Audit Evaluation on IFRS 15 and Real Estate Industry in Dubai
 sales@farahatco.com       +9714250025197142500251+      WhatsApp
Audit Services Evaluation on IFRS 15

Audit Services Evaluation on IFRS 15 and Real Estate Industry in UAE

In this article, we will discuss an Audit Services overview of IFRS 15 related to the real estate industry.

IFRS 15 and the Real Estate Industry in Dubai and UAE

The IASB  IFRS 15, a converged standard for financial audit and statements, prepares to recognize revenue from customers’ contracts. This replaces all existing IFRS revenue requirements and US GAAP revenue requirements. This new standard aims to improve financial reporting on income and increase the comparability of top lines in financial statements worldwide.

The new standard was initially required for annual periods that began on or after January 1, 2017. The IASB amended IFRS 15, delaying the effective date by one year to 2018. After considering the feedback received from its consultation, the IASB decided in July 2015 that the effective date of IFRS 15 would be delayed by one year. Companies in Dubai and UAE that use IFRS have the option of applying the standard earlier.

IFRS 15 provides a five-step approach to revenue from customer contracts. It does not take into account the nature or industry of the revenue-generating transaction. The new standard is more comprehensive than current accounting standards regarding revenue and guides previously covered questions.

It outlines the accounting treatment of incremental costs associated with obtaining a contract and expenses incurred in fulfilling a contract. IFRS 15 presents a five-step model which replaces the notion of “transferring risks and rewards” with “transferring control.”

Read also: How to Record the Accounting Entries for the Right of Use Asset IFRS 16?

This five-step model is available as follows:

Step #1: Identify The Contract With A Customer

Contracts with customers should be binding and have commercial substance, regardless of whether they are written, verbal, or implied. If it is “probable” that the company is entitled to the consideration, the five-step model applies to customer contracts.

The Dubai firm will consider the ability and intent of the customer to pay the consideration in order to determine the likelihood of collection. IFRS 15 gives detailed guidelines to company audit teams concerning contract modifications. Modifications can be considered separate contracts or amendments to an original contract. It all depends on the situation. It also allows entities in Dubai and UAE to combine multiple contracts with the same customer.

Step #2: Identify The Separate Performance Obligations In The Contract

The Dubai firm must identify the services and goods promised in the contract. This allows the entity to determine which promised goods or services will be taken into consideration and accounted for under a separate performance obligation. This step is necessary to determine whether a service, good, or bundle is distinct. Multiple activities can be identified within real estate, but they are not required to be considered separate performance obligations.

Step #3: Calculate The Transaction Price

The transaction price is “The amount to which an entity in Dubai, UAE expects in return for transferring promised goods and services to a client, excluding amounts collected by third parties.” Entities should consider an estimate of any variable consideration, the fair value of any non-cash consideration, and the effect of any consideration payable. If there is significant financing in the contract, it should also be considered when determining the transaction cost.

Step #4: Align The Transaction Price With The Separate Performance Obligations

Entities refer to their standalone selling price to assign the transaction price to the performance obligations. This is the best way to measure each price. For the primary services and products provided, this information is readily available in the Dubai and UAE real estate industry. Entities could only use a residual approach to assign the transaction price to separate performance obligations if the standalone selling price is highly variable or unpredictable.

Step #5: Recognize Revenue When The Entity Fulfills A Performance Obligation

A customer can transfer promised goods and services from an entity to satisfy a performance obligation. This is called revenue recognition. This approach is different from IAS 18’s “risks and benefits” model. This is because IAS18 and IFRS 15 have different interpretations of continuing managerial involvement. This means that the control of goods or services does not pass from the seller to the buyer, but it does not preclude revenue recognition under IFRS 15.

Revenue recognition could occur at any time or over time. It is based on the fulfillment of performance obligations and the transferor control of promised goods or services. REC is a transfer of performance obligations over time if clauses in construction contracts indicate that the customer owns any work-in-progress while the contract item is being constructed. Some countries allow purchasers to pledge or sell unfinished apartments.

These are potential benefits that an asset can provide, as described in IFRS 15, which allows for revenue recognition over time. Off-plan contracts in real property give the entity an enforceable right for payment for any performance that has been completed. Another example of revenue that can be recognized over time is this.

End to End Audit Services in UAE – Accounting and Auditing Company in Dubai, UAE

We use a high-value-adding and risk-based approach to internal auditing in order to assist companies. Farahat & Co, one of the top audit firm in Dubai, ensures that clients receive timely audit services.

Read also: Accounting Entries How to Book Profit Sharing Under IFRS 16

Ervee is a CPA with international experience in Tax and Accounting. He has over 12 years of experience in accounting and bookkeeping and over a year in VAT implementation, registration, and accounting in UAE. He regularly drives out inefficiencies in company operations and loves the challenge of helping clients find additional ways for an easier and improved compliance and verification of transactions. Read more