per day; power generation capacity is 16,395 megawatt; and proven oil reserves of approximately 612.4 million barrels. Energy Industry in the United Arab Emirates Abu Dhabi National Energy Company PJSC operates in a country has the fifth largest natural gas reserves and sixth largest proven oil reserve in the world (Embassy of the United Arab Emirates, 2015). The United Arab Emirates’ energy industry is the world’s third largest crude oil exporter. This industry is also moving towards renewable energy and energy efficiency programs. IAS 1 Presentation of Financial Statements According to the Deloitte Global Services Limited (2014), the IAS 1 was reissued on September 2007 and outlines the overall requirements for financial statements presentation, including their structure, their minimum contents and some overriding accounting concepts such as the accrual concept and going concern concept. IAS 1 requires that financial statements be presented in a way that will facilitate comparability with the reporting entity’s financial performance for previous periods, as well as comparability of financial statements of other entities in the same industry. The IAS 1.9 requires that entities present in their financial statements the assets, equity, liabilities, incomes, expenses, gains, losses, distributions to and contributions from owners. In addition, other material information should be disclosed in the form of notes. For financial statements to be considered complete, an entity must prepare the following statements as per IAS 1.10: the income statement, statement of financial position, statement of cash flows, and the statement of changes in owners equity. The results of the study by this essay established that Abu Dhabi National Energy Company PJSC has followed these provisions since it prepared and presented the four financial statements (Abu Dhabi National Energy Company PJSC, 2014, pp. 3-9). In further complying with the provisions of IAS 1, Abu Dhabi National Energy Company PJSC prepared these statements in a comparative manner; both financial statements for 2013 and 2014 were presented. Further results indicated that Abu Dhabi National Energy Company PJSC used notes throughout the annual report to explain significant items and transactions. Through notes, it disclosed the summary of significant accounting policies that were used to account and treat its financial transactions. The use of the IFRS 9 The results of the study conducted by this essay established that Abu Dhabi National Energy Company PJSC uses the IFRS 9 in recognizing and measuring its financial instruments transactions. The IFRS 9 Financial Instruments was first issued by the IASB on November 12, 2009 as a way of replacing IAS 39 Financial Instruments: Recognition and measurement. The adoption was IFRS 9 was to begin on January 1, 2013 and I had new requirements for classifying and measuring all financial assets (Deloitte Global Services Limited, 2015). On October 28 2010, the IFRS 9 was reissued by IASB after it was amended to include new requirements for financial liabilities accounting and carried over from the IAS 39’s requirements for financial assets and financial liabilities derecognition. In simpler terms, the IFRS 9 requires that all financial assets those have been recognized and are within the realm of IAS 39 to subsequently measured at either the fair value or the amortized cost. Specifically, debt investment held within the business model and whose goal is to collect the contractual cash flows, which are solely principal and interest payment on the principal outstanding are measured at an amortized cost at the end of accounting periods. The IFRS 9 also permits entities to make an election that is irrevocable to present subsequent amendments in the fair value of equity investments whose holding motive is not trading, in other comprehensive incomes, with only dividend generally recognized in the profit and loss. New IFRS 9 requirements were issued on November 2013 and they related to the hedge accounting and closely align it with risk management so as to avail more useful information to financial statements’ users. These requirements also present a more principal based method to accounting for hedge and addressing the inconsistencies presented by IAS 39. Even though the mandatory application date for IRFS 9 is January 1, 2018, Abu Dhabi National Energy Company PJSC found it prudent to adopt it earlier and it, therefore, did so on January 1, 2014 and it did not perform any retrospective adjustments. According to the Abu Dhabi National Energy Company PJSC (2014, p. 28), the company recognizes financial liabilities and financial assets when it becomes abided to the contractual provisions of instruments. Abu Dhabi National Energy Company PJSC first recognizes the financial assets and financial liabilities at fair value. Other than the transaction costs incurred in respect to financial liabilities and financial assets at fair value through profit or loss, those incurred with respect to other financial liabilities and financial assets are deducted from or added to the fair value of the financial liability or financial assets. Transaction costs that are directly traceable to the financial assets and financial liabilities acquisition at fair value using profit or loss are immediately recognized in profit or loss. Further results indicated that Abu Dhabi National Energy Company PJSC offsets its financial assets and financial liabilities and reports the net amount in the consolidated balance sheet if and only if an enforceable legal right exists to offset the recognized amounts. In addition, the settlement should be on a net basis or assets are realized, and liabilities are simultaneously settled (Abu Dhabi National Energy Company PJSC, 2014, p. 28). This essay also found that Abu Dhabi National Energy Company PJSC recognizes and derecognizes all regular way sales or purchases1 of financial assets on a trade date basis. As per the requirements of IFRS 9, Abu Dhabi National Energy Company PJSC subsequently measures all recognized financial assets in their entirety at either fair value or amortized cost, depending on their classification. All debt instruments except the debt investments that have been designated as at fair value through profit or loss should be measured at amortized cost net impairment loss. These financial assets must be such that: they are held within a business model and whose goal is to collect the contractual cash flows; and the contractual terms of these assets give rise to cash flows on specified dates that are in form of the principal and interest payment on the principal outstanding. Abu Dhabi National Energy Company PJSC recognizes financial assets at fair value through other comprehensive income by making an irrevocable election to designate investments in equity instruments on an instrument by instrument basis as at financial assets at fair value through other comprehensive income. However, where the equity investment has been held for trading, designation at financial assets at fair value through other comprehensive income is not allowed (Abu Dhabi National Energy Company PJSC, 2014, p. 29). Investments in equity instruments at financial assets at fair value through other comprehensive income are first measured at fair value, and transactions costs are added. On subsequent measurements, these instruments are measured at the fair value with losses and gains arising from variations in fair value initially recognized in other comprehensive income. This essay also established that Abu Dhabi National Energy Company PJSC classifies investment in equity instruments as at financial assets at fair value through profit or loss. However, for the period ended 31st December 2014, Abu Dhabi National Energy Company PJSC had not designated any debt instrument as at financial assets at fair value through profit or loss. Abu Dhabi National Energy Company PJSC also derecognizes financial assets but only after the expiration of contractual rights to the cash flows (Abu Dhabi National Energy Company PJSC, 2014, p. 30). Recommendations From the above analysis, this essay recommends that Abu Dhabi National Energy Company PJSC’s Board of Directors improve on the disclosure of accounting concepts by expressing stating them and their application to its transactions. Other than the revenue recognition concept and historical cost concept, this essay did not find other concepts and principles being stated. For instance, the going concern concept is very critical and should be stated that to the Board’s view, nothing will prevent Abu Dhabi National Energy Company PJSC from continuing to operate efficiently in the foreseeable future. Conclusion This essay aimed at studying the application of IAS 1Presentation of Financial Statements and one IFRS as used by Abu Dhabi National Energy Company PJSC in its financial reporting. The results of this study established that Abu Dhabi National Energy Company PJSC follows the provisions of IAS 1 as it prepares all the four financial statements. In addition, it includes notes to accompany these statements. In respect to the IFRS, this essay studied IFRS 9 that deals with financial instruments. The findings indicated that Abu Dhabi National Energy Company PJSC adopted IFRS 9 on January 1, 2014 instead of the set date of January 1, 2018 and it is following it to the letter. This essay also advised the Board of Directors to improve on the disclosure of accounting concepts and principles it has used in recording its financial transactions. References Abu Dhabi National Energy Company PJSC. (2014). Abu Dhabi National Energy Company PJSC Report of the Board of Directors and consolidated financial Statement. Abu Dhabi: Abu Dhabi National Energy Company PJSC . Bloomberg L.P. . (2015). Abu Dhabi National Energy Co (TAQA) Details. Retrieved April 24, 2015, from Bloomberg L.P. : http://www.bloomberg.com/research/stocks/snapshot/snapshot.asp?ticker=TAQA:UH Deloitte Global Services Limited. (2014). IAS 1 — Presentation of Financial Statements . Retrieved April 24, 2015, from Deloitte Global Services Limited: http://www.iasplus.com/en/standards/ias/ias1 Deloitte Global Services Limited. (2015). IFRS 9 — Financial Instruments . Retrieved April 24, 2015, from Deloitte Global Services Limited,: http://www.iasplus.com/en-us/standards/international/ifrs-en-us/ifrs9 Embassy of the United Arab Emirates. (2015). Energy in the UAE. Retrieved April 24, 2015, from Embassy of the United Arab Emirates: http://www.uae-embassy.org/uae/energy Read More