The Revenue Recognition Update, Revenue from Contracts with Customers, shines a light on exactly how companies bring in their money. Two industries recognizing revenue in similar ways are law and architectural firms. Each performs billable-hour work and some contingency-based work, so they can learn from one another while evaluating accounting best practice for each of these scenarios:
Revenue Recognition Tips for Billable-Hour Based Work:
With the Accounting Standards Update (ASU) as issued by the FASB, a major point to remember is that revenue recognition should reflect the transfer of goods and services to a customer in an amount the entity expects to be entitled (for those goods or services). In general, firms billing for time won’t be impacted much by the standard. If service creates value to the customer as a function of time incurred, the firm has earned the revenue. (I can’t believe I’m writing this, as my good friends Ron Baker and Ed Kless at the VeraSage Institute have totally convinced me that the value customers want to pay for has everything to do with results and nothing to do with time. But, this is a revenue recognition blog article and not a practice management blog article!)
Issues arise when firms have multiple projects to track and manage. Now that the update is forcing everyone to reconsider the timing of revenue recognition, it’s even more important for firms to evaluate their accounting software with this new guidance in mind.
In addition to reviewing technology, conduct a billable rate review to establish proper standards. Architectural and law firms that bill by the hour need to carefully consider and confirm exactly how the rate of the billable hour is set, what constitutes non-billable time, and the various billable rates before entering into a project with a client.
Revenue Recognition Tips for Contingency- Based Work:
Applicable more for law firms than architectural firms, contingency-based work like personal injury cases delays revenue for law firms until the case is won. If unsuccessful, there is no payment made to the client or the firm and, of course, no revenue to recognize. Here’s a value billing example, if ever there was one.
Consequently, firms should adopt a cash basis for reporting contingency-based revenues. This simplifies the process considerably, but one must still deal with the longevity of a case. To show no revenue while waiting for a settlement presents a problem, so contingency-fee-type firms should plan to supplement the practice with other work.
For more detail around the Revenue Recognition Accounting Standard and what it means for your architectural or law firm, contact us at BTerrell Group, LLP.
By BTerrell Group, Texas- based Intacct Partner
Keywords: FASB accounting standards, Revenue Recognition Accounting Standard, Billable Rate Review, Billable-hour revenue, accounting standards updates, revenue recognition, contract management, revenue tracking from contracts, Enterprise Resource Planning solutions, Intacct, revenue recognition contingency-based work, revenue recognition billable hours, revenue recognition tips law architectural firm, accounting ERP law firms, accounting ERP architectural firms, Texas Intacct Partner