Bill-and-Hold Arrangement
Refers to when revenue is recorded before the delivery of the goods
What Is Bill and Hold?
The bill and hold arrangement is where the revenue or payment received is recorded before the delivery of the goods. It refers to a situation where the seller of the goods provides invoices to the customer but does not deliver the goods until a later date.
Due to the simplicity of manipulating earnings, a bill-and-hold arrangement is regarded. These are commonly known as a ‘Bill in place agreement.’
When the seller offers a discount or another incentive to the buyer to make an early payment, bill-and-hold arrangements may be advantageous to both the buyer and the seller.
Bill and hold agreements have occasionally been abused by businesses to make it appear as though they had higher sales than they did for a given quarter or year.
Normally, revenue is not recognized until after the delivery of goods or the provision of services. However, exceptions are made when a client expressly asks the seller to put off delivery and has a valid business justification.
This differs from generally accepted accounting principles (GAAP), which state that revenue for a transaction should be recognized after the products have been delivered to the buyer.
Due to the seller's ability to recognize revenue immediately and the potential to inflate its net income for financial reporting reasons, using the bill-and-hold basis is often problematic.
The requirements that must be completed for a seller to recognize revenue under this arrangement are described in IFRS 15 (Revenue from Contracts with Customers). Often these arrangements are related to financial fraud in the economy.
These arrangements are recorded in the books of accounts through the following journal entries:
| Particulars | Amount ($) |
|---|---|
| Dr. Accounts Receivables | XXX |
| Cr. Revenue | XXX |
| Particulars | Amount ($) |
|---|---|
| Dr. Cost of goods sold | XXX |
| Cr. Inventory | XXX |
These journal entries show that there was no cash inflow or outflow in this arrangement, and the revenue was recognized without any money involvement.
As a result, the seller is incentivized to work with the buyer to complete a bill-and-hold transaction before canceling the order when the payment is due.
Key Takeaways
- Bill-and-Hold Arrangement records revenue or payment before delivering goods.
- It can be advantageous with incentives for early payment. Generally, revenue is recognized after goods delivery.
- SEC criteria include transferring ownership risks to the buyer.
- The buyer must commit to purchase with a valid reason.
- The goods must be delivered regularly and fairly.
- After meeting criteria, SEC considers other factors.An example in the clothing industry illustrates the concept.
Criteria to Recognize a Bill-and-Hold Arrangement
The Securities and Exchange Commission (SEC) occasionally permits some companies to employ the bill-and-hold basis method of revenue recognition, but this is under stringent, regulated circumstances.
The SEC has established the following criteria to identify a bill-and-hold agreement since it is simple to commit financial fraud:
1. Ownership risks ought to be transferred to the buyer of the goods.
2. The buyer must commit to purchasing the items, ideally in writing.
3. The buyer must ask for the bill-and-hold arrangement and have a compelling justification for doing so.
4. The goods must be delivered to the buyer regularly and fairly.
5. The seller shall have no further obligations.
6. The products must not be used to fulfill other orders and must be kept separate from the seller's inventory.
7. The products must be prepared for shipping.
After meeting the above seven criteria, SEC takes into account several other factors to assess the suitability of the agreement, which are mentioned below:
1. History of bill-and-hold transactions used by the seller of the goods.
2. How significantly is the seller changing its standard conditions of sale for this particular transaction
3. The extent to which the seller's holding risk may be insured.
4. The extent to which a contingent sale is made due to the seller's possession of the goods
5. The potential value that a buyer would forfeit if the item's market value dropped.
Bill-and-Hold Arrangement Example
Here is an example that will help you understand the arrangement in a practical and real-life situation for the clothing products industry.
Example for clothing products industry:
The shirts Producer receives an order for 2500 cotton shirts from Comfort Co. Due to the problem of storing many shirts in the showroom (lack of a warehouse facility), Comfort Co. decided that this deal would be based on a bill-and-hold arrangement.
Bill-and-hold transactions between Shirts producer and Comfort Co. have standard terms already set for this agreement where the order must be kept in the warehouse of the shirts producer.
The order for Comfort Co. was stored separately by the Shirts producer and cannot be used for other orders or customers.
The agreement specified that Comfort Co. must send the payment within 60 days of the complete order being put in the warehouse of the shirts producer, for which, when needed, Comfort Co. can make a request for the delivery and accept it.
When should the Shirts Producer declare their profits?
Analysis:
Because Comfort Co. possesses the ownership of the shirts ordered, the Shirts Producer should collect revenue when the complete order of shirts is put in the warehouse of the shirts producer.
This is because the order cannot be used with other customers, and both parties accepted a request for a bill-and-hold arrangement.
Additionally, Comfort Co. requested prompt shipment for the order.
Bill-and-Hold Arrangement FAQ
With the bill-and-hold approach, revenue is recognized at the time of sale, even when the products are not necessarily delivered to the customer until after the sale.
A bill-and-hold agreement must be substantial as it lacks the physical room to store the products.
No, the bill-and-hold transactions are not included in the company’s inventory while preparing financials.
This can be monitored and reduced by the Securities and Exchanges Commission, which lays down several criteria for this arrangement.
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