Performance obligations are satisfied and revenue is recognized when a customer obtains control of promised goods or services. Physical possession is generally synonymous with control, but there are situations–like consignment arrangements–where this is not the case. In consignment arrangements, a consignee receives goods from a vendor without obtaining the full right to receive benefits from the asset or to direct use of the asset. An entity must determine if an arrangement is a consignment as this will affect the timing of revenue recognition.
Control of an asset is transferred to a customer when the customer obtains substantially all of the remaining benefits from an asset, and is able to direct the use of the asset. Vendors must assess when control is transferred in order to properly recognize revenue. The vendor should consider the following indicators from Accounting Standards Codification (ASC) 606-10-25-30, which signal a transfer of control:
- The vendor has a present right to payment for the asset.
- The customer has legal title to the asset.
- Physical possession of the asset has transferred.
- The customer bears the significant risks and rewards of ownership of the asset.
- The customer has accepted the asset.
For a detailed analysis on indicators of transfer of control, see Determining the Transfer of Control.
These indicators are to be considered in aggregate, and the presence (or absence) of a single indicator is not sufficient to determine the transfer of control. For example, in a consignment arrangement, physical possession has transferred but consignees generally have no obligation to pay for the product until its subsequent sale. Vendors often use these arrangements to improve the marketability of their products, to transfer products closer to the consumer, or to facilitate distribution by reducing risk for distributors. ASC 606-10-55-80 provides three indicators that a consignment arrangement exists:
- The vendor controls the product until a specified event occurs, such as the sale of the product to an end-customer, or until a specified period expires.
- The vendor is able to require the return of the product or transfer of the product to a third party.
- The consignee does not have an unconditional obligation to pay for the product (although it may be required pay a deposit).
The standard notes that this list is not all-inclusive. It is therefore appropriate for entities to consider these indicators of consignment arrangements in conjunction with the overall indicators and definition of the transfer of control, as there may be times when an indicator of a consignment arrangement is present and control has nevertheless transferred (see Example 2 below). However, when the indicators of a consignment are present and control has not transferred to the customer, the arrangement is a consignment. Consequently, the vendor will not record revenue for consigned goods that have been shipped until control is transferred. This may occur on the subsequent sale of a consigned good or the expiration of a specified period.
ASC 606 provides three indicators that a consignment arrangement may exist. These indicators provide a starting point for determining whether a vendor maintains control of a product after it is shipped. Additionally, the general ASC 606 process for determining the transfer of control should be consulted, as ultimately the ability to obtain substantially all of the remaining benefits from an asset and to direct its use determines control. In a consignment arrangement, revenue cannot be recognized until control of the product has transferred, which may be when a specified event occurs, such as the sale of the product to an end-consumer or the expiration of a specified period.
- ASC 605-10-S99-SAB 13.A.2-Q2
- ASC 606-10-55-79 to 55-80, 25-25, 25-30
- EY, Financial Reporting Developments: "Revenue from Contracts with Customers." October 2018. Section 4.5.
- KPMG, Issues In-Depth: "Revenues from Contracts with Customers." May 2016. Section 5.5.6.
- PWC, "Revenue from Contracts with Customers." August 2016. Section 8.6.