Bill-and-Hold Basis

What Is Bill-and-Hold Basis?

Bill-and-hold basis is a method of revenue recognition by which revenue is recognized at the point of sale, however the goods aren't delivered to the buyer until a later date. Note that this digresses from the generally accepted accounting principle (GAAP), which is to perceive revenue for a transaction right when the goods have been delivered to the buyer.

Utilizing the bill-and-hold basis is widely viewed as a controversial practice since it allows the seller to perceive revenue right away, potentially expanding its net income for financial reporting purposes. Under certain, severe conditions, the Securities and Exchange Commission (SEC) permits a few businesses to utilize the bill-and-hold basis method of revenue recognition; be that as it may, it is rare.

Understanding Bill-and-Hold Basis

The bill-and-hold basis is a aggressive method of revenue recognition. In that capacity, severe conditions must be met to apply this type of revenue recognition. As per the Securities and Exchange Commission, it must be utilized in conditions where the transactions meet a rundown of seven criteria. All seven criteria must be met for the lawful utilization of bill-and-hold.

Seven Criteria:

The buyer must commit recorded as a hard copy to buy the goods.
The buyer must interpretation of the risk of claiming the goods.
The buyer must request that delivery is delayed, and they must have a business justification behind doing as such.
Any goods sold under this basis must be done goods at the hour of sale.
The goods must not be accessible to satisfy some other orders, and they ought to be segregated in that capacity.
The seller must have no additional obligations to the buyer.
A reasonable delivery date must be scheduled for the goods.

Subjective Considerations

When all seven criteria are met, the SEC also considers several other subjective factors while deciding the fittingness of the bill-and-hold basis. These factors include:

The seller's history using bill-and-hold transactions
The degree to which the seller is adjusting its normal sales terms for this specific transaction
The degree to which the holding risk of the seller can be safeguarded
The degree to which the seller's holding of the goods makes a contingent sale
The potential value the buyer will lose on the off chance that the market value for the goods diminishes

Real-World Example of Bill-and-Hold Basis: Sunbeam

Coming up next is an illustration of an improper utilization of the bill-and-hold basis of revenue recognition. In 1996, Sunbeam, a small machine company, recruited a corporate turnaround specialist to assist with rolling out required improvements to their financially weak company. Al Dunlap, employed as the Chief Executive Officer (CEO), utilized a bill-and-hold strategy, notwithstanding other fraudulent accounting procedures, to cause Sunbeam's financial performance to look generally more appealing than it really was. Thus, Sunbeam's stock prices soar.

In 1997, Sunbeam sold various products on a bill-and-hold basis. These products were sold to different companies, yet they stayed in the warehouse after revenue was recorded on Sunbeam's books. Sunbeam's net income was artificially expanded in 1997 on the grounds that the revenues recorded from these sales would have typically been kept in 1998 when the products were delivered out to customers. Arthur Andersen, the Certified Public Accounting (CPA) firm also associated with the Enron scandal, gave a unqualified audit assessment of the company's 1997 financial statements.

In 1998, Dunlap was feeling much better of his station, as the board of directors (BoD) realized that he did nothing to further develop the company's financial situation materially. Because of various lawsuits, he was forced to pay $500,000 in fines and was restricted from filling in as an officer in any public company.

Features

This method is frequently abused and is subsequently exceptionally checked, as it can artificially increase current period profit.
Additionally, there are several other subjective or ethical factors to be thought about while deciding the fittingness of utilizing bill-and-hold basis.
Bill-and-hold must be utilized when the transaction meets a rundown of seven criteria issued by the SEC.
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.