PwC refers to the US member firm or one of its subsidiaries or affiliates, and may sometimes refer to the PwC network. This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors. Aviat’s analysis is thorough and shows that the arrangement with these two customers qualifies as a bill-and-hold transaction (July 2019 letter).

• Based on this real-world example, revenue should be recognized once it’s set aside exclusively for a particular mining or natural resource extraction company.
• However, ASC 605 was criticized for being overly complex and challenging to interpret, leading to the development of the newer ASC 606 standard.
• It’s crucial that such contracts are detailed and meet the accounting standard requirements to ensure rightful revenue recognition and audit compliance.
• Accounting software provides real-time reporting and analysis, giving companies the ability to monitor revenue recognition and identify any discrepancies or potential compliance issues.
• 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.

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• Despite the transition to ASC 606, some companies still have legacy contracts that fall under the jurisdiction of ASC 605.
• Last Friday, the SEC issued two releases regarding guidance on revenue recognition, along with a related Staff Accounting Bulletin.
• 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.
• This clause guarantees that all parties and their successors must uphold the obligations and rights established in the agreement.
• These terms clarify when payments are due, acceptable forms of payment, any penalties for late payments, and any applicable discounts or incentives for early payments.
• This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors.

Table of Contents

ASC 606’s four criteria for determining bill-and-hold arrangements and when storage service represents a separate performance obligation. A “bill and hold” clause is a contractual agreement where a seller invoices a buyer for goods but retains physical possession of the goods until a later date. asc 605 bill and hold Typically used when the buyer is not ready to take delivery, this arrangement allows the seller to recognize revenue despite the delay in transfer of goods.

Navigating ASC 605: Revenue Recognition Compliance in Legacy Contracts With Accounting Software

Since a mining or energy company is unsure of the profitability when recovering resources that are price-dependent on dynamic economic conditions, they often enter into a bill-and-hold arrangement with their supplier. Since the steel producer and the drilling company have an existing arrangement with standard terms, there’s an established history of bill-and-hold transactions. If machinery or drilling equipment is fully built for one of these companies, the equipment manufacturer will sequester the equipment and prohibit it from being shipped to any other buyer. Similarly, the invoice for the equipment must be satisfied by the customer in full within 30 days of the equipment being placed and waiting for the resource company buyers. By leveraging accounting software, businesses can ensure they stay compliant while also streamlining their financial processes.

Breaking Down Bill-and-Hold Arrangements

However, ASC 605 was criticized for being overly complex and challenging to interpret, leading to the development of the newer ASC 606 standard. 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.

These points should be clearly articulated either in the sales contract or as a separate written agreement specifically addressing the bill and hold terms. Last Friday, the SEC issued two releases regarding guidance on revenue recognition, along with a related Staff Accounting Bulletin. These releases are notable for all SEC registrants, as they update prior revenue recognition guidance.

Frequently asked questions

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. Revenue related to the storage service would then be recognized over time as service is provided.

Example: Machine Parts And Storage

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. ASC 605, or the “Revenue Recognition Standard,” was developed to provide guidance for recognizing revenue from contracts with customers. The primary objective of this standard was to establish a consistent method for revenue recognition that could be applied across industries.

Instead of shipping the product first, the seller bills the customer first, and delivery is arranged for a future date. It’s crucial that such contracts are detailed and meet the accounting standard requirements to ensure rightful revenue recognition and audit compliance. Accounting software can be easily scaled and adapted to accommodate changes in a company’s operations or the regulatory environment.

Goods producers also must determine if there’s a custodial component during a bill-and-hold arrangement. Accounting software can help automate the revenue recognition process, reducing the risk of errors and ensuring compliance with ASC 605. It can track the performance obligations, contract terms, and billing schedules, automatically calculating and recognizing revenue at the appropriate time.