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.
Con-Sign Industries (CSI) is a manufacturer of large electronic signs and billboards. Many advertising shops acquire signs from CSI for their customers. CSI ships the signs with full payment due immediately. Legal title does not transfer, and CSI retains the right to require shipment of any unsold electronic signs to other sign shops. When this right is exercised a full refund is provided. Similarly, sign shops may return any unsold signs to CSI for a full refund.
Issues – Is this a consignment arrangement? How does this impact the recognition of revenue when CSI ships electronic signs to sign shops?
Analysis. CSI has received payment and has transferred physical possession of the signs, which are indicators that control has transferred. However, because sign shops can return the signs and CSI can require sign shops to ship the signs to other shops, the risks and rewards of ownership have not transferred. Additionally, legal title remains with CSI. In aggregate, it appears the customer is not able to obtain substantially all of the remaining benefits or the signs of direct the use of the signs.
Furthermore, all three indicators of a consignment arrangement (control by the vendor, vendor’s ability to require return or transfer, and no unconditional obligation of consignee to pay) are present. Consequently, this arrangement is a consignment. Because of this, revenue recognition must be deferred until the subsequent sale to the end-consumer. Likewise, the consignee may be required to recognize revenue on a net basis. For additional analysis of this topic, see Principal/Agent Considerations (Gross vs. Net).
Buy Back Books (B3) sells wholesale books to university bookstores with a customer put option. Universities are generally able to sell books at a significant markup from B3’s wholesale prices, but B3 will repurchase any unsold books for the initial sale price less a nominal restocking fee if a university exercises the option.
Issues. Considering that universities do not have an unconditional obligation to pay for the product, is this a consignment arrangement? How does a sale with a customer put option differ from a consignment arrangement?
Analysis. Because this put option is exercisable at the discretion of the university and not the vendor (B3), control of the books has transferred to the university. Consequently, despite the presence of one indicator that this is a consignment arrangement, it is not considered a consignment. The difference between a consignment arrangement and a sale with a customer put option is that in a consignment arrangement the vendor retains substantially all of the remaining benefits from an asset, and is able to direct its use, while in a sale the customer obtains such benefits and the ability to direct the use of the asset. For more details regarding customer put options, see Repurchase Agreements.
Comparison to 605
ASC 605 provides little guidance for private entities entering into consignment arrangements. However, Topic 13.A.2, which provides direction for Securities and Exchange Commission (SEC) filers, is often used as a reference by other entities as well. This guidance indicates that if the title to a good has passed to a customer and the good is not actually sold, the transaction should be treated as a consignment arrangement. Several examples of this are provided, a few of which are listed below:
- A customer’s obligation to pay is implicitly excused until consumption or sale
- The seller has an obligation to bring about resale
- A repurchase price exists that will be adjusted for holding costs and interest
ASC 606 provides three indicators to assist in identifying consignment arrangements, which contain the underlying principles of the examples outlined in SAB Topic 13.A.2. Consequently, consignment arrangements will be accounted for similarly under ASC 606 and ASC 605.
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.