Question

You make a huge sale to a client worth $1M. It is December 31st, the last day of your accounting calendar. The client explains that they do not currently have room in their warehouse for the shipment but you are free to bill them today (therefore recognizing the revenue in the current year) and you can simply ship the merchandise to them in two weeks to allow them to make room in their warehouse (this means ownership of the merchandise has not transferred to the customer). Are you able to recognize this revenue in the current year? Why or why not?

Answer 1

ANSWER

• As per GAAP, if the material is not transferred and billed (aka Bill and Hold Transactions), it cannot be recognized as revenue for the same accounting period.
• However, looking at the complexity of the topic, the SEC has set forth seven criteria, all of which must be met in order to recognize revenue in case of delivery has not occurred.
• The first criterion of this list of 7 is "Risk of ownership must have passed to the buyer"
• But in this case, it is specifically mentioned that the ownership (and hence the risk) of the merchandise has not yet transferred to the customer.

  So, the revenue for $1M may not be recognized in the current year.

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