A bill-and-hold arrangement arises when a customer is billed for a product, but the vendor does not deliver the product to the customer until a later date. If certain criteria are met, the vendor can recognize revenue before delivering the product, and the customer can recognize an asset before taking physical possession of the product. The purpose of these criteria is to determine whether the customer has control of the goods even though physical delivery to the customer may not have occurred. Control must pass to the customer for the agreement to qualify as a bill-and-hold arrangement.
Transfer of Control in Bill-and-Hold Arrangements
To recognize revenue in a bill-and-hold arrangement under ASC 606, the seller should assess whether the customer has control of the goods in the arrangement. ASC 606 offers five indicators of control which should be assessed first. You can read more about them in this RevenueHub article: Determining the Transfer of Control. For bill-and-hold arrangements, four additional criteria must be met for a customer to obtain control of a product in a bill-and-hold arrangement (ASC 606-10-55-83):
- The reason for the bill-and-hold arrangement is substantive. A substantive reason may be that the customer lacks storage capacity or its production schedule does not require the goods until a later time. Although a customer’s explicit request exists in many bill-and-hold arrangements, it is not required; for example, based on customary practice, a customer may purchase goods from the vendor months before it can store and use them, so the vendor stores the sold products for the customer without a formal agreement.
- The product is identified as the customer’s asset. To qualify as the customer’s asset, the sold goods must be stored identified separately as belonging to the customer and cannot be substituted for identical goods.
- The product is ready for delivery to the customer. The goods must be completed, packaged, and ready to ship.
- The seller cannot use the product or direct the product to another customer. To meet this criterion, the seller cannot have the ability to use the product or direct the product to another customer once the product is sold.
Storage: Another Performance Obligation
Once the seller has determined that it has transferred control of the goods to the customer, the seller must consider whether the custodial or storage service and the goods are separate performance obligations. Storage service is a performance obligation if the customer benefits from the service separately and it is distinct from other promises. For example, a contract may explicitly state that the seller is to provide storage service for a period of time to the customer; in this case, the storage service is considered a separate performance obligation and should be allocated a portion of the transaction price. Revenue related to the storage service would then be recognized over time as service is provided. Storage service will likely be considered a separate performance obligation in most bill-and-hold arrangements.
For more information on determining whether storage service is a separate performance obligation, refer to the RevenueHub article Distinct Within the Context of the Contract. For more information on allocating the transaction price to storage services, refer to the RevenueHub article Standalone Selling Prices.
Companies should evaluate whether control has passed to the customer using both the control criteria of ASC 606-10-25-30 and the more specific bill-and-hold guidance in paragraph 55-83. If control transfers to the customer in a bill-and-hold transaction, the seller should apply the guidance on determining whether an obligation is “distinct within the context of the contract” to determine whether the custodial or storage service should be recognized as a separate performance obligation.
- ASC 606-10-55-81 to 84, 25-30
- Codification of Staff Accounting Bulletins, Topic 13. Sections A.3.a and C.
- SEC Staff Accounting Bulletin No. 116. August 2017.
- KPMG, Handbook: “Revenue Recognition.” December 2019. Section 7.5.3.
- EY, “Revenue from contracts with customers (ASC 606).” January 2020. Section 7.5.
- Deloitte, “A Roadmap to Applying the New Revenue Recognition Standard.” July 2019. Section 8.6.7.