Reference no: EM131942196

Problem - SEC Accounting and Auditing Enforcement Release (AAER) No. 108 specifies certain conditions or criteria that a bill and hold transaction of a public company should meet in order to qualify for revenue recognition. The AAER also specifies certain factors that should be considered in evaluating whether a bill and hold transaction meets the requirements for revenue recognition. AAER No. 108 state that a "bill and hold" transaction should meet the following conditions:

The risks of ownership must have passed to the buyer.

The customer must have made a fixed commitment to purchase the goods, preferably reflected in written documentation.

The buyer, not the seller, must request that the transaction be on a bill and hold basis, The buyer must have a substantial business purpose for ordering the goods on a bill and hold basis.

There must be a fixed schedule for delivery of the goods. The date for delivery must be reasonable and must be consistent with the buyer's business purpose (e.g., storage periods are customary in the industry).

The seller must not have retained any specific performance obligations such that the earning process is not complete.

The ordered goods must have been segregated from the seller's inventory and not be subject to being used to fill other orders.

The equipment must be complete and ready for shipment.

Required:

1. Discuss why a buyer may want to order on a bill and hold basis. Why might a seller want to classify an order as bill and hold if it does not meet the above criteria?

2. Identify and discuss the reliability of the types of evidence an auditor would need to determine whether each condition cited above was met for a bill and hold transaction.