Identifying a Contract with a Customer under IFRS 15 in the UAE

Identifying a contract with a customer under IFRS 15 in the UAE stays right at the start of revenue recognition. If the contract fails the tests, revenue cannot move to the income statement, even when cash arrives. 

That can affect tax planning, banking covenants and dividend decisions. This guide walks through the IFRS 15 criteria, then applies them to common UAE structures such as long-term services, framework agreements and contracts with government entities.

Why Contract Identification Matters Under IFRS 15

IFRS 15 treats a contract as the basic unit for revenue recognition. Once a valid contract exists, management can identify performance obligations, decide on transaction price and track satisfaction of those obligations.

If the arrangement does not pass the contract tests, any money received stays as a liability until conditions change or the transaction closes. For UAE entities with advance invoices or retainers, this can create large contract liability balances and awkward swings in reported profit when issues finally clear. Correct identification also supports corporate tax and VAT work.

The Five IFRS 15 Criteria for a Contract

IFRS 15 sets five gates that must all be met before an arrangement qualifies as a contract with a customer. A short checklist helps management apply these gates in daily work.

Key criteria under IFRS 15

• The parties have approved the arrangement and understand their obligations through signatures, exchanges of letters or clear electronic acceptance.
• Each party’s rights regarding goods or services can be identified in the written terms or supporting documents.
• Payment terms can be identified, including price, timing and any variable elements such as performance bonuses or penalties.
• The contract has commercial substance, meaning the risk and timing of cash flows will change for the entity.
• It is probable that the entity will collect the consideration in exchange for the goods or services that will transfer.

If any gate fails, revenue recognition waits. For example, when collectability looks weak, receipts will be treated as deposits until evidence improves.

How UAE Practice Influences The Criteria

Local business customs shape how contracts are documented. Some sectors rely heavily on stamped purchase orders, others on standard forms, and some on email chains. IFRS 15 focuses on substance rather than format, yet weak documentation makes the tests harder to apply.

Regulators in the UAE also watch related impacts. Banks often request clear contracts before extending facilities. Tax authorities may review contracts when assessing VAT treatment or corporate tax positions, especially where large prepayments or discounts appear. Consistency between legal contracts, commercial practices and accounting entries therefore carries extra weight.

Written Contracts and Email Trails

Many UAE entities operate with master service agreements plus individual purchase orders. In such cases, the master sets the rights and obligations while each PO triggers a separate contract under IFRS 15. Revenue then tracks performance under that PO, not the entire framework.

Sometimes the only evidence of agreement is an exchange of emails that confirms scope and price. If the content covers rights, duties and consideration, IFRS 15 can still view it as a contract, yet the risk of later disputes rises. Clear numbering, version control and archiving reduce that risk and support audit work.

Dealing With Modifications and Change Orders

Projects in construction, technology and facilities management often change midstream. IFRS 15 treats a contract modification as either a separate contract or part of the existing one, depending on the nature of the change.

If additional goods or services are distinct and the price rises by an amount that reflects stand-alone selling price, the modification forms a new contract. Otherwise, it adjusts the original one, which may require a catch-up adjustment to revenue. Careful tracking of variation orders, scope changes and time extensions is therefore vital for large UAE projects.

Multiple Parties and Agency Situations

Some arrangements involve three parties. A platform may connect a restaurant and a customer, or a logistics firm may act on behalf of a retailer. IFRS 15 then asks which party controls the goods or services before transfer to the end customer. That party is the principal and records gross revenue. The agent records only its commission.

Evidence includes who bears inventory risk, who sets prices and who has primary responsibility for fulfilling the promise. Mistakes in this assessment can double count revenue across group entities or understate exposure to returns and warranty claims.

Grey Areas That Often Trigger Questions

Certain patterns tend to draw attention during reviews or audits.

Typical grey areas in UAE contracts includes:

• Mixed social and commercial activities, for example, a clinic that runs a subsidised charitable wing together with a premium section. Contract terms must show which services are provided on arm’s-length terms and how the entity is compensated.
• Government or quasi-government contracts with complex approval chains, where verbal instructions sometimes precede written amendments. Evidence of formal approval for scope and price adjustments is critical.
• Arrangements that combine goods with long term maintenance, where it is unclear if the customer can benefit from each element on its own. The answer affects performance obligation analysis, yet starts with clear contract identification.

Documentation Practices That Help During Audits

Strong documentation turns contract identification into a quick task, not a long debate. Helpful practices include:

• Standard templates with clear sections for scope, price and payment schedule, with numbered change orders.
• A central repository where signed contracts, POs and key correspondence sit together, indexed by project or customer.
• Periodic internal reviews comparing actual billing and delivery against contract terms so that deviations are addressed early.

These steps also support consistent VAT invoices and reduce conflicts between legal teams, finance and operations.

How Arnifi Supports IFRS 15 Contract Identification

For many UAE entities, IFRS 15 reviews first arise during an audit, a funding round or a tax planning exercise. Arnifi’s expert accounting and bookkeeping services enter at this stage to run focused workshops with finance teams, review sample contracts and build simple decision trees that staff can apply across new deals.

The goal is not to create dense manuals. Instead, Arnifi helps design short checklists for sales teams, simple mapping tables for finance and clear links between contract clauses, performance obligations and tax treatment. That way, new contracts arrive in the accounting system already aligned with IFRS 15 logic.

Final Thoughts

Identifying a contract with a customer under IFRS 15 in the UAE blends technical rules with practical judgment.  Entities that invest in clean templates, disciplined change-order procedures and short decision guides usually find that revenue debates fade and attention shifts to business performance instead. 

When needed, hire Arnifi’s accounting and bookkeeping services to work with a single partner that links contract wording, accounting entries and tax implications so that boards and founders can rely on numbers that match real deals, not just invoices.

FAQs

1. What counts as “approval” of a contract under IFRS 15 in the UAE?

Approval can take the form of a signed agreement, a stamped purchase order or a documented electronic acceptance. The key point is clear evidence that both parties intend to be bound and understand their obligations and payment terms.

2. How should informal email agreements be treated?

If emails clearly set out scope, price and responsibilities, they may satisfy IFRS 15 criteria. However, the risk of misunderstandings is higher, so many entities later formalise such arrangements into short written contracts to reduce disputes.

3. Can a framework agreement alone be treated as a contract for revenue recognition?

Often the framework sets general terms, while individual purchase orders or call-off notices create contracts for specific goods or services. Revenue typically follows the performance under those individual orders rather than the framework itself.

4. What happens when collectability becomes doubtful after a contract starts?

If conditions worsen, management reassesses collectability. Revenue already recognised remains, but new revenue may stop until it again becomes probable that consideration will be collected. 

5. How do contract modifications affect existing IFRS 15 assessments?

Each significant modification is analysed to decide if it forms a new contract or alters the existing one. That decision affects how much revenue is caught up immediately and how much is recognised over the remaining term.