What Is Bill-And-Hold Basis?
Bill-and-hold basis is a method of revenue recognition whereby revenue is recognized at the point of sale, but the goods aren't delivered to the buyer until a later date. Note that this deviates from the generally accepted accounting principle (GAAP), which is to recognize revenue for a transaction at the point when the goods have been shipped to the buyer.
Using the bill-and-hold basis is widely considered to be a controversial practice because it allows the seller to recognize revenue immediately, potentially inflating its net income for financial reporting purposes. Under certain, strict conditions, the Securities and Exchange Commission (SEC) does allow some businesses to use the bill-and-hold basis method of revenue recognition; however, it is rare.
- Bill-and-hold basis is a controversial method of revenue that books income recognition at the point of sale while goods are not delivered until a later date.
- This method is often misused and is therefore highly monitored, as it has the ability to artificially increase current period profit.
- Bill-and-hold can only be used when the transaction meets a list of seven criteria issued by the SEC.
- Additionally, there are several other subjective or ethical factors to be considered when determining the appropriateness of using bill-and-hold basis.
Understanding Bill-And-Hold Basis
The bill-and-hold basis is an aggressive method of revenue recognition. As such, strict conditions must be met in order to apply this type of revenue recognition. According to the Securities and Exchange Commission, it can only be used in conditions where the transactions meet a list of seven criteria. All seven criteria must be met in order for the lawful use of bill-and-hold.
- The buyer must commit in writing to buy the goods.
- The buyer must take on the risk of owning the goods.
- The buyer must request that delivery is delayed, and they must have a business reason for doing so.
- Any goods sold under this basis must be finished goods at the time of sale.
- The goods must not be available to fulfill any other orders, and they should be segregated as such.
- The seller must have no additional obligations to the buyer.
- A reasonable delivery date must be scheduled for the goods.
Once all seven criteria are met, the SEC also considers several other subjective factors when determining the appropriateness of the bill-and-hold basis. These factors include:
- The seller's history utilizing bill-and-hold transactions.
- The extent to which the seller is modifying its normal sales terms for this specific transaction.
- The extent to which the holding risk of the seller can be insured.
- The extent to which the seller's holding of the goods creates a contingent sale.
- The potential value the buyer will lose if the market value for the goods decreases.
Real World Example of Bill-and-Hold Basis: Sunbeam
The following is an example of an inappropriate use of the bill-and-hold basis of revenue recognition. In 1996, Sunbeam, a small appliance company, hired a corporate turnaround specialist to help make needed changes to their financially-ailing company. Al Dunlap, hired as the Chief Executive Officer (CEO), used a bill-and-hold strategy, in addition to other fraudulent accounting techniques, in order to make Sunbeam's financial performance appear better than it really was. As a result, Sunbeam's stock prices skyrocketed.
In 1997, Sunbeam sold numerous products on a bill-and-hold basis. These products were sold to other companies, but they remained in the warehouse after revenue was recorded on Sunbeam's books. Sunbeam's net income was artificially inflated in 1997 because the revenues recorded from these sales would have typically been recorded in 1998 when the products were shipped out to customers. Arthur Anderson, the Certified Public Accounting (CPA) firm also involved in the Enron scandal, gave an unqualified audit opinion of the company's 1997 financial statements.
In 1998, Dunlap was relieved of his station, as the board of directors (BoD) realized that he did not do anything to materially improve the company's financial situation. As a result of numerous lawsuits, he was forced to pay $500,000 in fines and was banned from serving as an officer in any public company.