All You Need To Know About Accounting for IT Business
The IT industry in Dubai is an ever booming sector. Information Technology firms in Dubai are already making a big mark on a global level by employing a large number of techies from around the world. Dubai is focusing on hosting many global level technical events that will increase the participation of information technology firms around the world.
The Software-as-a-Service (SaaS) business model is the main attraction with Software companies which were earlier only attached with the sale of software products. But, how about the accounting practices? While many of the accounting and tax issues faced by software companies are common in other industries as well, there are certain areas in which software companies must be well-versed in order to establish credibility with investors.
IFRS 15 for the software industry
As expected, the implementation of IFRS 15 is proving to be a challenge in the software industry. Even if there is no significant change to the pattern of revenue recognition, management will need to make a number of new judgments and estimates. Often there can be contract deliverables in software arrangements that are not yet billed (for example, future maintenance periods). IFRS 15 requires these to be disclosed, in addition to an explanation of what comprises accrued and deferred revenue (contract liabilities and contract assets) and over what period the services have been, or will be, performed.
IAS 1 requires entities to disclose certain information about significant judgments and estimates. Management might conclude that the judgments and estimates made in the application of IFRS 15 result in similar accounting to previous GAAP, but the thought process is likely to be different.
5-step process for Accounting-Friendly Revenue Recognition
1. Identify the contract with a customer
This doesn’t have to be a written contract. It can be a verbal contract or implied through the terms and conditions that the customers agree to when they sign up
2. Identify the separate performance obligations in the contract
A performance obligation is a distinct service that the customer can benefit from on its own, or when used with other services provided, and is separate from other goods or services in the contract
3. Determine the transaction price
How much is expected to receive for the entire service
4. Allocation of the transaction price to each performance obligations
Estimates of stand-alone selling prices to be prepared for each of the performance obligations in the contract
5. Recognize revenue when (or as) the entity satisfies
Revenue is recognized over time for each of the performance obligations
Understanding when to charge VAT is extremely important because it is not always necessary to charge VAT in UAE. VAT to be charged with every sale, but don’t collect it from every customer each time.
It basically comes down to two factors:
Where is your customer located?
Is the transaction B2B (Business to business) or B2C (Business to Customer)?
Any further doubts or clarifications with regard to the above, our VAT experts at CDA are always available to assist.
Why choose CDA?
CDA is a team of such skilled, efficient, and experienced professionals who can keep your business financials on track, who can keep you well-informed of the financial statements of the business. Setting up IT firms or businesses can be a profitable option given the current and upcoming circumstances.
You may also read, Benefits of Outsourcing Accounting Services for Your Business in UAE
Feel free to contact us in any such case, we would be glad to help! You are always welcome to start a discussion on any IT business issue with CDA. Our experts will offer you a one-hour free consultation. CDA experts are one of the best catalysts in the field of Business Consultancy Services, CFO Services, Tax Consultation Services, Due-diligence Services and Accounting & Auditing Services.