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 separately 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.
Aviat Networks, Inc. Explains its Bill-and-Hold Arrangements to the SEC
In June 2019, Aviat Networks, Inc. received a comment letter from the SEC about its bill-and-hold arrangements:
We note under bill-and-hold arrangements, customers can direct the use of the bill-and-hold inventory for which you retain physical possession and thus, “transfer of control has been met.” Please explain to us how you applied the guidance in ASC 606-10-25-30 in concluding that a customer has obtained control in a bill-and-hold arrangement. Additionally, in your assessment of transfer of control, tell us how each of the criteria under ASC 606-10-55-83 has been met.
Aviat’s response is a great example of how to analyze the control criteria in ASC 606. Aviat explained that two of its customers (“M” and “G”) engage in bill-and-hold transactions, and Aviat has a separate warehouse for each of these customers. Aviat argued that these transactions meet all the control criteria in both ASC 606-10-25-30 (except for physical possession) and ASC 606-10-55-83. Aviat’s reasoning is as follows:
- Aviat has a contractual right to 100% of the payment from M once the goods are delivered to the warehouse. Aviat has a contractual right to only 50% of the payment from customer G when goods are delivered, but right to payment is not the overarching principle in revenue recognition according to BC148 of ASU 2014-09 and acceptance is considered a formality.
- The legal title passes to the customer when goods arrive at the warehouse.
- The customer can direct where the goods are deployed once the goods enter the warehouse.
- The customer has the legal title to all the risks and rewards associated with the goods in the warehouse.
- Acceptance is a formality because the equipment is built specifically for the customer and historical returns are insignificant.
- The customer requested the bill-and-hold arrangement.
- The warehouse space is specifically for that customer’s goods.
- The goods are ready to be deployed for installation when they reach the warehouse.
- Once the goods are in the warehouse, Aviat cannot use the equipment or sell it to another customer because the company has no legal title.
Aviat’s analysis is thorough and shows that the arrangement with these two customers qualifies as a bill-and-hold transaction (July 2019 letter).
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.
Example: Machine Parts and Storage
Builder enters a contract to sell 10 machine parts to a customer for $3,000 on December 31, 20X7, and the customer pays the full amount on that date. The customer requests that Builder store the purchased goods because it does not need them for production until later. Although the customer does not provide a specific delivery schedule for the goods, Builder estimates that it will store the goods for two months. Builder packages the machine parts and stores them in an area separate from its inventory. The customer receives the legal title of these goods on December 31, 20X7 and has the right to use the goods however it wants during the storage period.
Builder should recognize revenue from the sale of machine parts on December 31, 20X7 because control of the goods is transferred to the customer, as indicated by the four criteria. The reason for this transaction is substantive because the customer does not need the goods for production until a later date. The goods are identified as belonging to the customer because they are physically separate from the rest of Builder’s inventory. The goods are packaged and ready for shipment. Moreover, because the customer has the legal title of the goods, Builder cannot use the goods or direct the goods to another customer.
Because the customer benefits separately from the storage service and the storage service is distinct from the machine parts (storage service is not an input to produce the machine parts), this contract contains two performance obligations: (1) the machine parts and (2) the storage service. If the standalone selling prices of the machine parts and the storage are $2,800 and $400 respectively, Builder should recognize 87.5 percent ($2,800/$3,200) of the $3,000 on December 31, 20X7 and recognize 12.5 percent over time as it completes the storage service. The table below illustrates the revenue recognition schedule for this contract.
|Performance Obligation||Allocated Price||December 31, 20X7||January 31, 20X7||February 28, 20X8|
|Sale of Machine Parts||$2,625||$2,625||$0||$0|
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.