What is Service Company Accounting?
Service company accounting is the financial reporting approach for businesses that sell professional or technical services rather than physical products. Revenue is recognised when the service is rendered, often over time under IFRS 15, and costs are mainly labour and project-related expenses.
How It Works
- Identify the performance obligation in each service contract (time-based or output-based).
- Recognise revenue over time using an input method (hours, costs incurred) or output method (milestones reached).
- Capture project costs against each engagement for margin analysis.
- Bill clients per contract terms (fixed-fee, time-and-materials, retainer) and follow up on collection.
Saudi Context
Saudi consultancies, IT firms, audit and tax advisors, and Pro Services partners apply IFRS 15. Long-term contracts use percentage of completion. VAT applies at 15% on most services, with specific zero-rated and exempt categories defined by ZATCA.
Example
A Riyadh IT consultancy signs a SAR 600,000 12-month managed services contract. It recognises SAR 50,000 revenue per month using a time-based input method, plus 15% VAT on each invoice.