Gross vs net certified: the certificate is not the invoice

Gross and net in one certificate

Take a contract of AED 20 million with a 10% advance of AED 2 million, repaid at 10% of each certificate, retention at 10% up to a limit of 5% of the contract, and VAT at 5%. Certificate No. 5 values the month’s work at AED 1.5 million:

Only the last line is cash. The two deductions are not discounts: retention is revenue already earned that is paid later, and the advance repayment settles money the employer paid earlier. Each one belongs in the statement of financial position.

Why the gross figure is the one that counts

A contractor building on the employer’s land recognises revenue over time under IFRS 15, because the employer controls the works as they are built (paragraph 35(b)). Revenue follows the work done, and a certified valuation is a survey of work performed, one of the output methods the standard names (paragraph B15). Retention and advance repayments do not change how much work was done, so they do not change revenue.

The employer adds the cost of the works to capital work in progress as the work is done (IAS 16), with directly attributable costs such as the consultants’ fees, and starts depreciation when the asset is available for use (paragraph 55), normally at taking over. The cost of the work is the gross value, whatever is deducted from the payment.

The journal entries

For certificate No. 5, the two sets of books mirror each other:

The advance payment

The advance is not revenue for the contractor and not a cost for the employer. FIDIC calls it an interest-free loan for mobilisation (Sub-Clause 14.2): the work it pays for comes later, and the certificates take it back.

• When the AED 2 million advance is paid, the contractor debits the bank with AED 2.1 million, and credits the advance from the employer with AED 2 million and VAT payable with AED 100,000
• The employer debits the advance paid to the contractor with AED 2 million and VAT recoverable with AED 100,000, and credits the bank
• Each certificate then moves the repaid part of the advance into revenue for the contractor and into capital work in progress for the employer, as in the entries above
• For the employer the advance is a prepayment for work, not a financial asset (IAS 32 paragraph AG11), so show it with or beside capital work in progress, not as a loan

Contractors usually conclude that a mobilisation advance repaid as the work proceeds is not a financing component under IFRS 15 (paragraph 62(c)), but a large advance on a long contract should be assessed. Under the 1999 Red Book repayment starts when certified payments pass 10% of the Accepted Contract Amount less Provisional Sums, at 25% of each later certificate, unless the Appendix to Tender sets other figures, and any balance falls due at taking over. Keep the advance balance in the ledger equal to the balance in the certificate, and within the advance payment guarantee.

Retention

Retention is revenue already earned that is paid later. Under Sub-Clause 14.9 half is certified at taking over and the rest after the Defects Notification Period. While it depends on completing the works and the defects period, the contractor shows it as a contract asset, and moves it to receivables when it falls due (IFRS 15 paragraphs 105 to 108). It protects the employer against unfinished work rather than financing either side, so it is not discounted (paragraph 62(c)). The employer shows a retention payable, split between current and non-current by when it will be released.

• On release, the contractor moves the amount from retention receivable to the receivable from the employer, and adds VAT if it was not charged before
• The employer debits retention payable and credits the contractor’s account; capital work in progress does not change, because it already holds the full value
• If part of the retention is kept because the employer paid others to remedy defects, record it as its own item with its reason, never by writing off the balance

VAT on the certificate

In the UAE, construction is normally a continuous supply. VAT is due at the earliest of the tax invoice, the payment due date shown on it, or payment received, and no later than one year after the work is done (Article 26 of the VAT Decree-Law). The tax invoice must follow within 14 days of that date. Two lines of the certificate need care:

• Advance repayment: VAT was charged when the advance was received, so it is not charged again on the gross value
• Retention: Federal Tax Authority guidance makes VAT on retention due when it is paid, when a tax invoice is issued for it, or 12 months after the work is certified complete, whichever comes first. If the invoice shows only the amount due now, VAT on retention waits for the release invoice; if it bills the gross value, VAT on retention is due now
• The employer recovers input VAT only against a valid tax invoice, so the invoice must agree with the certificate line by line
• Saudi Arabia, Bahrain and Oman have their own rates and rules. ZATCA’s guideline for contractors in Saudi Arabia charges VAT on the full invoiced amount, retention included

Variations, claims and deductions

• Instructed and valued variations are part of the gross value in the certificate that includes them
• Claims and variations not yet agreed: the contractor includes them in revenue only when it is highly probable they will not be reversed (IFRS 15 paragraph 56), and the employer accrues them when it is probable it will pay (IAS 37)
• Delay damages deducted: for the contractor they reduce contract revenue (IFRS 15 paragraph 51); the employer agrees with its auditor whether they reduce the cost of the asset or count as income
• Back-charges and contra-charges: book each as its own item with its support, never by netting it into the work certified

Work done but not yet certified

Certificates arrive weeks after the month ends. At each reporting date the contractor adds the work done since the last valuation as a contract asset, measured the same way, and the employer accrues the same work in capital work in progress from the Engineer’s or its quantity surveyor’s estimate. Amounts applied for but cut by the Engineer are not revenue unless the contractor expects to be paid them. A contract expected to make a loss needs a provision for the whole loss as soon as it is known (IAS 37).

Common mistakes

• Booking the net certified amount as revenue or as capital work in progress
• Booking the advance as revenue when it arrives, or as a cost when it is paid
• Leaving the advance balance untouched while the certificates repay it
• Treating retention as a discount, or writing it off at handover
• Charging VAT twice on the advance: when it is received and again in the gross value
• Forgetting VAT on the retention release invoice
• Matching payments to invoices but never the ledger to the cumulative certificate

The monthly reconciliation

1. 1
   Gross

   Revenue or capital work in progress for the contract equals the gross certified to date, plus work done since the last valuation

2. 2
   Retention

   The retention balance equals the retention deducted to date, less releases

3. 3
   Advance

   The advance balance equals the advance paid less the repayments to date, and is covered by the guarantee

4. 4
   Cash

   The receivable or payable equals the net certified to date, plus VAT, less payments

5. 5
   VAT

   Output and input VAT for the contract match the tax invoices issued and received

Tax and reporting in the UAE

UAE corporate tax starts from the accounting profit in the financial statements (Article 20 of Federal Decree-Law No. 47 of 2022), which follow IFRS, or IFRS for SMEs for smaller businesses. Revenue booked on the net figure therefore also moves taxable income between years. In the notes, show contract assets, contract liabilities and receivables separately (IFRS 15 paragraph 116), and the guarantees banks have issued on the company’s behalf.

A short accounting policy that matches this approach:

Templates for each step