2016
IFRS 15 Demystified
New revenue standard decoded
Worked Example: Consignment
arrangement
New Revenue Standard Supplement
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WorkedExample:Consignment
arrangement
SCENARIO
Alpha is a pharmaceutical company which develops and manufactures drugs and pharmaceuticals for
use as medicines. Beta is one of many authorised dealers of Alpha. The reporting period of Alpha ends
on 31 March every year. On 1 March 2015, Alpha transferred goods (newly developed vitamins) to a
dealer, Beta, on a consignment basis. Beta undertook to sell these vitamins on behalf of Alpha and remit
the proceeds, less a commission of 10%, when the end customer paid Beta for them. The cost price of
the vitamins was CU 160 and the invoice price was CU 200. By 31 March 2015, Beta had sold vitamins at
an invoice price of CU 120 and received payment of CU 80. Beta made a payment of CU 100 on 31
March 2015.
How would Alpha and Beta account for this transaction?
PARAGRAPH REFERENCES
B77 and B78 of IFRS 15
WHAT THE STANDARD SAYS
Evaluating whether the other party (in this case Beta) has or hasn’t gained control of the product at a
point in time is crucial in order to determine whether the product is held in a consignment arrangement
according to paragraph B77.
Under IFRS, control of an asset refers to the ability to direct the use of, and obtain substantially all of the
remaining benefits from, the asset. Control includes the ability to prevent other entities from directing
the use of, and obtaining the benefits from, an asset.
If Beta hasn’t gained control of the product after delivery, this means that it holds the product in a
consignment arrangement and cannot recognized revenue on delivery.
Indicators that an arrangement is a consignment arrangement (paragraph B78)
•
•
•
The product is controlled by the entity until a specified event occurs, such as the sale of the
product to a customer of the dealer or until a specified period occurs;
The entity is able to require the return of the product or transfer the product to a third party
(such as another dealer); and
The dealer does not have an unconditional obligation to pay for the product (although it might
be required to pay a deposit).”
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Control of an asset refers to the ability to direct the use of, and obtain substantially all of the remaining
benefits from, the asset. Control includes the ability to prevent other entities from directing the use of,
and obtaining the benefits from, an asset.
Based on the guidance from the standard above, Alpha can only recognise revenue when Beta (the
dealer) sells the goods to the end customer. Therefore, only those goods sold by Beta to the end
customer prior to 31 March 2015 should be recognised as revenue. The amount of revenue that should
be recognised is the invoice price of the consideration payable by the end customer, which in this case is
CU 120. The cost of sales is: [CU 160 x CU (120 ÷ 200)] = CU 96. The commission payable is CU 12 (CU
120 x 10%), which should be treated as a part of cost of sales. The amount of trade receivable is CU 108
(CU 120 – CU 12). The cost of unused goods is CU 64 (CU 160 – CU 96), should be included in inventory
of Alpha.
Alpha
Consignment to Beta
Date
2015
March 31
Particulars
Dr
Purchases
Beta (Sales)
Beta (Commission)
Stock on consignment
Profit or loss (Profit)
160
Cr
120
12
64
12
Balance
160 (Dr)
40 (Dr)
52 (Dr)
12 (Cr)
–
Beta
Date
2015
March 31
Particulars
Consignment to Beta
Consignment to Beta
Bank
Dr
Cr
Balance
12
108
120 (Dr)
108 (Dr)
–
120
The profit on consignment is calculated as under –
CU
Revenue
120
Cost of sales
96
Gross profit
24
Sales commission
12
Accounting profit
12
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