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. Companies currently rely on Staff Accounting Bulletin (SAB) 104 for guidance on accounting for bill-and-hold arrangements.
The new standard, however, requires a vendor to determine whether the customer has control of the goods in a bill-and-hold transaction. Companies that currently recognize revenue on a bill-and-hold basis will, in most instances, continue to do so under the new standard.
To recognize revenue in a bill-and-hold arrangement under Accounting Standards Codification (ASC) 606, the seller should assess whether the customer has control of the goods in the arrangement. ASC 606 provides the following criteria that must be met for a customer to obtain control of a product in a bill-and-hold arrangement:
- The reason is substantive for the bill-and-hold arrangement. 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 separately stored and cannot be substituted for identical goods,
- The product is ready for delivery to the customer. This means that 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.
When the seller meets all of the criteria above and transfers control of the goods to the customer, the seller needs to consider if the custodial service is a separate performance obligation from selling the goods. Custodial 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 vendor is to provide custodial service for a period of time to the customer aside from selling the goods; in this case, the custodial service is considered a separate performance obligation and should be allocated a portion of the transaction price. Revenue related to the custodial service should be recognized over time as service is provided. Custodial service will likely be considered a separate performance obligation in most bill-and-hold arrangements.
For more information on determining whether a custodial service is a performance obligation, refer to Distinct within the Context of the Contract. For more information on allocating the transaction price to a custodial service, refer to Standalone Selling Prices.
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 Builder to store the purchased goods because it does not need them for production until a later date. 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 that is separate from its inventory storage. 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. When should Builder recognize revenue from this transaction?
Builder should recognize revenue from this transaction 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 time. The goods are identified as the customer’s goods because they are physically separated from 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 once they are sold.
Since the customer benefits separately from the custodial service and the custodial service is distinct from the machine parts (because custodial service is not used as an input to produce the machine parts), this contract contains two performance obligations: (1) the machine parts and (2) the custodial service. If the standalone selling price of the machine parts is $2,800 and the storage service is $400, Builder should recognize 87.5 percent ($2,800/$3,200) of the $3,000 on December 31, 20X7 and recognize 12.5 percent as it completes the warehouse duty. The table below illustrates the revenue recognition schedule for this contract.
Comparison to 605 and Topic 13
The new standard is less prescriptive than current Securities and Exchange Commission (SEC) guidance; however, they are similar in that both require evidence that the customer has control of the goods. The new bill-and-hold guidance differs in two main aspects from current guidance.
First, a bill-and-hold arrangement no longer must be at the customer’s request. Rather, the new standard requires that the reason for the arrangement be substantive. Although not required, a customer’s explicit request is usually indicative of a substantive reason for a bill-and-hold transaction.
Second, the contract does not need to specify a fixed delivery schedule. However, storing the customer’s goods is generally considered a separate performance obligation and the vendor needs to allocate a portion of the transaction price to account for this obligation.
The new standard has fewer requirements than SAB 104, but their concepts are similar. Since the SEC has yet to rescind its bill-and-hold criteria, publicly-filing vendors subject to SEC rule should still consider SAB 104 in situations that involve no fixed delivery schedule or when the customer did not explicitly request the arrangement. However, if the SEC rescinds SAB 104, in some instances, revenue could be recognized earlier because the new standard does not require a fixed delivery schedule nor the customer’s explicit request. The SEC will likely revisit this topic in the near future.
The new standard does not require bill-and-hold arrangements to be at the customer’s request nor does it require the vendor to specify a fixed delivery schedule. This may allow companies to recognize revenue earlier in some bill-and-hold transactions. However, these changes should not have a significant impact on contracts that currently recognize revenue on a bill-and-hold basis. The new standard does not replace SAB 104, but it is likely that the SEC will reexamine its guidance in light of the new standard. Currently, public companies should continue to use SAB 104, and private companies can use ASC 606 for bill-and-hold transactions.
- ASC 606-10-55-81 to 55-84.
- EY, Financial reporting developments: “Revenue from contracts with customers.” Revised August 2017. Section 7.4 “Bill-and-hold arrangements.”
- KPMG, Issues In-Depth: “Revenues from Contracts with Customers.” May 2016. Section 5.5.7 “Bill-and-hold arrangements.”
- PWC, “Revenue from contracts with customers.” August 2016. Section 8.5 “Bill-and-hold arrangements.”