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IFRS 15

IFRS 15: Demystifying the Art of Revenue Recognition

The International Financial Reporting Standard (IFRS) 15, “Revenue from Contracts with Customers,” is a global reporting standard established with the intent of helping companies how to recognize revenue. It’s a framework that helps businesses define when and how much revenue to record in their financial statements. Adopted on January 1, 2018, IFRS 15 ensures consistent, comparable, and transparent financial reporting for companies worldwide, making it easier to understand revenue to the users of the financial statements.

 

Why IFRS 15 Matters

Assume you run a business selling services. It is crucial to know exactly when you’ve earned your revenue and can report it. This clarity helps the users of your financial statements (such as; investors, regulators, and other stakeholders) understand your financial health with a better understanding. Before IFRS 15, different companies used varied methods to recognize revenue, making the comparisons between businesses difficult. IFRS 15 standardizes this process, ensuring every business follows the same rules.

 

five step model

The Five-Step Model

IFRS 15 uses a five-step model to signify how revenue should be recognized. Let’s break it down with practical life examples:

 

  1. Identify the Contract with a Customer

A contract is an agreement between two or more parties that creates rights and obligations with consequences.

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.

 

  1. Identify the Performance Obligations

Performance obligations are the promises in a contract to transfer goods or services to a customer. A single contract may have multiple performance obligations.

Example: In the consultancy contract, you promise to provide market research, strategic planning, and financial analysis. Each of these tasks is a separate performance obligation.

 

  1. Determine the Transaction Price

The transaction price is the amount of money you expect to receive for fulfilling the contract. This includes fixed amounts, variable amounts, and any non-cash considerations.

Example: The consultancy contract is valued at AED 5,000. However, if the client requests additional services beyond the initial scope, you adjust the transaction price accordingly. The final transaction price could vary.

 

  1. Allocate the Transaction Price to the Performance Obligations

Once you know the total transaction price, you allocate it to each performance obligation based on their standalone selling prices.

Example: If market research typically costs AED 2,000, strategic planning AED 1,500, and financial analysis AED 1,500, you allocate the AED 5,000 transaction price accordingly.

 

  1. Recognize Revenue When (or as) the Entity Satisfies a Performance Obligation

Revenue is recognized when you fulfill each performance obligation, either over time or at a specific point in time.

Example: For the consultancy contract, you recognize revenue as you complete each task. If market research is completed first, you recognize the revenue allocated to that task upon completion.

 

Practical Life Example: Software as a Service (SaaS) Company

Let’s consider a SaaS company that provides accounting software with ongoing customer support and regular updates. Here’s how IFRS 15 would apply:

  • Identify the Contract: The customer subscribes to the software service for one year, paying AED 12,000 upfront.
  • Identify the Performance Obligations: The contract includes access to the software, regular updates, and customer support. These are distinct services that can be identified separately.
  • Determine the Transaction Price: The total price is AED 12,000 for the year.
  • Allocate the Transaction Price: Assume the standalone selling price is AED 8,000 for the software access, AED 2,000 for updates, and AED 2,000 for customer support.
  • Recognize Revenue: The company recognizes revenue over time as the customer uses the software. Each month, AED 1,000 is recognized as revenue (AED 12,000/12 months).

 

Why This Matters to You

Understanding IFRS 15 ensures that revenue is recorded accurately, reflecting the true/actual performance of the business. This provides investors with greater confidence in the reliability of financial statements. For businesses, compliance with these global standards minimizes the possibility of mistakes and ensures consistency in reporting, stimulating trust and credibility.

 

Revenue/ Income recognition under UAE Corporate Tax

The UAE Corporate Tax Law also places a greater reliance and importance on recognition of revenue as per IFRS. The taxable persons are expected to comply with IFRS for preparation of books of accounts in general for computation of the taxable income and in particular the revenue recognition for claiming the Small Business Relief also should done by complying with the IFRS 15.

 

Conclusion

IFRS 15 makes it easier to recognize revenue consistently, which helps the users of the financial statements (such as; investors, regulators, and other stakeholders) understand financial statements better. Whether you’re a business owner, investor, or accountant, understanding these rules is vital. Following the five-step model ensures companies report revenue accurately, building trust in their financial well-being.

 

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Why Choose Spectrum Auditing?

At Spectrum Auditing, we go beyond just being an auditing firm; we’re your trusted partner in navigating the ever-evolving landscape of UAE regulations. Here’s what sets us apart:

  • Unparalleled Expertise: Our team consists of accredited auditors, management accountants, consultants with in-depth knowledge of UAE laws, ensuring your business remains compliant.
  • Streamlined Solutions: We take a comprehensive approach, guiding you through every step of the process, from risk assessment to filing reports.
  • International Recognition: Be audits or any type of compliance, we adhere to the highest standards (ISA, IAS, IFRS), providing global credibility.
  • Personalized Support: We understand every business is unique. We tailor our services to address your specific needs and answer any questions you may have.

 

Partner with Spectrum Auditing today. Let’s focus on your success, while you focus on what you do best – running your business.

 

Contact us today for a consultation at +971 4 2699329  or email [email protected] to get all our queries addressed.

 



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Balaram Vuchidi

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