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8.5 Bill-and-hold arrangements
Publication date: 31 May 2023
us Revenue guide
Bill-and-hold arrangements arise when a customer is billed for goods that are ready for delivery, but the reporting entity does not ship the goods to the customer until a later date. Reporting entities must assess in these cases whether control has transferred to the customer, even though the customer does not have physical possession of the goods. Revenue is recognized when control of the goods transfers to the customer. A reporting entity will need to meet certain additional criteria for a customer to have obtained control in a bill-and-hold arrangement in addition to the criteria related to determining when control transfers (refer to RR 6.2).
Excerpt from ASC 606-10-55-83
For a customer to have obtained control of a product in a bill-and-hold arrangement, all of the following criteria must be met:
g. The reason for the bill-and-hold arrangement must be substantive (for example, the customer has requested the arrangement).
h. The product must be identified separately as belonging to the customer.
i. The product currently must be ready for physical transfer to the customer.
j. The entity cannot have the ability to use the product or to direct it to another customer.
A bill-and-hold arrangement should have substance. A substantive purpose could exist, for example, if the customer requests the bill-and-hold arrangement because it lacks the physical space to store the goods, or if goods previously ordered are not yet needed due to the customer's production schedule.
The goods must be identified as belonging to the customer, and they cannot be used to satisfy orders for other customers. Substitution of the goods for use in other orders indicates that the goods are not controlled by the customer and therefore revenue should not be recognized until the goods are delivered, or the criterion is satisfied. The goods must also be ready for delivery upon the customer's request.
A customer that can redirect or determine how goods are used, or that can otherwise benefit from the goods, is likely to have obtained control of the goods. Limitations on the use of the goods, or other restrictions on the benefits the customer can receive from those goods, indicates that control of the goods may not have transferred to the customer.
A reporting entity that has transferred control of the goods and met the bill-and-hold criteria to recognize revenue needs to consider whether it is providing custodial services in addition to providing the goods. If so, a portion of the transaction price should be allocated to each of the separate performance obligations (that is, the goods and the custodial service).
Example RR 8-6 and Example RR 8-7 illustrate these considerations in bill-and-hold transactions. This concept is also illustrated in Example 63 of the revenue standard (ASC 606-10-55-409 through ASC 606-10-55-413).
EXAMPLE RR 8-6
Bill-and-hold arrangement – industrial products industry
Drill Co orders a drilling pipe from Steel Producer. Drill Co requests the arrangement be on a bill-and-hold basis because of the frequent changes to the timeline for developing remote gas fields and the long lead times needed for delivery of the drilling equipment and supplies. Steel Producer has a history of bill-and-hold transactions with Drill Co and has established standard terms for such arrangements.
The pipe, which is separately warehoused by Steel Producer, is complete and ready for shipment. Steel Producer cannot utilize the pipe or direct the pipe to another customer once the pipe is in the warehouse. The terms of the arrangement require Drill Co to remit payment within 30 days of the pipe being placed into Steel Producer's warehouse. Drill Co will request and take delivery of the pipe when it is needed.
When should Steel Producer recognize revenue?
Analysis
Steel Producer should recognize revenue when the pipe is placed into its warehouse because control of the pipe has transferred to Drill Co. This is because Drill Co requested the transaction be on a bill-and-hold basis, which suggests that the reason for entering the bill-and-hold arrangement is substantive, Steel Producer is not permitted to use the pipe to fill orders for other customers, and the pipe is ready for immediate shipment at the request of Drill Co. Steel Producer should also evaluate whether a portion of the transaction price should be allocated to the custodial services (that is, whether the custodial service is a separate performance obligation).
EXAMPLE RR 8-7
Bill-and-hold arrangement – retail and consumer industry
Bill-and-hold arrangement – retail and consumer industry
Game Maker enters into a contract during 20X1 to supply 100,000 video game consoles to Retailer. The contract contains specific instructions from Retailer about where the consoles should be delivered. Game Maker must deliver the consoles in 20X2 at a date to be specified by Retailer. Retailer expects to have sufficient shelf space at the time of delivery.
As of December 31, 20X1, Game Maker has inventory of 120,000 game consoles, including the 100,000 relating to the contract with Retailer. The 100,000 consoles are stored with the other 20,000 game consoles, which are all interchangeable products; however, Game Maker will not deplete its inventory below 100,000 units.
When should Game Maker recognize revenue for the 100,000 units to be delivered to Retailer?
Analysis
Game Maker should not recognize revenue until the bill-and-hold criteria are met or if Game Maker no longer has physical possession and all of other criteria related to the transfer of control have been met. Although the reason for entering into a bill-and-hold transaction is substantive (lack of shelf space), the other criteria are not met as the game consoles produced for Retailer are not separated from other products.
8.5.1 Government vaccine stockpile programs
Vaccine manufacturers may participate in government vaccine stockpile programs that require the manufacturer to hold a certain amount of vaccine inventory for use by a government at a later date. Control transfer should be assessed against the bill and hold criteria in the standard, considering for example, whether the stockpile inventory is separately identified as belonging to the customer and the impact of any requirement to rotate the inventory. Management will also need to consider whether the government has return rights and whether there are other performance obligations within the arrangement, such as the storage, maintenance, and shipping of vaccines.
SEC reporters should apply the SEC’s interpretative release, codified in ASC 606-10-S25, which states that vaccine manufacturers should recognize revenue and provide the appropriate disclosures when vaccines are placed into US government stockpile programs because control of the vaccines has transferred to the customer (the government) and the criteria in ASC 606 for recognizing revenue in a bill-and-hold arrangement are satisfied. This interpretation is only applicable to childhood disease vaccines, influenza vaccines, and other vaccines and countermeasures sold to the US government for placement in the Strategic National Stockpile.
PwC. All rights reserved. PwC refers to the US member firm or one of its subsidiaries or affiliates, and may sometimes refer to the PwC network. Each member firm is a separate legal entity. Please see www.pwc.com/structure for further details. This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors.
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