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.

Introduction

An entity applies PFRS 15 Revenue from Contracts with Customers to account for revenues from
contracts with customers. PFRS 15 supersedes PAS 18 Revenue.

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.

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.

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 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.

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 the latter 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.

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. 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.

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.

Reference: Accounting for Special Transactions (Advanced Accounting 1) 2020 Edition by Zeus Vernon B. Millan.
Note: This module shall be used for classroom learning purposes only and shall not be distributed outside the class.

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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

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 (1) Cash 100,000
Commission income (100K x 20%) 20,000
Payable to Hannah Co. 80,000

`(2)
No entry is made because Hannah Co. 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

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.

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

PFRS 15 provides the following additional guidance in accounting for consignment arrangements:

When another party is involved in providing goods or services to a customer, the entity shall determine
whether it is acting as a principal or an agent.

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. When the

Reference: Accounting for Special Transactions (Advanced Accounting 1) 2020 Edition by Zeus Vernon B. Millan.
Note: This module shall be used for classroom learning purposes only and shall not be distributed outside the class.

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performance obligation is satisfied, the principal recognizes revenue at the gross amount of
consideration.

The entity is an agent if its performance obligation is to arrange the provision of goods or services by
another party. When the performance obligation is satisfied, the agent recognizes revenue at the
commission or fee to which it is entitled.

The following are indicators that an entity is an agent (and therefore does not control the good or
service before it is provided to a customer):
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: (Based on IFRS 15.IE231 to IE233)

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.

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.
Reference: Accounting for Special Transactions (Advanced Accounting 1) 2020 Edition by Zeus Vernon B. Millan.
Note: This module shall be used for classroom learning purposes only and shall not be distributed outside the class.

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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.

When the performance obligation is satisfied, X Co. recognizes revenue at the gross amount of the
contract price negotiated with the customer.

Summary
A consignor recognizes revenue only when the consigned goods are sold to end customers. The
revenue recognized is the gross amount of the sale price agreed with the consignee.
Consigned goods are included in the consignor’s inventory.
Freight and other incidental costs of transferring consigned goods to the consignee form part
of the cost of the consigned goods.

---End---

Reference: Accounting for Special Transactions (Advanced Accounting 1) 2020 Edition by Zeus Vernon B. Millan.
Note: This module shall be used for classroom learning purposes only and shall not be distributed outside the class.

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