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Get clear, actionable steps for bill and hold revenue recognition, including key criteria, compliance tips, and best practices for accurate reporting.
Few accounting practices attract more scrutiny from auditors than bill and hold arrangements. Because it involves recognizing revenue before a product ships, it has historically been linked to financial fraud, putting it directly in the crosshairs of regulators like the SEC. But this doesn't mean you should avoid it. When executed properly, bill and hold revenue recognition is a perfectly valid and useful tool for businesses. The key is to have ironclad internal controls and a deep understanding of the rules. This article is your guide to navigating the compliance landscape, managing the inherent risks, and implementing a process that ensures every transaction is defensible.
At its core, a bill-and-hold arrangement is an accounting method that lets you recognize revenue before you physically deliver the goods to your customer. Imagine a customer buys a large quantity of your product but asks you to store it for them because they don’t have the warehouse space yet. In this scenario, you bill them and record the sale, even though the product hasn’t left your facility. While it sounds simple, this method comes with a strict set of rules to ensure it’s used correctly and ethically.
In a typical bill-and-hold transaction, you issue an invoice to your buyer and officially record the sale in your books, all while the goods remain in your possession. This is usually done at the customer’s request for a specific business reason. However, you can’t just decide to do this to make your quarterly numbers look better. Both U.S. Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Standards (IFRS) have laid out specific criteria that must be met. The goal of these rules is to confirm that a legitimate sale has occurred and that control of the goods has truly passed to the customer, even if the delivery is postponed.
To properly recognize revenue under a bill-and-hold arrangement, you need to check off a few critical boxes. First, there must be a substantive business reason for the customer’s request to delay delivery. Second, the product must be identified separately as belonging to the customer and can't be used to fill other orders. Third, the product must be finished and ready for physical transfer at any time. Finally, you can no longer have the ability to direct the use of the product—the customer must have taken control. Meeting all these criteria proves the transaction is legitimate.
Bill-and-hold arrangements sometimes get a bad rap because they have been associated with financial statement fraud. The risk is that a company might use this method to prematurely recognize revenue and inflate its earnings. However, the arrangement itself isn't fraudulent. The problem arises when companies recognize revenue without satisfying all the required criteria. When managed with integrity and supported by clear documentation, a bill-and-hold sale is a valid and useful practice. It’s all about following the rules and maintaining transparency to ensure your financial reporting is accurate and compliant.
Recognizing revenue before you ship a product sounds great, but it’s not as simple as just sending an invoice. To stay compliant and keep your books clean, you have to meet a specific set of criteria. Think of these as the non-negotiable rules of the road for any bill-and-hold arrangement. Getting any of these wrong can lead to major headaches during an audit. Let’s walk through the five essential requirements you need to satisfy to make sure your bill-and-hold transactions are legitimate and defensible.
First things first, the request to delay delivery must come from your customer and for a legitimate reason. This isn't a loophole for you to recognize revenue early. The customer needs to have a substantive business purpose for asking you to hold their items. For example, maybe their new facility isn't ready yet, or they're coordinating a complex project installation. A bill-and-hold arrangement is only valid when it serves the customer's needs, so make sure their reason is clearly documented and makes practical sense.
Once the sale is made, the product officially belongs to your customer, even if it's still in your warehouse. To prove this, you must identify the specific goods and separate them from your own inventory. This means you can't just have a note in your system; the items should be physically set aside, packaged, and marked as the customer's property. This segregation is critical because it shows the goods are no longer available for you to sell to anyone else. They are off-limits and are simply awaiting shipment instructions from their new owner.
The product you're holding must be 100% complete and ready for physical transfer at any moment. This means it's fully assembled, has passed all quality checks, and is packaged for shipment. You can't recognize revenue if there are still manufacturing steps or finishing touches left to do. The core principle here is that the only thing preventing the product from being delivered is the customer's request to wait. According to guidance from PwC, if the customer called and asked for it to be shipped today, you should be able to do so without any further production work.
This is a big one. For a bill-and-hold arrangement to be valid, the "control" of the product must officially transfer to the customer. This is a key concept in ASC 606. Control means the customer now has the ability to direct the use of the product and receives the benefits from it. They should be able to, for instance, decide to sell the product to another party while you're still storing it. Importantly, the customer also assumes the risks of ownership, like loss or damage. This transfer of control is what truly separates a completed sale from inventory you're just holding.
A verbal agreement isn't going to cut it. You need a formal, binding commitment from the customer to purchase the goods. This should be documented in a contract or purchase order that clearly outlines the terms. The agreement must include a fixed payment schedule, showing that the customer is committed to paying for the product on a normal timeline, regardless of the delivery date. It should also specify a reasonable and expected timeframe for the eventual delivery. Having these clear terms documented protects both you and your customer and provides auditors with the proof they need.
When you’re dealing with bill-and-hold arrangements, you can't just wing it. Specific accounting standards are in place to keep everything fair, transparent, and consistent. Getting these rules right isn’t just good practice—it’s essential for compliance and avoiding some serious financial headaches down the road. Think of these standards as your rulebook for recognizing revenue correctly.
The two main frameworks you’ll encounter are ASC 606, which is the standard in the United States, and IFRS 15, its international counterpart. While they share a lot of common ground, they have subtle differences you need to be aware of, especially if you do business globally. On top of that, for public companies in the U.S., the Securities and Exchange Commission (SEC) keeps a close watch to prevent any misleading financial reporting. Following these guidelines ensures your financial statements are accurate and can stand up to scrutiny during an audit. Let’s break down what each of these standards means for your bill-and-hold transactions.
Under US GAAP, ASC 606 is the go-to standard for revenue recognition. For a bill-and-hold arrangement to be valid, it lays out a few non-negotiable criteria you must meet before you can recognize the revenue. First, the reason for the arrangement must come from your customer and be substantive—in other words, there has to be a real, legitimate business purpose for them asking you to hold the goods. Second, the product must be identified separately as belonging to the customer and can't be used to fill another order. It also has to be completely finished and ready for physical transfer. Finally, you can't have any other performance obligations left to fulfill. Meeting all these points is crucial for proper ASC 606 compliance.
If your company follows international standards, you’ll be looking at IFRS 15. The good news is that its rules for bill-and-hold arrangements are very similar to ASC 606. However, IFRS 15 places a strong emphasis on whether the customer has obtained control of the product. This means the customer must be able to direct the use of the product and receive essentially all of its remaining benefits, even if you’re still storing it. The core idea is that if the customer truly controls the asset, they own it, and you can recognize the revenue. This principle of customer control is the key test under IFRS 15.
For publicly traded companies in the U.S., the Securities and Exchange Commission (SEC) has its own set of strict standards. The SEC is particularly focused on preventing revenue recognition fraud, where companies might use bill-and-hold sales to inflate their revenue numbers prematurely. They will closely scrutinize the documentation and the business rationale behind these arrangements to ensure they are legitimate and not just a tactic to meet sales targets. Failing to meet SEC requirements can lead to significant penalties, restatements, and a loss of investor trust, so it’s an area where you want to be absolutely certain you’re following the rules.
Solid documentation is your best friend when it comes to bill-and-hold arrangements. It’s your proof that the transaction is legitimate and meets all the necessary criteria. You should have a clear, written request from the customer detailing why they need the arrangement. Your records must also show that the product is identified, segregated from your other inventory, and ready to go. A clear delivery schedule and confirmation that you’ve fulfilled all your obligations are also essential. Keeping all this straight can feel overwhelming, but the right systems make it manageable. Seeing how an automated solution handles this can be a game-changer for your team.
Understanding bill and hold arrangements is one thing, but seeing how they ripple through your financial statements is another. These transactions don't just live on paper; they directly influence your company's reported performance, its perceived value, and its cash position. Getting the accounting right is critical for accurate reporting, maintaining investor confidence, and making sound business decisions. Let's walk through the key financial areas that bill and hold arrangements affect.
The most immediate impact of a bill and hold sale is on the timing of your revenue. Typically, you record revenue when you deliver a product. With a bill and hold arrangement, you can recognize that revenue before the product ever leaves your warehouse. This can make your sales numbers look stronger in the current period. However, this isn't a loophole to inflate your figures whenever you want. You must meet the strict criteria laid out in accounting standards like ASC 606 to justify recognizing revenue early. The substance of the sale and the customer's request are what matter most.
When you recognize revenue from a bill and hold sale, your accounts receivable increases, which in turn adds to your total assets and retained earnings. But here’s the tricky part: the inventory, while sold, technically remains in your possession. It must be segregated and identified as belonging to the customer. If these arrangements are handled improperly, it can lead to a misrepresentation of your financial health. Recognizing revenue for sales that don't meet the criteria can be considered fraud, which can seriously damage your company's reputation and erode the trust of investors and lenders.
It’s easy to confuse revenue with cash, but they are two very different things. Recognizing revenue on your income statement doesn't mean the cash is in your bank account. Bill and hold arrangements can create a significant lag between when you report income and when you actually receive payment. This gap can put a strain on your cash flow, making it harder to cover operational costs like payroll and rent. It's essential to create accurate cash flow projections that account for the actual payment terms of the sale, not just the revenue recognition date.
Transparency is non-negotiable when it comes to bill and hold sales. Because these are special arrangements, you are required to provide clear and detailed disclosures in the footnotes of your financial statements. Stakeholders need to understand the nature and terms of these transactions. This includes disclosing the amount of revenue recognized and the reasons for the arrangement. Proper disclosure ensures you remain compliant with accounting standards and gives investors, auditors, and other stakeholders a clear picture of your sales activities. It’s a key part of building and maintaining trust in your financial reporting.
Bill-and-hold arrangements, while useful, come with a higher level of scrutiny for a reason. Because you’re recognizing revenue before the product physically leaves your possession, the potential for error or misstatement is significant. This isn’t something to be afraid of, but it does mean you need a solid plan for managing risks and implementing strong internal controls. A proactive approach is key to ensuring your financial statements are accurate and can withstand an audit.
The history of bill-and-hold is marked by high-profile fraud cases, which has led regulators to watch these transactions closely. For your business, this means that simply meeting the minimum criteria isn’t enough. You need to build a robust system of checks and balances that proves every transaction is legitimate and correctly timed. This protects your business, ensures compliance, and gives you confidence in your financial data. You can find more financial best practices on the HubiFi blog.
Think of your internal control framework as the rulebook for your bill-and-hold process. It should clearly define every step, from verifying the customer’s request to the final sign-off on revenue recognition. This isn't just about good accounting; it's a critical defense against compliance issues. Since the infamous Sunbeam case, the SEC has pursued numerous companies for revenue recognition fraud involving these arrangements. Your framework should include segregation of duties—ensuring the person who makes the sale isn't the same person who approves the revenue recognition—and a clear audit trail for every single transaction. This creates accountability and makes it much harder for mistakes or intentional misstatements to go unnoticed.
Because bill-and-hold can be used to accelerate revenue, it’s often viewed as an "aggressive" accounting method. This perception alone is a risk, as it can attract extra attention from auditors. The primary risk is recognizing revenue too early, before all ASC 606 criteria have been met. This can happen if a customer's request isn't substantive, if the product isn't truly ready for shipment, or if control hasn't actually transferred to the buyer. This can artificially inflate your earnings, especially at the end of a reporting period, which is a major red flag. Understanding these potential pitfalls is the first step toward building a process that avoids them. HubiFi’s solutions are designed to bring clarity to complex revenue streams like this.
The line between an error and fraud can be thin, but it often comes down to intent. According to experts, fraud occurs when someone at the company recognizes revenue knowing that the strict conditions for a bill-and-hold arrangement haven't been satisfied. To prevent this, you need to implement hard stops in your process. Require multiple levels of approval for every bill-and-hold sale, including a final review by a senior member of your finance team. Conduct periodic internal audits specifically focused on these transactions to verify that documentation is complete and all criteria were met. By creating a system of verification, you reduce the opportunity for anyone to bend the rules. If you need help building these controls, you can schedule a demo to see how automation can enforce compliance.
A frequently overlooked risk in bill-and-hold arrangements is physical inventory. Even though the product has been sold, it’s still in your warehouse, and you are responsible for it. As the seller, you are still on the hook for storing and protecting the goods until they are picked up or delivered. This means you bear the risk of damage, theft, or loss. Check your business insurance policy to confirm that it covers goods sold to customers but still held on your premises. If you’re storing high-value items, you may need to adjust your coverage to reflect the increased liability. A quick conversation with your insurance provider can prevent a major financial headache down the road.
Putting bill and hold arrangements into practice requires more than just knowing the rules; it demands a solid, repeatable process. When you get the implementation right, you create a system that supports accurate financials and stands up to scrutiny. Think of it as building the foundation before you put up the walls. A strong foundation ensures everything that follows is stable and secure. Getting these practices in place from the start will save you headaches during audits and give you confidence in your financial statements. For more tips on streamlining your financial operations, you can find helpful articles on the HubiFi blog.
Your first step is to build a strong internal control framework. These controls are your safety net, ensuring that every bill and hold transaction strictly follows the revenue recognition criteria. The goal is to create checks and balances that monitor these arrangements from start to finish. This includes verifying that all conditions are met before any revenue is recorded. Without these safeguards, you risk significant financial misstatements and compliance issues. Effective controls aren't about adding bureaucracy; they're about creating a clear, consistent process that protects your business and ensures you adhere to compliance standards every time.
Think of documentation as your audit trail. For every bill and hold transaction, you need a complete record that tells the full story. This isn't the place to cut corners. Your files should include the customer's written request, a clear explanation of the substantive business reason for the arrangement, and proof that the goods are identified and stored separately from your other inventory. Detailed documentation is your primary evidence to show auditors that you’ve met all the necessary criteria. Keeping these records organized and accessible makes audits smoother and demonstrates a commitment to accurate financial reporting.
Your accounting systems need to be configured to handle the specific rules of bill and hold transactions. Manually tracking these arrangements in spreadsheets is a recipe for errors. Instead, define your system requirements to ensure the criteria are built directly into your revenue recognition process. Your software should be able to flag these transactions, track their status, and apply the correct accounting treatment automatically. This ensures consistency and reduces the risk of human error. Having the right system integrations in place allows your technology to enforce compliance, giving your finance team the tools they need to manage these complex arrangements effectively.
A process is only as good as the people who run it. It’s essential that everyone involved—from your sales team initiating the deal to the finance team recording it—understands the rules. Comprehensive training ensures your team knows the specific criteria that must be met for revenue recognition under a bill and hold arrangement. When your sales team understands the requirements, they can structure deals correctly from the beginning. When your finance and operations teams are aligned, they can execute and document the transaction properly. This collective understanding prevents non-compliant agreements and fosters a culture of accuracy across the organization.
Managing the complexities of revenue recognition, especially for bill and hold arrangements, can feel like a constant battle. Manual processes are not only slow but also prone to errors that can put your compliance at risk. Thankfully, technology offers a much better way. By using the right tools, you can streamline the entire process, ensure accuracy, and get a clearer picture of your company’s financial health.
Automation does more than just speed up repetitive tasks; it gives you powerful insights into your business. By automating revenue recognition, you can quickly adapt to market changes and make smarter decisions about where to allocate your resources. Instead of spending hours buried in spreadsheets, your team can focus on strategy, pricing, and customer engagement. This shift allows you to uncover unrecognized cash flows and get a real-time view of your financial performance, which is essential for sustainable growth. You can find more insights on how to improve your financial operations on our blog.
Your business data probably lives in multiple places—your CRM, ERP, and accounting software. Without a way to connect them, you’re working with an incomplete picture. Seamless integrations are the key to solving this. When your systems communicate, you gain full visibility into customer contracts and accounts receivable. This unified view is critical for complying with ASC 606, as it ensures the correct accounting principles are applied consistently. It also helps you understand customer buying habits and churn rates, making future revenue forecasting much more reliable.
Waiting until the end of the month to understand your revenue is a thing of the past. Real-time analytics provide an up-to-the-minute view of your financial standing. By dramatically reducing manual data entry, you increase reporting accuracy and create revenue forecasts you can actually trust. This level of clarity is transformative. In a dynamic business environment, having access to accurate, immediate financial data is essential for making confident decisions that drive growth. It allows you to spot trends as they happen and adjust your strategy accordingly, keeping you ahead of the curve.
HubiFi combines automation, seamless integrations, and real-time analytics into a single, powerful solution. Our platform is designed to handle high-volume transactions and complex revenue scenarios like bill and hold with ease. We help you stay compliant with changing regulations while providing the data visibility you need to make strategic decisions. By automating your revenue recognition processes with HubiFi, you can close your books faster, pass audits confidently, and get back to focusing on what you do best—growing your business. Schedule a demo to see how we can simplify your financial operations.
Implementing a bill and hold process isn't a one-and-done task. It requires ongoing attention to keep your financial reporting accurate and compliant. Think of it as a living part of your business operations that needs regular check-ins to function correctly. As your company grows, your contracts change, and regulations evolve, your approach to bill and hold revenue recognition must adapt, too. Building a strong foundation of continuous improvement and monitoring is the key to managing these arrangements successfully over the long term, ensuring you’re always ready for scrutiny and confident in your financial statements.
Audits are a fact of life in business, and with bill and hold arrangements, you can expect auditors to pay close attention. The SEC has a history of cracking down on revenue recognition fraud involving these specific transactions, so having your ducks in a row is non-negotiable. The best way to prepare is to maintain impeccable records for every single bill and hold sale. This means keeping customer requests, proof of product segregation, and readiness-for-shipment documentation organized and easily accessible. When you treat every day like audit day, you’ll find the real thing is far less stressful. For more tips on staying ahead, check out the financial insights on the HubiFi blog.
Your business isn’t static, and neither are your accounting processes. What works today might need adjustments tomorrow. It’s crucial to regularly review your bill and hold procedures to ensure they still align with current accounting standards. Under both U.S. GAAP and IFRS, revenue from a bill and hold transaction can only be recognized when specific criteria are met. Schedule periodic reviews—quarterly or semi-annually—with your finance and operations teams to walk through the process, identify any gaps, and make necessary updates. This proactive approach helps you catch potential issues before they impact your financials.
Accurate revenue recognition depends entirely on accurate data. In a bill and hold arrangement, you’re recording revenue before the product physically leaves your warehouse, which makes the supporting data even more critical. Scattered spreadsheets and manual tracking are recipes for error. A centralized system that connects your sales, inventory, and accounting data is essential for maintaining a single source of truth. When all your information flows seamlessly, you can be confident that every recognized sale meets the necessary criteria. Strong data management is also about having the right integrations to pull information from your CRM, ERP, and other business systems automatically.
Don’t wait for an audit to find a problem. Continuous monitoring allows you to proactively identify and address compliance risks in real time. Fraud often occurs when team members recognize revenue knowing that the strict conditions for a bill and hold sale haven’t been satisfied. You can mitigate this risk by setting up automated alerts for transactions that deviate from your established policies. For example, an alert could flag a sale where the product hasn’t been segregated within the required timeframe. Assigning clear responsibility for reviewing these exceptions ensures that nothing falls through the cracks. If you'd like to see how automation can help, you can schedule a demo to explore a tailored solution.
What's the biggest mistake companies make with these arrangements? The most common pitfall is failing to prove that the customer has a legitimate, substantive business reason for the request. It's easy to focus on segregating the inventory and getting it ready to ship, but if the arrangement was initiated by your company to accelerate revenue, it won't pass an audit. The request must genuinely benefit the customer and be documented clearly, otherwise the entire transaction can be invalidated.
Can I suggest a bill and hold arrangement to a customer to help meet my sales goals? No, this is a major red flag for auditors. The arrangement must be initiated at the customer's request for their own substantive business purpose, like a delay in their facility's readiness. Using this method as a tool to pull future revenue into the current quarter is exactly the kind of practice that accounting standards like ASC 606 were designed to prevent. The focus must always be on the customer's need, not your internal targets.
How is a bill and hold sale different from just storing a customer's order for them? The key difference comes down to the transfer of control. In a legitimate bill and hold sale, the customer officially owns the product even though it's in your warehouse. This means they bear the risks of ownership and have the ability to direct the use of the product, for instance, by reselling it to someone else while you're still storing it. Simply holding an order that you still control is just deferred delivery, not a completed sale.
What happens if the product gets damaged in my warehouse after the sale is recognized? This is a critical point to clarify in your agreement. Even though the customer has taken control of the product, you are still physically responsible for its safekeeping. You bear the risk of loss or damage while it's on your premises. It's essential to review your business insurance policy to ensure you have adequate coverage for goods sold but held in your possession.
Does the customer have to pay for the goods immediately? Not necessarily, but the payment terms must be fixed and follow a normal schedule, independent of the delivery date. You can't have open-ended or conditional payment terms. The contract must show a firm commitment from the customer to pay for the goods, which provides evidence that a true sale has occurred. This is why a clear, documented payment schedule is a non-negotiable part of the arrangement.
Former Root, EVP of Finance/Data at multiple FinTech startups
Jason Kyle Berwanger: An accomplished two-time entrepreneur, polyglot in finance, data & tech with 15 years of expertise. Builder, practitioner, leader—pioneering multiple ERP implementations and data solutions. Catalyst behind a 6% gross margin improvement with a sub-90-day IPO at Root insurance, powered by his vision & platform. Having held virtually every role from accountant to finance systems to finance exec, he brings a rare and noteworthy perspective in rethinking the finance tooling landscape.
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