Professional services: unbilled work

Marlowe & Finch Advisory is a 25-person consulting firm. Its product is time. Staff record hours to client codes every day; the month's accounting turns those hours into revenue, receivables and contract balances. Four issues dominate.

1. Time-and-materials (T&M) revenue. On T&M engagements the client pays agreed hourly rates for hours worked. The client benefits as the work is done, so revenue is recognised over time. IFRS 15.B16 offers a practical expedient: if the firm has a right to invoice an amount that corresponds directly to the value of work completed (hours × agreed rates), it recognises revenue at that amount.

2. Unbilled work. Invoices go out on the 5th of the following month, so at month end much revenue is unbilled. Where the firm's right to payment for hours already worked is unconditional — only an invoice and time stand in the way — the unbilled amount is a receivable (IFRS 15.108), often labelled unbilled receivables. Where payment depends on something else — delivering the final report on a fixed-fee job — it is a contract asset (IFRS 15.107). Many firms loosely call all unbilled time "WIP" or "accrued income"; the analyst's job is to know which one it really is.

3. Write-downs. Not every hour recorded can be billed. A fee cap, a client dispute or over-servicing means recorded time at charge-out rates exceeds what the client will pay. Under IFRS 15 the amount the firm can't bill was never part of the transaction price (variable consideration is constrained to amounts highly probable not to reverse, IFRS 15.56). So the write-down reduces revenue. It is not a credit loss: credit losses arise when a client can't pay what it owes, not when the firm can't bill it.

4. Retainers and advances. Cash received before the work is done is a contract liability.