A bill-and-hold sale is invoiced to the customer while the seller keeps the goods. Year-end is when these deals multiply, and they are a classic route to pulling revenue into the wrong period. ASC 606 allows revenue on a bill-and-hold basis only when four criteria are met and the seller then treats its storage as a service. This post covers the criteria, the entries, and the procedures that test them.
What is a bill-and-hold arrangement?
Paragraph 606-10-55-81 defines it as a contract under which an entity bills a customer for a product but keeps physical possession until it is transferred to the customer at a point in time in the future. The standard's examples of a legitimate reason are the customer's lack of space or delays in the customer's production schedule.
The accounting question is the one that applies to every sale: has the customer obtained control? Paragraph 55-82 says that for some contracts control passes on shipment or delivery, but a customer can obtain control even though the product stays in the seller's possession. In that case the customer can direct the use of, and obtain substantially all the remaining benefits from, the product even though it chose not to take physical possession. The seller then "does not control the product" and instead provides custodial services over the customer's asset.
What are the four criteria?
In addition to the general control guidance in 606-10-25-30, paragraph 55-83 requires all four of these:
- The reason for the arrangement is substantive, for example the customer asked for it.
- The product is identified separately as belonging to the customer.
- The product is currently ready for physical transfer to the customer.
- The seller cannot use the product or direct it to another customer.
If any one fails, revenue waits for delivery. There is no partial credit, and an invoice or a signed order does not substitute for the criteria.
Is storage a separate performance obligation?
Paragraph 55-84 says an entity that recognizes revenue on a bill-and-hold basis considers whether it has remaining performance obligations, such as custodial services, and if so allocates part of the transaction price to them using the allocation guidance in 606-10-32-28 through 32-41. See standalone selling price allocation for how that allocation is built.
Worked example
A manufacturer agrees on December 10 to sell machinery for $250,000 and hold it until March 31 at the customer's request because the customer's plant is under renovation. The machine is complete, tagged with the customer's name, stored in a separate bay, and the seller has no right to redeploy it. The contract fee covers the machine and storage through March 31. The standalone selling price of the machine is $240,000 and of the storage service is $10,000. Cost of the machine is $150,000.
Because all four criteria are met, control transfers when the machine is ready and set aside. At the date control transfers:
| Entry | Debit | Credit |
|---|---|---|
| Accounts receivable | $250,000 | |
| Revenue, product sales | $240,000 | |
| Contract liability, custodial services | $10,000 | |
| Cost of goods sold | $150,000 | |
| Inventory | $150,000 |
The $10,000 for custody is recognized over the holding period from December 10 to March 31, on a consistent time basis. The point for the auditor is that $10,000 does not belong in December revenue in full. If the same facts failed criterion 4 because the seller reserved the right to ship the machine to another customer, no revenue is recorded in December, the inventory stays on the books and any cash received is a customer deposit, not revenue.
Audit procedures
Start with a risk assessment. Revenue recognition is a presumed fraud risk under AU-C 240, and year-end bill-and-hold activity is a fact pattern that sharpens it.
- Identify the population. Ask management for all sales in the last weeks of the year where goods had not shipped by year-end. Cross-check against sales orders shipped in the first weeks of the new year, open shipping documents, and the invoice register for invoices with no bill of lading. Searching only for the label "bill and hold" misses unlabeled arrangements.
- Read the contract and the customer's request. Look for the substantive business reason in writing from the customer, not from the sales team. Evidence that the seller proposed the arrangement to hit a target is a red flag.
- Inspect the goods. For selected items, physically inspect the product on site. Confirm it is complete, ready for shipment, tagged or segregated as the customer's, and not available to fill other orders. Tie serial numbers to the contract. This is the direct test of criteria 2, 3 and 4 and cannot be replaced by inquiry.
- Test the inventory count. Under inventory observation procedures, confirm that bill-and-hold goods recorded as sold are excluded from the book inventory and the count totals, and that goods held for unrecognized sales remain in.
- Confirm with the customer. Send a confirmation under AU-C 505 that states the order, the amount, the request to hold, the expected delivery date, the absence of side agreements, and that the customer takes title and risk. Address it to an authorized officer of the customer, not only the buyer who placed the order.
- Test the cutoff. Trace the revenue to the period in which the criteria were first met. Compare the dates of the customer's request, the segregation of the goods, and the invoice. Follow the same logic as general cutoff testing.
- Test the custodial component. Verify that a portion of the price was allocated to storage, that the allocation is supported, and that the contract liability is released over the holding period.
- Examine subsequent events. Read shipping records and returns after year-end. Goods shipped to a different customer, or returned, undermine criterion 4.
What belongs in the file?
The population listing, the customer request, the criteria checklist for each item with its evidence, the inspection notes, the confirmation, the allocation to custodial services, and the conclusion. Where criteria were not met and revenue was reversed, include the adjusting entry and its effect on pretax income.
Frequently asked questions
Can revenue be recognized when the customer simply agrees to a later delivery date?
No. The agreement does not satisfy the criteria in 606-10-55-83. The product must be separately identified, ready for transfer, and unavailable to the seller for other use.
Do the criteria apply to services?
They address products the seller holds. Services follow the general guidance on when a performance obligation is satisfied; see ASC 606 revenue recognition.
Is a confirmation enough on its own?
No. Paragraph 55-83 turns on physical facts about the goods, so inspection corroborates the confirmation.
Sources
- FASB, Accounting Standards Update 2014-09, Revenue from Contracts with Customers (Topic 606), paragraphs 606-10-55-81 to 55-84 (bill-and-hold) and 606-10-32-28 to 32-41 (allocation): https://viewpoint.pwc.com/dt/us/en/fasb_financial_accou/asus_fulltext/2014/asu_201409revenue_fr/asu_201409revenue_fr_US/asu_201409revenue_fr_US.html
- AICPA, AU-C Section 240, Consideration of Fraud in a Financial Statement Audit; AU-C Section 501, Audit Evidence, Specific Considerations for Selected Items; AU-C Section 505, External Confirmations: https://www.aicpa-cima.com/resources/landing/aicpa-professional-standards
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AU-C references are to AICPA Professional Standards, paraphrased here; read the standard itself before relying on a requirement. This page is guidance, not professional advice. Report an error