Unbilled Revenue

An engineering firm completes work in March but issues its invoice in April, and if the work satisfies the revenue recognition requirements in March, the firm may record revenue then even though it has not sent a bill. The corresponding balance is a right to consideration, not cash in the bank.

Under IFRS 15, revenue is recognised when or as a performance obligation is satisfied by transferring control of a promised good or service, so work performed does not automatically mean all contract revenue has been earned, and the agreement and the measure of progress need checking. The balance sheet label depends on the right.

IFRS 15 describes a contract asset when the right to consideration for transferred goods or services remains conditional on something other than time, while an unconditional right is shown separately as a receivable. That distinction is easy to miss: a bill that has not yet been prepared may still be a receivable if only time must pass before payment is due, and conversely, sending a document called an invoice does not eliminate a substantive contractual condition.

Start with the contract: identify what the customer was promised, when it receives the benefit and how the transaction price is allocated, then compare recognised revenue with the amount already billed or due. 'Revenue earned minus amount invoiced' is a planning shortcut, not a complete IFRS formula, because advance invoices, contract liabilities, modifications and conditional rights can make the simple subtraction misleading.

For a straightforward illustration, suppose $500,000 of revenue has been recognised and $380,000 has been billed for that same work, so a remaining $120,000 may be unbilled, although its proper balance sheet presentation still depends on the contractual right. Do not recognise every hour logged as revenue, since a fixed-price project may require an appropriate progress measure and estimates of total work, while a time-and-materials contract may have different evidence for completed services and enforceable payment.

Milestone billing can lag work performed, as a contract might permit an invoice only after customer acceptance even though some revenue is recognised over time. Determine whether the acceptance condition is substantive before classifying the asset.

Keep a contract-by-contract schedule showing opening balance, revenue recognised, invoices, cash collections, adjustments and closing balance, and reconcile it to the general ledger, because a single unexplained total makes errors difficult to find. Support the estimate with evidence such as approved work records, delivery confirmations, milestones or reliable progress data; invoices issued after period-end may help check an earlier estimate but do not replace evidence of performance at the reporting date.

Review aged balances too, since a long-outstanding contract asset may reflect unresolved acceptance, disputed scope or a weak progress estimate, and ageing by project and reason is more useful than treating all old amounts as a billing-team problem. A timely billing process can reduce the time between performance and an invoice where the contract allows it, but it cannot create an unconditional right sooner than the contract permits.

Cash flow can remain strained while reported revenue grows, because wages and supplier bills may be paid before the customer owes cash, so forecast invoice eligibility, due date and actual collection separately, and remember that IFRS 15 requires assessment of a contract asset for impairment under IFRS 9. For owners, unbilled revenue shows a gap between accounting performance and customer billing, so understand why that gap exists, which rights are conditional and when the business can actually invoice and collect.