Accounting for Consignment Arrangements in Retail and Distribution

✦ In a consignment arrangement, one party (the consignor) delivers goods to another (the consignee) who holds and sells the goods on behalf of the consignor.

✦ Under ASC 606, revenue is not recognized by the consignor until control of goods transfers—typically upon sale to the end customer.

✦ Consigned inventory remains on the consignor’s books until sold, and must be presented separately or disclosed appropriately.

✦ Accurate treatment requires evaluating control, risk of loss, and return rights between the parties.

1. What Is a Consignment Arrangement?

✦ A consignment occurs when a supplier (consignor) ships goods to a third party (consignee) who:

 • Does not take title or assume risk of ownership, and

 • Sells the goods to end customers on behalf of the consignor

✦ Common in retail, electronics, and automotive parts distribution.

2. Indicators of a Consignment Arrangement (ASC 606-10-55-80)

✦ Indicators that control has not transferred to the consignee include:

 • The product is controlled by the consignor until a specified event (e.g., resale)

 • The consignor may require return or redirect the goods

 • The consignee does not have an unconditional obligation to pay

✦ These factors support continued inventory recognition by the consignor.

3. Revenue Recognition by the Consignor

✦ Revenue is recognized only when control of the product transfers to the end customer.

✦ This typically occurs when:

 • The consignee sells the goods to a third party, or

 • A contractual condition triggers transfer (e.g., specific time lapses)

✦ Until then, goods are not derecognized from inventory, and no revenue is booked.

4. Journal Entry — Sale to End Customer

Example:

• Sales price = $5,000

• Cost = $3,000

Entry by consignor upon sale:

debit Accounts Receivable / Cash – $5,000

 credit Revenue – $5,000

debit Cost of Goods Sold – $3,000

 credit Inventory – $3,000

5. Accounting for the Consignee

✦ The consignee does not record inventory.

✦ Upon sale, the consignee records commission revenue or a fee based on the agreement.

Entry (if commission = $500):

debit Cash / Payables – $5,000

 credit Commission Revenue – $500

 credit Due to Consignor – $4,500

✦ The consignee remits the balance to the consignor.

6. Inventory and Disclosure for the Consignor

✦ Consigned goods remain in inventory and are tracked separately in sub-ledgers.

✦ Disclose:

 • Nature of consignment arrangements

 • Amount of consigned inventory at period-end

 • Risks retained (e.g., returns, unsold goods)

✦ If material, disclose consignee relationships in related party footnotes.

7. IFRS Comparison (IFRS 15)

Topic	US GAAP (ASC 606)	IFRS 15
Revenue recognition	On transfer to end customer	Same
Inventory control	Remains with consignor	Same
Commission recognition	Upon sale by consignee	Same
Required indicators	Three specific indicators	Similar principles

8. Common Errors

✦ Recognizing revenue upon delivery to consignee instead of end customer

✦ Removing inventory from books before control transfers

✦ Recording consigned goods on consignee’s balance sheet

✦ Omitting disclosure of consignment arrangements and inventory balances

✦ Misunderstanding performance obligations in multi-party consignment contracts