Goods sold on consignment are goods a supplier hands to a retailer to sell on the supplier’s behalf, with ownership staying where it was until the retailer sells them to an end customer. The retailer never buys the stock, so the supplier carries the inventory and the risk while the goods sit on the shelf, and the retailer takes a fee or a commission out of the eventual sale price.
The supplier is the consignor and the retailer is the consignee. A consignor is a person that delivers goods to a consignee in a consignment, and a consignee is a merchant to which goods are delivered in a consignment (Uniform Commercial Code 9-102(a)(19) and (a)(21)).
What Makes It a Consignment Rather Than a Sale
Commercial law is specific, and the definition carries four conditions rather than describing an intention.
A consignment means a transaction, regardless of its form, in which a person delivers goods to a merchant for the purpose of sale and: the merchant deals in goods of that kind under a name other than the name of the person making delivery, is not an auctioneer, and is not generally known by its creditors to be substantially engaged in selling the goods of others; with respect to each delivery, the aggregate value of the goods is $1,000 or more at the time of delivery; the goods are not consumer goods immediately before delivery; and the transaction does not create a security interest that secures an obligation (Uniform Commercial Code 9-102(a)(20)).
Two of those conditions catch people out. A store whose creditors already know it substantially sells other people’s goods falls outside the definition, and so does a delivery worth less than $1,000. The phrase “regardless of its form” does the rest of the work: calling the paperwork a consignment agreement does not make the arrangement one, and calling it something else does not take it out.
When the Revenue Is Recognized
Not on delivery. That is the whole accounting point of the arrangement, and the revenue standard says it in a sentence.
When an entity delivers a product to another party, such as a dealer or a distributor, for sale to end customers, the entity should evaluate whether that other party has obtained control of the product at that point in time, and a product that has been delivered to another party may be held in a consignment arrangement if that other party has not obtained control of the product. Accordingly, an entity should not recognize revenue upon delivery of a product to another party if the delivered product is held on consignment (FASB Accounting Standards Update 2014-09, paragraph 606-10-55-79).
Physical possession is the reason the question arises at all. The customer’s physical possession of an asset may indicate control, but physical possession may not coincide with control of an asset, and in some consignment arrangements a customer or consignee may have physical possession of an asset that the entity controls (FASB Accounting Standards Update 2014-09, paragraph 606-10-25-30).
The Three Indicators
The standard supplies a test rather than leaving the judgment open. Indicators that an arrangement is a consignment arrangement include, but are not limited to, the following (FASB Accounting Standards Update 2014-09, paragraph 606-10-55-80):
- 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 expires.
- The entity is able to require the return of the product or transfer the product to a third party, such as another dealer.
- The dealer does not have an unconditional obligation to pay for the product, although it might be required to pay a deposit.
Read the third one against a real agreement. A deposit does not make the arrangement a sale, and an unconditional obligation to pay does, whatever the document is titled. A recall right, the second indicator, is the one that most often decides a marginal case, because a supplier that can pull the stock back and send it to a different store has not given up control of it.
The Rule That Can Cost a Consignor the Goods
Retaining title against the consignee is not the same as retaining it against the consignee’s creditors, and this is where an unfiled consignment turns into a loss.
Except as otherwise provided in subsection (b), for purposes of determining the rights of creditors of, and purchasers for value of goods from, a consignee, while the goods are in the possession of the consignee, the consignee is deemed to have rights and title to the goods identical to those the consignor had or had power to transfer (Uniform Commercial Code 9-319(a)).
So a lender with a blanket lien over the consignee’s inventory can reach goods the consignor still owns.
Subsection (a) opens by excepting subsection (b), and subsection (b) is the reason consignors file a financing statement. For purposes of determining the rights of a creditor of a consignee, law other than this article determines the rights and title of a consignee while goods are in the consignee’s possession if, under this part, a perfected security interest held by the consignor would have priority over the rights of the creditor (Uniform Commercial Code 9-319(b)).
The article it sends the question away from is Article 9 itself, and the part it names is Article 9’s own perfection and priority rules. So a consignor who has perfected steps outside the deeming rule on the creditor question, and a consignor who has not is exposed to the consignee’s creditors on goods it never sold. The two subsections do not reach equally far either: the deeming rule speaks to creditors and to purchasers for value, and the exception speaks only to a creditor.
Where the Goods Sit on the Books
With the consignor, on both sets of rules, and that is the part a bookkeeper gets wrong first.
On the tax side the seller includes goods out upon consignment in inventory, a rule set out in inventory accounting along with the rest of the title test. On the consignee’s side the mirror applies: goods on hand that belong to someone else do not belong in inventory even though they are on the shelf and were counted, a point worked through in merchandise inventory.
The count is where the error surfaces. A physical count picks up everything on the floor, so consigned stock has to be identified and excluded by the consignee and added back by the consignor, and neither adjustment happens on its own.
Where a US Firm Meets It
Three questions, in this order, and all of them are documentary.
Whose goods are these. Ask for the agreement rather than the invoice, and test it against the three indicators rather than its title, because an arrangement with an unconditional obligation to pay is a sale however the parties describe it (FASB Accounting Standards Update 2014-09, paragraph 606-10-55-80).
When was the sale. For a consignor client, revenue follows the consignee’s sale to the end customer, not the shipment, so the cutoff work runs on the consignee’s sales reports and those usually arrive late.
What was excluded from the count. For a consignee client, the workpaper has to show consigned goods being taken out of the count rather than assumed away, and for a consignor client it has to show them added in.
Common Questions
It means the goods were placed with a retailer to sell, with ownership staying with the supplier until the retailer sells them to a customer. The retailer never bought the stock, so the supplier carries it in inventory in the meantime and the retailer earns a fee or commission when it sells.
The consignor, until the sale to the end customer. That is a limited answer against the consignee’s creditors, though. Except as otherwise provided in subsection (b), while the goods are in the consignee’s possession the consignee is deemed to have rights and title identical to those the consignor had or had power to transfer (Uniform Commercial Code 9-319(a)). Subsection (b) is the exception a perfected consignor relies on, and it is set out above.
Not on delivery. An entity should not recognize revenue upon delivery of a product to another party if the delivered product is held on consignment (FASB Accounting Standards Update 2014-09, paragraph 606-10-55-79). The sale happens when control passes, which in a genuine consignment is when the consignee sells to an end customer.
Accountably places trained offshore accountants and tax preparers inside US CPA and EA firms under layered review, and a trial task lets a firm’s own reviewer grade a real block of inventory and cutoff work before any client file depends on it.
