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Guidance from Four Standards
Statement on Auditing Standards (SAS) 99, Consideration of Fraud in a Financial Statement Audit, requires the auditor to "presume there is a risk of material misstatement due to fraud relating to revenue recognition." One category of revenue - from bill-and-hold transactions - is especially vulnerable to fraud or, at the least, is often accounted for incorrectly. The problem is that the accounting guidelines for these types of transactions are scarce, unclear, and contradictory.
Bill-and-hold transactions occur when the seller records a sale but the goods or services have not been delivered. A common example is where a seller produces the products, holds them for shipment, and records a sale in December. The customer, however, does not take delivery until the following year. The task is to determine if this sale is properly recorded at December 31.
Guidance for the bill-and-hold accounting treatment is found in four standards. Exhibit I shows the applicable guidance and, perhaps more importantly, reveals that the criteria for recording bill-and-hold transactions leave considerable room for interpretation.
With respect to U.S. Generally Accepted Accounting Principles (U.S. GAAP), guidance for evaluating purported bill-and-hold transactions can be inferred from the general revenue recognition criteria found in FASB' s Accounting Standards Codification (ASC). Issued in 2009, the ASC includes the guidance in both Concepts Statement 5, Recognition and Measurement in Financial Statements of Business Enterprises, and AICPA Statement of Position (SOP) 97-2, "Software Revenue Recognition." SEC Staff Accounting Bulletin (SAB) 104, "Revenue Recognition," provides further guidance for public companies. Nonpublic companies are not subject to SAB 104 and must use their own judgment to determine proper accounting for bill-and-hold sales.
The Issues
There is evidence that suggests bill-andhold transactions are not uncommon and are recorded by both public and nonpublic companies. A review of Accounting and Auditing Enforcement Releases issued by the SEC since 2000 shows that a number of public companies improperly recorded purported bill-and-hold transactions. Exhibit...