Topic 5

Consignment Sales
 Learning Objectives

Explain a consignment arrangement.

Apply the principles of PFRS 15 in recognizing revenue
from a consignment arrangement.
Prepare journal entries related to a consignment
arrangement.
 Consignment arrangements
Under a consignment arrangement, an entity (called the ‘consignor’)
delivers goods to another party (called the ‘consignee’) who
undertakes to sell the goods to end customers on behalf of the
consignor.
 Timing of revenue recognition
The consignor recognizes revenue only when the consignee sells the
consigned goods to end customers because it is only at this point
that the consignor relinquishes control over the goods.
 Who records the inventory?
Accordingly, the consigned goods remain in the consignor’s
inventory until they are sold to end customers. The consignee
records the consigned goods only through memo entries.
 Freight and other incidental costs
Freight and other incidental costs that the consignor incurs in transferring the
consigned goods to the consignee (e.g., transportation and insurance) are
capitalized as cost of the consigned goods.
Repair costs for damages during shipment and storage and other maintenance costs are
charged as expense.
If the consignee shoulders the freight and other incidental costs, the consignee treats the
costs as receivable from the consignor if the costs are reimbursable; if not, the
consignee recognizes them as expense.
 Commission or fee
In a typical consignment, the consignee is entitled to a commission based on
the consignor’s sales price.
In other arrangements, the consignee “purchases” the goods from the
consignor simultaneously with the sale to the end customer. In this case, the
consignee earns income by making a mark-up on the final selling price.
In some other arrangements, the consignee earns both a commission and a
mark-up.
 Commission or fee
The commission is recognized as expense by the consignor and as income by the
consignee.
Normally, the consignee deducts its commission from the amount remitted to
the consignor.
 Commission is paid in advance
In cases where the commission is paid in advance to the consignee, the
consignor records the advance commission as receivable and not cost of
inventory.
When the related goods are sold to the end customer, the consignor
derecognizes the receivable and recognizes commission expense.
 Revenue recognition
When the consigned goods are sold to end customers,
• The consignor recognizes revenue at the gross amount of consideration,
i.e., the sale price agreed with the consignee.
• The consignee recognizes revenue at the commission or fee to which it is
entitled.
 Illustration: Revenue recognition from
consignment sales
Hannah Co. consigns goods costing P220,000 and with a total sales
price of P390,000 to Samuel, Inc. Samuel will be entitled to a 20%
commission based on its sales.

Hannah Co. – Consignor Samuel, Inc. – Consignee

Memo entry Memo entry
 Illustration: Revenue recognition from
consignment sales
Samuel, Inc. sells consigned goods costing P55,000 for P100,000.
Hannah Co. is not notified of the sale.

Hannah Co. – Consignor Samuel, Inc. – Consignee

No entry Cash 100,000
Commission income (100K x 20%) 20,000
Payable to Hannah Co. 80,000
 Illustration: Revenue recognition from
consignment sales
No entry is made at Hannah Co.’s book because Hannah was not notified of
the sale. In case Hannah Co. is notified, Hannah would recognize revenue on
this date as follows:
Receivable from Samuel, Inc. 80,000
Commission expense 20,000
Revenue 100,000
 Illustration: Revenue recognition from
consignment sales
Note:
In practice, it is uncommon that the consignor is notified of each
sale as those sales occur.
More commonly, the consignor receives notice of the consignee’s
sales on scheduled dates, such as weekly, monthly or quarterly,
depending on the arrangement.
 Illustration: Revenue recognition from
consignment sales
Samuel Inc. makes the weekly remittance of sale proceeds, net of commission,
to Hannah Co.

Hannah Co. – Consignor Samuel, Inc. – Consignee

Cash 80,000 Payable to Hannah Co. 80,000
Commission expense 20,000 Cash 80,000
Revenue 100,000

Cost of goods sold 55,000

Inventory 55,000
 Principal versus Agent considerations
Principal
The entity is a principal if it controls the good or service before the good or
service is transferred to the customer.
However, the entity is not necessarily a principal if it obtains legal title of a
product only momentarily before legal title is transferred to the customer.
A principal may personally satisfy a performance obligation or it may engage
another party (for example, a subcontractor) to satisfy some or all of a
performance obligation on its behalf.
 Principal versus Agent considerations
Agent
The entity is an agent if its performance obligation is to arrange the provision
of goods or services by another party.
 Principal versus Agent considerations
Revenue recognition
When the performance obligation is satisfied:
• the principal recognizes revenue at the gross amount of consideration.
• the agent recognizes revenue at the commission or fee to which it is
entitled.
 Indicators that an entity is an agent
a. Another party is primarily responsible for fulfilling the contract;
b. The entity does not have inventory risk before or after the goods have been
ordered by a customer, during shipping or on return;
c. The entity does not have discretion in establishing prices for the other party’s
goods or services and, therefore, the benefit that the entity can receive from those
goods or services is limited;
d. The entity’s consideration is in the form of a commission; and
e. The entity is not exposed to credit risk for the amount receivable from a
customer in exchange for the other party’s goods or services.
 Illustration 1
Chopee Co. operates a website that enables customers to purchase goods from a range of
suppliers who deliver the goods directly to the customers. When a good is purchased via the
website, Chopee is entitled to a 10% commission based on the sales price. Chopee’s website
facilitates payment between the supplier and the customer at the price set by the supplier.
Chopee has no further obligation to the customer after arranging a sale.
Analysis:
Chopee is an agent because it does not control the good or service before it is provided to the
customer (i.e., indicators ‘a’ to ‘e’ above are present). Chopee’s performance obligation is to
arrange the transfer of goods from the supplier to the customer. When this performance
obligation is satisfied, Chopee recognizes revenue equal to the agreed commission.
 Illustration 2
X Co. installs CCTV (closed circuit television) for customers. X Co. does not maintain
inventory of CCTVs. Instead, when a customer contracts X Co., X Co. purchases the CCTV
from a supplier and installs it at the customer’s premises. X Co. chooses the supplier; however,
the CCTV purchased must meet the customer’s specifications, otherwise the customer can
reject it. X Co. negotiates the contract price with the customer. Therefore, X Co.’s profit is
based on the difference between the contract price and the purchase price of the CCTV less the
labor and other materials and overheads relating to the installation. Half of the contract price is
due upon signing of contract and the balance is due after installation is complete. In case of
factory defects, the customer can seek remedy from the supplier under the supplier’s warranty.
However, X Co. is responsible for any faults relating to the configuration and installation of the
CCTV.
 Illustration 2
Analysis:
X Co. is a principal because it controls the CCTV before it is provided to the customer. This is
evidenced by the following:
a. X Co. is primarily responsible for fulfilling the contract because, although the CCTV is
purchased from a supplier, X Co. is ultimately responsible for ensuring that the CCTV
functions in accordance with the customer’s specifications.
b. X Co. has inventory risk because of its responsibility in correcting errors in specifications.
c. X Co. has discretion in establishing the selling price with the customer.
d. X Co.’s consideration is not in the form of a commission.
e. X Co. has credit risk for the amount receivable from the customer.
 Illustration 2
When the performance obligation is satisfied, X Co. recognizes
revenue at the gross amount of the contract price negotiated with
the customer.
 Recap
Consignor vs. Consignee / Principal vs. Agent
Who records the inventory?
Freight and incidental costs
Revenue recognition