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Accounting Treatment of the Revenues of Audit Firms in Accordance with IFRS 15
17-Aug-2022
“Revenue from Contracts with Customers”, and the Mechanism of Tax Accounting in Accordance with the Applicable Laws and Regulations
By: Dr. Hussam Addin Ahmad Khalil, Mr. Ihab Hossam Al Deen Ahmad Khalil- IASCA Members
…………. Part Two
The Second Method - Recognition of Revenues over a Period of Time:
Recognizing revenue over a period of time refers to the satisfaction of the performance obligation over recurring periods of time or over a period of time, i.e., the delivery of goods or provision of services is carried out in stages to satisfy a single performance obligation. For example, providing some services such as auditing, consulting services, special engagements services, or long-term construction contracts, are examples of cases where revenues shall be recognized over a period of time. Many determinants help professionals determine that the revenue recognition will be carried out over a period of time, such as:
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When the customer simultaneously receives and consumes the benefits provided by the entity’s performance, for example, when an audit firm provides tax advisory services based on an annual contract.
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When the customer controls the asset, whenever any stage of production is completed, for example, when a contractor builds on the customer’s land, or when an audit firm provides project evaluation services; an intangible asset will be created when the evaluation is implemented and completed.
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When a seller manufactures or assembles an asset that has no alternative use, but to be sold to a specific customer; therefore, the seller has the right to receive payments for the work accomplished. For example, when a manufacturer designs a special equipment for the plastic industry with special specifications for a certain customer.
At this point, it is necessary to highlight the accounting treatment on long-term contracts for auditing firms and consultancy services.
The contract for audit firms; or what is called the assignment letter, is an agreement between two parties, whereby the first party (the audit firm) provides audit services, tax advisory services, and/or services for special engagements requested by the customer. These services are provided for the benefit of the second party, (the beneficiary, the company, a group of companies, individuals) at a price that is often specified and fixed at the time of concluding the contract. Examples of those contracts include:
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Auditing the financial statements for the year (....);
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The audit of a special case;
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The revision of a special list;
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The audit of the implementation of a specific accounting standard;
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A special business, as the customer requires;
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The provision of tax consultation services (income and/or sales tax);
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Feasibility studies;
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Project assessment services;
An accounting problem arises regarding the treatment of audit firms’ service contracts, as this type of contracts is usually implemented over a long period of time. Therefore, the implementation spans over more than one accounting period and requires an appropriate accounting method to allocate the contract’s revenue and costs over the accounting periods needed for the contract's implementation.
Regarding the implementation of the Income Tax Law No 34 for 2014, and the amendments thereof, Article 15 (A) stipulates that: “Income and deductible expenses for the taxpayers who use the accrual basis of accounting regarding the long-term contracts shall be computed based upon the actual progress rate of the contract within the tax period in accordance with the provisions and procedures to be specified by the executive instructions”
Methods of Measurement of the Obligation Progress Rate over time:
IFRS 15 addresses how entities recognize revenues arising from long-term contracts, and provides two methods to treat long-term contracts; both the input method and the output method. The input method will be adopted to measure the entity’s progress rate in satisfying the contractual obligation. These methods provide a faithful depiction of revenue recognition:
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