What is a bill and hold arrangement? It is an arrangement or a contract under which the seller bills the customer for goods but holds the possession of these goods till a certain point of time in future. After retaining the physical possession till a certain time, the goods are delivered to the customer.
Legally, the sale is made at the time of billing and the ownership of the inventory is transferred to the customer at that time. However, as accountants, do we only look at the legal structure of transactions or we look at the economic substance as well? Yes! You remember the substance over form principle.
Accounting of bill and hold arrangement poses two possible accounting questions.
- Whether to record the sale at the time of billing; or
- Whether to record the sale when the goods are delivered to the customer.
Answer to the above question lies in determining when the control of goods is transferred to the customer. Typically, in bill and hold arrangements, the seller holds the inventory on specific instructions of the customer and the seller usually charges some inventory holding fee as well for the custodian services provided to the customer. In addition, if the goods are ready and can be transferred to customer at the time the invoice is raised, and these goods cannot be sold to other parties, then we can say that control of goods is transferred to the customer at the time of billing. In such cases, sale is recorded at the time of billing.