Open contracts - Year end

Is there a way of accounting for not yet invoiced contracts at year end?

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I work in the finance department of a company that provides IT services. We have a large amount of deferred revenue since most of our services are annual and paid upfront. We also have multi year contracts where the customer will sign a contract for say 5 years and we will invoice them annually.

I have a question about accounting for these contracts. I have been reading online about intangible assets and how open contracts can be included within that. However it wasn't mentioned everywhere so I wanted to clarify. When it comes to these contracts, which are often high value but we have only invoiced 1/5 at the year end point, but the customer has signed the contract and cannot cancel so we will issue 4 more invoices over the next 4 years - is there a way of accounting for that? Is it possible to include it somewhere on the balance sheet?

Any advice would be greatly appreciated (of course I have also queried with our external accountants but doing my own research also until they get back to me)
 

 

Replies (11)

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RLI
By lionofludesch
06th Jan 2023 15:30

If you've yet to provide the service, I vote no.

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By User deleted
06th Jan 2023 18:53

So we do provide the service all the way through - it’s a managed service and it starts usually the day of the first invoice and is contracted for sometimes 5 years.

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By I'msorryIhaven'taclue
08th Jan 2023 17:56

Quote:

So we do provide the service all the way through...

Yes, but you've only provided that service all the way through (let's suppose, y/e 31 December 2022) Year 1; at that point in time - end of 2022 - you've yet to provide the service for yrs 2 to through to yr 5.

Revenue recognition!

Is there any impairment on the cards? Just asking.

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By lionofludesch
08th Jan 2023 18:15

Quote:

So we do provide the service all the way through - it’s a managed service and it starts usually the day of the first invoice and is contracted for sometimes 5 years.

If you've yet to provide the service, I still vote no.

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By Hugo Fair
06th Jan 2023 15:58

"We also have multi year contracts where the customer will sign a contract for say 5 years and we will invoice them annually" ... so how does this differ from the same scenario on the purchasing side (office rental, equipment leasing, etc)?

Those contracts might (indeed should) give you extra confidence with any forecast you carry out, but aren't guaranteed - and, as Lion says, have nothing to do with the accounts unless they can be recognised in that year (hence delivery is paramount - as will be the associated costs, eventually).

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By User deleted
06th Jan 2023 18:51

So for example for the 5 year contracts we begin the service on the first day - and it continues for 5 years. Technically we are delivering continuously up until the end date of the contract, it’s just that many of our customers prefer to be invoiced annually rather than upfront for the whole thing, but they sign the contract for the full 5 years.

From the purchasing side since it’s our own service we are providing the costs associated with it (like rent and salaries of the tech employees who monitor the firewalls etc) come under expenses.

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By Hugo Fair
06th Jan 2023 19:44

Hope your "external accountants" have more patience than me in explaining the fundamentals of accounting.

Do you really not understand the lack of logical connection between saying "for the 5 year contracts we begin the service on the first day - and it continues for 5 years" ... and the points raised here about not being able to recognise revenue (whether invoiced or not) that is for work yet to be delivered?

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By Leywood
06th Jan 2023 16:13

+1.

BTW asking on a forum is not doing your own research.

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By D V Fields
06th Jan 2023 16:25

The method is established in the standards:

Section 23 refers.
https://www.frc.org.uk/getattachment/0fba8b6a-ff2b-46e2-8c3f-adfc174d300...(January-2022)(2).pdf

You'll have to establish what is applicable in your circumstances - but this should be your reference.

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By I'msorryIhaven'taclue
08th Jan 2023 18:06

You're spoiling him! OP, follow Mr Fields' signpost as a starting point to conducting your own research, and then come back with your findings.

I'm uncertain from your post - perhaps others are too - whether you're delivering an annual service five times over, or a five-year service once over. There's a difference - not least a legal distinction - between the two. The accounting treatment should follow.

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By Hugo Fair
08th Jan 2023 19:10

FWIW my assumption was neither of those scenarios ... the most common form of these service contracts in the IT sector is akin to an insurance contract.
Specifically, whilst it may include a once p.a. 'maintenance' call/visit, the bulk of the charge is for delivering resolutions to any problem (at least from a restricted list of types of problem) encountered by the purchaser within a specified period of time.

In that scenario, where the amount of work to be delivered (and hence the costs of delivery) cannot be known until various 'cut-off dates', it is most common to defer recognition of revenues for any days/weeks/months not yet delivered (because they're in the future as at the cut-off date).

This of course applies even to revenue invoiced and paid - as opposed to any sums that are covered by a future-looking contract but (under the terms of said contract) have not yet been invoiced/paid.

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