Navigating Unbilled Receivables Under ASC 606

Revenue Recognition Has Evolved. Has Your Balance Sheet?

In the post-ASC 606 landscape, much has been said about revenue recognition, performance obligations, and contract modifications. Yet, the real test of whether a company understands this standard lies not in its revenue disclosures — but in the careful treatment of unbilled receivables and contract fulfillment costs.

If revenue recognition defines the timing of revenue, then contract cost capitalization defines the integrity of matching. In my years working with venture-backed companies across SaaS, services, and hybrid models, I have consistently found that unbilled receivables and capitalized contract costs are where the tension between accounting theory and business execution becomes most acute.

Handled correctly, these are balance sheet assets. Misapplied, they become landmines — obscuring true economic performance and inviting audit scrutiny.

Understanding the Nature of Unbilled Receivables

Let us begin with unbilled receivables. These arise when a company has satisfied a performance obligation — and is entitled to payment — but has not yet invoiced the customer. They are not the same as deferred revenue, which represents cash received before performance. Unbilled receivables sit on the opposite side of that equation.

In practical terms, unbilled receivables often surface in:

• Time-and-materials contracts with monthly billing lags
• Milestone-based arrangements where the milestone has been met but the invoice has not been triggered
• SaaS or implementation projects where contract terms allow revenue recognition ahead of billing

Under ASC 606, companies must recognize revenue as performance obligations are satisfied. This means that billing schedules cannot dictate revenue timing. If your system still ties revenue recognition to invoice generation, your accounting is likely outdated and possibly non-compliant.

ASC 340-40: A New World for Contract Costs

Where things become more intricate is with contract costs. ASC 340-40 requires that incremental costs of obtaining a contract — like sales commissions — be capitalized and amortized over the life of the related revenue. But it also introduces a second category: costs to fulfill a contract.

These are not commissions. They include:

• Project setup labor
• Configuration or implementation costs
• Dedicated software environments or customization efforts
• Pre-delivery staging or manufacturing effort for long-lead products

If these costs are directly related to a contract, generate or enhance resources, and are expected to be recovered, then they must be capitalized — not expensed.

This is a significant shift from legacy GAAP, under which many of these costs were often booked to expense immediately.

Why This Matters: The Economic Signal

From a financial reporting standpoint, the capitalization of fulfillment costs and recognition of unbilled receivables allows a company to match cost and revenue in a way that reflects economic substance. This preserves gross margin integrity and prevents distortion of period-over-period comparisons.

However, there is a practical tension. Capitalizing costs boosts EBITDA in the short term. But it creates deferred expense that must be amortized, often straight-line, over the revenue recognition period. If churn increases, or if the contract is terminated, amortization must be accelerated — sometimes creating a P&L shock.

In one Series B services firm I supported, implementation costs were capitalized aggressively under ASC 340-40. But when the company shifted to shorter-term contracts to improve agility, amortization schedules no longer matched reality. The result: a write-down of $600,000 in contract asset balances and three quarters of restated gross margins.

Systems Thinking: It Is Not Just a Journal Entry

Operationalizing ASC 340-40 requires alignment across sales, operations, billing, and finance. The capitalization of fulfillment costs depends on understanding contract structure — not just revenue schedules.

Your ERP must track project-level labor and tie it to specific contracts. Your billing system must allow for separation between invoice triggers and performance obligation satisfaction. And your amortization logic must be reviewed quarterly, especially as average contract terms shift.

Relying on spreadsheets or “close-of-the-quarter” judgment calls is a recipe for inconsistencies — and audit challenges.

Risks and Red Flags

Finance leaders must pay particular attention to the following risks:

• Overcapitalization of indirect costs: Only direct, incremental fulfillment costs should be capitalized. General training, sales enablement, or pre-sales scoping do not qualify.
• Churn and early termination: If the customer cancels or the contract is modified, previously capitalized costs may need to be written down.
• Delayed billing cycles: If unbilled receivables persist for more than 60–90 days without conversion to billed AR, auditors may question collectibility.
• Lack of amortization alignment: If revenue is recognized ratably but costs are amortized unevenly, margin volatility will ensue.

Regulatory and Investor Expectations

Investors and auditors are now paying closer attention to the treatment of unbilled receivables and capitalized contract costs, especially in high-growth SaaS or professional services businesses. These accounts affect working capital, margin visibility, and free cash flow.

Overstating unbilled receivables may paint an unrealistically optimistic picture of backlog. Undercapitalizing fulfillment costs may understate margin and mislead strategic partners about the cost-to-deliver. The CFO must balance compliance with clarity.

Steps for Finance Leaders

1. Inventory your contract cost types. Identify which are capitalizable under ASC 340-40. Create standardized criteria and documentation templates.
2. Align with RevOps and project managers. Fulfillment costs must be tagged and mapped at the project level to enable accurate capitalization.
3. Review unbilled AR aging. Monitor for trends in delayed billing or disputed milestones. Consider establishing reserves where collection risk exists.
4. Refine amortization schedules. Base these on actual revenue timing, not contract length alone. Update quarterly.
5. Train the team. This is not just a controller issue. Sales, legal, and delivery teams need to understand how contract structure affects accounting.

Conclusion: Balancing Clarity with Complexity

Unbilled receivables and contract cost capitalization are not just technical nuances. They are reflections of how your company thinks about economic value, customer delivery, and performance measurement.

Finance leaders must ensure that these accounts are not just technically accurate, but economically truthful. In a world where investors are scrutinizing CAC payback, gross margin consistency, and deferred revenue trends, these line items carry weight far beyond their nominal value.

Call to Action

If you operate in a services, SaaS, or project-based business, take a fresh look at how you’re handling contract fulfillment costs and unbilled receivables. Review your processes, your assumptions, and your systems. The clarity you bring to these areas will directly influence how your margins — and your credibility — are viewed.