A bill and hold transaction is one in which the seller does not ship goods to the buyer, but still records the related revenue. Revenue can only be recognized under this arrangement when a number of strict conditions have been met. Otherwise, there is a risk of fraudulently recognizing revenue too early.
The Securities and Exchange Commission (SEC) does not like this type of transaction, and does not usually allow it, since revenue is normally only recognized when goods are shipped to the buyer.
The SEC requires that all of following criteria be met before a bill and hold transaction will be allowed:
- The risks of ownership have passed to the buyer
- The buyer has committed in writing to buy the goods
- The buyer has requested that the seller hold the goods, and has a business reason for doing so
- There is a scheduled delivery date for the goods that is reasonable
- There are no remaining obligations that the seller must complete
- The goods cannot be used to fill orders from other customers, and so have been segregated
- The goods must be complete
To make matters even more difficult, the SEC points out that the following additional factors be considered:
- The extent to which the seller is modifying its normal terms for this transaction
- The seller's history of employing bill and hold transactions
- The extent to which the buyer will lose if the market value of the held goods subsequently declines
- The extent to which the holding risk of the seller can be insured
- The extent to which the seller's holding of the goods really creates a contingent sale that the buyer could reject
The issue is also addressed in the Contracts with Customers accounting standard, which is the same in both GAAP and IFRS. This standard states that the following conditions must all be present for the seller to recognize revenue under a bill-and-hold arrangement:
- Adequate reason. There must be a substantive reason why the seller is continuing to store the goods, such as at the direct request of the customer.
- Alternate use. The seller must not be able to redirect the goods, either to other customers or for internal use.
- Complete. The product must be complete in all respects and ready for transfer to the customer.
- Identification. The goods must have been identified specifically as belonging to the customer.
Under a bill-and-hold arrangement, the seller may have a performance obligation to act as the custodian for the goods being held at its facility. If so, the seller may need to allocate a portion of the transaction price to the custodial function, and recognize this revenue over the course of the custodial period.