Annual report pursuant to Section 13 and 15(d)

Revenue Recognition

Revenue Recognition
12 Months Ended
Sep. 30, 2019
Revenue from Contract with Customer [Abstract]  
Revenue Recognition Revenue Recognition
Beginning October 1, 2018, we recognize revenue in accordance with ASC Topic 606, Revenue from Contracts with Customers. We adopted this standard using the modified retrospective method; accordingly, only periods after October 1, 2018, utilize this new standard.
Under this new standard, we recognize revenue as, or when, we satisfy performance obligations under a contract. We account for a contract when the parties have approved the contract and are committed to perform on it, the rights of each party and the payment terms are identified, the contract has commercial substance and it is probable that we will collect substantially all of the consideration. A performance obligation is a promise in a contract to transfer a distinct good or service, or a series of distinct goods or services, to a customer. The transaction price of a contract must be allocated to each performance obligation and recognized as the performance obligation is satisfied.
Although our services may have many components, these components are not necessarily distinct performance obligations as they may be interdependent on or interrelated to each other. Where our contracts contain more than one performance obligation, we allocate the contract’s transaction price to each performance obligation using our best estimate of the standalone selling price of each component. This method will vary from contract to contract. Where available, we utilize standalone selling prices of similar components. If this information is unavailable, we utilize a suitable metric to allocate selling price, such as costs incurred.
The majority of our contracts have performance obligations which are satisfied over time. In most cases, we view our performance obligations as promises to transfer a series of distinct services to our customer that are substantially the same and which have the same pattern of service. We recognize revenue over the performance period as a customer receives the benefits of our services. This continuous transfer of control is supported by the unilateral right of many of our customers to terminate contracts for convenience, without having to provide justification for this decision. Where we are reimbursed on a cost-plus basis, we recognize revenue based upon our costs incurred to date; where we are reimbursed on a fixed price basis, we recognize revenue based upon an appropriate output measure which may be time elapsed or another measure within the contract. When we have variable fees, such as revenue related to the volume of work or award fees, we allocate that revenue to the distinct periods of service to which they relate. In estimating our variable fees, we are required to constrain our estimates to the extent that it is probable that there will not be a significant reversal of cumulative revenue when the uncertainty is resolved.
Other performance obligations are satisfied at a point in time, rather than over time. We recognize revenue only when the customer has received control over the goods provided. Revenue recognition on these performance obligations does not require a significant level of judgment or estimation.
Where we have contract modifications, these are reviewed to determine whether they should be accounted for as part of the original performance obligation or as a separate contract. Where the modification changes the scope or price and the additional performance obligations are at their standalone selling price, these services are considered as a separate contract. Where there is a modification and the additional performance obligations are not at their standalone selling price, we consider whether those performance obligations are distinct from those already delivered. If services are distinct from those already provided, the contract is accounted for prospectively, as though the original contract had been terminated and a new arrangement entered into. Where the modification includes goods or services which are not distinct from those already provided, we record a cumulative adjustment to revenue based upon a remeasurement of progress towards the complete satisfaction of performance obligations not yet fully delivered.
Disaggregation of revenue
In addition to our segment and geography reporting, we disaggregate our revenues by product, contract type and customer type. Our operating segments represent the manner in which our Chief Executive Officer reviews our financial results which is further discussed in "Note 2. Segment information."
By operating segment and service
(dollars in thousands) Year ended September 30, 2019
Program administration $ 883,772   
Assessments and appeals 136,109   
Workforce and children services 100,454   
Other 56,153   
Total U.S. Health and Human Services 1,176,488   
Program administration 779,573   
Technology solutions 160,342   
Assessments and appeals 171,282   
Total U.S. Federal Services 1,111,197   
Workforce and children services 272,801   
Assessments and appeals 252,447   
Program administration 63,734   
Other 10,148   
Total Outside the U.S. 599,130   
Total revenue $ 2,886,815   

By contract type
(dollars in thousands) Year ended September 30, 2019
Performance-based $ 1,193,075   
Cost-plus 1,088,541   
Fixed price 441,146   
Time and materials 164,053   
Total revenue $ 2,886,815   
By customer type
(dollars in thousands) Year ended September 30, 2019
New York State government agencies $ 362,724   
Other U.S. state government agencies 804,213   
Total U.S. state government agencies 1,166,937   
United States Federal Government agencies 1,040,980   
International government agencies 558,599   
Other, including local municipalities and commercial customers 120,299   
Total revenue $ 2,886,815   

With the exceptions of the U.S. Federal Government and New York State, no customer provided more than 10% of our annual revenue in fiscal year 2019.
Many of our U.S. state government agency programs receive significant federal funding. We believe that the credit risk associated with our receivables is limited due to the creditworthiness of our customers.
Contract balances
Differences in timing between revenue recognition and cash collection result in contract assets and contract liabilities. We classify these assets as accounts receivable — billed and billable and unbilled receivables; the liabilities are classified as deferred revenue.
In many contracts, we bill our customers on a monthly basis shortly after the month end for work performed in that month. Funds are considered collectible and are included within accounts receivable — billed and billable.
Exceptions to this pattern will arise for various reasons, including those listed below.
Under cost-plus contracts, we are typically required to estimate a contract’s share of our general and administrative expenses. This share is based upon estimates of total costs which may vary over time. We typically invoice our customers at an agreed provisional billing rate which will differ from actual rates incurred. If our actual rates are higher than the provisional billing rates, an asset is recorded for this variance; if the provisional billing rate is higher than our actual rate, we record a liability.
Certain contracts include retainage balances, whereby revenue is earned but cash payments are held back by the customer for a period of time, typically to allow the customer to evaluate the quality of our performance. This balance is classified as accounts receivable - unbilled until restrictions on billing have been lifted.
In certain contracts, we may receive funds from our customers prior to performing operations. These funds are typically referred to as “set-up costs” and reflect the need for us to make investments in infrastructure prior to providing a service. This investment in infrastructure is not a performance obligation which is distinct from the service that is subsequently provided and, as a result, revenue is not recognized based upon the establishment of this infrastructure, but rather over the course of the contractual relationship. The funds are initially recorded as deferred revenue and recognized over the term of the contract. Other contracts may not include set-up fees but will provide higher fees in earlier periods of the contract. The premium on these fees is deferred.
Following the adoption of ASC Topic 606 in fiscal year 2019, some of our contracts, notably our welfare-to-work contracts in the Outside the U.S. Segment, include payments for outcomes which occur over several months. We are required to estimate these outcome fees ahead of their realization and recognize this estimated fee over the period of delivery.
During the year ended September 30, 2019, we recognized revenue of $39.4 million included in our deferred revenue balances at October 1, 2018, as updated for the effects of ASC Topic 606.
Contract estimates
We are required to use estimates in recognizing certain revenue.
Some of our performance-based contract revenue is recognized based upon future outcomes defined in each contract. This is the case in many of our welfare-to-work contracts in the Outside the U.S. Segment, where we are paid as individuals attain employment goals, which may take many months to achieve. We recognize revenue on these contracts over the period of performance. Our estimates vary from contract to contract but may include estimates of the number of participants, the length of the contract, the participants reaching employment milestones. We are required to estimate these outcome fees ahead of their realization and recognize this estimated fee over the period of delivery. During the year ended September 30, 2019, we recognized revenue from these performance-based fees of $91.3 million. Our accounts receivable - unbilled balance at September 30, 2019 included $47.0 million of these estimated outcome fees.
Other performance-based contracts with future outcomes include those where we recognize an average effective rate per participant based upon the total volume of expected participants. In this instance, we are required to estimate the amount of discount applied to determine the average rate of revenue per participant. During the year ended September 30, 2019, we recognized revenue from these performance-based fees of $144.0 million.
Where we have changes to our estimates, these are recognized on a cumulative catch-up basis. In the year ended September 30, 2019, our revenue included a reduction of $10.9 million from changes in estimates.
Remaining performance obligations
At September 30, 2019, we had approximately $328 million of remaining performance obligations. We anticipate that we will recognize revenue on approximately 58% of this balance within the next twelve months. This balance excludes contracts with an original duration of twelve months or less, including contracts with a penalty-free termination for convenience clause, and any variable consideration which is allocated entirely to future performance obligations including variable transaction fees or fees tied directly to costs incurred.
Accounts receivable reserves
Changes in the reserves against accounts receivable were as follows (in thousands):
  Year ended September 30,
  2019 2018 2017
Balance at beginning of year $ 4,285    $ 6,843    $ 4,226   
Additions to reserve 4,018    243    5,106   
Deductions (2,921)   (2,801)   (2,489)  
Balance at end of year $ 5,382    $ 4,285    $ 6,843   
In evaluating the net realizable value of accounts receivable, we consider such factors as current economic trends, customer credit-worthiness, and changes in the customer payment terms and collection trends. Changes in the assumptions used in analyzing a specific account receivable may result in a reserve being recognized in the period in which the change occurs.
At September 30, 2019 and 2018, $11.5 million and $13.4 million of our unbilled receivables related to amounts pursuant to contractual retainage provisions. We anticipate that the majority of the fiscal 2019 balance will be billed and collected during fiscal year 2020.