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Guidance on Recognizing Professional Services Revenue on a Monthly Basis?

The short version of my issue is that I would like to modify our revenue recognition policy for our professional services so that we can recognize on a monthly basis based on the number of hours delivered, versus at the end of the delivery period when we receive a signed Proof of Completion “POC” from the customer. Our company, which I recently joined, is a privately held software company that also sells professional services on a stand-alone, hourly basis, completely separate from the software (separate order & invoice). Do you have experience with this that you could point me to specific guidance that would support recognizing on a monthly basis? I thought ASC606-10-55-18 was relevant though doesn’t go into effect until 2016. Below are additional details about out process. Our standard professional services work order contains a clause that states “Customer will sign a written Proof-of-Completion to certify the delivery of the services”. The company’s revenue recognition policy for the services has been to defer the entire amount on the order until the Proof-of-Completion (POC) form has been returned by the Customer. The amount is then recognized in full in the month the POC is received. Our services are frequently sold in large hourly buckets to be delivered in quarterly or even 12 month periods (e.g. 1,500 hours to be delivered from 4/1/15 to 3/31/16). The services orders are invoiced at different times depending on the customer, with some invoiced in advance, some at milestones, and some at the end of the delivery period. The associated expense to deliver the services is not deferred. It is somewhat buried when the services are provided by existing staff, but becomes more apparent when the services are provided by a 3rd party vendor. We are audited by a 2nd tier firm and the services revenue and expenses are material. From my perspective, there are two problems: 1) the revenue and expense are not being matched, and 2) there is large variability in the services revenue as the revenue for a large project is not recognized until fully delivered and the POC is received back from the customer. It is hard to forecast services revenue given that a customer may take a couple months to return the POC at the end of the delivery period. The internal accounting team is agreed (I think) that we need to modify our process to match the revenue and the expense. I would much prefer, though, to recognize the revenue on a monthly basis according to the number of hours performed, versus deferring both the revenue and expense until the POC is received. When I told the team that I would like to recognize the revenue as delivered over the life of the contract, they said that we can’t do that given the POC clause in our contract. They also said that the auditors wouldn’t sign off on it. As I‘m not a technical expert on revenue rec, any information you can provide is greatly appreciated!

Answers

EMERSON GALFO
Title: CFO
Company: C-Suite Services
LinkedIn Profile
(CFO, C-Suite Services) |

It all depends on what your clients can and will agree to. At the top of my head, one option is (for lack of a better term) PROVISIONAL INVOICING! Invoices that do not have a due date or provisioned on the POC. Maybe payments are NOT required until the execution of a POC (which btw is not a good revenue model..incredibly hard on the cash flow especially for big or long duration contracts)....but it does NOT mean you CANNOT bill them. You can follow the percentage of completion method (if that is more indicative of the work done). There are two advantages to this...(1) you are recognizing the revenue for the month and matched with the expenses (2) your client is being made aware of the progress of the work/billing.

Also, you did NOT elaborate on other clauses of the contract like disputes on billings or work being satisfied. What are the liabilities of each party if in case there is dispute or the client does NOT agree to sign the POC for whatever reason. This detail will affect your decision on how to go about it. If the dispute clauses on the contract stipulate that the client will be liable for your company's cost, then you are already a step ahead.

Anonymous
(Accounting Manager) |

On April 1, 2015, FASB purposed a deferral of the new revenue recongnition standard.

Public entities

For U.S. GAAP public entities, the proposed deferral would result in the new revenue standard being effective for fiscal years and interim periods within those fiscal years beginning after December 15, 2017. Calendar year-end public entities would therefore be required to apply the new revenue guidance beginning in their 2018 interim and annual financial statements.

Nonpublic entities

Similar to public entities, the FASB will propose a deferred effective date for nonpublic entities for one year. Nonpublic entities would be required to apply the revenue standard for fiscal years beginning after December 15, 2018, and interim periods within fiscal years beginning after December 15, 2019. Nonpublic calendar year-end entities would therefore first be required to apply the new revenue standard in their 2019 annual financial statements and 2020 interim financial statements.

Emerson is correct on that you need to understand you current agreement with your clients. If you specified in the agreement that you will recognize revenue only when in receipt of POC, then you can't make this change.

EMERSON GALFO
Title: CFO
Company: C-Suite Services
LinkedIn Profile
(CFO, C-Suite Services) |

"If you specified in the agreement that you will recognize revenue only when in receipt of POC,"

I disagree with that interpretation. A contract can not or should not redefine revenue recognition (and the matching principle) rules on each other's books. My entire point is that (from inference from his posting) payment may NOT be required until the execution of the POC but this does NOT mean that they CANNOT send them an invoice (albeit a "provisional" one with NO due date or payment provisioned on the execution of the POC).

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