IASB issued new standard IFRS 18
On 9 April 2024, the International Accounting Standards Board (IASB) published its new standard IFRS 18 Presentation and Disclosures in Financial Statements that will replace IAS 1 Presentation of Financial Sta…
Consignment inventory
Do you have inventory that may be considered as a consignment inventory? How would you treat it in your US GAAP reporting?
Consignment inventory transactions can take different forms. In many cases, consignment inventory represents inventory that is received by a dealer (consignee) from a manufacturer (consignor) for the purpose of selling the inventory to customers. The dealer returns any unsold inventory to the manufacturer. The manufacturer maintains title to and risk of ownership of the inventory until the inventory is sold to the end customer.
In other cases, the consignee is a manufacturer that receives inventory from a supplier (consignor). The manufacturer can return the inventory to the supplier before the inventory is consumed in the manufacturer’s production; however, once the inventory is consumed, the title and risk of ownership transfer to the manufacturer. Therefore, the consignee does not record inventory in its balance sheet for the amount of consignment inventory held until the inventory has been consumed in the consignee’s production.
Example
A retailer enters into an agreement with a supplier to purchase inventory to sell to customers. Under the agreement, the retailer receives the inventory and has the right to return the inventory at any time during the contract period, but must either return or purchase any unsold inventory at the end of the contract period. Is this agreement a consignment inventory arrangement?
How to treat this inventory?
If the retailer takes title to and assumes risk of ownership of the inventory upon receipt, the agreement would generally not be considered a consignment arrangement. Therefore, the retailer would record the inventory as of the date of inventory receipt. If the supplier retains title to and maintains risk of ownership of the inventory, the agreement generally would be considered a consignment arrangement and the supplier would continue to record the inventory until both title and risk of ownership transfer to the retailer (e.g., when the retailer sells the inventory to a customer).
Primary Reference for this area under US GAAP is the FASB codification, reference 330-10-05-3. There was also a Q&A issued in the SEC Staff Accounting Bulletin, Topic 13.A.2., „Persuasive Evidence of an Arrangment“, for further reference in this area.
The article is part of dReport – July 2018, Accounting news.
