Consignment stock: moving the goods does not always make a sale

Control, not custody, decides the sale

A manufacturer ships stock to a dealer before year end and the warehouse system marks it as dispatched. The dispatch note records a movement of goods. It does not record a sale. Revenue is recognised when control of a good transfers to the customer, and physical possession need not coincide with control. A consignee can physically hold goods that the supplier still controls.

For products delivered to a dealer or distributor for onward sale, IFRS 15 directs the supplier to assess whether the dealer has obtained control. If the goods are held on consignment, no revenue arises on delivery to the dealer. This article looks at the supplier's books only and does not cover FRS 102, IFRS for SMEs, US GAAP or tax treatment.

Indicators that the dealer is holding consignment stock

IFRS 15 gives non-exhaustive indicators of a consignment arrangement. The supplier controls the product until a specified event occurs, such as the dealer selling it on. The supplier can require the product to be returned or redirected to another party. The dealer has no unconditional obligation to pay for the product, although it may be required to pay a deposit.

These are indicators to weigh, not three mandatory conditions or a complete checklist. A dealer's cash deposit does not by itself overturn consignment, and any receipt is accounted for under its actual terms. Equally, dealer custody does not prove consignment. An ordinary sale with a right of return can transfer control at delivery and needs the separate returns accounting in paragraphs B20 to B27.

Worked hypothetical: 100 units at a dealer at 31 December

The following facts and figures are hypothetical, in GBP and excluding VAT and other taxes. A supplier owns 100 units costing £60 each, £6,000 in total, and sends them to a dealer before year end. The supplier can demand their return or redirect them, and the dealer has no unconditional duty to pay for unsold units. The contract assessment confirms that the supplier keeps control until each specified end sale, when the dealer owes £100 per unit unconditionally. Dealer reports and supporting evidence confirm 40 end sales before 31 December. The 60 unsold units are undamaged and recoverable at cost. Dealer resale prices, commissions, deposits, financing and later return rights are outside the example.

Dispatch creates no revenue or cost of sales, and total inventory stays at £6,000. The supplier may record an internal location transfer, Dr stock at dealer £6,000, Cr warehouse stock £6,000, which changes no total.

When the 40 units transfer, the supplier records Dr trade receivable £4,000, Cr revenue £4,000. Inventory sold is expensed in the period the related revenue is recognised, so it also records Dr cost of sales £2,400, Cr stock at dealer £2,400. Gross profit on the units sold is £1,600, and closing stock at the dealer is 60 × £60 = £3,600.

Recording all 100 units as sold at dispatch would, on these facts, overstate revenue by £6,000, cost of sales by £3,600 and profit by £2,400, and understate stock by £3,600.

At each period end, reconcile supplier-owned quantity at each dealer to confirmed sell-through dates, the withdrawal and redirection rights in the contract and the event that makes payment due. A dealer confirmation is most useful when it states whose stock the units are and which units have sold.