Magazine article The CPA Journal

Accounting for Bill-and-Hold Transactions

Magazine article The CPA Journal

Accounting for Bill-and-Hold Transactions

Article excerpt

Guidance from Four Standards

Statement on Auditing Standards (SAS) 99, Consideration of Fraud in a Financial Statement Audit, requires the auditor to "presume there is a risk of material misstatement due to fraud relating to revenue recognition." One category of revenue - from bill-and-hold transactions - is especially vulnerable to fraud or, at the least, is often accounted for incorrectly. The problem is that the accounting guidelines for these types of transactions are scarce, unclear, and contradictory.

Bill-and-hold transactions occur when the seller records a sale but the goods or services have not been delivered. A common example is where a seller produces the products, holds them for shipment, and records a sale in December. The customer, however, does not take delivery until the following year. The task is to determine if this sale is properly recorded at December 31.

Guidance for the bill-and-hold accounting treatment is found in four standards. Exhibit I shows the applicable guidance and, perhaps more importantly, reveals that the criteria for recording bill-and-hold transactions leave considerable room for interpretation.

With respect to U.S. Generally Accepted Accounting Principles (U.S. GAAP), guidance for evaluating purported bill-and-hold transactions can be inferred from the general revenue recognition criteria found in FASB' s Accounting Standards Codification (ASC). Issued in 2009, the ASC includes the guidance in both Concepts Statement 5, Recognition and Measurement in Financial Statements of Business Enterprises, and AICPA Statement of Position (SOP) 97-2, "Software Revenue Recognition." SEC Staff Accounting Bulletin (SAB) 104, "Revenue Recognition," provides further guidance for public companies. Nonpublic companies are not subject to SAB 104 and must use their own judgment to determine proper accounting for bill-and-hold sales.

The Issues

There is evidence that suggests bill-andhold transactions are not uncommon and are recorded by both public and nonpublic companies. A review of Accounting and Auditing Enforcement Releases issued by the SEC since 2000 shows that a number of public companies improperly recorded purported bill-and-hold transactions. Exhibit 2 provides a list of these companies and the specific ways they inappropriately recorded revenue. Additionally, our informal surveys of participants in continuing professional education courses indicate that bill-and-hold sales are not uncommon for nonpublic companies. Given that bill-and-hold transactions occur, what are the concerns for accountants and auditors in dealing with them?

A fundamental problem for public and nonpublic companies is that bill-and-hold transactions are not specifically addressed in the ASC. Thus, looking to U.S. GAAP for guidance in evaluating bill-and-hold transactions is of limited usefulness. Further, the SEC has concluded that GAAP does not allow public companies to carry out bill-and-hold transactions without the purchaser having a compelling business purpose for requesting delay in delivery. Some bill-and-hold transactions that are constructed to meet the "compelling business purpose" criterion end up leading to -

* earnings management,

* the recording of fraudulent sales, or

* increased risk of material misstatements.

While the ASC fails to directly address the issue of bill-and-hold transactions, the SEC has provided public companies with specific guidance in this area. SAB 104 sets forth six specific guidelines that, at a minimum, must be met if revenue is to be recognized in a purported bill-and-hold transaction.

Accountants and auditors should consider all accounting literature when there is an absence of specific guidance or inconsistencies within the standards. While nonpublic companies are not subject to SAB 104, the authors believe such companies should also consider the bill-and-hold guidelines therein.

Key Principles

Concepts Statement 5, SOP 97-2, and SAB 104 agree that revenue, in general, should meet two principles (these principles are also implied in International Accounting Standard [IAS] 18, Revenue): Revenue is realized or realizable, and the earnings process is complete. …

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