Question

As part of an effort to increase cash and reduce the cash cycle, the connections between the AP and AR processes are often scrutinized to see if the company is fully billing what it is entitled to bill … to this end, folks sometimes ask about "unbilled" and how long that "unbilled" has remained in that state … is number for "unbilled" best derived from what has been declared as revenue under 606 but not yet billed or as what has been billed out to vendors if vendors are involved in the performance?

Answer 1

ASC 606 provides guidance regarding revenue recognition for all types of customer contracts. The core principle is to recognize revenue to understand the transfer of agreed goods or services to customers in an amount that reflects the exact consideration liable to be paid by that customer in exchange for those goods or services.

ASC 606 .lays down following steps to recognize the revenue of a transaction:

1. Identify the customer contract;
2. Identify the performance obligation in the contract;
3. Determine the transaction price;
4. Allocate the transaction price to the performance obligation;
5. Recognize revenue when each part of the performance obligation is satisfied.

Hence, an entity could bill his customer for the whole or part of the transaction price basis the stage of completion of the performance obligations. Accordingly, in case the entity has performed 50% of the performance obligation, he is eligible to recognize and bill 50% of the transaction price from the customer. In such case, if the entity bills only 30% of the transaction price and recognizes 50% of the transaction price in its book, the balance 20% shall be said to be "unbilled" by the entity.

Thus, the number of "unbilled" is best derived basis the revenue recognition procedure given under ASC 606.