DEFINITION of Bill and Hold
A bill and hold is a form of sales arrangement in which a seller of a good bills a customer for products but does not ship the product until a later date. For a transfer of ownership to occur, certain conditions must be met. These conditions include payment for the goods, that the goods be segregated from all other similar goods by the seller, and that the goods be finished and ready for use.
This is also referred to as "bill in place."
BREAKING DOWN Bill and Hold
The bill and hold arrangement may be beneficial for the parties involved, but great care must be taken by both parties to ensure that all of the criteria are met. If the arrangement does not meet all of the stated criteria, there will be no transfer of ownership. This means that revenue can't be recognized by the seller, and no assets or inventory can be recorded by the buyer related to this transaction.
There have been many scandals surrounding a bill and hold arrangement, and care must be taken when analyzing this type of financial shenanigans.
Case Study: Sunbeam
A classic example is Sunbeam’s ploy in November of 1996. To boost sales during CEO Al Dunlap’s “turnaround year,” Sunbeam convinced retailers to buy gas grills a full six months before they were needed – not a bad move if you want to extend the seasonal nature of gas grill sales. In exchange for big discounts, retailers gladly purchased merchandise they wouldn’t receive until months later and still wouldn't have to pay for until another six months after being invoiced. To make the arrangement even sweeter, Sunbeam agreed to store the grills in leased third-party warehouses until customers requested.
Sunbeam booked the sales and profits from all $35 million in bill and hold transactions. Only to reverse a whopping $29 million of the $35 million in revenue recognized too quickly and shifted sales to future quarters after questionable accounting moves were flagged by Sunbeam’s auditor Arthur Andersen. It’s deceptive business moves and subsequent accounting treatments like these that have earned these techniques the moniker “stuffing the channel.”