In business spheres, revenue recognition is essential as it sets the foundation for financial statements that provide insights into a company’s financial performance. In Dubai, a revenue recognition standard IFRS 15 has been introduced and businesses are required to ensure compliance. Top Audit Firms in Dubai assist corporations to effectively implement IFRS standards and to stay compliant.
Importance of IFRS 15 Revenue Recognition
- IFRS 15 improves consistency and comparability in financial reporting. When a company adopts the new standard, it is required to apply the same principles to all revenue contracts, ensuring consistency in financial statements. This will make it easier for investors and stakeholders to compare financials across businesses, thereby making informed decisions about investing, lending, and other transactions.
- IFRS 15 will enhance transparency in financial reporting. Under the old standards, businesses had room to use different accounting policies to recognize revenue, leading to inconsistencies in financial statements. IFRS 15, on the other hand, requires businesses to identify the performance obligations and revenue recognition criteria, ensuring transparency in financial statements.
- IFRS 15 will ensure that businesses recognize revenue when it is earned. In the past, businesses would recognize revenue when they received payment, even if they had not completed the service or delivered the product. This could lead to overstating revenue and understating expenses, leading to misleading financial statements. IFRS 15, however, requires businesses to recognize revenue when the service is completed or the product is delivered, ensuring that revenue is recognized when it is earned.
- IFRS 15 will ensure that businesses meet the new standards for contract law. The new standard requires businesses to follow a five-step model to recognize revenue, and this will help businesses to align with the contract law principles. By doing so, businesses will be able to avoid litigation costs and other risks associated with non-compliance.
- IFRS 15 will improve investor confidence in financial statements. Compliance with the new standard will ensure that financial statements are more transparent, comparable, and reliable, which will ultimately lead to increased investor confidence. This, in turn, will attract more investors and stakeholders, leading to increased business growth.
Steps involved in the revenue recognition model according to IFRS 15
Below are the main steps involved in the revenue recognition model according to IFRS:
Identification of contract with the client.
This emphasizes the need for a legal contract between each business and the customer, outlining all of the rights and responsibilities of both parties.
Separating the various performance responsibilities in the contract
At this point, various performance responsibilities must be independently identified depending on the contract’s content.
Establishing the transaction price
This will rely on the compensation that was agreed upon for the transfer of commodities or services. Agreements with changeable elements will need price estimation based on the information provided.
Distribution of transactional costs
Every obligation of performance defined in step 2 will receive a certain amount of the contract.
Revenue Recognition Upon Fulfillment of Performance Obligation
When the agreed-upon items or services are provided to the client and the client has control, revenue must be recorded over time or at that specific point in time.
When one of the following conditions is fulfilled, an entity recognizes revenue over time:
- All of the advantages offered by the entity are concurrently consumed and received by the client when the client is served;
- The customer controls an asset that is generated or improved by the entity’s performances;
- The performance of the entity does not result in the creation of an asset with a purpose other than that of the entity, and the entity has an enforceable right to compensation for performance already rendered.
Seek the services of top audit firms in Dubai
Essentially, corporations are required to recognize IFRS 15 revenue, in compliance with financial regulations and standards. Thus, businesses are advised to seek the services of Top Audit Firms in Dubai. Therefore, contact us today and we shall be glad to assist you.
Kasun Liyanage is an Audit Manager with over 7 years of experience dealing with diversified corporate clients. He not only manages the team’s work schedule but also is an expert in handling audit areas such as external audits and fraud investigation, Internal control benchmarking and best practices and well as preparation of financial statements and IFRS compliance.