Bill and hold definition
/What is Bill and Hold?
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.
Bill and Hold Example
As an example of a bill and hold transaction, a manufacturer of golf carts accepts an order from a golf cart distributor for 1,000 golf carts. The manufacturer produces the carts in accordance with the timeline established by the distributor, but the distributor does not have sufficient warehouse space in which to house them. Accordingly, the manufacturer stores the carts on behalf of the distributor and bills it for the full amount ordered, plus storage fees. The manufacturer also sets these carts aside, so that they cannot be sold to some other buyer. Under these specific conditions, the manufacturer can recognize the full amount of revenue associated with the carts, despite not having shipped them to the customer.
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Requirements for Bill and Hold Transactions
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.
Example of a Fraudulent Bill-and-Hold Scheme
Sunbeam Corporation, a manufacturer of consumer appliances, became infamous in the late 1990s for engaging in a fraudulent accounting scheme involving bill-and-hold transactions. The fraud occurred during the tenure of CEO Albert J. Dunlap, who had been hired to turn the struggling company around.
Sunbeam pressured distributors to agree to bill-and-hold transactions near the end of fiscal periods. In these deals, distributors "bought" large quantities of products at steep discounts. Sunbeam then recorded these transactions as revenue, even though the goods remained in Sunbeam's warehouses and the distributors had no immediate need for the products. By prematurely recognizing revenue, Sunbeam artificially inflated its sales figures. This created the illusion of a successful turnaround and drove up the company’s stock price.
In 1998, the company's new management team reviewed the accounting practices and discovered the fraudulent activities. Sunbeam restated its earnings for 1996, 1997, and the first quarter of 1998, revealing significant overstatements of revenue. The SEC launched an investigation, concluding that Sunbeam's fraud had misled investors. As a result, Dunlap and other executives faced legal action and were banned from serving as officers or directors of public companies. In addition, Sunbeam filed for bankruptcy in 2001 as the company struggled to recover from the reputational damage.