What Is the Right to Invoice Practical Expedient?

The Financial Accounting Standards Board’s (FASB) revenue recognition standard, ASC 606, provides a framework for how companies account for revenue from contracts with customers. The guidance includes several optional simplifications called practical expedients, which are accounting shortcuts that can streamline reporting. One such simplification is the right to invoice practical expedient.

Defining the Right to Invoice Practical Expedient

The right to invoice practical expedient is a policy election that permits a company to recognize revenue for an amount it has the right to bill. This option is available for performance obligations—promises in a contract to transfer goods or services—that are satisfied over time. It allows an entity to bypass complex calculations for measuring its progress toward completing a performance obligation. Instead of determining a percentage of completion, the company can recognize revenue equal to the amount invoiced.

This expedient is useful for service contracts where billing is straightforward and directly reflects the work performed. For example, a contract where a company bills a fixed amount for each hour of service is a common scenario where this simplification applies. The invoiced amount serves as a direct proxy for the value delivered to the customer. It is an optional accounting policy that must be applied consistently to similar types of contracts.

Criteria for Application

The primary condition for using the right to invoice practical expedient is that the entity’s right to consideration must be for an amount that “corresponds directly with the value to the customer of the entity’s performance completed to date.” This phrase from ASC 606-10-55 means the invoiced amount must be a reasonable reflection of the value the customer has received.

Contracts structured on a time-and-materials basis are prime candidates for this expedient. For instance, if a consulting firm bills $200 for each hour of service, the invoice for 10 hours of work ($2,000) directly corresponds to the value of those 10 hours transferred to the client. A contract to process a large volume of transactions at a fixed price per transaction would also likely qualify.

Conversely, many contract structures would fail to meet this criterion. Contracts with significant upfront payments or back-end rebates may indicate that invoiced amounts do not align with the value transferred. A contract with milestone payments not directly tied to the work performed would also be ineligible, such as when a contractor bills 25% of the contract price for a project phase that only represents 10% of the total value.

Contracts with escalating or de-escalating price structures also require judgment. A four-year service contract where the annual fee increases by 10% each year would only qualify if the entity can demonstrate that the value of the service provided also increases by 10% annually. Without such justification, the escalating fees do not correspond directly with the value transferred, making the expedient inapplicable.

Application and Disclosure Requirements

By electing this practical expedient, a company recognizes revenue equal to the amount it has the right to invoice for that period, aligning revenue recognition directly with its billing. This avoids the need to separately measure progress toward completion using other methods, such as tracking costs incurred against total expected costs.

When an entity chooses to use this expedient, it must disclose this fact in its financial statements. The disclosure should state that the expedient has been applied and identify the types of performance obligations for which it is used.

Using this expedient also relieves the company of another disclosure requirement. Under ASC 606, companies must disclose information about their remaining performance obligations. If revenue is recognized using the right to invoice expedient, the company is exempt from this specific disclosure for those contracts.