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Get clear, actionable steps on revenue recognition for professional services, including ASC 606 guidance, contract tips, and compliance essentials.
Your financial statements tell a story about your business. But what if that story is based on the wrong timeline? Recognizing revenue based on invoices or payments can distort your company’s performance, making it difficult to gauge profitability and plan for growth. Proper revenue recognition for professional services under the ASC 606 standard aligns your reported income with your actual service delivery. This isn't just an accounting exercise; it’s a strategic imperative. It builds trust with investors, ensures you can pass audits with confidence, and gives you the clear, reliable data you need to guide your business forward with certainty.
Revenue recognition is the accounting principle that determines when you can officially count income as revenue. For professional services, it’s not as simple as when you send an invoice or get paid. Instead, you record revenue as you deliver your services and fulfill your promises to the client.
The guiding standard for this is ASC 606, a framework that provides a clear, five-step process to ensure companies recognize revenue consistently. This means you might recognize revenue incrementally over a project's life as you hit certain milestones. This approach gives you a much more accurate picture of your company's financial health. Getting this right is fundamental to understanding your business's performance, which you can explore further in our HubiFi Blog.
How and when you recognize revenue directly impacts your company’s financial story. It’s the foundation for accurate financial statements, showing how profitable your projects are and how strong your business is overall. Proper revenue recognition gives you a true measure of your performance, which is critical for making smart strategic decisions.
But the effects go far beyond your internal reports. Following ASC 606 correctly is complex and touches nearly every part of your business, from sales commission structures and employee bonuses to tax liabilities. Getting it right ensures you stay compliant and can pass audits with confidence. More importantly, it builds trust with investors by presenting a clear view of your financial standing. You can schedule a demo to see how automation can bring this level of clarity to your business.
The biggest change introduced by ASC 606 is the formal shift to an accrual accounting mindset. Previously, many businesses recognized revenue when the risks associated with a service were transferred to the customer—often at the point of invoicing. Now, the standard requires you to recognize revenue when control of the service transfers to the customer. This means you record revenue as the client receives the benefit of your work.
For example, if you complete one-third of a consulting project in a given month, you should recognize one-third of the project's revenue in that same month, regardless of your billing schedule. This method aligns your reported revenue with your actual performance. It requires systems that can track project completion and performance obligations, often by connecting different data sources through powerful integrations with HubiFi.
If you’ve been in business for a while, you know that accounting standards aren’t static. ASC 606 represents one of the most significant shifts in revenue recognition in recent memory, moving away from industry-specific rules to a single, comprehensive framework. The goal was to make revenue reporting more consistent and comparable across different companies and industries, which is especially important for professional services firms that often deal with complex, multi-part contracts.
Instead of focusing on when a project is billed or when cash is collected, ASC 606 centers on a core principle: you should recognize revenue when you transfer promised goods or services to a customer. This is measured by the amount of payment you expect to receive in exchange. This principle-based approach requires you to apply more judgment, but it also provides a clearer, more logical path for reporting your earnings. For service businesses, this often means rethinking the timing of revenue recognition to better align with how and when you deliver value to your clients. You can find more expert takes on financial operations on the HubiFi Blog.
At the heart of the new standard is a five-step model that guides you through the entire revenue recognition process. Think of it as a roadmap for accurately reporting your income.
This structured approach ensures you account for every part of your customer agreement correctly.
The biggest change introduced by ASC 606 is the shift from focusing on the "risks and rewards" of ownership to the "transfer of control." Under older guidance, you might have recognized revenue when a project was substantially complete and the risk was off your plate. Now, the key question is: When does your customer gain control of the service or asset?
This means revenue is recognized when your client can direct the use of and get the benefits from the service you’ve provided. It’s a subtle but critical distinction that can significantly change the timing of your revenue. For many service firms, this provides a more accurate picture of financial performance, aligning revenue directly with the value delivered over the life of a project. Getting this right often requires robust systems that can handle complex allocations and timing, which is why seamless data integrations are so important.
In professional services, you likely don't use a one-size-fits-all contract for every client. You might have clients on retainer, others on fixed-fee projects, and some on a time and materials basis. Under ASC 606, the structure of your contract directly determines how and when you recognize revenue. It’s not just about when you send the invoice or when cash hits your bank account. Instead, you have to analyze the specific promises—or performance obligations—made to your client in each agreement. Getting this right is fundamental for accurate financial reporting and maintaining compliance.
Time and materials (T&M) contracts are often the most straightforward for revenue recognition. With this model, you bill clients for the hours your team works and the cost of any materials used. Because the value is transferred to the client continuously as the work is performed, revenue is recognized over time. This approach provides a clear, real-time reflection of the services you've delivered. For example, if your consulting firm bills for 40 hours of work in a month, you recognize the revenue for those 40 hours within that same month. This method aligns your financial statements with the actual progress of your service delivery.
Fixed-fee projects can be more complex. Even though there's a single price, the project might contain several distinct promises to your client. Under ASC 606, you must identify each of these performance obligations to determine the right timing for revenue recognition. Revenue can be recognized at a single point in time—like when a final report is delivered—or over time as you hit specific project milestones. The key is to assess when the customer gains control of the promised service. For a multi-stage project, you might recognize portions of the revenue as each phase is completed and approved by the client.
Retainers require careful evaluation under ASC 606. You can no longer just recognize retainer fees as revenue when you receive the payment. Instead, you need to look at the nature of the agreement. Is the retainer a fee for being "on call" and available to the client, or is it an advance payment for specific services you'll perform later? If it’s for general availability (a stand-ready obligation), you might recognize the revenue evenly over the retainer period. If it's an advance, you’ll recognize the revenue as you deliver the specific services covered by that payment, which is a key consideration for business and professional services.
When other parties are involved in delivering services to your client, you have to determine if you're acting as the principal or the agent. This distinction is critical because it affects the amount of revenue you record. If you are the principal, you control the service before it's transferred to the client, and you record the gross revenue. If you're an agent, you are simply arranging for another party to provide the service, and you only record your net fee or commission as revenue. For example, if your agency hires a third-party contractor for a project and you control their work, you're the principal. If you just connect the client with the contractor, you're the agent.
Knowing when to record revenue is just as important as knowing how much. Under ASC 606, timing isn’t tied to invoices or cash payments. It’s all about when you deliver on your promises and the client gains control of the service. This shift ensures your financial statements accurately reflect your company’s performance. Let’s break down the key timing considerations for your service business.
Think of your client contracts as a series of promises, or "performance obligations." Your job is to identify these distinct promises and recognize revenue as you fulfill each one. This means tying revenue directly to project milestones where your client receives tangible value. For example, if a marketing agency provides a brand audit and a new website, each is a separate obligation. You’d recognize revenue for the audit once it’s delivered, not wait until the entire project is finished. This approach provides a more accurate, real-time view of your earned revenue and keeps your financials in check.
ASC 606 requires you to determine if revenue should be recognized over time or at a single point in time. The right choice depends on how your customer benefits from your work. You can recognize revenue over time if your client receives value as you perform the service—like a monthly SEO retainer. On the other hand, if the client only gets control of the final deliverable at the end, you’d recognize the revenue at that specific point in time. A project to build a single, custom software feature is a great example. The key is to analyze when control transfers, as this is the trigger for revenue recognition.
Client contracts often include performance bonuses, discounts, or rebates, known as "variable consideration." You need to estimate these amounts and include them in the transaction price, but only if it’s highly probable a significant reversal won’t occur later. Contracts can also change mid-project. When a client requests a scope change, you need a clear process to handle it as a modification or a new contract. Having a system that can manage these adjustments is crucial for accuracy, especially when data flows between platforms. This is where seamless integrations become incredibly valuable.
Setting the transaction price sounds simple, right? It’s just the amount on the contract. But under ASC 606, it’s a bit more nuanced. The transaction price is the total amount of compensation you expect to receive from a customer in exchange for your services. This isn't just about the base fee; it also includes any variable amounts, like bonuses or discounts, that could change the final total. Think of it as the most realistic estimate of what will actually land in your bank account from that specific contract.
Getting this step right is foundational for the rest of the revenue recognition process. It directly impacts how much revenue you recognize for each service you deliver. If your contracts involve more than a single fixed fee—and for many service businesses, they do—you'll need to carefully consider all the factors that could affect the final price. This includes everything from performance incentives to potential refunds. The goal is to establish a clear and defensible transaction price that accurately reflects the value of the agreement before you move on to allocating it to your specific performance obligations. This is where having a system that can handle complex contract terms becomes invaluable, as manual calculations can quickly become overwhelming and prone to error. Automated revenue recognition platforms are designed to manage this complexity, ensuring your transaction prices are calculated accurately every time.
Most professional services contracts include a mix of fixed and variable pricing. The fixed part is easy—it’s the set fee you’ve agreed upon. The variable component is where things get interesting. This includes any part of the price that isn't fixed, like performance bonuses, rebates, or discounts. Under ASC 606, you can’t just wait and see what happens. You need to estimate the amount of variable consideration you expect to earn and include it in the transaction price from the start. The key is that you should only include it if it’s highly probable that you won’t have to reverse that revenue later on.
What happens when you offer a discount on a package of services? You can’t just apply it to whichever service you feel like. ASC 606 requires you to allocate the discount proportionally across all the distinct services—or performance obligations—in the contract. You’ll need to base this allocation on their standalone selling prices, which is what you’d charge for each service individually. For example, if you bundle a $1,000 consulting project with a $500 training session for a total of $1,200, that $300 discount needs to be spread fairly across both the consulting and the training, not just tacked onto one of them.
Bundled contracts are standard in professional services, often combining things like setup, implementation, and ongoing support. The challenge with ASC 606 is that you must break these bundles down into their individual components, or "promises." Each distinct promise is a separate performance obligation. This is a major shift, as it often means recognizing more separate obligations than you might have previously. You then have to determine when each promise is fulfilled—at a single point in time or over a period—to recognize revenue accurately. This ensures that your financial statements reflect the true timing of your service delivery, which is a core principle of the ASC 606 standard.
Getting a handle on ASC 606 is a major step, but putting it into practice brings its own set of hurdles. For professional services firms, the complexity isn't just in understanding the five steps; it's in applying them to contracts that are often fluid and multifaceted. You might find that your existing processes and software aren't quite up to the task, creating manual work and a higher risk of error.
These challenges aren't confined to the accounting department. The shift to ASC 606 has a ripple effect across your entire organization, influencing everything from how you structure your client agreements to how you compensate your sales team. It requires a coordinated effort and, often, a new way of thinking about the connection between service delivery and financial reporting. Tackling these issues head-on is the key to not only achieving compliance but also gaining clearer insight into your company's financial health. You can find more insights in the HubiFi Blog to guide you through these complexities.
Service contracts are rarely straightforward. They often include multiple services bundled together, clauses for variable fees, and the potential for modifications or add-ons down the line. Under ASC 606, you have to carefully dissect each contract to identify every distinct "performance obligation"—essentially, each specific promise you've made to your customer. This process can be incredibly time-consuming and subjective. If you misidentify the obligations or allocate the transaction price incorrectly at the start, it will throw off your revenue recognition for the entire life of the contract, leading to inaccurate financials and compliance headaches.
ASC 606 compliance is not a task you can isolate within your accounting software. It demands data from multiple sources, including your CRM, project management tools, and time-tracking systems. Many businesses find that their legacy systems just can't communicate with each other effectively, forcing their teams into a maze of manual data entry and messy spreadsheets. This patchwork approach is not only inefficient but also prone to human error. A truly compliant and scalable process requires seamless integrations with HubiFi that connect your entire tech stack, ensuring data flows automatically and accurately from one system to the next.
One of the biggest shifts under ASC 606 is moving from recognizing revenue when you send an invoice to recognizing it as you actually deliver the service. For many professional services firms, this can mean recognizing revenue sooner or spreading it out differently over the project's lifecycle. This change directly impacts your financial statements and key performance metrics. It can alter your revenue forecasts, affect cash flow management, and change how stakeholders perceive your company's performance. Getting comfortable with this new timing requires real-time visibility into project progress and financial data.
If you change how you recognize revenue, you likely need to change how you pay sales commissions. Paying your sales team based on when a contract is signed or an invoice is paid can create a major disconnect if the revenue is being recognized over several months or even years. To keep everyone aligned, sales compensation plans should reflect the new revenue timing. This might mean restructuring bonuses or commissions to be paid out as performance obligations are met. It’s a sensitive area that requires clear communication and careful planning to ensure your sales team stays motivated and focused on long-term customer value.
Trying to manage ASC 606 compliance with spreadsheets is like trying to build a house with a single screwdriver—it’s possible, but it’s going to be slow, painful, and probably a little wobbly. The right technology stack doesn't just make compliance easier; it gives you a clearer, more accurate picture of your business's financial health. When your systems talk to each other, you can stop spending hours manually reconciling data and start using that time to make strategic decisions.
The key is to build a system where data flows smoothly from one tool to the next. Your project management data should inform your financial forecasts, which should then flow into your accounting system for the final record-keeping. Creating this connected ecosystem is what turns revenue recognition from a compliance headache into a source of valuable business insight. With seamless integrations, you can automate the tedious work, reduce the risk of human error, and get real-time visibility into your revenue streams. This allows you to close your books faster and pass audits with confidence.
Think of Professional Services Automation (PSA) software as the command center for your projects. These tools are designed to manage the entire lifecycle of a client engagement, from initial proposal to final delivery. They help you track crucial details like billable hours, project milestones, and resource allocation. For revenue recognition, this is gold. A PSA system provides the raw data you need to forecast revenue accurately and determine when you’ve met your performance obligations. It captures the progress of your work, which can then be fed into your accounting system to ensure your recognized revenue perfectly aligns with the services you’ve delivered.
If a PSA is your project command center, an Enterprise Resource Planning (ERP) system is your business's central nervous system. ERPs are comprehensive platforms that integrate all of your core business functions, including finance, HR, and supply chain management. When it comes to revenue recognition, the ERP is where the final, official accounting happens. It takes the project data from your PSA and other sources to perform the precise calculations needed for billing and financial reporting. An ERP provides a single, unified view of your company’s financial data, which is absolutely essential for maintaining accurate records and ensuring compliance.
While ERPs are powerful, they aren't always built to handle the specific nuances of ASC 606 for service-based businesses. That’s where automated revenue recognition platforms come in. These specialized tools are designed to streamline compliance with complex standards. They automate the five-step model, manage sophisticated contracts with multiple performance obligations, and handle variable considerations without manual workarounds. By connecting to your other systems, these platforms create a single source of truth for revenue, helping you close the books quickly and accurately. If you're ready to see how automation can transform your process, you can schedule a demo to explore the possibilities.
At the foundation of any solid revenue recognition process is clean, accurate data. This starts with diligent time tracking and project management. Whether it’s a simple time-tracking app or a more robust project management tool, these systems capture the fundamental inputs for your revenue calculations. Without a reliable way to track hours spent and milestones achieved, the data flowing into your PSA and ERP systems will be flawed from the start. Ensuring your team consistently and accurately logs their work is the first and most critical step toward compliant and trustworthy financial reporting. It’s the bedrock upon which your entire revenue recognition strategy is built.
Getting your revenue recognition right is one thing; proving it to auditors is another. That’s where documentation comes in. Solid documentation is your evidence—it shows the logic behind your numbers and demonstrates that you’re consistently following ASC 606 guidelines. Think of it as building a clear, defensible case for your financial statements. Without it, you’re left scrambling during an audit and facing potential compliance issues.
Proper documentation isn’t just about ticking a box for compliance. It creates a reliable system of record that helps you close your books faster and with more confidence. When your team has clear policies and a detailed audit trail to follow, there’s less guesswork and fewer errors. This foundation of clear, accessible records is what allows you to make smarter, data-backed decisions for your business. Let’s walk through the key documents you need to have in place.
Every service agreement you sign is the starting point for revenue recognition. That’s why you need a consistent process for reviewing each one. The goal is to carefully look at your contracts to identify all the distinct goods or services you promise to customers. These are your performance obligations, and they are the building blocks of ASC 606. Your review process should be a standard procedure, ensuring that you identify each obligation, determine its standalone value, and understand the terms of payment before any work begins. This isn't just a task for the finance team; your sales and legal teams should be involved to ensure everyone understands what’s being sold and delivered.
ASC 606 compliance touches nearly every part of your business, from sales commissions and IT systems to your financial reports. To manage this complexity, you need clear, written policies and procedures. These documents act as your company’s rulebook for revenue recognition, ensuring everyone applies the standards the same way every time. Your policies should outline exactly how you handle different contract types and, just as importantly, you should have a process for how to handle changes to contracts. A simple amendment could be treated as a separate contract or an adjustment to the existing one, and your team needs to know how to proceed without having to guess. You can find more insights on financial operations on our blog.
An audit trail is the story of your revenue. It’s a detailed record that connects every recognized dollar back to a specific performance obligation in a customer contract. According to the standard, revenue should be recognized based on the level of completion and when the customer receives the benefit of the service, not just when an invoice is sent or cash is received. Your audit trail provides the proof. It should include contracts, change orders, project completion reports, and any judgments made along the way. A strong audit trail makes your month-end close smoother and gives auditors the transparency they need. Using an automated platform can create this trail for you, linking data from different systems to provide a single source of truth.
Understanding the principles of ASC 606 is one thing, but applying them consistently is where the real work begins. Moving from theory to practice requires a coordinated effort across your organization, the right processes, and the best tools for the job. It’s about creating a system that not only ensures compliance but also supports your business as it grows. By focusing on a few key areas, you can build a robust framework for revenue recognition that is both accurate and efficient, giving you the confidence you need to make smart financial decisions.
Revenue recognition isn't just a task for the finance department. Because ASC 606 touches so many parts of a business—from sales contracts and project management to IT systems and executive compensation—it’s essential that everyone is on the same page. When your sales team structures a deal or your project managers report on milestones, their actions directly impact how and when you recognize revenue. Miscommunication or a lack of understanding between departments can lead to compliance errors and reporting delays. Start by providing clear training for all relevant teams, not just your accountants. For more guidance on related financial topics, you can find helpful articles on the HubiFi blog.
ASC 606 compliance is an ongoing process, not a one-time project. As your business evolves, so will your contracts and service offerings. It's critical to regularly review your processes to make sure they still hold up. This starts with your contracts. You should consistently and "carefully look at your contracts to identify all the distinct goods or services you promise to customers." This helps ensure you’re correctly identifying performance obligations every single time, especially when you introduce new services or bundled deals. Set a schedule for periodic reviews of your revenue recognition policies. This proactive approach not only keeps you compliant but also helps you continuously refine your operations for better efficiency and accuracy.
For high-volume service businesses, managing revenue recognition with spreadsheets is not just inefficient—it’s a major risk. Manual data entry and complex formulas are prone to human error, which can lead to inaccurate financial statements and painful audit findings. The right technology automates the complex calculations and documentation required by ASC 606, freeing up your team to focus on strategic analysis. An automated platform like HubiFi can pull data from your different systems to create a single source of truth for revenue. Our platform offers seamless integrations with the tools you already use, ensuring your financials are always up-to-date. If you're ready to replace manual work with reliable automation, schedule a demo to see how we can help.
Why can't I just recognize revenue when I send an invoice or get paid? This is one of the biggest mindset shifts with ASC 606. The standard requires you to record revenue when you actually deliver value and transfer control of a service to your client, not just when money changes hands. This approach gives a more accurate and real-time picture of your company's financial performance, matching your reported income to the work you've completed.
My fixed-fee project has multiple parts. Do I recognize all the revenue at the end? Not necessarily. You need to break the project down into its distinct promises, or "performance obligations." If you deliver a brand audit in month one and a new website in month three, you should recognize the revenue for the audit when it's delivered. You don't have to wait until the entire project is finished. This method ensures your revenue reflects the value you provide as you provide it.
We're a small firm still using spreadsheets. Is that a problem? Spreadsheets can work when you're just starting out, but they become risky as your business grows. They are prone to human error, require a lot of manual work to maintain, and make it difficult to create a clear audit trail. As your contracts become more complex, relying on spreadsheets can lead to compliance issues and an inaccurate view of your financial health.
How do I handle a client who wants to change the project scope halfway through? When a client changes the scope, you need a clear process to evaluate it. You'll have to determine if the change is a modification to the existing contract or if it's essentially a new, separate contract. How you classify it will affect how you allocate the price and recognize the revenue for the new work, so having a consistent policy is key to staying compliant.
Does this really affect departments outside of my finance team? Absolutely. Revenue recognition impacts your entire operation. Your sales team needs to understand how contract terms affect revenue timing, as this can influence their commission plans. Your project managers provide the critical data on milestones and completion that finance needs to recognize revenue accurately. Getting it right requires coordination across the whole company.
Former Root, EVP of Finance/Data at multiple FinTech startups
Jason Kyle Berwanger: An accomplished two-time entrepreneur, polyglot in finance, data & tech with 15 years of expertise. Builder, practitioner, leader—pioneering multiple ERP implementations and data solutions. Catalyst behind a 6% gross margin improvement with a sub-90-day IPO at Root insurance, powered by his vision & platform. Having held virtually every role from accountant to finance systems to finance exec, he brings a rare and noteworthy perspective in rethinking the finance tooling landscape.
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