Bill and Hold

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The SEC frowns upon bill and hold transactions. It will generally not allow revenue recognition in either of the following circumstances:

When a company completes manufacturing of a product and segregates the inventory within its facility; or
When a company ships products to a third-party storage facility while retaining title to the product and payment by the buyer will not occur until it is delivered to the buyer.

The SEC bases its bill and hold opinion on the underlying concepts that revenue recognition does not occur until the customer takes title to the goods and assumes the risks and rewards of ownership. Consequently, the SEC uses all of the following criteria when determining whether revenue should be recognized:

Ownership risk must pass to the buyer;
The customer makes a (preferably) written commitment to buy the goods;
The buyer must request that the sale be on a bill and hold basis, and have a substantial business purpose for doing so;
There is a reasonable delivery schedule for the goods;
The seller has no remaining performance obligations;
The goods have been segregated, and cannot be used to fill other orders received by the seller; and
The product must be complete.

The SEC further points out that these bill and hold criteria are not a checklist that will guarantee revenue recognition if a company can structure a transaction to meet all of the requirements; they are general criteria used to examine the intent of a transaction. In addition, the following factors should be considered in making the revenue recognition determination:

Whether the seller has modified its standard billing and credit terms for the buyer;
The seller’s past pattern of using bill and hold transactions;
Whether the buyer has assumed the risk of loss if the market value of the goods declines;
Whether the seller’s custodial risks of the goods purportedly sold are insurable and insured; and
That the business reasons for the bill and hold arrangement have not imposed a contingency on the buyer’s commitment to accept the goods.

The SEC further states that delivery has generally not occurred unless the product has been delivered to either the customer or another site specified by the customer. If the customer specifies delivery to a staging site but a substantial portion of the sales price is not payable until delivery is ultimately made to the customer, then revenue recognition must be delayed until final delivery to the customer has been completed.