Category: IFRS Advisory

In today’s fast-changing business world, it’s essential for companies to report their earnings clearly and accurately. One key way to do this is by following IFRS 15: Revenue from Contracts with Customers, a global standard for recognizing revenue. IFRS 15 standard helps businesses know when and how to recognize the money they earn from contracts with their customers.

A big part of IFRS 15 is understanding contract identification, the first step in figuring out when a business should start recognizing revenue. For businesses in the UAE, knowing how to identify a contract correctly is essential for staying on the right side of the law and maintaining good financial practices. As companies in the UAE grow and expand, it’s increasingly important to follow IFRS 15 to avoid potential problems and keep financial records accurate.

Let’s understand why complying with the International Financial Reporting Standard (IFRS) 15 is becoming a must for businesses in the UAE.

What is IFRS 15?

IFRS 15 is an international accounting standard that sets out how and when to recognize revenue from contracts with customers. It was developed by the International Accounting Standards Board (IASB) and became effective on January 1, 2018. The goal of IFRS 15 is to provide a clearer and more consistent way for businesses to recognize revenue across different industries and regions.

The primary objectives of IFRS 15 are:

1. To enhance comparability of revenue recognition practices across different industries and jurisdictions.
2. To enhance the transparency of financial reporting by providing clear guidance on how to recognize revenue.
3. To reduce diversity in revenue recognition practices and improve consistency in financial reporting.
4. To improve the relevance of financial information by reflecting the transfer of promised goods or services to customers in a manner that is economically significant.

Industries Most Affected by IFRS 15 in the UAE

Several industries in the UAE are significantly impacted by the implementation of IFRS 15, including:

• Telecommunications: Complex contracts with various services, including voice, data, and broadband.
• Construction: Long-term contracts with multiple phases and revenue recognition over time.
• Technology and Software: Licensing, subscription, and maintenance revenue models.
• Retail: Sales, warranties, and loyalty programs.
• Real Estate: Property sales, leasing, and development projects.

Key Principles Governing Revenue Recognition (Five-Step Model)

IFRS 15 introduces the following five-step model to recognize revenue:

1. Identify the Contract(s) with a Customer

A contract must be legally enforceable and approved by both parties, with clear rights, payment terms, and obligations.

Example: You run a consultancy service provider. When a client signs a contract for advisory services, that contract outlines what services you’ll provide and what the client will pay.

2. Identify the Performance Obligations in the Contract

A performance obligation is a promise to transfer a good or service to the customer. This step involves identifying each distinct good or service that must be delivered.

Example: In the consultancy contract, you promise to provide Accounting, AML & Banking Services. Each of these tasks is a separate performance obligation.

3. Determine the Transaction Price

The transaction price is the amount the company expects to receive for the transfer of goods or services. It may include variable amounts such as discounts, rebates, or performance bonuses.

4. Allocate the Transaction Price to Performance Obligations

If the contract involves multiple goods or services, the total transaction price must be allocated to each performance obligation based on its relative stand-alone selling price.

Example: If Accounting typically costs AED 2,000, AML is AED 1,500, and Banking is AED 1,500, you allocate the AED 5,000 transaction price accordingly based on the services provided.

5. Recognize Revenue when (or as) the Performance Obligation is Satisfied

Revenue is recognized when the company transfers control of the good or service to the customer, either at a point in time or over time, depending on the terms of the contract.

Criteria for Identifying a Contract under IFRS 15

To identify a contract with a customer under IFRS 15, businesses must ensure that the agreement meets five specific criteria:

1. Approval and Commitment: Agreement Between Parties

Both parties must approve and commit to the contract’s terms, whether in writing, verbally, or implied by actions. A clear, mutual agreement is required for the contract to be enforceable.

2. Rights to Goods or Services: Identifiable Obligations

The contract must clearly define what goods or services are being provided. Both the business and the customer should know what is expected from each party.

3. Payment Terms: Clearly Defined Consideration

The contract must specify the payment amount and schedule. This ensures the business knows how much and when it will be paid for the goods or services.

4. Commercial Substance: Expected Impact on Cash Flows

The contract must have commercial substance, meaning it affects the company’s financial position or cash flow in a meaningful way.

5. Collectability: Probable Collection of Consideration

The business must expect to collect the agreed payment from the customer. If there’s doubt about the customer’s ability to pay, the contract may not meet the criteria.

Practical Steps for Contract Identification in the UAE

To comply with IFRS 15 in the UAE, businesses must:

1. Analyzing Contracts in Various Sectors

Analyze sector-specific contracts (real estate, retail, construction) for clear performance obligations. For instance,

• Real estate contracts, like property sales or leases, should clearly define performance obligations (e.g., property delivery or maintenance) and when revenue can be recognized.
• Retail contracts, such as single sales or supply agreements, need to outline the delivery of goods and post-sale services to determine revenue recognition timing.
• Construction contracts, often long-term, should break down milestones and tasks to recognize revenue as work progresses.

2. Dealing with Verbal and Informal Contracts

In the UAE, verbal agreements are common. For these:

• Ensure mutual understanding of terms, including payment and obligations.
• Document verbal agreements in writing (e.g., email) to clarify performance obligations and payments.
• Be cautious, as informal contracts may lack the necessary detail for IFRS 15 compliance.

3. Contracts with Government Entities

Government contracts in the UAE often have specific terms and regulations. When dealing with these:

• Understand special terms such as payment schedules and milestones.
• Ensure the contract meets IFRS 15 criteria, especially regarding collectability and commercial substance.
• Identify performance obligations related to public service or regulatory requirements.

Read Also: IFRS Advisory Services in UAE

How Can UAE Businesses Stay Compliant with IFRS 15?

Compliance with IFRS 15 is crucial for UAE businesses to ensure accurate financial reporting and avoid regulatory penalties. Experienced auditors and accountants play a vital role in helping businesses implement IFRS 15. They:

• Review contracts to ensure all performance obligations and revenue recognition criteria are met.
• Provide guidance on accounting treatments for complex transactions.
• Conduct regular audits to verify compliance with IFRS 15 and other accounting standards.

Non-compliance with IFRS 15 in UAE can lead to significant penalties, including:

• Fines imposed by regulatory authorities.
• Reputational damage and loss of investor trust.
• Legal consequences if financial misstatements result in disputes or fraud claims.

How Shuraa Tax Can Help

Professional services from Shuraa Tax ensure seamless IFRS 15 implementation. Shuraa tax offers:

• Expert analysis of contracts and advice on revenue recognition.
• Customized solutions for IFRS compliance tailored to specific industries.
• Ongoing support to update accounting practices in line with regulatory changes in the UAE.

Trusted audit firms like Shuraa Tax can make the process easier. From reviewing contracts to aligning with UAE regulations, our professional services ensure smooth implementation and help you avoid penalties. Let Shuraa handle the complexities, get in touch today at +971 508912062 or info@shuraatax.com.

Following challenging accounting standards is critical when you increase your business abroad and manage significant transactions. The International Financial Reporting Standards (IFRS) are widely accepted rules for financial reporting included by many countries. Companies typically adopt these standards to guarantee compliance and maintain correct financial records.

However, because these standards can change and cause confusion, it’s essential to have contact with IFRS Advisory Services. In this blog by Shuraa Tax, we explore the importance of these services and how Shuraa Tax can assist in guaranteeing compliance with IFRS regulations.

What does IFRS Advisory mean?

IFRS, or International Financial Reporting Standards, offers a fundamental framework for creating financial statements. These universal rules are used worldwide to guarantee financial statements are uniform, reliable, and can be compared easily. The International Accounting Standards Board (IASB) issues the IFRS framework. IFRS is a global language that fosters business transactions with credibility and transparency. Therefore, companies must adhere to IFRS guidelines to uphold effective and dependable financial reporting.

Benefits of IFRS

The following are the benefits of IFRS:

• Improves transparency and comparability of financial information, assisting investors in making informed decisions.
• Reinforces accountability by bridging the gap between capital providers and recipients.
• Promotes economic efficiency by allowing global risk and opportunity recognition, enhancing capital allocation.
• Increases reliability of financial statements through precise preparation and ethical practices.
• Facilitates VAT compliance, particularly in jurisdictions like the UAE, where IFRS is mandatory for listed and LLC companies, ensuring credible VAT reporting.

Key International Financial Reporting Standards

Below are a few significant International Financial Reporting Standards (IFRS):

IFRSs & IASs	Objectives & Scopes
IFRS 2	An organisation must recognise share-based payment transactions in its financial statements, such as granted shares, share options, or share appreciation rights.
IFRS 3	Business Combinations cover accounting for when one company gains control of another through acquisition or merger.
IFRS 5	This standard outline accounting for non-current assets designated for sale or distribution to owners.
IFRS 6	Exploration and Evaluation of Mineral Resources standard permits entities new to the standard to use their existing accounting policies for exploration assets. It also changes how impairment testing is conducted for these assets.
IFRS 9	Acknowledgement and Measurement categorise financial assets based on the business model in which they are held, and it is applicable across all industries.
IFRS 10	Consolidated Financial Statements sets rules for preparing and presenting consolidated financial statements, mandating entities to include those they control.
IFRS 14	Regulatory Deferral Accounts lets first-time adopters of IFRS continue accounting for ‘regulatory deferral account balances’ as per their previous GAAP, with slight adjustments.
IFRS 15	Revenue from Contracts with Customers applies to all customer contracts.
IAS 2	Inventories dictate how to account for various inventory types.
IAS 16	Property, Plant, and Equipment govern the accounting for most types of such assets.

Importance of IFRS

Financial reporting standards are essential for global and international reporting as they provide consistent data, confirm economic efficiency, and aid investors in identifying opportunities and risks worldwide to improve capital allocation. IFRS provides general guidelines for preparing financial statements.

It’s essential for the following reasons:

1.     Starting consistent measures and recognition methods prevents manipulation, errors, and discrepancies in financial reporting.

2.     With multinational corporations operating worldwide, a universal accounting standard improves the credibility of financial reports, facilitating international trade and economic growth.

3.     IFRS ensures consistency in treating business activities, provides users of financial statements with clear explanations for item recognition, and enables accurate decision-making.

Latest updates in the IFRS

Stay updated on the latest developments in International Financial Reporting Standards.

1.     IFRS 15 – Revenue from contracts with customers

IFRS 15 centres on transferring control and identifying performance obligations. We evaluate how these obligations align with the requirements of IFRS 15, considering various revenue sources such as Trading, Construction, and Services. It offers a unified model for recognising revenue from all goods and services across diverse industries.

Our IFRS advisory services will conduct an Impact assessment on IFRS 15, covering the following key areas:

• Identifying customer contracts and performance obligations.
• Evaluating whether obligations are fulfilled at a specific point or over time, based on IFRS 15 criteria.
• Verifying contract cost recognition and transaction price allocation.
• Determining the timing of revenue recognition.
• Analyzing contract modifications for IFRS 15 compliance.
• Assessing the need for significant estimate revisions.
• Identifying areas requiring critical judgment and interpretation.
• Recommending extensive disclosure requirements as per the new standard.

IFRS 15 Substitutes 

IAS 11	Construction contracts
IAS 18	Revenue
IFRIC 13	Customer loyalty programs
IFRIC 15	Agreement for the construction of the real estate
IFRIC 18	Transaction of assets from customers

2.  IFRS 16- Leases 

IFRS 16, issued by the International Accounting Standards Board, provides guidelines for lease accounting. Effective in January 2019, for most companies reporting under IFRS, it replaced the previous leasing standard, IAS 17, issued in January 2016.

The impact of IFRS 16 standard:

• Enhances transparency regarding companies’ lease obligations, assets, and liabilities.
• Improves comparability between companies that lease and those that borrow to purchase assets.

Our IFRS advisory services at Shuraa Tax for IFRS 16 – Leases will include:

• Identifying lease contracts and assessing IFRS 16 applicability.
• Reviewing any subleases.
• Conducting lease accounting reviews as necessary.
• Providing guidance on determining discount rates, lease terms, etc.
• Assisting in preparing lease amortisation tables.
• Offering guidance on transition methods.
• Recommending changes to IT systems and processes to comply with IFRS 16 requirements.
• Addressing disclosure requirements according to the standard.

3. IFRS 9 – Finanqcial Instruments

IFRS 9, issued by the International Accounting Standards Board (IASB), focuses on financial instrument accounting and replaces the IAS 39 Recognition and Measurement standard.

The impact assessment for IFRS 9 will broadly include:

• Categorising and measuring financial assets and liabilities.

• Evaluating impairment of financial assets and liabilities using the three-stage damage model.
• Applying IFRS 9 through practical expedients.
• Addressing disclosure requirements as per the standard.

Under IFRS 9—financial instruments, starting an impairment allowance is mandatory. It must be regularly assessed, and any changes in the allowance must be reflected in the profit and loss account.

4.  IFRS 17- Insurance Contracts

IFRS 17 mandates that insurance liabilities be assessed at their current fulfilment value, offering a standardized measurement and presentation method for all insurance contracts. It replaces IFRS 4 Insurance Contracts and related interpretations and applies to periods starting from January 1, 2023. Early adoption is allowed if IFRS 15 Revenue from Contracts with Customers and IFRS 9 Financial instruments are implemented.

Other IFRS Advisory Services in the UAE include:

• Developing Accounting Policies/IFRS Manual.
• Conducting IFRS Training.
• Providing Implementation Support for IFRS standards such as IFRS 16, IFRS 9, and IFRS 15, among others.

Shuraa Tax IFRS Services

Well-known for its exceptional IFRS consulting services across the UAE, Shuraa Tax assists clients comprehensively in financial reporting, preparing IFRS financial statement, analysing upcoming amendments, and more. Our IFRS advisory and consulting services include:

• Assistance with IFRS adoption and implementation
• Support for implementing complex standards
• Conducting impairment testing and modelling
• Ensuring compliance with revenue recognition processes and controls
• Developing comprehensive reporting manuals
• Formulating sustainability plans
• Helping update IFRS accounting policies by standards changes or adoptions
• Providing training and facilitating knowledge transfer processes.

Why Choose Shuraa Tax Accounting?

Implementing the new IFRS standards has posed significant challenges for companies in the UAE, particularly because many have delayed the process. This results in a concentrated workload towards the end of the year rather than being spread out. It also requires substantial efforts from the IT side. These new standards have led to discrepancies in income statement and balance sheet arrangements.

At Shuraa Tax, our experienced professionals can provide superior IFRS advisory services for your business, ensuring alignment with global standards and compliance with tax regulations to relieve your business of tax burdens.

In addition to offering IFRS advisory services in the UAE, Shuraa Tax efficiently manages CFO Services, Auditing Services, Accounting & Bookkeeping Services, Accounting Software Services, Due Diligence Services, and Tax Filing & VAT Consultancy services promptly and conveniently for our valued clients. Our customer-centric approach is highly regarded, and we guarantee exceptional service for your business.

Require IFRS advisory services? Don’t hesitate to reach out to us. Shuraa Tax is here to assist you! Contact us today to learn more about our services. Reach us at +971508912062 or email us at info@shuraatax.com.