 Hello and welcome to this session in which we will discuss bill and hold arrangement as part of the revenue recognition. So what is bill and hold? Basically, we have to understand that you have to meet certain criteria for revenue to be recognized. So bill and hold is part of this umbrella of revenue recognition rules. So what is a bill and hold arrangement? It's when the buyer signs a contract to make a purchase but asks the seller to keep the inventory. So the buyer is not ready to take physical delivery of the product but takes title of an accept billing. They'll say, okay, bill me, but please, I cannot take the delivery now. I may pick the product up in two, three weeks a month, whatever the reason is. So the customer asks the seller to hold the product and their warehouses to be delivered in the future. Now, why is this important? Why do we have to learn about this? Because think about it. What could happen is this. We have company A and company B. And when company A is short on sales, they would ask company B because they're short on sales because they want to meet the revenue that they promised the investors, Wall Street. So what they will do, they would ask company B, why don't you buy from us a million worth of product and we'll have an arrangement called bill and hold. We'll call it bill and hold arrangement. You don't have to take delivery. Just sign so we can book the revenue. So this quarter, we do it. The next quarter, maybe we'll do the same thing for you. So this is why it's important. So what you're doing, you are reporting fictitious revenue. Okay, because one indication, one strong indication of a sale took place is physical delivery, physical control. And hopefully this makes sense. Once a buyer has control of the product, this is usually an overshadowing indication that a sale took place. So in a bill and hold, well, we make a sale, but the buyer did not take delivery of the product. Is this really a sale? Because one of the important indication of a sale is transfer of control. The buyer took the product. Now it's under warehouse. It's under their control. A case in point is a company called Nordel Networks. It's a Canadian company. Obviously now it's gone. So let me show you what Nordel Networks did during the internet.com era or the internet boom of the 2000, 2001 and 2002. So you have to understand what Nordel Networks do. They do sell telecommunication equipment that support the internet. So when the internet was growing in 97, 98, 99, 2000, their sales went throughout the roof because everybody wanted to have the internet. So let's see what Nordel Networks did. So Nordel Network, which or Nordel, engage in two fraudulent accounting scheme, one involving revenue fraud and the other involving earning management fraud, which is basically the same. It's revenue fraud, basically. The first scheme accelerated material amount of revenue into year 2000 and created false appearance that Nordel was withering an economic downturn better than its competitor. So in 2000, all those internet companies, anything that's internet, starting early 2000, the business started to slow down because everyone, practically everyone in the US and Canada that wanted to have internet infrastructure, they already purchased it. So if everybody has it, the business will start to slow down. But Nordel Networks find a way to kind of have a false appearance that they are doing better. So the fraud took two forms. In November 2000, Nordel altered its revenue recognition policies to accelerate into 2000 revenue, particularly revenue of its optical internet business. This is the major business as needed to meet its quarterly and annual revenue guidance and to hide at the same time, worsening condition of its business. And if you are in telecommunication industry and you misled and you reported numbers, even though your numbers only has to do with your company, but when you report false numbers about the internet industry back then, well, you are misleading everyone in the on Wall Street. So here's what they did. Build and hold transaction were the center of the scheme. So US gap permits a company to recognize revenue prior to the delivery of a product. If the transaction meet specific criteria, which we look at these specific criteria on the next slide. But the point I'm trying to make is this, just to show you how things happen. In the second quarter of 2000, so in the second quarter, they banned the use of bill and hold transaction company wide. So they told older divisions, we don't book revenue and under a bill and hold transaction. But notice here, after its revenue fell significantly short of expectation in the third quarter, sort of quarter later, they reintroduce bill and hold transaction to do what to increase sales. Okay, so the change principally affected the reporting of revenues, specifically that division, the optical business division, which was a metric closely watched by Wall Street. So Wall Street wanted to know how is that optical business growing in the whole economy because Nordel network was a major supplier. And Nordel was trying to fudge the numbers to show that the economy is still hot. Everybody's still buying. They do not want to show that the economy is slowing down. The transaction did not satisfy US gap requirement, but Nordel nevertheless recognized revenue as if they did. So in all, Nordel accelerated more than one billion in revenue through unproper bill and hold transaction. So as a result of this bill and hold, they were able to show that they had an additional $1 billion in revenue. That's not a small number. It's not only the number itself, it's the indication of the number telling Wall Street telling all other companies telling investors telling financial analysts that we are still doing good. Well, in reality, you are not. You are misleading everyone. And if you know anything about the dot com error, a lot of companies went bust early late 2000, early 2001. And by 2000, by late 2001, we had 9 11 and more companies went out of business and we had few fraud accounting fraud cases. But the point is, once you mislead the investors, you're misleading everyone. Now, what we're going to do, we want to take a look at those criteria. So what is what are gap criteria. So you are allowed to build to be able to recognize revenue under a bill and hold transaction. But there are certain conditions you have to meet before you can do it. Before we look at those conditions, I would like to remind you whether you are a student or a CPA candidate to take a look at my website, farhat lectures dot com. I don't replace your CPA review course. I don't replace your accounting course. My motto is helping saving CPA candidate and accounting student one at a time. How by providing new resources such as lectures, multiple choice, true, false, that's going to help you reinforce the concept. So after you watch the lectures, well, practice multiple choice, go to my website. If you're a CPA candidate, my material is aligned with your backer, Roger, Wiley, Gleam, Miles, I provide you 1500 previously released AI CPA questions with detailed solution. If you have not connected with me on LinkedIn, please do so. Take a look at my LinkedIn recommendation. Like this recording, share it with others. Help me tremendously. Connect with me on Instagram, Facebook, Twitter and Reddit. So let's see when to recognize revenue for a bill and hold transaction. So let's look at some of the conditions. And most of them I believe should make sense, but let's take a look at them to make sure if you have a bill and hold, you can recognize the revenue. One, the agreement must make business sense. So if you have an agreement with another company, the agreement must make business sense. You have to explain why you are holding the inventory. There should be a good reason. A good reason will be, for example, I don't have place in my warehouse, but I need to make the purchase because maybe I am, I don't have enough employee in my warehouse. I don't have enough space. I'm having some supply chain issues. So please, I need to buy this inventory, but hold it for me. This is good reason or something that makes business sense. So you have to have a reason and the reason cannot be, well, I will do it for you this semester, this quarter so you can improve your revenue. Next quarter we'll do bill and hold and I will, you know, I will, I will assume I am the buyer. You can do that. Okay. Two, the seller must segregate the product from other inventory belonging to the seller. So if you sold something and it's a bill and hold transaction, put that inventory away someplace in your warehouse where it's clearly marked, that's it. You cannot touch it. It's separate than your inventory. It must be segregated, but that's not a problem. That's not a problem because as long as you keep it separately, it's fine. Also the segregated product must be ready for physical transfer or delivery. Here I put at a moment notice. It means if the buyer wants to pick it up tomorrow, they're ready to pick it up because they accepted billing. They accepted the agreement. You're supposed to have that inventory ready if you want to recognize it as revenue. Three, the seller cannot for actually the seller cannot use the product in any way, shape or form. Simply put, you cannot sell that product to another customer. You cannot use it as a lien for a loan. You cannot do anything with it. It's not really yours. It's sitting on your warehouse someplace. As long as you meet those conditions and specifically the most important one is the first one. Is the agreement being made to book fictitious revenue or is it being made for a good business sense? Now, if you want to learn more about Nordtel networks, you can do your own search and see who the day business with and how they did it. But that's beyond the scope of the scores. But the point is it has to make a business sense. Let's take a look at an example just to illustrate this concept. Adam's sporting goods, manufacture and supply gym equipment for retailers, equipment for retailers. Ryan's sporting goods, a major retailer is planning to expand in the Northeast by opening 10 retail stores simultaneously. It's a large expansion in the Northeast. Ryan ordered and signed an agreement buying 6 million worth of gym equipment, but asks Adam's sporting goods to hold the equipment and Adam's warehouses till the opening week as Ryan has no room in its warehouses. So, okay, we signed a contract to buy 6 million worth of equipment. Gym equipment, we're opening 10 different gyms. We're expanding in the Northeast. Well, the only problem is right now we're still building those gyms. We don't have room in our warehouses. Our warehouses maybe are in California and Adam's in Pennsylvania. And, you know, we can't manufacture them in Pennsylvania, ship them to California, then ship them back to the Northeast. So we told, we ask Adam, could you please keep those in your warehouse until our gyms open then we can, we will take delivery. Do you think do we have a sale here? It's a bill and hold, but do we have a sale? I would say we met the first condition. It makes business sense. That's why they want, they want you to hold, to hold on the inventory because they don't have a room for it. But they are, you can tell they are investing in, investing in land. They are building the property for the gym. Therefore, there's a good business sense. There's a commercial substance. We have a sale. Well, make, Adam's will make sure to segregate the product. So therefore, they just physically segregate the product ready for shipment whenever the, whenever Ryan wants to dump and Adam cannot use the product for any, in any way, sell it to another customer, put it up as a lien, so on and so forth. If Adam's can meet those conditions, then Adam can book a count receivable six, six million sales, six million. We have a sale. If not, then we also have to do cost of goods sold and credit inventory, whatever the amount, let's put it two million. Okay. Just, I just made it up. Okay. Just to kind of complete the transaction. So under those circumstances, Adam will have a sale, although it's a bill and hold transaction. But let's assume, change the scenario a little bit and assume that Ryan wants to meet, let's assume Adam's wants to report an additional six million of earnings contacted. Ryan said, look, why don't we have a bill and hold arrangement where I'm, let's just sign the contract. You don't have to take delivery. Then maybe two months later, we'll cancel the contract and nothing will be done. Basically. Then under those circumstances, Adam is trying to increase the revenue by six million. That's what they're trying to do. They're not really making an actual sale. Therefore, they should not be able to book the sale. And this is what Nortel Networks said. Try to book, recognize revenues under bill and, bill and hold arrangement when the bill bill and hold arrangement wasn't really a true sale. What should you do now? Go to farhatlectures.com, work MCQs, look at other resources to reinforce the concept of revenue recognition. Revenue recognition is an important whether you are an intermediate accounting students or a CPA candidate. Invest in your accounting education, invest in your certification. The CPA is worth it. Good luck, study hard, and of course, stay safe.