CONSIGNMENT SALES

 Consignment – it is a transfer of possession of merchandise from the owner called the consignor
to another party called the consignee who acts as his agent for the purpose of selling goods.

CONSIGNMENT
Title to the good is not passed to the consignee
although there is transfer of possession.
No profit can be recognized by the consignor
as a result of the transfer.
Unsold goods in the hands of the consignee
are still shown as part of the inventory of the
consignor.
SALE
Title to the goods is transferred from seller to
the buyer, which may or may not be
accompanied by transfer of possession.
Profit is normally realized at the point of sale.
Unsold goods in the hands of the buyer is
now shown as part of his inventory.

 Rule on ownership when goods are consigned

 It is a physical transfer of goods without transfer of title of ownership to an agent called

consignee tasked to sell the goods of the owner called the consignor, for a fee or
commission.

 As soon as goods are sold, the cash collected by consignee is due for remittance to the
consignor.

 While the goods are in the hands of the consignee, the goods are owned by the consignor
and must be included in the latter’s assets.

 Advantages/benefits of consigning goods from the viewpoint of consignee and consignor

 CONSIGNOR VIEWPOINT

o Wider marketing area especially if the product is new and dealers hesitate to invest in
it
o Serves as a market survey especially in new territories
o Retail price of goods can be controlled
o Lesser risk of not being paid by the consignee in case consignee becomes insolvent
since goods and the proceeds from the sale cannot be subject to attachment.

 CONSIGNEE VIEWPOINT

o Minimize working capital requirement since consigned merchandise does not require
immediate payment until it is sold.
o Risk of loss from unsold goods is avoided since these can be returned if not sold.

 Rights and duties of consignee

 Rights of Consignee

o Right to be reimbursed for advances of expenses

 o Right to receive compensation either in the form of commission or difference
between the price fixed by the consignor and the price assigned by the consignee
o Right to make the usual warranties with which the consignor will be bound
o Right to extend credit if this is usual customs in the business or if the consignor has
not expressly restrained it.

 Duties of Consignee

o To preserve the consigned goods with the diligence of the good father of the family
o To keep the consignor’s property and receivables separate from his own
o To exercise prudence in granting credit as well as diligence in making collections
o To render an accounting of the goods by delivering what he may have received from
the sale of the consigned goods.
o He cannot, without the express will of the consignor, sell on credit. If he does, then
he is liable to pay the consignor as soon as consigned goods have been sold.

 What is an account sale, why prepare an account sale?

 Statement prepared by consignee to inform the consignor about the status of the consigned
merchandise as to sales made, expenses paid in advance by consignee, amount due for
remittance and number of units still on hand.

 Entries are prepared to update the consignment shipment made by the consignor.

 Is an account sale similar to the Consignment In account in content?

 Yes. Consignment In account contains reimbursable expenses, consignment sales,

commission income, and remittance to consignor which can be seen and needed in preparing
the Account Sales.

 Consignment In Dr, receivable from the consignor

 Consignment In Cr, payable to consignor

 Is the Consignment IN account a real or a nominal account? Explain

 The Consignment In account is a real account

 It is used to account for its obligation to pay which should be credited when sales are made to
represent a payable (not a revenue) and debited for expenses including commission which he
wants to charge to the consignor.

 Usually, consignment in is a credit balance, before remittance, representing the amount due.
When remittance is in full, it is debited to close the account.

 Is the Consignment Out account a real or nominal account? Explain.

 The Consignment Out account is a nominal account which represents consignment profit or
loss
 The Consignment Out is like the Joint Operation Account
  Consignment Out Dr, Cost of merchandise consigned, consignment expenses by consignee,
transportation, and insurance expense by consignor
 Consignment Out Cr, Sales made by the consignee and for consigned goods returned

 In a consignment arrangement, when and what account title will consignee use to recognize
revenue?

 The consignee will use “Commission Income” account title to recognized revenue since the
consignee generates profit primarily through commissions. It is recognized once goods are
sold, and commission was granted.

 In a consignment arrangement, when and what title will consignor use to recognize
revenue?

 The consignor will use “Consignment Profit or Loss” account title to recognize revenue since
it represents the net income of the consignor. It is recognized when all goods are sold or when
there are no goods on the hand of the consignee—either the consignee sold it or return it.

 Rules in recording shipment cost, expenses and returns in the books of the consignor.

 Consignment Out Dr, Cost of merchandise consigned and consignment expenses

 Consignment Out Cr, Sales made by the consignee and for consigned goods returned

 What is PFRS 15? Give its core principle and enumerate the 5-step model of PFRS 15.

Step 1: Identify the contract with the customer

A contract with a customer will be within the scope of IFRS 15 if all the following conditions are met:
[IFRS 15:9]

the contract has been approved by the parties to the contract; each party’s rights in relation to the goods or
services to be transferred can be identified; the payment terms for the goods or services to be transferred
can be identified; the contract has commercial substance; and it is probable that the consideration to
which the entity is entitled to in exchange for the goods or services will be collected.

If a contract with a customer does not yet meet all of the above criteria, the entity will continue to re-
assess the contract going forward to determine whether it subsequently meets the above criteria. From
that point, the entity will apply IFRS 15 to the contract. [IFRS 15:14]

The standard provides detailed guidance on how to account for approved contract modifications. If certain
conditions are met, a contract modification will be accounted for as a separate contract with the customer.
If not, it will be accounted for by modifying the accounting for the current contract with the customer.
Whether the latter type of modification is accounted for prospectively or retrospectively depends on
whether the remaining goods or services to be delivered after the modification are distinct from those
delivered prior to the modification. Further details on accounting for contract modifications can be found
in the Standard. [IFRS 15:18-21].

Step 2: Identify the performance obligations in the contract

At the inception of the contract, the entity should assess the goods or services that have been promised to
the customer, and identify as a performance obligation: [IFRS 15.22]
a good or service (or bundle of goods or services) that is distinct; or a series of distinct goods or services
that are substantially the same and that have the same pattern of transfer to the customer.

A series of distinct goods or services is transferred to the customer in the same pattern if both of the
following criteria are met: [IFRS 15:23]

each distinct good or service in the series that the entity promises to transfer consecutively to the
customer would be a performance obligation that is satisfied over time (see below); and a single method
of measuring progress would be used to measure the entity’s progress towards complete satisfaction of
the performance obligation to transfer each distinct good or service in the series to the customer.

A good or service is distinct if both of the following criteria are met: [IFRS 15:27]

the customer can benefit from the good or services on its own or in conjunction with other readily
available resources; and the entity’s promise to transfer the good or service to the customer is separately
identifiable from other promises in the contract.

Factors for consideration as to whether a promise to transfer goods or services to the customer is not
separately identifiable include, but are not limited to: [IFRS 15:29]

the entity does provide a significant service of integrating the goods or services with other goods or
services promised in the contract; the goods or services significantly modify or customize other goods or
services promised in the contract; the goods or services are highly interrelated or highly interdependent.

Step 3: Determine the transaction price

The transaction price is the amount to which an entity expects to be entitled in exchange for the transfer
of goods and services. When making this determination, an entity will consider past customary business
practices. [IFRS 15:47]

Where a contract contains elements of variable consideration, the entity will estimate the amount of
variable consideration to which it will be entitled under the contract. [IFRS 15:50] Variable consideration
can arise, for example, as a result of discounts, rebates, refunds, credits, price concessions, incentives,
performance bonuses, penalties, or other similar items. Variable consideration is also present if an entity’s
right to consideration is contingent on the occurrence of a future event. [IFRS 15:51]

The standard deals with the uncertainty relating to variable consideration by limiting the amount of
variable consideration that can be recognized. Specifically, variable consideration is only included in the
transaction price if, and to the extent that, it is highly probable that its inclusion will not result in a
significant revenue reversal in the future when the uncertainty has been subsequently resolved. [IFRS
15:56]

However, a different, more restrictive approach is applied in respect of sales or usage-based royalty
revenue arising from licenses of intellectual property. Such revenue is recognized only when the
underlying sales or usage occur. [IFRS 15:B63]

Step 4: Allocate the transaction price to the performance obligations in the contracts
Where a contract has multiple performance obligations, an entity will allocate the transaction price to the
performance obligations in the contract by reference to their relative standalone selling prices. [IFRS
15:74] If a standalone selling price is not directly observable, the entity will need to estimate it. IFRS 15
suggests various methods that might be used, including: [IFRS 15:79]
Adjusted market assessment approach Expected cost plus a margin approach Residual approach (only
permissible in limited circumstances).

Any overall discount compared to the aggregate of standalone selling prices is allocated between
performance obligations on a relative standalone selling price basis. In certain circumstances, it may be
appropriate to allocate such a discount to some but not all of the performance obligations. [IFRS 15:81]

Where consideration is paid in advance or in arrears, the entity will need to consider whether the contract
includes a significant financing arrangement and, if so, adjust for the time value of money. [IFRS 15:60]
A practical expedient is available where the interval between transfer of the promised goods or services
and payment by the customer is expected to be less than 12 months. [IFRS 15:63]

Step 5: Recognize revenue when (or as) the entity satisfies a performance obligation

Revenue is recognized as control is passed, either over time or at a point in time. [IFRS 15:32]

Control of an asset is defined as the ability to direct the use of and obtain substantially all of the
remaining benefits from the asset. This includes the ability to prevent others from directing the use of and
obtaining the benefits from the asset. The benefits related to the asset are the potential cash flows that
may be obtained directly or indirectly. These include, but are not limited to: [IFRS 15:31-33]

using the asset to produce goods or provide services; using the asset to enhance the value of other assets;
using the asset to settle liabilities or to reduce expenses; selling or exchanging the asset; pledging the
asset to secure a loan; and holding the asset.

An entity recognizes revenue over time if one of the following criteria is met: [IFRS 15:35]

the customer simultaneously receives and consumes all of the benefits provided by the entity as the entity
performs; the entity’s performance creates or enhances an asset that the customer controls as the asset is
created; or the entity’s performance does not create an asset with an alternative use to the entity and the
entity has an enforceable right to payment for performance completed to date.

If an entity does not satisfy its performance obligation over time, it satisfies it at a point in time. Revenue
will therefore be recognized when control is passed at a certain point in time. Factors that may indicate
the point in time at which control passes include, but are not limited to: [IFRS 15:38]

the entity has a present right to payment for the asset; the customer has legal title to the asset; the entity
has transferred physical possession of the asset; the customer has the significant risks and rewards related
to the ownership of the asset; and the customer has accepted the asset.

 Which provisions of PFRS 15 are relevant to a consignment arrangement? Read uploaded

PFRS 15.

IFRS 15.B77 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.B78 The standard provides indicators that an arrangement is a consignment arrangement as
follows.— Indicators of a consignment arrangement:

While the entity retains control of the product... When is revenue recognized? When control
transfers to the intermediary or end customer... Performance obligation is not satisfied and revenue is not
recognized Performance obligation is satisfied and revenue is recognized The entity controls the product
until a specified event occurs (e.g. 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
– e.g. another dealer The dealer does not have an unconditional obligation to pay for the products,
although it might be required to pay a deposit © 2019 KPMG IFRG Limited, a UK company, limited by
guarantee. All rights reserved. 5 Step 5 – Recognize revenue when or as the entity satisfies a performance
obligation | 157 5.6

Consignment arrangements | Example 22 – Retail: Consignment arrangement Manufacturer M enters into

a 60-day consignment contract to ship 1,000 dresses to Retailer R’s stores. R is obliged to pay M 20 per
dress when the dress is sold to an end customer. During the consignment period, M has the contractual
right to require R to either return the dresses or transfer them to another retailer. M is also required to
accept the return of the inventory. M determines that control has not transferred to R on delivery, for the
following reasons: – R does not have an unconditional obligation to pay for the dresses until they have
been sold to an end customer; – M is able to require that the dresses be transferred to another retailer at
any time before R sells them to an end customer; and – M is able to require the return of the dresses or
transfer them to another retailer. M determines that control of the dresses transfers when they are sold to
an end customer – i.e. when R has an unconditional obligation to pay M and can no longer return or
otherwise transfer the dresses. M recognizes revenue as the dresses are sold to the end customer.

Example 23 – Automotive: Consignment arrangement Carmaker C requires Automotive Supplier S to

deliver a predetermined number of brake lightbulbs to C’s warehouse based on a forecast production plan.
However, legal title over the lightbulbs and a right to payment arise only when the parts are retrieved
from the warehouse and moved to C’s assembly line. Brake lightbulbs 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 lightbulbs returned by C. S determines that control over
the lightbulbs has not transferred to C on delivery to C’s warehouse because: – C does not have an
unconditional obligation to pay for the lightbulbs until they have been moved to its assembly line; and – S
is able to require that the lightbulbs be transferred to another carmaker any time before C installs them in
its cars. S determines that control of the lightbulbs 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. © 2019 KPMG IFRG Limited, a UK company, limited by guarantee. All rights reserved. 158

| Revenue – IFRS 15 handbook Example 24 – 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 deliver