Another area where IFRS 15 might cause differences from existing accounting practices
Some interesting revenue-related issues come up through bill and hold arrangements – ones in which (to cite the IFRS 15 definition) “an entity bills a customer for a product but the entity retains physical possession of the product until it is transferred to the customer at a point in time in the future.” These constitute yet another area in which the transition to IFRS 15 might cause differences for some entities from their current practices.
These differences could flow from just about any aspect of the standard. For instance, where the bill and hold arrangement arises as part of a multi-element contract, IFRS 15 might lead to a different analysis of the performance obligations, or of the amount of contract revenue to be allocated to each identified obligation. But even in a simpler case – in an otherwise straightforward retail arrangement, for instance – differences might arise.
The current IAS 18 says revenue is recognized in a bill and hold arrangement when the buyer takes title, provided it’s probable that delivery will be made; the item is on hand, identified and ready for delivery to the buyer at the time the sale is recognized; the buyer specifically acknowledges the deferred delivery instructions; and the usual payment terms apply. But, in addition to its different core requirements for determining whether a performance obligation has been satisfied, IFRS 15 sets out some new criteria for recognizing revenue in bill and hold situations:
- the reason for the bill-and-hold arrangement must be substantive (for example, the customer has requested the arrangement)
- the product must be identified separately as belonging to the customer
- the product currently must be ready for physical transfer to the customer
- the entity cannot have the ability to use the product or to direct it to another customer
It might seem from this, for instance, that IAS 18 allows a vendor to recognize revenue from a bill and hold arrangement even where it hasn’t specifically identified the items sold to the customer – as long as the vendor has enough of the items generally to be able to deliver them when requested, and meets all the other criteria. For another example, it might seem that IAS 18 accommodates recognizing revenue in situations where the arrangement is instigated by the vendor (maybe because of hold-ups in the delivery process) rather than by the customer. If so, both of these practices would likely have to change on adopting IFRS 15.
Interestingly, the criteria in IFRS 15 evoke those in old Canadian GAAP, which asked among other things whether the buyer, rather than the seller, requested that the transaction be on a bill and hold basis; whether the buyer had a substantial business purpose for ordering the goods on that basis; and whether the ordered goods were segregated from the seller’s inventory and not subject to being used to fill other orders. During the transition to IFRS, the OSC noted in one of its communications that “the criteria for recognizing revenue for bill-and-hold arrangements under IFRS differ and may result in revenue being recognized earlier.” I don’t know though whether any cases were ever identified where this actually generated a material difference from old Canadian GAAP – one would certainly have had to proceed with care in taking such a step. Likewise, if the differences between the criteria in IAS 18 and those in IFRS 15 come to be sticking points in maintaining current revenue recognition practices for a particular entity’s bill and hold arrangements, the question will surely arise of whether there aren’t more substantive problems with those existing practices.
This is worth emphasizing because the area has at least twice been cited in high-profile enforcement cases. In a January 2009 settlement agreement with the OSC, Biovail Corporation admitted “that it recognized the revenue with respect to the sale of (a quantity of tablets) on June 30, 2003 on a ‘bill and hold’ basis. However, Biovail acknowledged…that the revenue recognition requirements under Canadian GAAP for ‘bill and hold’ arrangements were not met with respect to the (items) and that, accordingly Biovail should not have recognized revenue in its Q2 2003 Financial Statements…” The issue also arose in the allegations (which were ultimately dropped) against former executives of Nortel Networks Corporation. In that case, “revenue recognized on bill and hold transactions was supported, in part, by Risk of Loss (“ROL”) letters. ROL letters received from customers acknowledged that title to goods and the risk of loss to those goods had transferred to the customer even though Nortel maintained possession of the goods.” In some instances, the OSC alleged, this was “inappropriate, in part, as the letters were initiated by Nortel, not by the customer.”
This all suggests that regulators, as they monitor the transition to IFRS 15, might focus on this area more than some others of relatively similar prominence. That’s not too surprising – the issues are (at least superficially) easy to get one’s head around in a way that some others aren’t – booking revenue before you get rid of the stuff, what gives?! This isn’t to say that recognizing revenue in such situations is inherently aggressive or suspect – it isn’t. But it’s always wise to anticipate the questions that might be asked about an accounting treatment, and to incorporate the answers in advance into one’s analysis…
The opinions expressed are solely those of the author