Consignment arrangements under IFRS 15

Consignment arrangements

An entity may deliver goods to another party but retain control of the goods – e.g. it may deliver a product to a dealer or distributor for sale to an end customer. These types of arrangements are called ‘consignment arrangements’, and do not allow the entity to recognize revenue on delivery of the products to the intermediary. [IFRS 15.B77]

IFRS 15 provides indicators that an arrangement is a consignment arrangement as follows. [IFRS 15.B78]

Consignment arrangements

Worked example – Consignment arrangement

Manufacturer M enters into a 60-day consignment contract to ship 1,000 dresses to Retailer A’s stores. Retailer A is obligated to pay Manufacturer M 20 per dress when the dress is sold to an end customer. During the consignment period, Manufacturer M has the contractual right to require Retailer A to either return the dresses or transfer them to another retailer. Manufacturer M is also required to accept the return of the inventory.

Manufacturer M determines that control has not transferred to Retailer A on delivery, for the following reasons:

  • Retailer A does not have an unconditional obligation to pay for the dresses until they have been sold to an end customer;
  • Manufacturer M is able to require that the dresses be transferred to another retailer at any time before Retailer A sells them to an end customer; and
  • Manufacturer M is able to require the return of the dresses or transfer them to another retailer.

Manufacturer M determines that control of the dresses transfers when they are sold to an end customer – i.e. when Retailer A has an unconditional obligation to pay Manufacturer M and can no longer return or otherwise transfer the dresses. Manufacturer M recognizes revenue as the dresses are sold to the end customer.

Worked example – Automotive: Consignment arrangement

Carmaker C requires Automotive Supplier S to deliver a predetermined number of brake light bulbs to C’s warehouse based on a forecast production plan. However, legal title over the light bulbs and a right to payment arise only when the parts are retrieved from the warehouse and moved to C’s assembly line.

Brake light bulbs produced by S can also be sold to other carmakers and S has the contractual right to require C to return the parts or deliver them to another carmaker. S is also required to accept any excess light bulbs returned by C.

S determines that control over the light bulbs has not transferred to C on delivery to C’s warehouse because:

  • C does not have an unconditional obligation to pay for the light bulbs until they have been moved to its assembly line; and
  • S is able to require that the light bulbs be transferred to another carmaker any time before C installs them in its cars.

S determines that control of the light bulbs transfers when they are moved to C’s assembly line i.e. when C has an unconditional obligation to pay S and can no longer be asked to return or transfer the goods.

Something else -   IFRS 15 Property development obligations

Worked example – Automotive: Not a consignment arrangement

Carmaker D enters into a contract with Automotive Supplier S to deliver windscreens for D’s cars. According to the contract, S is required to maintain a minimum number of windscreens in D’s warehouse during the contract term. Once they have been delivered, S cannot access the windscreens (other than for stocktaking). It also has no right to require the windscreens to be returned or redirected to another carmaker.

The price of the windscreens is determined when they are delivered to D’s warehouse. S has a right to payment for the windscreens either when they are moved to D’s assembly line or within six weeks of delivery, whichever is earlier.

While they are stored at D’s warehouse, D bears any insurance fees and storage costs. In addition, it is liable for the risk of loss, theft or damage. However, S retains legal title to the windscreens until payment is received.

According to the relevant legal framework in D’s jurisdiction, goods are deemed to be accepted if D does not claim otherwise without an undue delay.

S concludes that the arrangement with D is not a consignment arrangement, because:

  • it is unable to require D to return the windscreens or to transfer them to a third party; and
  • S has an unconditional right to payment for the windscreens once they are delivered that is dependent only on the passage of time. D’s actions can only influence the timing of the payment.

Judgement is required to determine the point in time at which control over the windscreens is transferred to D. Under this fact pattern, S notes that:

  • it is unable to direct the windscreens to another use once they have been delivered;
  • it has an unconditional right to payment for windscreens (see above);
  • even though it retains legal title to the windscreens, this is a protective measure against D’s failure to pay;
  • it has transferred physical possession of the windscreens to D;
  • it has transferred the significant risks and rewards of ownership of the windscreens – i.e. the price risk, demand risk and inventory risk; and
  • under the local law, D is deemed to accept the windscreens delivered to its warehouse if it does not claim otherwise shortly after delivery.

Therefore, S concludes that control over the parts has been transferred to D on delivery to its warehouse.

Something else -   Fundamental qualitative characteristics

Entities entering into a consignment arrangement need to determine the nature of the performance obligation (i.e., whether the obligation is to transfer the product to the consignee or to transfer the product to the end-customer). This determination would be based on whether control of the product passes to the consignee. Typically, a consignor does not relinquish control of the consigned product until the product is sold to the end-customer or, in some cases, when a specified period expires.

Consignees commonly do not have any obligation to pay for the product, other than to pay the consignor the agreed-upon portion of the sale price once the consignee sells the product to a third party. As a result, for consignment arrangements, revenue generally would not be recognised when the products are delivered to the consignee because control has not transferred (i.e., the performance obligation to deliver goods to the end-customer has not yet been satisfied).

While some transactions are clearly identified as consignment arrangements, there are other less transparent transactions, in which the seller has retained control of the goods, despite no longer having physical possession. Such arrangements may include the shipment of products to distributors that are not required (either explicitly or implicitly), or do not have the wherewithal, to pay for the product until it is sold to the end-customer.

Something else -   Relevance in the Framework 2018

Judgement is necessary in assessing whether the substance of a transaction is a consignment arrangement. The identification of such arrangements often requires a careful analysis of the facts and circumstances of the transaction, as well as an understanding of the rights and obligations of the parties and the seller’s customary business practices in such arrangements. While not required by IFRS 15 or IAS 2, encourage entities off course need to consider to separately disclose the amount of their consigned inventory, if material.

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Something else -   Recognition of revenue as principal or agent

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