Bill-and-hold revenue under ASC 606 and IFRS 15: the four criteria

10 min read

A bill-and-hold arrangement lets a seller recognize revenue on goods that are still sitting in its own warehouse, but only when control of those goods has already passed to the customer and four specific criteria are met. ASC 606 and IFRS 15 use identical wording for this guidance (ASC 606-10-55-81 to 55-84 and IFRS 15 paragraphs B79 to B82): the reason for the arrangement must be substantive, the product must be identified separately as belonging to the customer, it must be ready for physical transfer, and the seller must be unable to use it or direct it to another customer.

The arrangement arises when a customer has paid for, or has been invoiced for, finished goods but asks the seller to keep them for a period. A buyer may lack warehouse space during a plant expansion, may want guaranteed supply for a production run that starts months later, or may be buying a product that is customarily stored by the producer, such as aged spirits held in the distiller's barrel houses. The seller issues the invoice, the customer often pays, and the goods do not move.

The accounting risk is concentrated around period ends. Revenue on held goods can be booked before shipment, so auditors and regulators read bill-and-hold sales as a classic channel for pulling revenue into the current quarter or year. A sale that fails the criteria stays in inventory with a contract liability on the balance sheet, and in the example below that difference moves more than one million dollars of revenue and about 258,000 dollars of gross margin from one fiscal year to the next.

··········

HOW ASC 606 AND IFRS 15 DECIDE WHEN CONTROL TRANSFERS.

Both standards start from the general model for a performance obligation satisfied at a point in time. The seller recognizes revenue when the customer obtains control of the asset, meaning the ability to direct its use and obtain substantially all of its remaining benefits. ASC 606-10-25-30 lists five indicators of that transfer: the entity has a present right to payment, the customer has legal title, the entity has transferred physical possession, the customer has the significant risks and rewards of ownership, and the customer has accepted the asset. IFRS 15 contains the same five indicators.

Physical possession is the indicator a bill-and-hold arrangement fails by definition. The implementation guidance therefore asks the seller to look past the location of the goods and decide whether the customer controls them anyway. The standards accept that possession and control can separate, which is the same logic that applies in the opposite direction to consignment arrangements, where the customer holds the goods and the seller still controls them.

The first step is to determine when the seller has satisfied its obligation to transfer the product, using the general indicators. Where the customer has legal title, a present obligation to pay and the risks of ownership, the analysis moves to the specific bill-and-hold criteria. All four must be met at the same time for control to have transferred while the seller still holds the goods. A failure on any one of them means revenue waits for delivery or for the date when the criteria are later satisfied.

··········

THE FOUR BILL-AND-HOLD CRITERIA UNDER ASC 606-10-55-83 AND IFRS 15 B81.

The criteria appear in identical terms in both standards, and the FASB's own comparison of Topic 606 and IFRS 15 marks the bill-and-hold paragraphs as having no wording differences.

........

Criterion	What the seller must show	Typical evidence
Substantive reason	The arrangement exists for a genuine business reason, for example the customer requested it	Written customer request, lack of customer storage, production schedule
Separate identification	The product is identified separately as belonging to the customer	Segregated storage, tags, serial numbers, separate inventory location
Ready for physical transfer	The product is currently ready to be shipped to the customer	Completed production, quality release, no remaining assembly
No use by the seller	The seller cannot use the product or direct it to another customer	Contract terms, warehouse controls, no substitution in practice

........

The substantive-reason test is where most of the judgement sits. A request that originates from the customer, documented before the period end, carries more weight than an arrangement proposed by the seller's sales team in the last week of the quarter. A pattern of bill-and-hold sales clustered at quarter ends, with no change in the customers' operating circumstances, points to a reason that is not substantive.

Separate identification requires more than an allocation on paper. When the seller holds fungible goods in a common pool, such as identical units on the same shelves, the customer's goods are not identified until they are physically segregated or individually marked. The readiness test excludes goods that still need finishing, testing or configuration, because the seller has not yet completed the product it promised.

The fourth criterion is breached when the seller keeps the practical ability to ship the held units to someone else and replace them later. If the warehouse team routinely fills other orders from the customer's stock, the customer does not control those goods, regardless of what the contract says. Controls over the physical stock are therefore part of the revenue evidence.

The SEC's interpretive release of August 18, 2017 (Release No. 33-10402) states that registrants should no longer rely on the older bill-and-hold guidance of Exchange Act Release No. 23507 once they have adopted Topic 606. That earlier SEC staff guidance contained additional conditions, such as a fixed delivery schedule, which do not appear in ASC 606. US companies that carried those conditions into their revenue policies should check that the current policy reflects the four Topic 606 criteria.

··········

CUSTODIAL SERVICES AS A SEPARATE PERFORMANCE OBLIGATION.

When the seller recognizes revenue on a bill-and-hold basis, both standards require it to consider whether it has remaining performance obligations, such as custodial services, to which part of the transaction price must be allocated (ASC 606-10-55-84 and IFRS 15 B82). Storing, insuring and safeguarding the customer's goods for months is a service the customer receives over time.

Illustrative Example 63 in both standards (IE322 to IE327 in IFRS 15, ASC 606-10-55-408 to 55-413) works through a contract for a machine and spare parts in which the entity also provides custodial services, and treats the custodial service as a distinct performance obligation. The practical consequence is that a single invoice for goods held in the seller's warehouse often contains two revenue streams: product revenue recognized at the bill-and-hold date and storage revenue recognized as the custodial period passes.

The allocation follows the general relative standalone selling price method. If the contract does not price storage separately, the seller still estimates a standalone selling price for it and allocates any discount proportionately, unless the discount relates specifically to one obligation. The site's article on transaction price allocation under IFRS 15 and ASC 606 covers the allocation mechanics in more detail.

··········

BILL-AND-HOLD: ASC 606 VS IFRS 15 COMPARISON.

........

Topic	ASC 606	IFRS 15
Location of guidance	ASC 606-10-55-81 to 55-84	Paragraphs B79 to B82
Control indicators	ASC 606-10-25-30, five indicators	Same five indicators
Four bill-and-hold criteria	All four required	Identical, all four required
Custodial services	Assess as a separate obligation	Same requirement
Illustrative example	Example 63, 606-10-55-408 to 55-413	Example 63, IE322 to IE327
Regulator overlay	SEC Release 33-10402 retires prior SEC guidance after adoption	No equivalent

........

The conclusions on the same facts should be the same under both frameworks. Differences in outcomes come from elsewhere in the revenue model: the collectibility threshold in step one, the US GAAP accounting policy election for shipping and handling performed after control transfers, and the different disclosure requirements of the two frameworks for public and private entities. Where shipping happens after control has passed, a US GAAP entity may elect to treat it as a fulfillment cost, while an IFRS reporter assesses whether shipping is a separate service.

··········

[[ADPLUS_300x250_1]]

BILL-AND-HOLD WORKED EXAMPLE WITH JOURNAL ENTRIES.

The figures below are illustrative. A manufacturer with a December 31 year end contracts to sell 5,000 custom components to a customer that is rebuilding its receiving warehouse. At the customer's written request, the manufacturer will store the finished components for six months, from January 1 to June 30, 2027, and ship them on June 30. The contract price is $1,068,000, invoiced on December 31, 2026 and payable in 30 days. The components are complete, tested, tagged with the customer's name and moved to a segregated bay on December 31. The contract prohibits the manufacturer from using them for other orders. The cost of the components is $156 per unit.

The manufacturer sells the components separately at $210 per unit and charges $5,000 per month for comparable storage. The discount of $12,000 is allocated proportionately because nothing indicates it relates to either obligation.

........

Item	Standalone selling price	Allocated price
Components (5,000 x $210)	$1,050,000.00	$1,038,333.33
Custodial service (6 x $5,000)	$30,000.00	$29,666.67
Total	$1,080,000.00	$1,068,000.00

........

All four criteria are met on December 31: the customer requested the arrangement for a documented operational reason, the goods are segregated and tagged, they are ready for shipment, and the manufacturer cannot redirect them. Control of the components transfers on December 31, 2026, and the storage revenue is recognized evenly over six months at $4,944.45 per month, with the final month adjusted to $4,944.42 for rounding.

........

Date	Account	Debit	Credit
Dec 31, 2026	Accounts receivable	$1,068,000.00
Dec 31, 2026	Revenue, product		$1,038,333.33
Dec 31, 2026	Contract liability, custodial service		$29,666.67
Dec 31, 2026	Cost of sales	$780,000.00
Dec 31, 2026	Inventory		$780,000.00
Jan 30, 2027	Cash	$1,068,000.00
Jan 30, 2027	Accounts receivable		$1,068,000.00
Jan 31 to May 31, 2027, each month	Contract liability, custodial service	$4,944.45
Jan 31 to May 31, 2027, each month	Revenue, storage service		$4,944.45
Jun 30, 2027	Contract liability, custodial service	$4,944.42
Jun 30, 2027	Revenue, storage service		$4,944.42

........

The 2026 income statement shows product revenue of $1,038,333.33 and gross margin of $258,333.33. The storage revenue of $29,666.67 falls entirely in 2027. Shipping the goods on June 30 creates no further revenue entry, because control of the components has already transferred.

Suppose instead that the components sat in the general finished-goods area and the warehouse team could ship them to other customers. The fourth criterion fails, and the manufacturer still controls the goods at December 31. If the invoice creates an unconditional right to payment, the December 31 entry becomes a debit to accounts receivable of $1,068,000.00 and a credit to contract liability of the same amount, the components stay in inventory at $780,000.00, and no revenue or cost of sales is recorded in 2026. Product revenue and cost of sales are then recognized when control passes, on shipment on June 30, 2027 or earlier if the criteria are met before then. The balance-sheet presentation of these amounts is covered in the article on contract assets vs contract liabilities under IFRS 15 and ASC 606.

··········

PRESENTATION AND DISCLOSURE OF BILL-AND-HOLD SALES.

After control transfers, the goods are the customer's inventory, and the seller removes them from its own inventory even though they remain in its warehouse. Stock counts at the seller's year end must exclude the held goods and reconcile them to the bill-and-hold register, and the customer's auditors may ask the seller to confirm the quantities held on the customer's behalf.

The unearned custodial portion is a contract liability until the storage is provided. If the customer pays in advance and the storage period is long, the seller also assesses whether a significant financing component exists, a question discussed in the article on the significant financing component under ASC 606 and IFRS 15.

Both frameworks require disclosure of the significant judgements that affect the timing of revenue, including how the entity determined when customers obtain control of promised goods. An entity with material bill-and-hold sales usually describes the arrangement, the criteria it applies and how storage services are accounted for in its revenue policy note.

··········

COMMON ERRORS AND JUDGEMENT AREAS IN BILL-AND-HOLD ACCOUNTING.

The most frequent error is treating a seller-initiated arrangement as substantive. An offer of extended storage made to close a sale before the period end, with no customer constraint behind it, does not meet the first criterion, and the timing of such requests is one of the first items auditors test.

A second error is recognizing revenue on goods that are not finished or not segregated. Units still in final testing, or held in a shared bin from which any order can be filled, fail the readiness or identification tests. The register of held goods should match the physical stock on the bill date and at each later reporting date.

A third error is omitting the custodial service. Booking the full contract price as product revenue on the bill date overstates current-period revenue by the value of the storage still to be provided, and leaves no liability for that obligation.

Judgement is also needed when the customer holds a right to cancel or return the held goods. A broad right of return does not by itself prevent the transfer of control, but it brings in the variable consideration and refund liability guidance, and a right to cancel the order before shipment may indicate that the contract has not yet created enforceable rights to the goods. The general control analysis is described in the article on over-time vs point-in-time revenue recognition under IFRS 15 and ASC 606.

··········

BILL-AND-HOLD REVENUE CHECKLIST FOR CONTROLLERS.

........

Step	Check
1	Customer's written request and business reason dated before the bill date
2	Legal title, payment terms and risk of loss transferred under the contract
3	Goods complete, tested and ready to ship on the bill date
4	Goods segregated or individually tagged as the customer's
5	Contract and warehouse controls prevent use for other orders
6	Custodial service identified, priced and allocated
7	Held goods excluded from the seller's inventory count
8	Bill-and-hold sales near period ends reviewed for patterns

........

··········

BILL-AND-HOLD UNDER ASC 606 AND IFRS 15: WHERE JUDGEMENT REMAINS.

The rules themselves are settled and converged. ASC 606 and IFRS 15 apply the same control indicators, the same four bill-and-hold criteria and the same requirement to account for custodial services, and the SEC has confirmed that its pre-Topic 606 bill-and-hold conditions no longer apply to registrants that have adopted the standard. On identical facts, a US GAAP reporter and an IFRS reporter should recognize product revenue on the same date.

The open questions are factual. Whether a reason is substantive depends on documented customer circumstances and on the pattern of arrangements around period ends. Whether goods are separately identified and unavailable to the seller depends on how the warehouse actually operates, which makes physical controls and inventory records part of the revenue evidence. The standalone selling price of storage, the treatment of rights to cancel and any financing component remain entity-specific estimates that need to be documented when the sale is booked.

··········

·····

DATA STUDIOS

·····

datastudios.org