In general, your accountant is correct. However, under a very
specific set of circumstances, the SEC will allow you to engage in a
bill and hold transaction that will allow you to recognize the sales
revenue without having shipped the equipment. Since you state that
the customer requested that you keep the equipment for them, and they
have a legitimate business reason for having done so, it appears that
you may be able to meet the necessary criteria if you can transfer the
title for the equipment to them. I have provided several resources
below describing them. You should of course discuss this with your
accountant to insure that your proposed transaction meets all of these
criteria because such transactions are widely viewed as being risky
from an accounting standpoint. An improper bill and hold transaction
can be viewed as fraud.
The most lengthy examination of a recent SEC Staff pronouncement on
this type of transaction is the last source I have listed from KPMG.
Of the documents I found, this is the most important one for your
accountant to review.
Sincerely,
Wonko
"Bill-and-Hold Transactions
Occasionally, a company may record sales revenue for goods that will
be shipped later. The auditor must examine this arrangement? a
?bill-and-hold? or ?ship-in-place? transaction?closely. Such
transactions may merit revenue recognition, but the risk is high. The
SEC, in AAER 108, stated several criteria a company must consider
before recording a bill-and-hold transaction as revenue (see Exhibit
1). For example, if the customer has a legitimate reason for
requesting delayed shipment, such as a temporary lack of storage
space, revenue recognition may be proper.
Auditors must be unusually skeptical before accepting such revenue as
legitimate. Assuming that bill-and-hold goods are material, the
description and quantity of goods should be confirmed directly with
the customer. In addition, the auditor should ask the customer to
explain the business purpose behind the delayed shipment.
An egregious example of the customer not having a substantial business
purpose is found in AAER 1393: Sunbeam Corporation induced its
customers into accelerating purchases by offering discounts for buying
seasonal merchandise months before they normally would. Sunbeam
offered to store the off-season merchandise until the customer needed
it. The SEC concluded that the buyer did not have ?a substantial
business purpose for ordering on a bill-and-hold basis when its only
motive is to obtain the various inducements offered by the seller.?
Although some companies may provide letters signed by the customer
that request a delayed shipment, such a letter does not by itself
provide adequate evidence that a revenue transaction has occurred,
because the company may have persuaded the customer to write it. Some
kind of direct customer contact is necessary in order to obtain
critical information about the transaction. Exhibit 1, which is partly
based on AAER 108, contains several key questions that auditors should
consider before accepting that revenue on bill-and-hold transactions
is properly recorded. The SEC does not claim these questions are
all-inclusive; in fact, AAER 108 and SAB 101 state that it is possible
for a transaction to meet all of these criteria and still fail to meet
the revenue criteria. Auditors must always consider the economic
substance of the transaction before attesting to the client?s revenue
presentation."
"Auditor Skepticism and Revenue Transactions" by Jimmy W. Martin, The
CPA Journal (2002) http://www.nysscpa.org/cpajournal/2002/0802/features/f083002.htm
Here is a link to Exhibit 1, which provides a list of questions that
must be satisfied: http://www.nysscpa.org/cpajournal/2002/0802/images/Page32.jpg.
You will most likely want to save it to your computer and then zoom
in on it using any photo viewer since the text is a bit small.
"Bill and hold sales are unusual transactions subject to stringent
accounting criteria. The Commission has previously articulated these
criteria in In the Matter of Stewart Parness, Exchange Act Rel. No.
23507, Accounting and Auditing Enforcement Rel. ("AAER") No. 108
(August 5, 1986).15 The Parness criteria relevant to the instant case
include:
The buyer, not the seller, must request that the transaction be on a
bill and hold basis;
The buyer must have a substantial business purpose for ordering the
goods on a bill and hold basis; and
The risks of ownership must have passed to the buyer.
Other relevant factors include: "whether [the seller] has modified its
normal billing and credit terms for this buyer" and "the seller's past
experiences with and pattern of bill and hold transactions." "
Footnote 15 observes "That opinion cautioned, however, that the
specified criteria did not constitute a checklist; "[i]n some
circumstances, a transaction may meet all the factors listed... but
not meet the requirements for revenue recognition." Parness." This is
why this type of transaction is considered to be risky.
"In the Matter of Sunbeam Corporation" SEC (May 15, 2001)
http://www.sec.gov/litigation/admin/33-7976.htm
"Such bill-and-hold sales are unusual transactions subject to
stringent accounting criteria. The SEC articulated these criteria in
the matter of Stewart Parness (Exchange Act Rel. No. 23507, Accounting
and Auditing Enforcement Rel. ("AAER") No. 108 (Aug. 5, 1986)). The
Parness criteria (search document for ?Parness?) that are relevant to
the example described above include:
The buyer, not the seller, must request that the transaction be on a
bill-and-hold basis.
The buyer must have a substantial business purpose for ordering the
goods on a bill-and-hold basis.
The risks of ownership must have passed to the buyer."
"Confronting Earnings Management" By Srinivas Sarva, ITAudit (February
1, 2003) http://www.theiia.org/itaudit/index.cfm?fuseaction=forum&fid=532
A recent publication is "KPMG Guide to SEC Staff Accounting Bulletin:
No. 104 ? Revenue Recognition" KPMG (2004)
http://intra.som.umass.edu/mannino/SOM%20630/Chapter%203/kpmg%20SAB%20104%20Guide.pdf.
pages 12-16. This provides a detailed examination of the SEC Staff's
current views on bill and hold transactions. An important point it
points out is that requests for bill and hold transactions from the
buyer should generally be made in writing. If you cannot get the
buyer to make the request in writing, you should strongly consider not
engaging in this type of transaction and recognizing the revenue this
year.
Search terms: "revenue recognition" accept title invoiced not shipped;
AAER 108; Parness criteria; AAER are 108 "In the matter of Stewart
Parness" |
