Codification Of Staff Accounting Bulletins

Topic 13 provides the staff’s views regarding the general revenue recognition guidance codified in ASC Topic 605. ASC Topic 606 provides a single set of revenue recognition principles governing all contracts with customers and supersedes the revenue recognition framework in ASC Topic 605, which eliminates the need for Topic 13. Prior to adoption of ASC Topic 606, registrants should continue to refer to prior Commission and staff guidance on revenue recognition topics. If Company M does not meet all of the foregoing criteria, the staff believes that Company M should not recognize in earnings any revenue for the membership fee until the cancellation privileges and refund rights expire. A registrant requires a customer to pay a nonrefundable “activation fee” when entering into an arrangement to provide telecommunications services. The terms of the arrangement require the customer to pay a monthly usage fee that is adequate to recover the registrant’s operating costs.

• The customer receives the legal title of these goods on December 31, 20X7 and has the right to use the goods however it wants during the storage period.
• Be the first to know when the JofA publishes breaking news about tax, financial reporting, auditing, or other topics.
• The buyer—not the seller—must have requested the transaction and must have a substantial business purpose for a bill-and-hold deal.
• This list is not meant to be a checklist of all characteristics of a consignment or financing arrangement, and other characteristics may exist.
• Revenue related to the storage service would then be recognized over time as service is provided.
• If the arrangement does not meet all of the stated criteria, there will be no transfer of ownership.

The cost of completing the obligation, or the fair value of that obligation, is more than insignificant in relation to such items as the contract fee, gross profit, and operating income allocable to the unit of accounting. Company E receives an order from a new customer for a standard model of its main product.

Accrual Accounting Vs Cash Basis Accounting: What’s The Difference?

This situation usually will exist when equipment performance can vary based on how the equipment works in combination with the customer’s other equipment, software, or environmental conditions. In these situations, testing to determine whether the criteria are met cannot be reasonably performed until the products are installed or integrated at the customer’s facility. The staff believes management and auditors are uniquely positioned to evaluate the facts and arrive at a reasoned conclusion. The staff will not object to a determination that is well reasoned on the basis of this guidance. Once the seller has determined that it has transferred control of the goods to the customer, the seller must consider whether the custodial or storage service and the goods are separate performance obligations. Storage service is a performance obligation if the customer benefits from the service separately and it is distinct from other promises.

When a client engages in bill-and-hold transactions, he or she should determine whether the transactions comply with the SEC’s criteria. As a result, Sunbeam booked significant sales, boosting the company’s share price. When questioned by auditors, Sunbeam eventually reversed a significant portion of the revenue recognized from such bill-and-hold arrangements, indicating that they were recognizing revenue too quickly and attempted to shift sales earlier onto their books.

For example, a contract may explicitly state that the seller is to provide storage service for a period of time to the customer; in this case, the storage service is considered a separate performance obligation and should be allocated a portion of the transaction price. Revenue related to the storage service would then be recognized over time as service is provided.

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There have been many scandals surrounding a bill and hold arrangement in the corporate world, and care must be taken when analyzing this type of financial shenanigans. Alexandra Twin has 15+ years of experience as an editor and writer, covering financial news for public and private companies.

The seller must not be able to redirect the goods, either to other customers or for internal use. At the end of the year, Company A has delivered 90 widgets, with the remaining 10 widgets having been produced, branded, and at its warehouse ready for delivery.

Whether the vendor has fulfilled the terms of the contract before customer acceptance is a matter of contract law, and depending on the facts and circumstances, an opinion of counsel may be necessary to reach a conclusion. The staff presumes that such contractual customer acceptance provisions are substantive, bargained-for terms of an arrangement. Accordingly, when such contractual customer acceptance provisions exist, the staff generally believes that the seller should not recognize revenue until customer acceptance occurs or the acceptance provisions lapse. The customer does not agree to purchase the delivered product until it accepts the product. In some cases, the acceptance provisions lapse by the passage of time without the customer rejecting the delivered product, and in other cases affirmative acceptance from the customer is necessary to trigger a sales transaction.

A Selected Revenue Recognition Issues

Arthur Andersen, the Certified Public Accounting firm also involved in the Enron scandal, gave an unqualified audit opinion of the company’s 1997 financial statements. Topic 13 is no longer applicable upon a registrant’s adoption of ASC Topic 606.

The future sales for the lease term do not exist at the inception of the lease, and future rentals would be limited to $200 per month if the store were subsequently closed and no sales were made thereafter. The estimates of terminations or cancellations and refunded revenues are being made for a large pool of homogeneous items (e.g., membership or other service transactions with the same characteristics such as terms, periods, class of customers, nature of service, etc.). In this situation, the staff would object to Company A recognizing revenue in proportion to the costs incurred because the set-up costs incurred bear no direct relationship to the performance of services specified in the arrangement. The staff also believes that it is inappropriate to recognize the entire amount of the prepayment as revenue at the outset of the arrangement by accruing the remaining costs because the services required by the contract have not been performed. A bill-and-hold arrangement arises when a customer is billed for a product, but the vendor does not deliver the product to the customer until a later date.

Based on the customer’s intended use of the product, location and other factors, there is no reason that the equipment would operate differently in the customer’s environment than it does in Company E’s facility. Accounting Series Release 292 (on bill-and-hold sales transactions), June 1981. SEC documents Accounting and Auditing Enforcement Release 108 (on bill-and-hold sales transactions), August 1986.

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If certain criteria are met, the vendor can recognize revenue before delivering the product, and the customer can recognize an asset before taking physical possession of the product. The purpose of these criteria is to determine whether the customer has control of the goods even though physical delivery to the customer may not have occurred. Control must pass to the customer for the agreement to qualify as a bill-and-hold arrangement. Malcolm Tatum In a bill and hold approach, the seller must track how much inventory has been committed to the buyer and make sure to not use that inventory to fill other pending orders. “Bill and hold” is a term used to refer to an arrangement between a buyer and a seller in which the buyer is billed for goods or services that have not actually been received.

As such, there exists a motive for the seller to collude with the buyer by informing the buyer to purchase on a bill-and-hold arrangement and then cancel the order once payment is due. Aviat’s analysis is thorough and shows that the arrangement with these two customers qualifies as a bill-and-hold transaction . Once the goods are in the warehouse, Aviat cannot use the equipment or sell it to another customer because the company has no legal title. To meet this criterion, the seller cannot have the ability to use the product or direct the product to another customer once the product is sold.

Fixed Or Determinable Sales Price

To qualify as the customer’s asset, the sold goods must be stored separately and cannot be substituted for identical goods. In 1998, 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. 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. Additionally, there are several other subjective or ethical factors to be considered when determining the appropriateness of using bill-and-hold basis.

Significant related-party transactions outside the ordinary course of business or with unaudited entities. For example, during an inventory, the auditor might come across goods that were billed to customers but that were not shipped or physically segregated. The date the seller expects payment and whether the seller has modified its normal billing and credit terms for the buyer. The buyer—not the seller—must have requested the transaction and must have a substantial business purpose for a bill-and-hold deal. The product must be complete in all respects and ready for transfer to the customer.

Codification Of Staff Accounting Bulletins

A talent agent whose fee receivable from its principal (i.e., a celebrity) for arranging a celebrity endorsement for a five-year term is cancelable by the celebrity if the celebrity breaches the endorsement contract with its customer. Has been sold to you on our normal payment terms as described in our invoice and those terms have not been modified. There are no written or oral amendments to the terms specified in the purchase order. Sales with a commitment from the seller to repurchase that, if known to the auditor or SEC, would preclude revenue recognition. The exhibit, a confirmation request letter, is an example of how the independent auditor can confirm whether a transaction meets the revenue-recognition conditions. Learn accounting fundamentals and how to read financial statements with CFI’s free online accounting classes.

The amount of the membership fee specified in the agreement at the outset of the arrangement is fixed, other than the customer’s right to request a refund. After paying a nonrefundable “initiation fee,” the customer is permitted to use the health club indefinitely, so long as the customer also pays an additional usage fee each month.

These provisions are referred to in this document as “customer-specific acceptance provisions” against which substantial completion and contract fulfillment must be evaluated. Further, the seller should consider whether it would be successful in enforcing a claim for payment even in the absence of formal sign-off.

In a bill-and-hold deal, the customer agrees to purchase goods, but the seller retains possession until the customer requests shipment. Bill and Hold Example 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. Malcolm Tatum After many years in the teleconferencing industry, Michael decided to embrace his passion for trivia, research, and writing by becoming a full-time freelance writer. Since then, he has contributed articles to a variety of print and online publications, including SmartCapitalMind, and his work has also appeared in poetry collections, devotional anthologies, and several newspapers. Malcolm’s other interests include collecting vinyl records, minor league baseball, and cycling.

Any of the improper and unusual revenue-transaction methods used to misstate quarterly revenue also can be used to change annual results. Auditors need to be alert to the whole gamut of warning signs that revenue-recognition fraud may be present. 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.

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An auditor who is familiar with the methods that have been used to fraudulently overstate revenue and the audit procedures that have been successful in detecting those frauds is better equipped to provide the scrutiny of revenue recognition now being called for by the SEC and the AICPA. Revenue-recognition frauds have been at the core of many suits against auditors; similarly, such frauds have been uncovered during SEC and AICPA ethics and quality control inquiry investigations. Thus, it’s appropriate that auditors improve their efforts to detect fraudulent financial reporting by focusing on improper revenue recognition. The seller must not retain any significant specific performance obligations, such as an obligation to assist in resale. The SEC has outlined that the above is not intended to be used as a checklist – in some circumstances, an arrangement may meet all the criteria above and not be approved for revenue recognition. IFRS 15 outlines conditions that must be met for a seller to recognize revenue under this arrangement. A bill-and-hold arrangement is a revenue recognition method in which revenue is recorded before the delivery of goods.

• A registrant in the biotechnology industry agrees to provide research and development activities for a customer for a specified term.
• The staff presumes that such contractual customer acceptance provisions are substantive, bargained-for terms of an arrangement.
• Bill and hold arrangements allow a seller to bill customers for product yet to be shipped.
• Bill and Hold.An Account generated by the sale of goods for which an invoice has been issued to the buyer, but the goods represented by such Account remain undelivered to the buyer and/or under the control of Borrower or Borrower’s representative.
• We also reference original research from other reputable publishers where appropriate.
• Note that this deviates from the generally accepted accounting principle , which is to recognize revenue for a transaction at the point when the goods have been shipped to the buyer.

1 The February 1999 AICPA publication “Audit Issues in Revenue Recognition” provides an overview of the authoritative accounting literature and auditing procedures for revenue recognition and identifies indicators of improper revenue recognition. Shipments of product at the end of a reporting period that significantly reduce customer backlog and that reasonably might be expected to result in lower shipments and revenue in the next period. Ask tax and consulting personnel who provide services to the client about their knowledge of management’s involvement in material transactions or with transaction principals.

What Is Ship And Bill Revenue?

A transaction is a finalized agreement between a buyer and a seller, but it can get a bit more complicated from an accounting perspective. A company with a hold recommendation generally is expected to perform with the market or at the same pace as comparable companies.

68 Gains or losses from the sale of assets should be reported as “other general expenses” pursuant to Regulation S-X, Article 5-03. Whether extended procedures are necessary in order to assure that there are no exceptions to the buyer’s commitment to accept and pay for the goods sold (i.e., that the business reasons for the bill and hold have not introduced a contingency to the buyer’s commitment). Because this response is needed for our auditors to complete their audit, we would appreciate a prompt response. At your request we are holding at your risk on our premises, and title has passed to you. If the company is going public, review information obtained by its securities counsel about management relationships for registration statement disclosure. Review of conflict-of-interest statements obtained by the company from its management.

Exceptions are made when a customer specifically requests that the vendor delay delivery and has a legitimate business reason for the request. Builder should recognize revenue from the sale of machine parts on December 31, 20X7 because control of the goods is transferred to the customer, as indicated by the four criteria. The reason for this transaction is substantive because the customer does not need the goods for production until a later date. The goods are identified as belonging to the customer because they are physically separate from the rest of Builder’s inventory. Moreover, because the customer has the legal title of the goods, Builder cannot use the goods or direct the goods to another customer. 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.