We use % complete to recognize our services revenue. We bill a lot of our services 50% upfront and 50% upon completion. However we do have a few instances where we might do 75% of the work on a project and recognize 75% of the revenue, but have the customer decide they don't want to continue. If we have billed 50% of the line and legitimately recognized 75% of the revenue as we completed the work and earned it. How do we clear the 25% unbilled revenue from the balance sheet? We legit earned the revenue, but if we close the Sales Order line it leaves a balance orphaned on the balance sheet. An easy solution would be to match the revenue rec % to the billing % so it nets out, but I get push back since services claims they did the work so they should get credit. I fear that if we let this continue our Unbilled account will continue to grow until it becomes a problem that could be material and cause a restatement, any input?

This is probably an accounting question, and you might be well advised to check with your auditors - they may want to adjust period end revenue with a provision for works started that won't be completed. But in principle, if the billing you can do is capped at 50% and the customer has decided to not continue with the work, you will have to back out the revenue you have recognised over and above the 50%. I agree that the services team will feel hard done by as they have done the work in good faith - there's an argument to say that someone else should get the revenue adjustment (journal it to hit a different department). From a business as a whole perspective, I'd be looking at ways to minimise risk of this happening again - 50-25-25 billing, or different penalties for customers backing out relating to actual effort expended (they would of course need to see evidence of the work completed, etc etc)

I agree you should discuss with audit/accounting, but here's what I would typically say: • If you determine an amount you are owed is never going to be collected - i.e you release the client from paying - you don't get to keep that revenue. You should adjust the total amount of revenue to equal the total billed. • Make sure that the accounting preference "Create and Maintain Element on Closed Sales Order" is unchecked. This will ensure that when you close the SO line, the total gets adjusted down to the 50% you billed. • Make sure that you are closing out projects like this to reflect that all the work that can be done is complete - i.e the planned work should drop to = the work done and % complete should be 100%. • This will cause ARM to create a journal clawing back the 25% revenue you didn't collect, and will automatically relieve the unbilled. • Alternatively you can invoice your customer for the 25% missing, to resolve the unbilled, then write off the invoice to bad debt expense. Except your auditors may take issue with that if your contract isn't clear on your right to invoice in that situation.

Thanks Catherine and Jon, and thank you Catherine for the suggestion on the Create and Maintain Element on Closed Sales Order. I told everyone we should adjust the revenue down to the billing % but they all freaked out. Thanks again