Bill-and-hold arrangements occur when an entity bills a customer for a product that it transfers at a point in time, but retains physical possession of the product until it is transferred to the customer at a future point in time. This might occur to accommodate a customer’s lack of available space for the product or delays in production schedules. [IFRS 15.B79]
To determine when to recognize revenue, an entity needs to determine when the customer obtains control of the product. Generally, this occurs at shipment or delivery to the customer, depending on the contract terms (for discussion of the indicators for transfer of control at a point in time, see Performance obligations satisfied at a point in time from Step 5 IFRS 15 in the link). The new standard provides criteria that have to be met for a customer to obtain control of a product in a bill-and-hold arrangement. These are illustrated below. [IFRS 15.B80–B81]
A further explanation of these criteria is as follows:
- The product must be identified separately as belonging to the customer. Even if the entity’s inventory is homogeneous, the customer’s product must be segregated from the entity’s ongoing fulfilment operations.
- The product currently must be ready for physical transfer to the customer. In any revenue transaction recognised at a point in time, revenue is recognised when an entity has satisfied its performance obligation to transfer control of the product to the customer. If an entity has remaining costs or effort to develop, manufacture or refine the product, the entity may not have satisfied its performance obligation. This criterion does not include the actual costs to deliver a product, which would be normal and customary in most revenue transactions, or if the entity identifies a separate performance obligation for custodial services, as discussed below.
- The entity cannot have the ability to use the product or to direct it to another customer. If the entity has the ability to freely substitute goods to fill other orders, control of the goods has not passed to the buyer. That is, the entity has retained the right to use the customer’s product in a manner that best suits the entity.
The reason for the bill-and-hold arrangement must be substantive (e.g., the customer has requested the arrangement).
A bill-and-hold transaction initiated by the selling entity typically indicates that a bill-and-hold arrangement is not substantive. In general it should be the customer to request such an arrangement and the selling entity would need to evaluate the reasons for the request to determine whether the customer has a substantive business purpose. Judgement is required when assessing this criterion. For example, a customer with an established buying history that places an order in excess of its normal volume and requests that the entity retains the product needs to be evaluated carefully because the request may not appear to have a substantive business purpose.
If an entity concludes that it can recognise revenue for a bill-and-hold transaction, IFRS 15.B82 states that the entity needs to further consider whether it is also providing custodial services for the customer that would be identified as a separate performance obligation in the contract.
A selling entity may utilise International Commerce Terms (Incoterms) to clarify when delivery occurs. Incoterms are a series of pre-defined commercial terms published by the International Chamber of Commerce (ICC) relating to international commercial law. For example, the Incoterm ‘EXW’ or ‘Ex Works’ means that the selling entity ‘delivers’ when it places the goods at the disposal of the customer, either at the seller’s premises or at another named location (e.g., factory, warehouse). The selling entity is not required to load the goods on any collecting vehicle, nor does it need to clear the goods for export.
Under an Ex Works arrangement, the entity’s responsibility is to make ordered goods available to the customer at the entity’s premises or another named location. The customer is responsible for arranging, and paying for, shipment of the goods to the desired location and bears all of the risks related to them once they are made available.
As a result it makes sense to evaluate all Ex Works arrangements using the bill-and-hold criteria discussed above to determine whether revenue recognition is appropriate prior to shipment.
Worked example – Bill-and-hold arrangement
Company C enters into a contract to sell equipment to Customer A, who is awaiting completion of a manufacturing facility and requests that Company C hold the equipment until the manufacturing facility is completed.
Company C bills and collects the nonrefundable transaction price from Customer A and agrees to hold the equipment until Customer A requests delivery. The transaction price includes appropriate consideration for Company C to hold the equipment indefinitely. The equipment is complete and segregated from Company C’s inventory and is ready for shipment. Company C cannot use the equipment or sell it to another customer. Customer A has requested that the delivery be delayed, with no specified delivery date.
Company C concludes that Customer A’s request for the bill-and-hold basis is substantive. It also concludes that control of the equipment has transferred to Customer A and that it will recognize revenue on a bill-and-hold basis even though Customer A has not specified a delivery date.
The obligation to warehouse the goods on behalf of Customer A represents a separate performance obligation. Company C needs to estimate the stand-alone selling price of the warehousing performance obligation based on its estimate of how long the warehousing service will be provided. The amount of the transaction price allocated to the warehousing obligation is deferred and then recognized over time as the warehousing services are provided.
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