What is a promise in a contract? This is both from an accounting and financial reporting and a legal perspective. IFRS 15 Revenue From Contracts With Customers (contents page here) established a comprehensive framework that outlines how much revenue should be recognized by audit services in Dubai and UAE and when.

The basic principle is that accounting and financial services in UAE should record revenue in order to show the transfer of promised goods and services to customers in an amount that represents the consideration to which they expect to be entitled in return. Here is a summary of IFRS 15.

From An Accounting and Financial Reporting Perspective, Promises in A Contract

If the promises in a contract are explicit or implicit, it is possible to create an expectation that the entity will deliver a good/service based on its customary business practices, published policy, or other specific statements.

When identifying promises in an agreement, it is important for audit firms in Dubai, UAE to fully understand the entity’s business practices, policies, representations made during negotiations, marketing materials, as well as its business strategies.

Promised goods and services include, but not be limited to:

Reselling or transfer of produced goods. Promises in a Contract

Arrange for another party’s transfer of goods or services

Contracts promise to be available for future goods and services.

For a customer, this could include building, designing, manufacturing or creating assets.

Granting the right to access or use intangible assets such as intellectual property

Giving the customer the option to buy additional goods and services, which provides a material right.

Execute contractually agreed-upon duties

How Audit Services in UAE Determine When Promises Are Performance Obligations

An entity in Dubai and UAE will identify the promises in a contract and determine which promises will be treated as performance obligations. An entity in Dubai, UAE must assess the goods and services that are promised to a customer in a contract. Then, it shall identify each promise to transfer to the customer as a performance obligation.

A good or service that is unique, or a group of goods or services. A series of distinct goods and services that are substantially identical and have the same transfer pattern to the customer

If the goods or services in question are:

Different (including as part a bundle); Promises in a Contract

Part of a group of distinct goods or services that are substantially similar and have the same pattern for transfer

An entity that promises a good or service but is not distinct should combine it with other promised goods and services until it can identify a set of distinct goods or services.

This could result in an accounting for all goods and services that were promised under a contract, as a single performance obligation.

From a legal perspective, promises in a contract

Law also accepts the concept of promise.

A contract is a promise, or set of promises, for which the law in the UAE provides a remedy or the performance of which it in some way recognizes to be a duty. A contract is any conduct or words of one or both parties which communicates a legally binding promise.

A departmental store buyer purchases a hair oil bottle and pays cash at the register. The store then sells the oil. However, it would be difficult for the customer and store to reach an agreement. It is likely that neither side made any promises and there was no obligation to perform in the future.

The law of contract governs the enforceability and validity of the promises made by the parties. It is also the body of law that applies to the formation, interpretation and performance of contracts as well as the remedies for a party’s failure to fulfill the promises.

This is where the agreement between the parties is key. If a promise was made, was it clear enough to clearly define the rights and obligations? Because casual promises are not usually used as a basis to recognize rights, it is also important to determine if the promisor intended this.

The question in law is whether the promisor intended to be legally bound. This includes free consent, competency of the parties, lawful object, consideration, and agreement must be valid and non-void.

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