A collaboration between the Financial Accounting Standards Board and International Accounting Standards Board produced IFRS 15 – Revenue From Contracts with Customers – and ASC 606 – Revenue from Contracts With Customers. IFRS 15 is identical to ASC 606, with minor differences.
The collaboration was initiated because of multiple accounting revenue recognition standards, which led to inconsistencies when accounting for contract revenue. Another reason was to achieve high-quality accounting standards worldwide, which is the ultimate goal at ISAB. It was published in May 2014. It should be implemented by early 2018.
To help accountants, and financial audit teams users of financial statements in Dubai, UAE understand and apply the new standard, it is important for auditing enthusiasts to note three key differences between IFRS 15, ASC 606 – and earlier revenue recognition standards.
One Framework That Allows For Many Judgements And Estimates
Significant differences were found between IASB and FASB’s revenue recognition standards. The US Generally Accepted Accounting Principles, (GAAP), contains over 180 papers on revenue recognition. These include industry guidance. IASB’s IFRS has different standards for contract revenues from customers.
IAS 11 and IAS 18 are examples of these differences. These varying standards led to inconsistencies between financial statements, which affected the goal of having comparable financial statements. The IFRS issued by IASB has different standards for contract revenues from customers.
IFRS 15 is an objective-based standard. This means that reporting entities in Dubai, UAE can choose different methods based upon the standard’s principles or objectives. The reporting entity must determine which methods are most useful and relevant to its business and for external users of financial statements.
The 16 industry task forces was created to help audit services in Dubai and UAE with revenue recognition. They also produced a discussion of their Joint Transition Resource Group for Revenue Recognition. Although the AICPA task force recommendations and TRG are not authoritative, Dubai company audit teams and accountants can still benefit from these discussions when making judgments and estimates.
The IFRS 15 standard has more detailed disclosure requirements. This is partly because the regulators and board members felt that the existing financial statements did not adequately disclose revenue information. Also, the new revenue recognition standard requires more estimations and judgments. New guidelines were therefore needed to give more detail regarding revenue recognition.
The new standard requires financial audit teams to create financial statements that provide sufficient detail to allow the user to understand the nature and amount of revenue and cash flow related to customer contracts. The new standard requires that all details of contracts, major judgments, and any changes to them, as well assets, related to contract cost, be disclosed.
From Income Statement To Balance Sheets
Currently, GAAP recognizes revenue only when it is realized or realizable and earned. This is based on the income statement. Your revenue as an entity would be realized when the consideration (such as payment) is received. If a Dubai entity has the right and guarantee of receiving the consideration in future, then the revenue will be realizable. Revenue is earned when the customer owes it to you. The company can also increase its account balance and earn revenue; the earning process ends when you deliver the goods/provide the service.
The core principle behind IFRS 15:
Recognize revenue to show the transfer of promised goods and services to customers in an account that reflects the consideration to what the entity expects in return for those goods and services.” The new recognition standard shifts the focus from the income statement towards the balance sheet.
The revenue should reflect the transfer of goods and services, as stated above. Audit firms in Dubai and other users of financial statements will have to make changes to their balances to meet the new revenue recognition standards. For example, moving an asset from the balance sheet or satisfying liability to recognize revenue would require them to create new assets.
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Read also: Audit Services In UAE Overview Of IFRS 8 Principles
Theshani is a Senior auditor and has experience of 4+ years in providing audit assurance and advisory services to a wide range of industry clients. She continues to stay on top of ever-changing industry dynamics by continuously learning and developing expertise.