Bill And Hold

A bill and hold arrangement describes a specific sales arrangement where the customer pays for the item upfront, but the seller only ships or delivers it at a later date. Receiving payment before delivery alleviates cash flow concerns and provides the seller with working capital to reinvest in the business.

It bridges the gap between immediate payment and delayed delivery, offering a win-win for sellers (faster revenue, secured orders) and buyers (locked prices, inventory control). While accounting can be tricky, it streamlines cash flow and delivery, making it valuable across industries like manufacturing, software, and construction.

Bill and hold transactions entail a nuanced approach to revenue recognition where sellers bill customers for goods but delay delivery. This practice can lead to potential risks, notably the premature recording of revenue before the customer actually receives the goods.

The Securities and Exchange Commission (SEC) is cautious about bill and hold transactions due to concerns about the timing of revenue recognition. Generally, revenue should align with the transfer of goods to the customer, ensuring transparency and accuracy in financial reporting.

When sellers retain goods as custodians in the bill and hold agreements, they may need to allocate a portion of the transaction's value to cover custodial responsibilities. Revenue recognition must align with the duration the seller holds these goods, ensuring compliance with accounting standards and fair representation of the financial position.

To manage these complexities, businesses often rely on billing software. This software aids in generating invoices, tracking payments, and maintaining accuracy in billing processes. It plays a crucial role in ensuring adherence to accounting standards, regulatory requirements, and ethical business practices in bill and hold scenarios.

The several criteria for bill and hold are as follows:

• Written Commitment: The buyer must provide a written commitment to purchase the goods.
• Risk Assumption: The buyer should bear the risk of owning the goods during the holding period.
• Business Reason for Delay: The buyer must have a valid business reason for requesting delayed delivery.
• Finished Goods: Goods sold under this arrangement must be finished at the time of sale.
• Segregation of Goods: The goods must not be available to fulfill other orders and must be segregated accordingly.
• No Additional Obligations: The seller must not have further obligations to the buyer beyond holding the goods.
• Scheduled Delivery: A reasonable delivery date must be agreed upon for the goods to be delivered.

There are several factors to consider for such an arrangement: 

• Seller's History with Bill and Hold Transactions: Review the seller's track record with similar transactions. Assess their past performance, reliability, and any issues related to bill and hold transactions. This evaluation helps gauge their experience and competency in handling such arrangements.
• Modification of Normal Sales Terms: Analyze how much the seller is deviating from their typical sales terms and practices for this specific bill and hold transactions. Understanding this modification's significance helps in assessing the transaction's uniqueness or potential risks.
• Insurability of Seller's Holding Risk: Consult with insurance experts to ascertain the feasibility of insuring the risk associated with holding the goods. Determine the extent to which this risk can be covered, considering factors like the nature of the goods, duration of holding, and insurance policies available in the market.
• Creation of Contingent Sale by Seller's Holding: Evaluate whether the seller's holding of goods creates a contingent sale, i.e., whether the transfer of ownership is contingent upon certain events or conditions. This determination affects revenue recognition and compliance with accounting standards.
• Potential Loss for Buyer Due to Market Value Decrease: Estimate the potential loss the buyer might incur if the market value of the goods decreases during the holding period. This assessment helps both parties understand and mitigate potential financial impacts.

Let us look at the bill and hold examples to understand the concept better:

Example #1

Imagine a furniture store offering a "pre-Black Friday" sale where customers can purchase select items at a discounted price, payable immediately. However, delivery is scheduled for after the holiday rush, in January. This is a classic bill and hold scenario. The store recognizes the revenue upfront, boosting its financial performance before the peak shopping season. Customers secure the discounted price and avoid the holiday crowds, but receive the furniture later.

Example #2

In the late 1990s, Sunbeam Corporation, led by CEO Al Dunlap, engaged in significant fraud through bill-and-hold arrangements by encouraging customers to bill large orders with good discounts. As a result, customers placed large orders. Thus, Sunbeam decided to hold the products at a warehouse until the retailers were ready to request and shelve them.

As a result, Sunbeam reported significant sales, which boosted the company's stock price. Sunbeam eventually undid a sizable amount of the revenue recorded from these bill-and-hold agreements when questioned by auditors, suggesting that they were trying to push sales onto their books earlier and were recognizing revenue too quickly. Sunbeam declared bankruptcy in 2001 after being charged with massive accounting fraud.