5.3.4: Bill-and-Hold Arrangements

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There are times when a customer may purchase goods from a company, but not take physical possession of the goods until a later date. Customers may have legitimate reasons for doing this, including a lack of warehouse space, delays in their own productions processes, or the need to secure a supply of a scarce product. When the selling entity is considering whether to recognize revenue on these types of contracts, it needs to consider if control of the goods has been transferred to the customer. Aside from the normal criteria that are used to evaluate control, an additional three conditions must be satisfied in bill-and-hold transactions:

The reason for the bill-and-hold transaction must be substantive;
The product must be identified separately;
The entity must not have the ability to use or resell the product to another customer.

(CPA Canada Handbook – Accounting, IFRS 15.B81)

Consider the following example. Koenig Ltd. processes rare-earth elements used in certain technological applications. One of these elements forms a critical component of a customer's product. The customer has requested Koenig Ltd. set aside a one-year supply of the element to ensure that its production process is not interrupted. The customer's factory is in close proximity to Koenig's warehouse, and transportation between the two locations is easily facilitated. The customer agrees to pay for the entire one-year supply, as well as a monthly rental fee to cover Koenig's cost of storing the product in its warehouse. The entire payment of $500,000, representing the cost of the element and 12 months of rent, is received on December 29, 2022. Koenig has separately identified and segregated the product in its warehouse, and the contract with the customer specifies that product cannot be sold to another customer. The fair value of the warehouse rental service being provided is $800 per month.

In this case, the revenue from the sale of the product can be recognized on December 29, 2022 because the reason for the bill-and-hold transaction is substantive (the customer requested it), the product has been identified separately, and the contract specifies that the product cannot be resold. Assuming the transaction price has been determined using the fair value of the product and rental service, revenue will be recognized as follows:

Revenue related to rental service $(\$ 800 \times 12)=\$ 9,600$

Revenue related to product Revenue related to product $(\$ 500,000-\$ 9,600)=\$ 490,400$

Thus, on December 29, 2022, Koenig will recognize revenue of $490,400 and report unearned revenue of $9,600. The $9,600 will be recognized as revenue at the rate of $800 per month over the next year. If the holding period were longer than one year, Koenig would also need to consider the presence of a financing component in the transaction price.

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