Technology consignment arrangements – Entities may deliver inventory on a consignment basis to other parties (e.g., distributor, dealer). By shipping on a consignment basis, consignors are able to better market products by moving them closer to the end-customer. However, they do so without selling the goods to the intermediary (consignee). Technology consignment arrangements
The following indicates the existence of a consignment arrangement: (IFRS 15 B78)
- The product is controlled by the vendor until a specified event occurs (e.g. sale of the product to a customer of the dealer or retailer, or until a specified period expires);
- The vendor is able to require the return of the product or transfer the product to a third party (e.g. transfer to another dealer or retailer); and
- The dealer or retailer does not have an unconditional obligation to pay for the product, even if it is required to pay a deposit.
Entities entering into consignment arrangements must determine the nature of the performance obligation (i.e., whether the obligation is to transfer the inventory to the consignee or to transfer the inventory to the end-customer). Under IFRS 15, this determination is based on whether control of the inventory has passed to the consignee upon delivery. Typically, a consignor will not relinquish control of consignment inventory until the inventory 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 inventory other than to pay the consignor the agreed-upon portion of the sales price once the consignee sells the product to a third party. As a result, revenue generally would not be recognised for consignment arrangements when the goods are delivered to the consignee because control has not transferred (i.e., the performance obligation to deliver goods to the customer has not yet been satisfied). This result is generally consistent with conclusions under IFRS requirements in IAS 181.
As a result, revenue generally would not be recognised for consignment arrangements when the goods are delivered to the consignee because control has not transferred. In other words, the performance obligation to deliver goods to the end-customer has not yet been satisfied. The entity would wait until the reseller sells the product to an end-customer to recognise revenue, which would be considered the point in time that the entity has transferred control of the product. The result would be similar to IAS 18.14, which requires revenue to be recognised only when the significant risks and rewards of ownership have been transferred to the end-customer.
Revenue recognition at a point in time
If a performance obligation is not satisfied over time, a vendor satisfies the performance obligation at a point in time. A vendor considers indicators of the transfer of control, which includes the following – the customer has physical possession of an asset. This may indicate that the customer has the ability to direct the use of and obtain substantially all of the remaining benefits from the asset or to restrict the access of other entities to those benefits. However, physical possession may not coincide with control of an asset; consignment stock arrangements may result in physical possession but not control.
Technology consignment arrangements Technology consignment arrangements Technology consignment arrangements
As a result revenue recognition will many times be at a point in time, under the following considerations:
The customer has physical possession of an asset. This may indicate that the customer has the ability to direct the use of and obtain substantially all of the remaining benefits from the asset or to restrict the access of other entities to those benefits. However, physical possession may not coincide with control of an asset; for example, consignment stock or bill and hold arrangements may result in physical possession but not control.
Consignment is an arrangement in which goods are left in the possession of an authorized third party to sell. Typically, the consignor receives a percentage of the revenue from the sale (sometimes a very large percentage) in the form of a commission.
Consignment deals are made on a variety of products, such as artwork, clothing and accessories, and books. Some types of retail sales may be viewed as a special form of consignment where producers rely on retail stores to sell their products to consumers, although secondhand stores and thrift stores are more typically associated with the practice of consignment.