Revenue Recognition Question 2211

  • Is it legal to recognize revenue before invoices are generated for clients? This is in the case where work has been performed, but not invoiced to the client for Fixed Fee engagements.

  • It would seem odd to do so, but I doubt that it is illegal. If the work has been completed, then the fees have been earned whether or not an invoice has been raised. The invoice acts more as a tool to collect the fee than to prove that the revenue has been earned.

  • Please go ahead and recognize revenue. This is known as ‘percentage of Completion’ method to recognize revenue, where a certain % of work has been completed, but the invoicing is not due, as the product has not reached a stated level of completion.%0AThis method of revenue recognition is absolutely permissible

  • Hello,
    Compliance with SOX generally requires following an accepted accounting standard is followed (GAAP) in connection with revenue recognition arrangements.
    For the construction industry, it is acceptable to recognize revenue using the percentage of completion method. However, revenue recognition requirements may vary by industry and as Mike stated, if goods have been delivered or services have been rendered, it is acceptable to recognize revenue irrespective of the invoicing process.
    In conjunction with revenue recognition, it is important that revenue is recognized in the period in which it was earned (matching principle) so you should be sure that the revenue is recognized and reported in the correct period.
    For detailed discussions about revenue recognition requirements, you should review the appropriate accounting pronouncements for your industry.
    Hope this further helps,

  • Yep, it certainly CAN be legal to recognise revenue in these circumstances.
    If you were in a goods despatched type scenario it would be fairly normal to accrue for the revenue in relation to goods despatched not invoiced - in the same way that you would accrue a creditor for goods received not invoiced - on the principle that it is key when title passes (i.e. rights and obligations) and not when the paperwork is generated.
    The construction case mentioned is also a good example of the need to match revenue with when the service is provided.

Log in to reply