Some reporting entities ship goods to a distributor, but retain control of the goods until a predetermined event occurs. These are known as consignment arrangements. Revenue is not recognized upon delivery of a product if the product is held on consignment. Management should consider the following indicators to evaluate whether an arrangement is a consignment arrangement.
Indicators that an arrangement is a consignment arrangement include, but are not limited to, the following:
- The product is controlled by the entity until a specified event occurs, such as the sale of the product to a customer of the dealer, or until a specified period expires.
- The entity is able to require the return of the product or transfer the product to a third party (such as another dealer).
- The dealer does not have an unconditional obligation to pay for the product (although it might be required to pay a deposit).
Revenue is recognized when the reporting entity has transferred control of the goods to the distributor. The distributor has physical possession of the goods, but might not control them in a consignment arrangement. For example, a distributor that is required to return goods to the manufacturer upon request might not have control over those goods; however, a reporting entity should assess whether these rights can be enforced.
A consignment sale differs from a sale with a right of return or put right. The customer has control of the goods in a sale with right of return or a sale with a put right, and can decide whether to put the goods back to the seller.
Example RR 8-8 and Example RR 8-9 illustrate the assessment of consignment arrangements.
EXAMPLE RR 8-8
Consignment arrangement – retail and consumer industry
Manufacturer provides household products to Retailer on a consignment basis. Retailer does not take title to the products until they are scanned at the register and has no obligation to pay Manufacturer until they are sold to the consumer, unless the goods are lost or damaged while in Retailer's possession. Any unsold products, excluding those that are lost or damaged, can be returned to Manufacturer, and Manufacturer has discretion to call products back or transfer products to another customer.
When should Manufacturer recognize revenue?
Manufacturer should recognize revenue when control of the products transfers to Retailer. Control has not transferred if Manufacturer is able to require the return or transfer of those products. Revenue should be recognized when the products are sold to the consumer, or lost or damaged while in Retailer's possession.
EXAMPLE RR 8-9
Consignment arrangement – industrial products industry
Steel Co develops a new type of cold-rolled steel sheet that is significantly stronger than existing products, providing increased durability. The newly developed product is not yet widely used.
Manufacturer enters into an arrangement with Steel Co whereby Steel Co will provide 50 rolled coils of the steel on a consignment basis. Manufacturer must pay a deposit upon receipt of the coils. Title transfers to Manufacturer upon shipment and the remaining payment is due when Manufacturer consumes the coils in the manufacturing process. Each month, both parties agree on the amount consumed by Manufacturer. Manufacturer can return, and Steel Co can demand return of, unused products at any time.
When should Steel Co recognize revenue?
Steel Co should recognize revenue when the coils are used by Manufacturer. Although title transfers when the coils are shipped, control of the coils has not transferred to Manufacturer because Steel Co can demand return of any unused product.
Control of the steel would transfer to Manufacturer upon shipment if Steel Co did not retain the right to demand return of the inventory, even if Manufacturer had the right to return the product. However, Steel Co needs to assess the likelihood of the steel being returned and might need to recognize a refund liability in that case. Refer to RR 8.2