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. 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.
Transfer of Control in Bill-and-Hold Arrangements
To recognize revenue in a bill-and-hold arrangement under ASC 606, the seller should assess whether the customer has control of the goods in the arrangement. ASC 606 offers five indicators of control which should be assessed first. You can read more about them in this RevenueHub article: Determining the Transfer of Control. For bill-and-hold arrangements, four additional criteria must be met for a customer to obtain control of a product in a bill-and-hold arrangement (ASC 606-10-55-83):
- The reason for the bill-and-hold arrangement is substantive. A substantive reason may be that the customer lacks storage capacity or its production schedule does not require the goods until a later time. Although a customer’s explicit request exists in many bill-and-hold arrangements, it is not required; for example, based on customary practice, a customer may purchase goods from the vendor months before it can store and use them, so the vendor stores the sold products for the customer without a formal agreement.
- The product is identified as the customer’s asset. To qualify as the customer’s asset, the sold goods must be stored identified separately as belonging to the customer and cannot be substituted for identical goods.
- The product is ready for delivery to the customer. The goods must be completed, packaged, and ready to ship.
- The seller cannot use the product or direct the product to another customer. 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.
Aviat Networks, Inc. Explains Its Bill-And-Hold Arrangmements To The SEC
In June 2019, Aviat Networks, Inc. received a comment letter from the SEC about its bill-and-hold arrangements:
We note under bill-and-hold arrangements, customers can direct the use of the bill-and-hold inventory for which you retain physical possession and thus, “transfer of control has been met.” Please explain to us how you applied the guidance in ASC 606-10-25-30 in concluding that a customer has obtained control in a bill-and-hold arrangement. Additionally, in your assessment of transfer of control, tell us how each of the criteria under ASC 606-10-55-83 has been met.
Aviat’s response is a great example of how to analyze the control criteria in ASC 606. Aviat explained that two of its customers (“M” and “G”) engage in bill-and-hold transactions, and Aviat has a separate warehouse for each of these customers. Aviat argued that these transactions meet all the control criteria in both ASC 606-10-25-30 (except for physical possession) and ASC 606-10-55-83. Aviat’s reasoning is as follows:
- Aviat has a contractual right to 100% of the payment from M once the goods are delivered to the warehouse. Aviat has a contractual right to only 50% of the payment from customer G when goods are delivered, but right to payment is not the overarching principle in revenue recognition according to BC148 of ASU 2014-09 and acceptance is considered a formality.
- The legal title passes to the customer when goods arrive at the warehouse.
- The customer can direct where the goods are deployed once the goods enter the warehouse.
- The customer has the legal title to all the risks and rewards associated with the goods in the warehouse.
- Acceptance is a formality because the equipment is built specifically for the customer and historical returns are insignificant.
- The customer requested the bill-and-hold arrangement.
- The warehouse space is specifically for that customer’s goods.
- The goods are ready to be deployed for installation when they reach the warehouse.
- 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.
Aviat’s analysis is thorough and shows that the arrangement with these two customers qualifies as a bill-and-hold transaction (July 2019 letter).
Array Technologies, Inc. Explains Its Bill-And-Hold Arrangements To The SEC
Array Technologies is a global manufacturer of clean and renewable energy. Their main product is solar tracking systems which are sold to various customers, including homeowners, small businesses, large corporations, and utility companies.
Array Technologies responded to an SEC question in which the SEC asked Array to clarify its 10-K with the following questions:
- The substantive reasons for the bill-and-hold arrangements
- Whether the products are separately identified since they belong to customers
- Whether the products are ready for physical transfer to customers
- Whether you have the ability to use the products or direct them to other customers
These four questions give great guidance on what the SEC is looking for if a company decided to use bill-and-hold arrangements and what questions the company has to have answered. Array responded by indicating that the customer holds the legal title to the solar panels as it bears all of the risk of loss. Array also does not have the ability to sell the solar panels to any other companies as the materials are bundled in their warehouses and are marked as belonging to the client. The solar industry has a test called the “Five Percent Safe Harbor” test in order to qualify for the Federal Solar ITC. The customer has to purchase material prior to the start of construction in order to qualify under this test, and that gives rise to the situation where the client does not have the space to accept the goods but has already paid for the goods. This test is an industry specific guideline, so it cannot be broadly applied (10-K for the fiscal year ended December 31, 2021).
LSC Communications, Inc. Explains Its Bill-And-Hold Arrangements To The SEC
In a December 2020 correspondence with the SEC, LSC Communications, Inc. analyzed the bill-and-hold criteria found in ASC 606-10-55-83 for various revenue arrangements it has with customers. LSC Communications is a commercial printing company that produces customized material for its customers. Relevant revenue streams include “print ahead” and “partial print” arrangements, in which LSC produces either content during off-peak periods for lower prices or common content for multiple publications.
In determining whether the general process followed with these arrangements met the criteria found in ASC 606-10-55-83, the company provided the following analysis:
- Substantive Reason: For all [these] revenue streams, the customer has requested the arrangement and derives substantive benefits from its terms. In each case, the applicable contract indicates the terms of production, storage throughout the length of the contract and delivery.
- Separate Identification: The product for each customer in these revenue streams is customized and includes content that is produced under copyrights or trademarks owned by the customer. Throughout the production and storage process, all product is identified to a specific customer.
- Ready for Physical Transfer: Once the customized product is completed it is ready for physical shipment. In many cases, orders for these products request part of the order to be delivered shortly after production.
- Cannot Be Used by Other Customer: As previously noted, the products are customized products that cannot be used by another customer. The Company does not have the ability to use the product or to direct it to another customer.
LSC Communications’ analysis of the transfer of control to customers under these bill-and-hold arrangements is clear and thorough, emphasizing the points of product customization and specific customer identification, characteristics that are pertinent to the nature of their business (December 2020 letter).
Storage: Another Performance Obligation
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. 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. Storage service will likely be considered a separate performance obligation in most bill-and-hold arrangements.
For more information on determining whether storage service is a separate performance obligation, refer to the RevenueHub article Distinct Within the Context of the Contract. For more information on allocating the transaction price to storage services, refer to the RevenueHub article Standalone Selling Prices.
Example: Machine Parts And Storage
Builder enters a contract to sell 10 machine parts to a customer for $3,000 on December 31, 20X7, and the customer pays the full amount on that date. The customer requests that Builder store the purchased goods because it does not need them for production until later. Although the customer does not provide a specific delivery schedule for the goods, Builder estimates that it will store the goods for two months. Builder packages the machine parts and stores them in an area separate from its inventory. 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.
Analysis
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. The goods are packaged and ready for shipment. Moreover, because the customer has the legal title of the goods, Builder cannot use the goods or direct the goods to another customer.
Because the customer benefits separately from the storage service and the storage service is distinct from the machine parts (storage service is not an input to produce the machine parts), this contract contains two performance obligations: (1) the machine parts and (2) the storage service. If the standalone selling prices of the machine parts and the storage are $2,800 and $400 respectively, Builder should recognize 87.5 percent ($2,800/$3,200) of the $3,000 on December 31, 20X7 and recognize 12.5 percent over time as it completes the storage service. The table below illustrates the revenue recognition schedule for this contract.
| Performance Obligation |
Allocated Price |
December 31, 20X7 |
January 31, 20X7 |
February 28, 20X8 |
| Sale of Machine Parts |
$2,625 |
$2,625 |
$0 |
$0 |
| Storage Service |
$375 |
$0 |
$187.50 |
$187.50 |
| Revenue Recognized |
– |
$2625 |
$187.50 |
$187.50 |
Calyxt, Inc. Explains Its Bill-And-Hold Arrangements To The SEC
Calyxt is a company that harvests soybean grain and sells it to large grain processors. One processor has a contract with Calyxt in which the processor buys grain from Calyxt and then requires Calyxt to keep the grain in a third-party storage facility until the processor requests it to be delivered. Calyxt responded to SEC questions about its bill-and-hold arrangements in a 2022 comment letter.
Calyxt first concluded that control of the grain had transferred according to the criteria in ASC 606-10-25-30. Calyxt then concluded that after the processor purchased the grain and it was placed in storage:
“The processor would assume all risks and rewards of ownership of the asset, including changes in the market value of the grain from that point forward”.
This allows Calyxt to recognize revenue at the time of sale, before the grain is transferred to the processor. To make the above determination, Calyxt analyzed whether the bill-and-hold arrangement met the four criteria in ASC 606-10-55-83:
Is the reason for the bill-and-hold arrangement substantive? “Calyxt concluded that the reason for the bill-and-hold arrangement was substantive, as the processor had requested that Calyxt store the grain because of the processor’s lack of available space for the product and to accommodate the processor’s planned crush schedule.”
Is the product identified as the customer’s asset? “Calyxt concluded that the product was separately identifiable as belonging to the processor. The Company transferred warehouse receipts to the processor for all grain at specified locations, demonstrating separate identification. These warehouse receipts indicated the specific grain silo and quantity of Calyxt grain that the processor had purchased and would receive under the contract.”
Is the product ready for delivery to the customer? “The product was ready at the time for the physical transfer to the processor in its current state and with no further effort or costs to refine, manufacture or develop the product necessary.”
Can the seller use the product or direct the product to another customer? “Upon the execution of the primary sales agreement, Calyxt no longer had the ability to use nor direct the use of the product to another customer. Calyxt’s role was limited to (1) being a custodian of the grain and (2) eventually delivering the grain to the processor once sufficient storage capacity was available at the processor’s facility.”
Calyxt concluded that the storage costs were immaterial to the transaction, so it did not account for the costs as a separate performance obligation. Calyxt chose to account for the shipping costs as costs to fulfill the promise to transfer the product, and not as a separate performance obligation (January 2022 letter).
Conclusion
Companies should evaluate whether control has passed to the customer using both the control criteria of ASC 606-10-25-30 and the more specific bill-and-hold guidance in paragraph 55-83. If control transfers to the customer in a bill-and-hold transaction, the seller should apply the guidance on determining whether an obligation is “distinct within the context of the contract” to determine whether the custodial or storage service should be recognized as a separate performance obligation.
Resources Consulted
