A customer buys specialized equipment and asks the seller to continue holding the equipment in the seller's warehouse because the customer's own facility is not yet ready, while the equipment is separately identified as belonging to the customer, ready for physical transfer, and the seller cannot use it or direct it to another customer. Under the bill-and-hold guidance in ASC 606-10-55-83, what is the central question in deciding whether the customer has obtained control despite the seller retaining physical possession?
- Whether the seller has issued an invoice for the equipment, regardless of any other facts
- Whether the customer has taken out insurance on the equipment while it remains at the seller's warehouse
- Whether the criteria for the customer obtaining control are met even though the seller retains physical possession, such as the reason for the bill-and-hold arrangement being substantive and the product being separately identified as belonging to the customer
- Whether more than 90 days have passed since the equipment was manufactured
Why C? And why not the others?
Correct answer: C. Whether the criteria for the customer obtaining control are met even though the seller retains physical possession, such as the reason for the bill-and-hold arrangement being substantive and the product being separately identified as belonging to the customer
ASC 606-10-55-83 makes clear that in a bill-and-hold arrangement the seller must still evaluate whether the customer has obtained control of the product even though the seller retains physical possession, applying indicators such as whether the reason for the bill-and-hold arrangement is substantive (as opposed to being requested solely to accelerate the seller's revenue), whether the product is separately identified as belonging to the customer, whether the product is currently ready for physical transfer to the customer, and whether the entity is unable to use the product or direct it to another customer. The scenario describes exactly these substantive indicators being met, which is what makes it possible to conclude control has passed despite the equipment sitting in the seller's warehouse. Issuing an invoice is a routine administrative step that has no bearing on whether control, as defined by ASC 606, has transferred; billing and control are separate concepts, and an invoice alone proves nothing about who controls the asset. Whether the customer insures the goods can be one supporting fact pattern detail in some arrangements but is not the central test the standard establishes; the guidance centers on the control indicators listed in ASC 606-10-55-83, not on insurance arrangements. There is no fixed 90-day or other calendar-based threshold anywhere in the bill-and-hold guidance; the assessment is entirely about substance and the specific control indicators, not the passage of a set amount of time.
Source: FASB Accounting Standards Codification: ASC 606-10-55-83, Revenue from Contracts with Customers — Bill-and-Hold Arrangements