IFRS 15, be that it’s a revenue recognition standard, affects all Dubai & UAE businesses into contracts with clients to transfer goods/services – private, public, and non-profit organizations. Through reliable audit services, both private and public companies must be compliant with IFRS 15.
The purpose of the IFRS 15 is to eliminate variations in the way companies in Dubai and UAE manage accounting for similar transactions. There is no standardization in reporting financial statements, which has made it challenging for consumers and investors to compare results across various disciplines and even entities within the same industry.
IFRS 15 Compliance
While creating the IFRS standard, Dubai, UAE businesses responsible wanted to develop a framework that ensures financial reporting consistency, simplifies financial statement preparation, and enhances comparative analysis and reporting via a five-step revenue recognition model.
We shall break down the compliance suggestions for audit firms in Dubai and other entities to have a clear understanding of the contract process:
Identifying the Contract with a Customer
These steps highlight the approach that Company audit professionals must meet on behalf of a company when creating a contract with a client to supply goods or services.
Identifying Performance Obligations in the Agreement
This step discusses how the contract’s distinct performance obligations should be addressed.
Calculate the Transaction Price
A transaction price is an amount an organization expects to receive from transferring the goods and services to the customer. This step clarifies what must be considered when determining the transaction price.
Assign the Transaction Price
This step describes how the contract’s performance obligations will be allocated across the transaction price, the amount the customer agrees to pay for goods and services.
- The business recognizes revenue when it fulfills its obligations
- The business can recognize revenue as it meets each of its performance obligations. This step outlines how that should be accomplished
The Impact of IFRS 15
Dubai, UAE companies record revenue in customer contracts using the Revenue from Contracts with Customers rule, which standardizes and simplifies the process. Some companies, such as retailers, don’t face as much impact since they sell products and receive revenues all at once.
However, the rule may have a positive impact on companies that sell recurring services such as subscriptions or licenses.
The previous law allowed companies to apply only six months’ revenue to their books if, for instance, they sold a 12-month software license. Revenue for the next six months would not be counted until the following year. Under IFRS 15 (and ASC 606), all income can be calculated simultaneously.
The implementation of IFRS 15 also has broad implications. Dubai entities will be impacted by your accounting, finance, and IT departments and your HR policies. Many companies are concerned about these broader implications and unknowns.
Analyzing the Effects on Business
A business decision can be difficult if not armed with proper information. Company audit specialists must assess how the new standards will impact their organization during the transition process. An evaluation of primary revenue streams and binding contracts is undertaken to identify revenue recognition changes that need to be made and the business units most affected by these changes.
In this phase, there are many important questions that financial audit teams should consider. What happens to your revenue recognition profile when you apply it to a sample of mission-critical contracts in the five-step compliance model? Are your customer contracts going to have to change? Do you need to change how you sell? Making a good business decision is difficult if you do not have the proper information.
To put together a good plan, team, and budget, you need to understand how much work is involved. Several factors come into play when allocating resources and calculating costs.
Requirements for Contract Evaluation
Your accounting policies will need to be built on a rules-based framework that considers your contracts. The audit team will have difficulty evaluating each of your contracts and drawing up new policies if they are highly variable.
Transition Method to Use
Both full and modified retrospectives have pros and cons, but both require considerable implementation efforts. In a complete retrospective, two previous comparative years must be restated. In contrast, two phases of record-keeping are required in a modified retrospective. In what ways are you putting in place the necessary systems and people?
Managing Comprehensive Disclosures
There is a significant increase in the cost of quantitative and qualitative disclosures under the new standards. The method audit services for a company plans to develop will allow systematic collection, review, and disclosure of information about remaining performance obligations, including resources consumed, labor hours spent, costs incurred, or machine hours used.
Post-transition Revenue Recognition Plans
What new revenue calculation rules will you apply to track performance obligations?
What are the human resources required to handle complex revenue scenarios, multiple revenue streams, and contract modifications? What controls will you implement along the way?
Audit firms in Dubai and other entities need to plan carefully and devote time to complying with the new standards. Still, it will not be a daunting challenge. It is likely that every organization, big or small, will find that the transition results in business transformation.
Umapathy Anuruthan, is a Senior Auditor at the firm, holds a Business Management Degree and carries with him an experience of 6+ Years, having worked in two of the Big 4 audit firms. He has a ‘hands-on’ understanding of external audits and financial reporting and is well-known for his approach to ensuring the highest quality and accuracy in audits for clients of numerous industries.