DEFINITION of 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. Typically, the commonly accepted practice is to recognize revenue for a transaction after the goods have been delivered to the seller. Using the bill-and-hold basis is sometimes regarded as a controversial practice because it allows the seller to recognize revenue immediately, potentially inflating financial reporting. Under certain, strict conditions the Securities and Exchange Commission (SEC) does allow businesses to use the bill-and-hold basis method of revenue recognition. However, it is rare.
Bill-and-hold basis is also known as bill and hold.
BREAKING DOWN Bill-And-Hold Basis
The bill-and-hold basis is one method of revenue recognition. According to the Securities and Exchange Commission, it can 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. Some of these criteria are that the buyer must commit in writing to buy the goods and request that delivery is delayed. The buyer must also take on the risk of owning the goods. Any goods sold under this basis must be finished goods at the time of sale and not be available to fulfill any other orders, and 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 lawfulness of the bill-and-hold basis.
In 1998, Sunbeam CEO, Al Dunlap used a bill-and-hold strategy in order to make Sunbeam's financial performance better than it really was by artificially inflating its revenue by 18%. Eventually, Dunlap was relieved of his station, as the board of directors realized that he did not do anything to materially improve the company's financial situation.