Dubai companies sell products and services to the general public, or individuals may use carrots on their customers to persuade them to buy. It is important to ask how Dubai audit firms can account for incentives in IFRS. Companies in Dubai often recognize promotions in profit/loss through company audit teams. This is an easy process but not the best.
Audit Firms in Dubai explains in this guide the rules that govern company auditors in this area.
What the Rules Say
In the past, the guide was somewhat confusing as it was based on different standards and interpretations. Audit services, for example, used AFRIC 13 customer loyalty programs to accounting to award loyalty points to buyers.
IAS 18 revenue was used to fund other transactions. The standard offered less guidance and was therefore more general. There was little guidance regarding accounting for discounts or coupons.
Fortunately, IFRS 15 Revenue From Contracts with Clients is in place and is very in-depth. There is no single rule that applies to all client incentives. Instead, different parts of the standard will use different promotion tools and require serious assessment. We will share some tips with you.
Are customers aware of the incentive that was provided at the beginning of the contract? Is it, for example, known before you purchase?
Was the discount, the free product, or something else provided after the agreement was in effect? If the client incentive is provided at the inception, it may be considered independent performance responsibility as it’s a material right. The company may then have to assign the transaction price.
It is important to highlight it at the beginning
Auditors might have to recognize a provision that is based on IAS37, modify the transaction price estimate, or do something else. Do volume discounts offered by Dubai businesses apply retrospectively or prospectively to new purchases? Or, is the final price for client purchases determined by the total goods purchased during a given period?
When company audit teams apply discounts prospectively for new purchases, it would be considered a material right. This means that clients have the option to receive additional goods at a discount. However, retrospective discounts are variable in determining transaction costs.
Are there any discounts available for bulk orders?
Is it possible that you are only offering this discount to one client because of this contract?
You might be entitled to a discount if you sign up for a contract that is not applicable to you, but other customers pay higher prices. If you offer a discount to all bulk buyers, this right isn’t important. It is the variable consideration that matters. Legal documents often include the phrase “Material Rights”. But what does this mean?
Read more: The Impact of IFRS 16 on Leasing for Businesses in Dubai
What is a material right in layman’s terms?
A customer receiving a material right is a benefit that cannot be obtained otherwise. After the first year of your network services contract, you have the right to one extra month for no additional charge.
You cannot get One Month Free if you don’t sign the contract for network services first.
If a customer was granted a material right in a contract, that right must be treated as a separate performance obligation. Many companies make mistakes. They don’t know how to identify material rights, don’t price it and don’t book revenue when they use it.
This is incorrect is there any right to use a particular material?
Two questions are required to determine if there is a material right.
Are you able to offer additional services or goods to your customers without entering into another agreement?
The customer can obtain the goods and services, regardless of whether there is a material right.
If you answered no, continue to question number 2.
Clients can purchase the goods/services of clients at the same price as their individual selling prices. If the answer is yes, then there is no material right because the clients could buy the same thing at the same price. If the answer is no, there is a material right. Audit services should consider it an individual performance obligation.
Financial Auditing Services in Dubai, UAE
At Audit Firms in Dubai, we offer audit services for businesses of all sizes. We have helped many entities including financial institutions, commercial businesses, schools, colleges, non-profit organizations, college districts, governmental entities and service organizations. After gaining a deep understanding of your business, we design our audit.
An audit is the highest assurance that your financial statements conform to generally accepted accounting principles. We might find areas that could be improved in your internal controls or processes during the audit process.
So, are you ready to work with the best audit firms in Dubai? If yes, send us an email, visit our website and fill out a form, or request a callback and we shall be in touch immediately.
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.
