Key points
- Consignment arrangements and bill-and-hold arrangements are accounted for under AASB 15
- Careful consideration of these types of arrangements are required as they impact the timing of recognition of revenue
- Applying AASB 15 often involves significant judgement, and entities should seek expert advice for complex or unique circumstances
Many inventory-based businesses enter into consignment and/or bill-and-hold arrangements. The question often arises as to when revenue should be recorded for these arrangements, which is dependent on understanding when control has passed to the customer. This article considers when control has passed under consignment and bill and hold arrangements, and the timing of revenue recognition for these arrangements in accordance with AASB 15 Revenue from Contracts with Customers (AASB 15).
Understanding when control has passed
The concept of control, and when control has passed to the customer, is critical to determining the timing of when revenue should be recognised in accordance with AASB 15.
An entity shall recognise revenue when the entity satisfies a performance obligation by transferring a promised good or service to a customer. An asset is transferred when the customer obtains control of that asset, which is the ability to direct the use of the asset and obtain substantially all of the remaining benefits from it.
Consignment sales
Entities may enter into consignment arrangements with their customers (e.g. Distributors or dealers), whereby the customer takes physical possession of the stock, and has no obligation to pay for it until it is sold to the end customer. Unsold stock can generally be returned to the seller. These arrangements must be analysed to determine the timing of when a sale is made, and when control passes, to the customer.
Accounting Guidance
When an entity delivers a product to another party (such as a dealer or a distributor) for sale to end customers, the entity shall evaluate whether control has transferred. If control has not transferred (for example, under a consignment arrangement), revenue is not recognised at that time.
Indicators that an arrangement is a consignment arrangement can include:
- the entity retains control of the product until it is sold by the dealer or until a specified period expires;
- the entity is able to require the return of the product; and
- the dealer does not have an unconditional obligation to pay for the product (a deposit may however be required).
Practical example
When should TyreCo record the sale? TyreCo should recognise revenue when the retail store sells the tyres to the end customer. Despite not having physical possession of the tyres, TyreCo retains control over the tyres until they are sold to the end customer. TyreCo is able to require return of the unsold stock, and there is no requirement for the Retail store to pay for the tyres until they are sold to the end customer. |
Bill-and-hold arrangement
A bill-and-hold arrangement is a contract under which an entity bills a customer for a product but the entity retains physical possession of the product until it is transferred to the customer in the future. For example, a customer may request an entity to enter into such a contract because of the customer’s lack of available space for the product or because of delays in the customer’s production schedules.
An entity shall analyse such arrangements to determine when it has satisfied its performance obligation to transfer a product by evaluating when a customer obtains control of that product.
Accounting Guidance
Control may transfer on delivery or shipment, depending on the contract terms. In some cases, however, a customer obtains control while the product remains in the seller’s possession because the customer can direct its use and obtain its benefits, even though the customer has decided not to exercise its right to take physical possession of that product. In those circumstances, the seller no longer controls the product and instead provides custodial services over the customer’s asset.
A customer obtains control in a bill-and-hold arrangement only if the arrangement is substantive (for example, the customer has requested the arrangement), and the product is separately identified as belonging to the customer, is ready for transfer, and cannot be used or redirected to another customer.
Practical example
When should JewelleryCo record the sale? JewelleryCo should record the sale of the ring prior to year-end as all the criteria indicate that control has passed to the customer. The ring has been specifically set aside for the customer, is ready for physical transfer, and cannot be directed to another customer. The reason for entering into the bill-and-hold arrangement is also substantive as it was requested by the customer. If an entity recognises revenue for the sale of a product on a bill-and-hold basis, the entity shall consider whether it has remaining performance obligations (for example, for custodial services) to which the entity shall allocate a portion of the transaction price. |
Summing up
Consignment sales and bill-and-hold arrangements are common areas to consider for inventory-based businesses. While the guidance above is provided for in AASB 15, specific facts and circumstances can arise which may require significant judgement. Please reach out to us, or your local Pitcher Partners contact to discuss further if required.
