How IFRS 15 Affects Companies in Dubai and UAE

How IFRS 15 Affects Companies in Dubai and UAE

For some accounting and financial services in Dubai and UAE, the effects of the new guidelines for revenue recognition will be small and they will still recognize revenue the same way they did before. But, for some accounting services in Dubai, they may face difficulties when applying for these new rules. The biggest issue will be areas that predominantly reliant on IAS 18 and other associated standards.

As opposed to the current standard, the IFRS 15 standard gives chartered accountants in Dubai and UAE less control over accounting decisions and instructs on how things should be done. The biggest areas are the following:

Revenue is recognized over time or at a certain point in time:

  • If revenue is recorded over time, how should Dubai and UAE accounting and financial services measure the progress toward completion.
  • How shall accounting services recognize revenue from several offers with various deliverables. Should the divide the contract in components?
  • How shall chartered accountants handle contract modifications?
  • How shall accounting services handle the contract costs, plus cost of acquiring the contract. Are they supposed to capitalize, defer, or expense the costs in profit or loss?
  • Are components financed in the contract? If so, how will these accounting services in Dubai handle time value of money.
  • What disclosures do Dubai chartered accountants need to make? Do they have the accurate and reliable data?

Different industries and sectors are impacted in various ways. In this guide, we shall highlight for key industries in UAE that may likely face the biggest challenges:

Telecommunications Companies in Dubai and UAE

Telecommunication companies handle a wide range of customers, contracts, and various offerings. So, the primary challenge for accounting services in UAE is  to split bundled offers into independent performance obligations and assign transaction price. Furthermore, the revenue for each performance obligations should be recognized over time or at the point of time.

With IAS 18, most telecom companies offer free handsets to clients and handle them as costs to obtain a client or market costs. For IFRS 15, this is not allowed because the standard requires accounting services to allocation transaction price to individual performance obligations. As such, telecom companies should assign total contract price between sale of monthly plan and the sale of handset.

The timing of revenue recognition fluctuates since in IFRS 15, the revenue is recorded earlier than in IAS 18. Another implication is that revenue recognition doesn’t correspond with monthly billing to clients, because there will be a few deferral accounts. This is a huge challenge for Dubai chartered accountants because the execution requires considerable changes in IT systems so that they can automatically determine and record the amount of revenue received every month.

Manufacturer Companies in Dubai and UAE

Manufacturing and contracting opportunities are varied.

IFRS 15 can still affect you if you produce similar products in large quantities that are largely typified and not too specific – just look at the example below.

On the other hand, manufacturers of specific equipment or goods in general whose production period is long can suffer profoundly from this change.

Here are some things to watch out for:

Revenues should be recognized either over time or at a particular point in time? When you recognize revenues over time, how will you measure their progress?

What is the appropriate way of accounting for changes to a contract, such as the delivery of additional goods?

Rebates are provided after delivery? Does volume discount apply? Would you consider awarding bonuses at the end of the year based on the volume of orders you received? This is likely to trigger the impact of IFRS 15.

Are there additional performance obligations you should include in your contract? If your products have some warranty period, should the warranty be included separately as a cost? Does your company provide any additional services?

Do you pay sales bonuses to your sales team when you obtain a contract? You might consider capitalizing them rather than equating them with costs.

Here’s an example of how IFRS 15 could affect contract modifications to illustrate the potential impact. Let’s examine subsequent orders from the same customer for the same goods.

Dubai and UAE Construction Companies and Property Developers – Real Estate

Real estate companies in Dubai and UAE, including construction and property development firms are typical of their contracts with clients of long-term nature. The primary problem is to decide whether the company can recognize revenue spread over a couple of years  or at the completion of a contract.

According to IFRS 15,  when an accounting service recognizes revenue over time:

When the performance of a company doesn’t create an alternative asset to use and the business has a right to reinforce payment for performance completed to date, the revenue must be recognized over time. For instance,  when developer makes an asset tailored to the needs of the customers, but it is not practical or expensive to transfer to another client, customers can pay for work completed to date, reasonably.

On the other hand, “no alternative use” can be accomplished contractually. This means the agreement prevents the entity from transferring the asset to another client. For real estate companies in Dubai and UAE, it will be important to evaluate whether or not the developer has the right  to pay for performance completed to date or not.

Technology and Software Development Entities in Dubai and UAE

UAE companies, especially those specialized in software development and offering various services are known for long-term contracts and diversity of operations.

Therefore, the main challenges for accounting and financial services are:

  • Recognizing individual performance obligations such as post deliver support, customization, sales of license, etc.)
  • Evaluation of the progress towards complying with the contract.
  • Evaluation of the licenses for the products developers and vendors sell.

In conclusion,

From the above insights, the new IFRS 15 can mess things in a company if not address well. However, it’s up to accounting services to come up with a plan and execute carefully.

If you want to know more about IFRS 15, or want assistance with IFRS, please reach out audit firms in Dubai experts.

My goal here was NOT to give you the full solution, because it is simply impossible without knowing your specific information.

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