What Should Be Considered in Real Estate Company Audit In UAE

Although no one in the realty industry would like to go through a Dubai real estate company audit, it is an important part of running a realty business. It is important to take the necessary steps before an audit occurs in order to reduce risk and ensure compliance with each real estate transaction. It is important to understand what a real estate audit in Dubai, UAE is and how it works, so you are prepared for when it comes.

What Is a Real-Estate Company Audit?

A company, firm, or individual in Dubai, UAE may be subject to an audit. This is done by the Internal Revenue Service or another third-party agency. A real estate company audit is different from an IRS audit. It examines an individual or company’s tax filings. Instead, it looks at the company’s financial and operational standing. This includes its compliance and record-keeping regarding each real estate asset. Management and owners can take steps now to make the audit kick-off discussions as productive and productive as possible.

Discuss with audit firms in Dubai about the following:

Current Status and Future Outlook of Operations

Situation of ongoing negotiations between tenants and lenders such as loss of tenants; lease modifications; COVID-19-related relief received, provided, or modified, or debt modifications or refinances.

• Timing is important. Examine and plan for any inefficiencies or delays caused by the current work-from home environment.
• Status of any legal and regulatory issues. This includes communications with an attorney about potential or pending legal issues.
• Subsequent events such as tenant vacancies may require adjustments to financial statements and related disclosures.
• Refusal to adopt applicable accounting standards updates.
• Modifications to deadlines and the impact of amended definitions of accelerated filers.

Examine Major Transactions And Any Changes To Internal Controls Or Processes

For any changes in the current year, including any due to working from home or staff turnover, update internal control narratives. Give detailed explanations and all executed legal documents for transactions that occurred during the year.

Be Prepared For Any Changes To Audit Requests

You should anticipate new requests such as virtual meetings for property managers or cash flow projections. To view and upload documents, you can use the secure auditor’s site. During planning meetings with auditors, management should ensure that the site is accessible by all personnel.

• Remotely discuss and walkthrough procedures and processes.
• Find out if the system has remote access to general-leger systems.

Moving Concern Considerations

Going concern is an audit consideration. However, it is important to consider the pandemic, and at the minimum, talk with the audit team. A variety of adverse circumstances can impact an entity’s ability as a going concern, including loss of a major tenant or negative operating cash flows. These auditor questions and requests should be anticipated:

Management should create an analysis that reflects the financial consequences of adverse conditions and includes a plan for mitigating them. These plans could include capital calls from owners; cost reductions such as maintenance deferrals or layoffs. Modification of debt terms including waivers of loan covenants. And disposal of assets in order to increase cash.

Prepare a budget for 2021 and projections of cash flow through 2022. Include an explanation of all assumptions.

Technical Accounting Considerations

Entities that report on the income tax basis (“ITB”) or generally accepted accounting principles (“GAAP”) are subject to certain considerations.

Rent Concessions

ITB – Tenants who receive rent concessions would offset the revenue and the corresponding account receivable.

GAAP – The Financial Accounting Standards Board (“FASB”) allows rent relief for tenants due to COVID-19 in certain cases. This is as though such relief were already provided in the original lease agreement. The Dubai, UAE entity can therefore recognize the rent concession during the current period, rather than accounting for it in a lease modification.

Rent Deferrals

ITB – Tenants who received rent deferrals would not have an impact on when revenue is recognized by the entity. This would only impact the timing of cash collection.

GAAP – You have two options for COVID-19-related rent delays. The deferral should be treated as if there were no changes in the lease contract. For more information on these options, click here.

Tenant-Related Assets

Accounts Receivable

Perform an in-depth evaluation of the collection potential of accounts receivable. Once all collection efforts have been exhausted, you can write off any uncollectible accounts receivable to operations. It is forbidden to allow for doubtful accounts. An allowance for doubtful accounts is not allowed in GAAP. This allowance should be recorded against any receivables that are unlikely to be collected.

Tenant Improvements

This is a list of tenant improvements that relate to tenants who have terminated or vacated their lease agreement in the past year. Are these assets likely to provide future economic benefits? Are these assets worth their carrying cost? These assets are tenant-specific? Do these assets need to be written off?

Deferred Leasing Costs

ITB and GAAP identify deferred leasing cost related to tenants that have vacated or terminated their lease agreement in the past year. All unamortized expenses are deducted.

Deferred Financing Costs

Management should conduct an analysis of any transaction that the entity has entered into to modify or extinguish its debt. This will determine how to treat existing and future financing costs. There may be nuances in the accounting basis that the entity reports on that will affect the treatment of financing expenses.

Extinguishment

Generally, real estate audit expert can will write off the amount that is left over from deferred financing costs. The new costs incurred will be capitalized and amortized over a term of the loan.

Modification

In general, amortize over the loan term the carrying amount of deferred financing costs that were in effect at the date of modification. Any new costs incurred during the modification period should be borne by the lender. GAAP allows real estate audit specialists to capitalize any new costs that are incurred and paid directly by the lender.

Asset Impairment

If an entity is required to report under GAAP, it must perform an impairment analysis on assets in the event that management finds that a “triggering incident” has occurred. One example of a triggering event is the loss of a significant tenant or the occurrence negative operating cash flows. Management should investigate if such triggering events have been experienced and, if so, determine whether the carrying amounts of assets cannot be recovered over their remaining useful lives. This is not an issue under the ITB.