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Accruals and unbilled amounts

Understanding Accruals in Legal Tracker

The Accruals Module in Tracker provides an integrated, efficient, and audited process for generating accrual data and sending it to your company's finance department. It is similar to electronic invoicing, except this data involves unbilled amounts rather than actual invoices.

Accruals Overview

The Legal Tracker accruals module helps you:
  • Create an automated, reliable process to generate accrual data and send it to your company's finance department. In addition to being able to send accrual data to your finance department at the end of each accrual period, the data is automatically included inTracker reports.
  • Incorporate law firm unbilled amounts into budget and forecast reports. Controlling outside counsel spending against the annual legal budget, called the departmental budget in Tracker, is one of the primary functions of the law department, and one of the primary ways in which law departments are evaluated. Company users can incorporate unbilled amounts in their financial data reports.
  • Create a workflow that reduces the burdens on law departments and law firms. Without Tracker's accrual module, accrual workflows imposed burdens on everyone involved. For example, law firms would receive many different spreadsheet formats, data requirements, etc. Companies had to get the data filled out, then manually combine the data that was returned. Tracker's accruals functionality reduces these burdens in multiple ways:
    • Firms can generate unbilled amounts from their time and billing system, and upload the amounts directly into Tracker. Law firms can use their own matter structure and matter numbers from their time and billing system, without having to use a spreadsheet of matters that the company provides. If the law firm has multiple matters for a single company matter in Tracker, Tracker automatically combines the multiple law firm amounts into one accrual for the firm in the Tracker matter.
    • Accrual workflows are coordinated with other workflows for maximum efficiency. For example, if a law firm is required to enter unbilled amounts, provide a budget reforecast, and enter a status report in June, those requirements become due at the same time. Similarly, if company users are required to review the law firm's unbilled amounts and approve a new reforecast, those requirements become due at the same time, and can be edited on the same page.
When setting up the Accruals Module, the company decides how often accruals will be due, when the amounts will be entered, and the duration of the input window. For example, the company might decide that accruals should be entered quarterly, before the end of the month, and with a three-day window in which firms must enter the amounts. The company then decides how to handle any review of the unbilled amounts. After the module is enabled, law firm users receive an email notification and alerts when it is time to input their unbilled amounts. If a company review is required, the company reviewer receives an alert and email notification. Finally, when the accrual input period is over, Tracker locks down the accrual amounts and saves them in the system. The company can then export the accrual data and send it to the finance department.
Reviewing Accruals
Law firms submit unbilled amounts directly into Tracker, either monthly, quarterly, or once at the end of the year. The requirement can be turned off for individual firms and for individual matters. Company users with financial data edit authority can also enter unbilled amounts on behalf of firms.
Your company can choose one of three options for review:
  • Establish a company review period and require review by company users.
     Company users responsible for each matter receive email notifications and action item alerts notifying them that the unbilled amounts of law firms need to be reviewed. During the review process, users can view the billed and budgeted amount to date for an accurate, current view of total spending versus the budget. Users can approve the financial information or edit the values when necessary. If the financials are edited, an email notification is automatically sent to the law firm.
  • Establish a company review period with review by Company System Administrators
    Company System Administrators can use the Unbilled Amounts Report to find any irregularities. Company System Administrators can edit unbilled amounts, but there is no formal approval process of the unbilled amounts.
  • No company review period but Company System Administrators review while firms are entering unbilled amounts.
    Company System Administrators can review the unbilled amounts for any irregularities during the law firm input period by using the Unbilled Amounts Report. After the firm input due date has passed, the accruals are locked down and there is no further review.
Lockdown and delivery to finance department
At the end of the input/review period, the accrual amount is saved as a permanent record in Tracker. The accrual amount is the sum of the unbilled amounts plus any pending invoices or invoices that had not been sent to AP. In other words, it is all known spending that has not reached your company's finance department at the end of the accrual period.
After the accruals are locked down, users can run the Accrual Report to view the data. This report can be exported and sent to your company's finance department. The Accrual Report also shows invoices that are sent to AP after the accrual lockdown so the remaining accrual balance can be tracked.
Rejected or disputed invoice amounts
When an invoice is rejected, the amount billed is "zeroed out" for the purposes of reporting in Tracker. In other words, if an invoice is rejected, the amount is no longer accounted for in Tracker. For this reason, you should instruct your firms that if a rejected invoice has not been resubmitted before the close of the accrual period, the invoice information must be included in their unbilled amounts. Disputed invoices are included in accruals, however.

The Four Key Concepts

Understanding the following key concepts will help you understand accruals in Legal Tracker.
Key concept 1: How the accrual amount is obtained, and the difference between the "accrual" and the "law firm unbilled amount"
The accrual that is generated in Tracker (called the Accrual Period Ending Balance) is the sum of two amounts:
  • The law firm unbilled amounts, plus
  • The value of pending invoices that have been received by the law department in Tracker but have not been sent to AP
During an accrual period, 2 accruals were generated for Matter A: Accrual — Firm 1 and Accrual — Firm 2:
  • For Firm 1, there are unbilled amounts of $30,000 and pending invoices of $40,000.
  • For Firm 2, there are unbilled amounts of $50,000 and pending invoices of $80,000.
The Accrual Period Ending Balance for Firm 1 was $70,000 and for Firm 2 it was $130,000. These Accrual Period Ending Balances are the amounts that are sent to your finance department.
Occasionally law department users refer to the law firm unbilled amount as the accrual. However, with respect to Tracker, the definition of accrual must be understood from the perspective of the finance department. As shown in the image above, in addition to the unbilled amount accruals also include the invoices that the law department has actually received in Tracker, but that have not been sent to the finance department.
Pending invoices are any invoices that have not been sent to AP. The image above shows that pending invoices are added to the law firm unbilled amount. In reality, this amount is any unapproved invoices plus any approved invoices that have not been sent to AP in the AP Extract. In other words, it is the amount of invoices that are in Tracker, but have not been set to AP for payment.
While the Accrual Period Ending Balance is of primary concern to your company's finance department, the unbilled amount is the focus of attention for company users in Tracker. Many of the displays and reports give the option of including unbilled amounts.
In addition, company users can now generate spending and budget reports using the Financial Data Export that include unbilled amounts along with pending and approved invoices.
Key concept 2: If firms enter unbilled amounts before the end of the month, the law firms enter two separate unbilled amounts
Because the firm is submitting the unbilled amounts before the end of the month, it must submit two unbilled amounts.
  • The prior month(s) unbilled amount, which is any unbilled amount through the last full calendar month
  • The current month estimated billing, which in the example below is the estimated billing for the month of June
Unbilled amounts are due on the 20th day of the last month each quarter, and the firm is submitting unbilled amounts in June at the end of the second quarter.
Both amounts (as well as pending invoices and other amounts that comprise the accrual) are displayed in the accrual profile.
The date range for the Prior Month's Unbilled Amount (April 1 - May 31) is the date range from the service period of the last invoice through the end of the prior month.
There are several reasons why two separate amounts are entered:
  • Keeping the prior months unbilled amount separate from the current month estimated billing creates a consistent approach with respect to unbilled amounts being generated from law firms' time and billing systems. Regardless of whether unbilled amounts are entered before or after the end of the month, the prior months unbilled amount is always a consistent amount because it is always the unbilled amount from the first day of the client’s fiscal year through the last full calendar month. This consistency helps firms create a standardized process for generating the unbilled amounts data.
  • The prior months unbilled amount is a known monetary amount based on actual work that has occurred. The current month estimated billing amount is an estimate, and clients want to review the estimate for reasonableness and their own budget purposes.
  • Clients can audit invoices posted against the prior months unbilled amount. If the two amounts were commingled, then the auditing would not be as accurate, which could lead to billing disputes and perhaps invoices being reduced.
Key concept 3: Each accrual includes amounts only for services rendered in the fiscal year of the accrual
For an invoice amount or an unbilled amount to be included in an accrual, such amounts must be for services rendered within the same fiscal year as the accrual.
For example, assume the company has a calendar fiscal year. The accrual recorded for Matter A for December is $100,000. When the January accrual is to be generated and sent to the finance department, the following amounts for Matter A are known:
  • Invoice #12345 was posted on January 15th for $45,000 for services rendered in November.
  • Although the firm has not posted an invoice for December, they still have $55,000 that they have not billed for services in December.
  • The firm's unbilled amounts for January is $50,000.
The accrual for the January accrual period will be $50,000. The reason is that when the January accrual is calculated, any amounts for the prior fiscal year are ignored. (If the firm manually entered its unbilled amounts for January, Tracker clearly notifies users not to include any unbilled amounts for prior fiscal years.)
When the spending for a fiscal year exceeds the final accrual for that fiscal year
In the example above, assume that in February Invoice # 23456 was posted in Matter A for $65,000 for services rendered in December. Thus, $110,000 of invoices were posted after the December accrual, which was only for $100,000.
Users will know that the invoices exceed the accrual because the Accrual Report will show that the Remaining Accrual Balance is -$10,000.
Managing a negative accrual balance
Each company has to decide how to manage spending that exceeds the final accrual for a fiscal year. Some companies will aggregate accruals and spending for a cost center, which can mitigate the problem. For example, the spending might be more than the final accrual on Matter A, but less than the final accrual on Matter B, so they offset each other (assuming both matters are assigned to the same cost center). In other situations, the company may have to move the excess forward into the next fiscal year. Thus, in the example above, the company could enter in Matter A a memo entry for -$10,000 for the service period of December and a second memo entry for +$10,000 for the service period of January. This does not affect the total amount of spending in the system because the sum of the memo entries is $0, but it will cause $10,000 to be shifted from the prior fiscal year into the current fiscal year.
Key concept 4: Budget data can be used to calculate the law firm unbilled amount
Tracker can be set up such that the unbilled amounts can be calculated from a budget for certain months during the year. This is an important (and patent pending) aspect of accruals in Tracker because it can greatly reduce the burdens associated with generating accruals.
For example, firms can be required to manually enter unbilled amounts only at the end of the fiscal year. This is the most efficient selection, because it creates the least burden on your firms, yet still lets you send materially accurate accruals information to your finance department every month. The following table shows how the unbilled amount will be obtained each month:
Month
Method by which law firm unbilled amount is obtained
Months 1-11
Unbilled amount derived from budget (or you can elect not to generate accrual data during this month)
12th Month
Unbilled amount manually entered by firms/vendors
Alternatively, firms can be required to manually enter unbilled amounts only at the end of each quarter. This is a greater burden on your firms, but still does not require the firms to manually enter unbilled amounts each month. If you choose the quarterly option, the table below shows how the unbilled amount will be obtained each month:
Month
Method by which law firm unbilled amount is obtained
Months 1-2
Unbilled amount derived from budget (or you can elect not to generate accrual data during this month)
3rd Month
Unbilled amount manually entered by firms/vendors
Months 4-5
Unbilled amount derived from budget (or you can elect not to generate accrual data during this month)
6th Month
Unbilled amount manually entered by firms/vendors
Months 7-8
Unbilled amount derived from budget (or you can elect not to generate accrual data during this month)
9th Month
Unbilled amount manually entered by firms/vendors
Months 10-11
Unbilled amount derived from budget (or you can elect not to generate accrual data during this month)
12th Month
Unbilled amount manually entered by firms/vendors

Determining When Unbilled Amounts Are Due

There are two parts to determining when unbilled amounts will be entered. First, law departments decide whether firms enter unbilled amounts before or after the end of the accrual period. Although most companies require firms to enter amounts before the end of the month because of finance department policies, it is significantly easier for your firms to enter amounts after the end of the month because they can pull data directly from their time and billing system, and they only have to enter one amount.
Second, law departments decide how often unbilled amounts must be entered. They can be required once a year, quarterly, or monthly.
Your company must establish a policy regarding firms' failure to enter unbilled amounts. Some companies choose to enter an unbilled amount of $0 for firms that fail to enter their own figures; other companies notify firms that pending invoices will be rejected or reduced if the firm fails to enter unbilled amounts.

Sending Accruals to the Company Finance Department

The Accrual Report export is the primary tool for sending the final accrual amount to your finance or AP department. For more information, see the Sending Accruals to Finance Help page (Company System Administrators only).
If your department requires firms to submit accruals monthly, then you will send the Accrual Report export to finance once a month. However, if firms and vendors are required to enter unbilled amounts quarterly or only once per year, then companies have the option of generating accrual data only for those months in which unbilled amounts are required.Determining Whether to Require Company Review of Unbilled Amounts
There are three possible system settings relating to a company review period:
  • There is a company review period, and company users are required to review the unbilled amounts.
  • There is a company review period, but review of the unbilled amounts is optional, and no alerts are sent to company users.
  • There is no company review period. Company System Administrators monitor unbilled amounts during the law firm input period and can enter unbilled amounts during that period, if necessary.

Action Items and Alerts

Action items and alerts
Information
Unbilled amounts review
If company review is required, the company users responsible for the financial data in the matter receive action an action items alert for budgets and accruals that shows how many matters require review.
In addition, users and delegates with financial review authority receive email alerts. See Accruals in the Alerts and Notifications topic for details.
Budget review
When a law firm user creates or modifies a law firm matter budget, the budget is considered pending, and company users who have a matter role of Matter Editor and higher (designated budget reviewers) receive an action items alert and an email notification to review the budget. The budget reviewer must then review the budget and approve, reject, or edit it.
If a company financial reviewer or budget reviewer creates or edits a law firm matter budget, no alerts or emails are sent, and no budget review is required.

This article applies to:

  • Product: Legal Tracker
  • Audiences: Company