You just closed a major deal, but there’s a catch: the customer needs you to store the products for a few months. From a sales perspective, it’s a win. From an accounting perspective, it’s a bill and hold arrangement that requires careful handling. The process of bill and hold revenue recognition forces you to prove the sale is final and the product is no longer yours, all while it still occupies space in your facility. This creates a critical link between your operational processes and your financial statements. We'll cover the essential steps you must take, from physically segregating the inventory to maintaining the right paperwork, to ensure your books accurately reflect the reality of the transaction.

Key Takeaways

• Confirm Customer Control Before Recognizing Revenue: The arrangement must be initiated by the customer for a valid reason, and you must prove they have control. This means the specific product is identified, set aside, and ready for them to take at any time.
• Document Everything to Create an Audit-Proof Record: Your best defense against compliance issues is a complete paper trail. For every bill and hold sale, keep a file with the customer's written request, the contract, and proof that the product is physically separated and identified as theirs.
• Systematize Your Approach with Policies and Technology: Avoid errors by creating a formal process. Develop a clear internal policy, train your team on the rules, and use integrated systems to automate checks and maintain a single source of truth for your financial data.

What is Bill and Hold Revenue Recognition?

A bill and hold arrangement is a specific type of sales agreement where you, the seller, bill a customer for a product but agree to hold onto it for them until a later date. While it sounds straightforward, recognizing revenue from these sales requires careful attention to the rules set out in ASC 606. Getting it wrong can lead to compliance issues, so let's walk through what you need to know.

The Basics of Bill and Hold

Think of it this way: you sell a large piece of custom machinery to a client, but their new factory floor isn't ready for installation. They ask you to store it for them for a few months. You send the invoice now but keep the machine in your warehouse. This is a bill and hold arrangement. The key detail is that you recognize the revenue from the sale before the product is physically delivered. Because the timing of revenue recognition is shifted, there are strict criteria you must meet to stay compliant and ensure your financial statements are accurate.

Breaking Down the Key Components

For you to recognize revenue under a bill and hold agreement, the transaction must meet four specific criteria. It’s not a pick-and-choose list; all four conditions must be satisfied.

1. There’s a substantive reason for the arrangement. The customer must request it for a valid purpose, like a lack of storage space. It can't be initiated by you simply to accelerate revenue.
2. The product is identified as the customer’s. The specific item must be set aside and marked as belonging to that customer. You can't just pull a similar item from your general inventory later.
3. The product is ready for shipment. It must be complete and available for immediate transfer to the customer.
4. You cannot use the product. The seller is not allowed to use the asset or sell it to another customer.

Clearing Up Common Misconceptions

Bill and hold arrangements have a complicated history and have sometimes been used to improperly inflate revenue. Because of this, auditors and regulators examine these deals with extra scrutiny. It’s not enough to just check the four boxes; you must also demonstrate that control of the product has truly transferred to the customer, which is the core principle of ASC 606. Another common oversight is treating storage as a freebie. If you're providing significant storage services, you may need to account for that as a separate performance obligation, meaning you'd recognize that portion of the revenue over the storage period.

What Are the ASC 606 Criteria for Bill and Hold?

Recognizing revenue for a bill-and-hold sale isn’t as simple as sending an invoice. Under ASC 606, you have to meet a strict set of criteria to prove that your customer has control over the product, even though it’s still in your possession. Think of it as a checklist—you must be able to tick every single box. If even one condition isn't met, you can't recognize the revenue until you actually ship the goods.

These rules are in place to prevent companies from prematurely booking revenue to inflate their sales figures, which is why auditors look at these arrangements so closely. Getting it wrong can lead to restated financials and a loss of investor confidence. Let’s walk through the specific requirements you need to satisfy to stay compliant and keep your books clean.

Does It Serve a Real Business Purpose?

First, the arrangement must have a substantive purpose. This means the customer must be the one to request the bill-and-hold arrangement for a valid business reason. For example, maybe their facility isn't ready to receive the goods, they have a temporary lack of storage space, or they need to coordinate delivery with a larger project schedule.

The request can't come from you, the seller, simply because you want to meet a sales target. The core of this criterion is demonstrating that the arrangement benefits the customer and isn't just a tactic to recognize revenue early. The entire transaction hinges on whether the customer truly has control of the goods despite the delayed delivery.

Who Really Controls the Product?

Once a product is part of a bill-and-hold arrangement, it belongs to the customer in every way that matters. This means you, the seller, can no longer do anything with it. The product must be identified separately as belonging to the customer and cannot be used to fill another order or be swapped for an identical item.

Essentially, your ability to direct the use of the product is gone. You are simply holding it on your customer's behalf. This is a critical test of control transfer. If you have the ability to redirect that specific product to another customer, then control hasn't truly passed, and you cannot recognize the revenue yet.

Where Is the Product Stored?

The product must be physically separate from your own inventory. You can't just leave it on the shelf with all your other stock. It needs to be clearly identified, tagged, or segregated in a way that marks it as the customer's property. This ensures it isn't accidentally used or sold.

Many businesses create a designated area in their warehouse specifically for sold customer goods awaiting shipment. This physical separation is a key piece of evidence for auditors that the product is no longer part of your available inventory. It must be ready for immediate transfer or shipment at the customer's request, reinforcing that they are the ones in control of the asset.

What Are the Payment Rules?

The customer must be committed to paying for the product, and the payment terms should be substantive. This usually means the customer has made a significant non-refundable deposit or the contract includes a fixed payment schedule that is not dependent on delivery.

Furthermore, the customer must have assumed the risks and rewards of ownership. If the product were damaged or lost while in your storage, the financial loss would fall on the customer (though they may be covered by insurance). This transfer of risk is a powerful indicator that the customer has accepted ownership and control, even without physical possession of the goods.

Do You Have the Right Paperwork?

Proper documentation is non-negotiable. You need a clear, written record of the customer's request for the bill-and-hold arrangement, including their substantive business reason. The contract terms must explicitly state that the product is sold, identify the specific goods, and outline the transfer of control and risk.

You also need to consider whether the storage you're providing is a separate service. If you're holding the goods for an extended period, ASC 606 may require you to account for the storage as a distinct performance obligation with its own revenue. Keeping meticulous records is crucial for a smooth audit and is much easier with the right integrated systems in place.

What Common Pitfalls Should You Avoid?

Bill-and-hold arrangements can be a useful tool, but they come with a lot of compliance tripwires. Because you’re recognizing revenue before delivering a product, auditors will look at these deals very closely. Getting it wrong can lead to restated financials and a loss of trust with investors. The key is to be proactive and understand where things can go sideways. By familiarizing yourself with the most common mistakes, you can build processes to sidestep them entirely and keep your revenue recognition clean and defensible. Let’s walk through the five biggest pitfalls you need to watch out for.

Misinterpreting "Control" Transfer

The most significant mistake is misunderstanding what it means for a customer to have "control" of a product. This isn't just about a verbal agreement; it's about whether the customer truly owns the goods, even if they aren't physically in their possession. According to ASC 606 guidance, the customer must have the ability to direct the use of the product and receive substantially all of its remaining benefits. If you, the seller, still have the right to swap the product for another one or sell it to someone else, then control hasn't actually transferred, and you can't recognize the revenue yet.

Overlooking Your Customer's Intent

A bill-and-hold arrangement must be initiated at the customer's request for a substantive reason. You can't suggest this arrangement simply to meet your own sales targets. The customer needs a legitimate business purpose, such as not having enough warehouse space at the moment or needing the product to align with a specific production schedule. If the "why" behind the request isn't solid and documented, the arrangement won't meet ASC 606 criteria. Always confirm and record the customer’s reason for the request to prove the arrangement is valid and not just a way to recognize revenue early.

Keeping Incomplete Documentation

When it comes to bill-and-hold, your documentation is your best defense in an audit. Failing to keep detailed records is a huge red flag. You need more than just an invoice; you need a complete file that tells the whole story. This includes the written contract, the customer’s formal request for the bill-and-hold arrangement, and proof that all ASC 606 criteria have been met. Every piece of communication that supports the arrangement should be saved. Without this paper trail, you’ll have a tough time proving the transaction is legitimate. Keeping your data organized is a core part of compliance, a topic we explore further in our HubiFi Blog.

Neglecting Storage and Protection

Even after control has transferred to the customer, the product is still in your warehouse. A common oversight is failing to properly manage the logistics and risks associated with storing these goods. As the seller, you are responsible for safeguarding the product until the customer takes possession. This means the goods must be identified separately, not used to fill other orders, and kept in ready-to-ship condition. You also bear the costs and risks of storage, like potential damage or loss. These responsibilities are a critical part of the arrangement and must be managed carefully.

Failing to Manage Risks

Bill-and-hold arrangements have historically been associated with financial fraud, which is why they attract so much scrutiny. They can be used to artificially inflate a company's earnings, especially if the customer cancels the order later on. This makes risk management essential. You need to assess the creditworthiness of your customer and the likelihood of order cancellation. Having a high volume of bill-and-hold sales can be a major risk factor that auditors will focus on. Implementing strong internal controls and having clear visibility into your data can help you manage these risks effectively. If you're concerned about your current processes, you can always schedule a demo to see how automation can help.

How Can You Ensure Compliance?

Navigating the rules of bill and hold can feel like walking a tightrope, but it doesn't have to. The key to staying compliant with ASC 606 isn't about memorizing every line of the standard; it's about building a solid, proactive strategy. Think of it as creating a system of guardrails that keeps your revenue recognition on the right path. This approach protects you from the headaches of non-compliance and builds a foundation of financial integrity that stakeholders and auditors will appreciate.

A strong compliance framework isn't just a defensive move—it's good business. It ensures your financial statements are accurate, which helps you make better strategic decisions. When you have clear processes, you reduce the risk of human error and create a repeatable model for handling these complex transactions. By focusing on a few key areas, you can confidently manage bill and hold arrangements without losing sleep over audit season. It all comes down to having strong controls, meticulous documentation, the right systems, smart fraud prevention, and regular check-ins on your processes.

Establish Strong Internal Controls

Think of internal controls as the specific rules of the road for your company's financial processes. For bill and hold arrangements, this means creating a clear, step-by-step procedure that your team must follow for every single transaction. This process should outline who has the authority to approve these arrangements and what criteria must be met before a sale can be recognized. Companies must follow specific accounting rules like ASC 606 and keep detailed records, including contracts and customer messages, to prove they’ve met all the requirements. This isn't just about ticking boxes; it's about creating a consistent and defensible process.

Follow Documentation Best Practices

In the world of accounting, if it isn’t documented, it didn’t happen. This is especially true for bill and hold arrangements. Your documentation is the evidence that proves you’ve met all the ASC 606 criteria. Start by getting the customer’s request in writing. From there, your records should clearly explain the substantive business reason for the arrangement—why does the customer need you to hold the product? According to RevenueHub, this detailed documentation is crucial for compliance. Keep a dedicated file for each bill and hold sale that includes the contract, the customer's request, proof the product is ready for shipment, and evidence that it’s segregated from your other inventory.

Set Up the Right Systems

Trying to manage bill and hold arrangements on spreadsheets is a recipe for errors and compliance issues. The complexity of ASC 606 requires a system that can handle the nuances of revenue recognition. The right technology can automate the compliance checks, ensuring you verify both the general rules for transferring control and the four specific bill-and-hold criteria for every transaction. By using automated revenue recognition solutions, you can create a single source of truth that connects your sales, inventory, and accounting data. This not only reduces manual work but also provides a clear, auditable trail for every arrangement.

Implement Fraud Prevention Measures

Let’s be direct: bill and hold arrangements are often linked to financial fraud because they can be used to prematurely inflate a company's earnings. This method is seen as risky, which is why it attracts so much attention from auditors. To protect your business, you need to implement strong fraud prevention measures. This includes separating duties so that the person who arranges the sale isn't the same person who approves the revenue recognition. You should also require multiple levels of management approval for any bill and hold agreement and conduct periodic internal reviews to ensure policies are being followed correctly.

Conduct Regular Risk Assessments

Compliance is not a one-and-done task. A bill and hold arrangement that is compliant today could become non-compliant tomorrow if circumstances change. That’s why it’s essential to conduct regular risk assessments. Schedule periodic reviews of all your active bill and hold agreements to confirm they still meet the ASC 606 criteria. Are the products still segregated? Is the customer still expected to take delivery? Auditors will look very carefully at these sales, so you need good paperwork to prove everything is correct. Regular check-ins help you identify and address potential issues before they become major problems during an audit.

What Documentation Do You Need?

When it comes to bill and hold arrangements, your motto should be: "If it isn't written down, it didn't happen." Proper documentation isn't just good practice; it's the foundation of your ASC 606 compliance. Without a clear paper trail, you'll have a tough time proving to auditors that you've met all the necessary criteria for recognizing revenue before delivery. Think of your documentation as the complete story of the transaction, from the customer's initial request to the final transfer of control. Each piece of paper, email, and contract clause adds a new chapter, providing the evidence you need to support your accounting decisions. Building a comprehensive compliance file for every bill and hold sale protects your business, ensures accurate financial reporting, and makes audit season far less stressful. Let's break down exactly what you need to have on hand.

Proof of the Customer's Request

First things first, you need to prove the customer initiated the bill and hold request for a legitimate business reason. This isn't just a casual agreement; the customer must have a substantive purpose, like not having enough warehouse space or needing to coordinate with other parts of a larger project. According to eCapital, "The customer must have a real reason for asking the seller to hold the goods." Keep records of these communications—whether they're emails or notes from a call—to show why the arrangement was necessary from the customer's perspective. This documentation is your first line of defense in proving the arrangement's validity.

Clear Contract Terms

Your contract is the backbone of the entire arrangement. It needs to be crystal clear, leaving no room for interpretation. The agreement must include a definitive promise from the buyer to purchase the goods. As the Corporate Finance Institute puts it, "The buyer must have a clear promise (preferably in writing) to buy the goods." This means your contract should explicitly outline the products, quantities, prices, and payment terms. It should also detail the bill and hold terms, confirming the customer's commitment and acknowledging that they have requested you to store the goods on their behalf. A vague agreement won't hold up under scrutiny, so make sure your legal language is solid.

Evidence of Control Transfer

This is where things can get tricky. You have to prove that control of the product has officially passed to the customer, even though it's still in your warehouse. How do you do that? By physically identifying and separating the goods. The product must be clearly marked as the customer's property and stored apart from your own inventory. As RevenueHub explains, "The product must be clearly marked as belonging to the customer. It should be stored separately and cannot be swapped with other similar products." This means you can't use those items to fulfill another order. Document this separation with inventory records, photos, and clear labeling to create tangible proof of the control transfer.

Details of Storage Arrangements

You also need to clarify the nature of the storage you're providing. Is it simply a part of the sale, or is it a separate service? If the customer is getting a distinct benefit from you holding their goods, you may have a separate performance obligation on your hands. RevenueHub notes that "Storage is a separate service if the customer benefits from it on its own, and it's different from just getting the product." For example, if you're providing specialized, climate-controlled storage for an extended period, that's likely a separate service. Your documentation should specify the terms of storage, including duration and any associated fees, to ensure you account for it correctly.

Your Complete Compliance File

Finally, pull everything together into a complete compliance file for each bill and hold transaction. This file is your single source of truth for auditors. It should contain every piece of evidence we've discussed: the customer's request, the signed contract, proof of product segregation, and details of the storage arrangement. Following accounting standards like ASC 606 requires you to keep detailed records, including contracts and customer messages, to show you met all the requirements. Having a centralized system where all this data lives is crucial. When your financial data is integrated, you can easily pull reports and demonstrate compliance without a last-minute scramble.

How Can Technology Help You Stay Compliant?

Trying to manage bill and hold arrangements using spreadsheets and manual processes is a recipe for compliance headaches. The rules are complex, the documentation requirements are strict, and the risk of human error is high. This is where technology becomes your most valuable player. The right tech stack doesn't just make your job easier; it builds a framework for accuracy and consistency that can stand up to scrutiny.

Instead of spending hours manually tracking contracts and transferring data, you can use automated systems to handle the heavy lifting. This frees up your team to focus on strategic analysis rather than tedious data entry. With the right tools, you can create a reliable, auditable trail for every transaction, ensuring you meet all ASC 606 criteria without the constant stress. Think of it as building a safety net for your revenue recognition process—one that catches errors before they become major problems and gives you a clear view of your financial health at all times.

Use Automation to Reduce Errors

Manual data entry is one of the biggest sources of compliance risk. Every time a number is typed or copied from one system to another, there’s a chance for a mistake. These small errors can snowball into significant financial misstatements. Automation removes this variable by handling the data for you. By setting up automated workflows for revenue recognition, you can drastically reduce the risk of manual errors and ensure your data aligns perfectly with ASC 606 requirements. This not only improves accuracy but also saves your team countless hours that would otherwise be spent on repetitive tasks and correcting mistakes. You can find more insights on how automation transforms financial operations on our blog.

Find the Right Revenue Recognition Software

Not all accounting software is created equal, especially when it comes to complex standards like ASC 606. You need a solution specifically designed for revenue recognition. The right software will do more than just book journal entries; it will help you model customer contracts, manage performance obligations, and generate compliant financial reports automatically. Look for a platform with robust reporting and analytics features that give you a clear, real-time view of your revenue streams. This end-to-end capability is essential for managing bill and hold arrangements correctly and providing the detailed documentation auditors expect. Exploring different pricing options can help you find a solution that fits your business volume and complexity.

Integrate Your Key Systems

Your company’s data probably lives in multiple places: a CRM for sales, an ERP for operations, and accounting software for finance. If these systems don’t communicate, you’re left with data silos that make getting a clear picture nearly impossible. Integrating your key systems creates a centralized data platform where information flows seamlessly. This gives you real-time visibility into your entire revenue lifecycle, from the initial contract to the final payment. When your systems are connected, you can automate complex revenue recognition processes with confidence, knowing the data is consistent and up-to-date across the board. Proper integrations are the foundation of a scalable and compliant financial operation.

Maintain a Single Source of Truth

When your systems are integrated, you create a single source of truth for your financial data. This means everyone in your organization—from sales to finance to leadership—is working with the same accurate, consistent information. A single source of truth is critical for aligning your revenue recognition policies with ASC 606 while accommodating your specific business model. It ensures that your financial reports are reliable and that you can make strategic decisions with confidence. When it’s time for an audit, having all your data consolidated in one place makes the process smoother and less stressful. You can schedule a demo to see how a unified data platform can transform your compliance strategy.

What Are the Financial Implications?

Getting bill-and-hold arrangements right isn't just about ticking compliance boxes—it has a real, tangible impact on your financial statements. How you handle these transactions can change the story your numbers tell, influencing everything from investor perceptions to your ability to make strategic decisions. Missteps can lead to financial restatements, which are not only costly and time-consuming but can also damage your company's credibility. Understanding the financial ripple effects is key to maintaining a healthy business.

When you enter a bill-and-hold agreement, you’re fundamentally altering the timing of your revenue, the structure of your balance sheet, and the relationship between your income and your actual cash. It also comes with a higher level of scrutiny, requiring detailed disclosures to keep stakeholders fully informed. Properly managing these implications is crucial for accurate reporting and building trust. For businesses dealing with high volumes of these transactions, having an automated system in place is essential for maintaining accuracy and ensuring you’re always audit-ready. You can explore more financial topics and best practices on the HubiFi blog.

How It Affects Revenue Timing

The most significant financial shift with a bill-and-hold arrangement is that you can recognize revenue sooner. In a typical sale, you book revenue when the product is delivered. But with bill-and-hold, you record the revenue from a sale before you actually deliver the goods to the buyer. This can make your company’s performance look stronger in a specific accounting period by pulling future sales into the present. However, this isn't a free pass. You can only accelerate revenue recognition if you’ve met all the strict ASC 606 criteria, proving that control has truly transferred to the customer even while the product is still in your warehouse.

The Impact on Your Balance Sheet

Bill-and-hold arrangements also change the look of your balance sheet. When you recognize revenue, you create an accounts receivable, which is the money your customer owes you. At the same time, the product is still physically with you, but it’s no longer your inventory to sell. As PwC guidance highlights, a key rule is that your company "cannot use or sell the goods to anyone else." This means the product must be identified separately from your regular inventory and is essentially held in trust for the customer. This shifts the composition of your current assets from inventory to receivables, a detail that auditors will definitely examine.

What It Means for Cash Flow

It’s important to remember that recognizing revenue doesn't mean you have cash in the bank. Bill-and-hold sales can create a disconnect between your income statement and your cash flow statement. While your revenue numbers might look great, your cash position won't change until the customer actually pays their invoice. As financial experts at eCapital note, these arrangements can be tricky and "might lead to companies reporting income too early if not handled correctly." This can create a misleading picture of your company's liquidity if you aren't carefully monitoring your receivables and managing cash flow expectations.

Meeting Financial Disclosure Rules

Because bill-and-hold arrangements are complex and can be misused, you have to be completely transparent about them in your financial disclosures. Investors, lenders, and auditors will want to see the details of these transactions to understand their nature and impact. According to RevenueHub, companies must carefully follow the rules for transferring control and also determine if the storage they provide is a separate service that needs to be accounted for differently. Clear and thorough disclosures are non-negotiable for proving you’re compliant and giving stakeholders a true and fair view of your financial health. If you need help ensuring your systems support this level of detail, you can always schedule a demo to see how automation can help.

Your Bill and Hold Implementation Checklist

Putting a bill and hold process in place requires careful planning and a systematic approach. It’s not something you can improvise. Getting it right from the start protects your revenue, ensures compliance, and keeps your financial statements accurate. This checklist breaks down the essential steps to help you build a compliant and effective bill and hold system. Think of it as your roadmap to recognizing revenue correctly without creating headaches for your finance team or auditors down the line. Each step is designed to add a layer of control and clarity, making your process robust and reliable.

Develop Clear Policies

First things first: you need a formal, written policy for all bill and hold arrangements. This document should clearly outline the criteria your company will use to determine if a sale qualifies under ASC 606. A key requirement is that the arrangement must have a substantive purpose, meaning there's a real business reason the customer has requested it. Your policy should define what qualifies as a valid reason and what doesn't. This isn't just about internal alignment; it's your first line of defense in an audit. Make it clear, accessible, and mandatory for any team member involved in these types of sales.

Train Your Team

A policy is only effective if your team understands and follows it. Your sales, finance, and operations teams must be trained on the specifics of your bill and hold policy and the underlying ASC 606 rules. Everyone needs to understand the criteria for transferring control and the documentation required to prove it. Conduct regular training sessions to ensure everyone knows how to identify a legitimate bill and hold request, what to include in the contract, and why cutting corners isn't an option. When your entire team is educated, you reduce the risk of non-compliant deals slipping through the cracks.

Integrate Your Technology

Manually tracking bill and hold sales is a recipe for errors. Your technology stack should support your compliance efforts, not hinder them. Integrating your CRM, ERP, and accounting software creates a single source of truth, ensuring that once a deal is signed, the revenue is recognized at the correct time. Automated systems can flag arrangements that need review, manage segregated inventory, and maintain a clear audit trail. Having the right system integrations in place is crucial for confirming that the customer truly has control and has taken on the risk of ownership, even when the goods are still in your warehouse.

Monitor for Compliance

Bill and hold arrangements aren't a "set it and forget it" activity. You need an ongoing monitoring process to ensure you remain compliant throughout the holding period. This involves periodically verifying that the customer's goods are still separately identified, ready for shipment, and haven't been used to fill other orders. Since auditors pay close attention to these sales, regular internal reviews can help you spot and fix issues before they become major problems. Schedule quarterly or semi-annual checks of all active bill and hold agreements to confirm everything is still in order and properly documented.

Put Quality Checks in Place

Finally, implement quality checks to confirm the finality of each sale. The arrangement should be structured so the buyer cannot easily cancel the order or change the terms. Your process should include a step to verify that the contract is legally binding and that the transfer of control is irreversible. This might involve getting written confirmation from the customer acknowledging they have taken ownership and control of the product. These checks ensure that you are recognizing revenue on sales that are truly complete, protecting the integrity of your financial reporting.

How to Prepare for Audits

Bill and hold arrangements are a known hot spot for auditor scrutiny, and for good reason. The nuances of ASC 606 criteria mean there’s a higher risk of misstatement, so you can bet your auditors will be paying close attention. Getting ahead of their questions is the best way to ensure a smooth audit process. A proactive approach that focuses on clear documentation, risk management, and regular internal checks will demonstrate your commitment to compliance and make the entire experience less stressful for your team.

Keep Your Documentation Audit-Ready

When auditors arrive, your documentation is your first line of defense. It’s not enough to just meet the ASC 606 criteria; you have to prove it. As accounting standards require, you must keep detailed records like contracts and customer messages to show you’ve met all the requirements. Think of it as building a case file for every single bill and hold transaction. This file should be organized and easy to access, containing the customer’s written request, the final contract, proof that the product is complete and segregated, and any relevant communications. Having your systems work together makes it much easier to maintain a clean and complete audit trail.

Assess and Mitigate Risks

Because bill and hold sales can be tricky, they might lead to reporting income too early if not handled correctly. Auditors will look very carefully at these arrangements, so it’s your job to identify and address potential risks before they do. Start by pinpointing where things could go wrong. Are your contract terms ambiguous? Is there a risk the customer won’t ultimately take possession of the goods? Once you identify potential issues, create a plan to mitigate them. This could involve standardized contract language, a mandatory checklist for your sales team, or enhanced monitoring for long-term arrangements. You can find more insights on managing financial compliance on our blog.

Verify Your Compliance Regularly

Compliance isn't a one-and-done task; it's an ongoing process. Circumstances can change, and an arrangement that was compliant three months ago might not be today. That’s why you should carefully check both the general rules for transferring control and the specific bill-and-hold criteria on a recurring basis. Set up a schedule—perhaps quarterly—to review all active bill and hold agreements. During this review, confirm that the substantive reason for the arrangement still exists, the product remains separately identified, and it’s still ready for physical transfer. This diligence helps you catch potential issues early and shows auditors you’re actively managing your compliance obligations.

Conduct Internal Reviews

Think of an internal review as a dress rehearsal for the real audit. This process involves having a fresh set of eyes—someone from your finance team or an internal auditor—examine your bill and hold processes and documentation. The goal is to spot weaknesses before an external auditor does. Full disclosure of these arrangements internally is essential for maintaining transparency and preparing for external scrutiny. An internal review can uncover gaps in your paperwork, inconsistencies in how your team applies the rules, or controls that need strengthening. This practice not only prepares you for an audit but also reinforces a culture of compliance across your organization. If you need better visibility into your data to conduct these reviews, you can schedule a demo to see how our platform can help.

Related Articles

• ASC 606 Implementation: Steps, Challenges, and Solutions
• ASC 606 Revenue Recognition: A Practical Guide
• ASC 606 Compliance: A Practical Guide

Frequently Asked Questions

What's the most common reason a bill and hold arrangement fails an audit? The most frequent pitfall is failing to prove that control of the product has truly transferred to the customer. It’s not enough for the product to be sold on paper; the customer must have the ability to direct its use, and you, the seller, must have given up your rights to it. This means the specific item is identified, set aside, and you can't use it to fill another order. If an auditor finds that you could have swapped the product for an identical one from your inventory, they will likely conclude that control never really transferred, and the revenue was recognized improperly.

Can I ever suggest a bill and hold arrangement, or must it always come from the customer? The request must be initiated by the customer for their own substantive business reason, like a temporary lack of storage or a need to align delivery with a project timeline. You cannot propose the arrangement simply to accelerate your revenue and meet a sales target. If you do suggest it, the reason must still benefit the customer and be thoroughly documented as such. The core principle is that the arrangement serves a legitimate customer need, not a seller's desire to book revenue early.

What happens if the customer cancels the order after I've already recognized the revenue? This is a significant risk and highlights why the initial contract and customer commitment are so important. If you've correctly followed all ASC 606 criteria, the sale should be largely non-cancellable, and the customer is obligated to pay. However, if a cancellation does occur, you would need to reverse the revenue you recognized. This can lead to a financial restatement, which is why it's crucial to assess your customer's creditworthiness and the finality of the sale before recognizing any revenue from a bill and hold arrangement.

How do I know if the storage I'm providing is a separate service I need to account for? You should consider storage a separate service, or performance obligation, if the customer receives a distinct benefit from it beyond simply waiting for delivery. Ask yourself if the customer could have hired another company to store the goods for them. If you are providing storage for an extended period or offering specialized conditions like climate control, it's very likely a separate service. In that case, you would need to allocate a portion of the total transaction price to the storage and recognize that revenue over the storage period.

My current process is mostly manual. What's the first step I should take to improve compliance? The best first step is to create a formal, written policy. This document should act as your company's rulebook, clearly defining what constitutes a compliant bill and hold arrangement under ASC 606. Outline the specific criteria that must be met, the documentation required for every transaction, and the approval process. Establishing this policy creates a consistent standard for everyone to follow and is the foundational piece you need before you can effectively train your team or implement technology to support your process.