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Bill-and-Hold Arrangements Under The New Revenue Recognition Guidance

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A bill-and-hold arrangement is a contract under which a company bills a customer for a product but retains physical possession of the product until it is transferred to the customer at a point in time in the future. For example, a customer may request a company to enter into such a contract because of the customer’s lack of available space for the product or because of delays in the customer’s production schedules.

Under ASC No. 606, the new Revenue Recognition guidance, there are two items to consider when it comes to bill-and-hold arrangements:

  • What are the performance obligations under bill-and-hold arrangements?
  • When is revenue recognized under bill-and hold arrangements?

What are the performance obligations under a bill-and-hold arrangement?

Under the bill-and-hold arrangements, there may be two separate performance obligations:

  1. Sale of the goods
  2. Custodial services over the goods

A company should determine if the custodial services (services to maintain and hold the item) they are providing to their customer are a separate performance obligation. If so, a portion of the contract price should be allocated to the custodial services and separately recognized over the period of time the product is being held by the company, along with the related costs of storing the product

When is revenue recognized under bill-and hold arrangements?

A company should recognize revenue when it satisfies a performance obligation by transferring a promised good to a customer. The transfers occur when a customer obtains control of the good. Under a bill-and-hold arrangement, the customer does not immediately take physical possession of the good, therefore, it may be difficult to define when control is transferred to the customer.

As result, the new guidance clearly addresses control under bill and hold arrangements. For a customer to have obtained control of a product in a bill-and-hold arrangement, all the following criteria must be met:

  1. The reason for the bill-and-hold arrangement must be substantive.
  2. The product must be identified separately as belonging to the customer.
  3. The product currently must be ready for physical transfer to the customer.
  4. The entity cannot use the product or direct it to another customer.

The biggest difference between the new guidance and the existing guidance is that there is no longer a requirement for the company to have a fixed delivery schedule from the customer to recognize revenue. As a result, a company may be able to recognize revenue earlier under the new guidance than under the existing guidance.

These changes to bill-and-hold arrangements will be effective for private companies for annual reporting periods beginning after December 15, 2018, but can be applied earlier as of annual reporting periods beginning after December 15, 2017.

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