Because revenue recognition is presumed to be a fraud risk in most audits, generally the double-entry nature of accounting means the existence of accounts receivable is also at risk. In recent years, several high-profile incidents of improper revenue recognition attracted the attention of the business media. The SEC has also expressed concerns about the number of instances of improper revenue recognition identified by SEC staff. One revenue issue involves "bill and hold" sales. Read the SEC guidance on revenue recognition (www.sec.gov/interps/account/sabcodetl3.htm) to answer the following questions:
a. What does the SEC indicate are the four basic criteria for determining whether revenue is realized or realizable?
b. What is a "bill and hold" transaction?
c. Why would a bill and hold transaction normally not qualify as a sale? What might justify recording a bill and hold transaction as a sale with a related receivable?
d. A customer of your audit client, Henson, LLC, made a formal, written request to establish a bill and hold arrangement in November 2016, an arrangement that is typical in the industry. The customer's written request outlines a delivery schedule that will begin in February 2017. As of November 2016, the product to be shipped in February is already complete and ready for shipment. Because the sale was completed in 2016, your audit client would like to record the bill and hold transaction described as a sale in 2016. You do not recall noticing any inventory held in a separate area of the client's warehouse during the December 31, 2016, inventory observation. In making your determination regarding the timing of the revenue recognition, what criteria has the SEC determined to be important?