Consignment Arrangements

Performance obligations are satisfied, and revenue is recognized when a customer obtains control of promised goods or services. Physical possession is generally synonymous with control, but there are situations–like consignment arrangements–where this is not the case. In consignment arrangements, a consignee receives goods from a vendor without obtaining the ability to direct the use of the asset or obtain all its remaining benefits substantially. An entity must determine if an arrangement is a consignment, as this will affect the timing of revenue recognition.

How To

Control of an asset is transferred to a customer when the customer obtains all the remaining benefits from an asset substantially and can direct the use of the asset. Vendors must assess when control is transferred to properly recognize revenue. The vendor should consider the following indicators from Accounting Standards Codification (ASC) 606-10-25-30, which may indicate that control has transferred:

The vendor has a present right to payment for the asset.
The customer has legal title to the asset.
Physical possession of the asset has transferred.
The customer bears the significant risks and rewards of ownership of the asset.
The customer has accepted the asset.

These indicators are not criteria that must all be met; rather, they support the overall principle that control transfers when a customer obtains the ability to direct the use of, and obtain all the remaining benefits from, the asset substantially. For a detailed analysis of indicators of transfer of control, see Determining the Transfer of Control.

These indicators are to be considered in aggregate, and the presence (or absence) of a single indicator is not sufficient to determine the transfer of control. For example, in a consignment arrangement, physical possession has transferred, but consignees generally have no obligation to pay for the product until its subsequent sale. Vendors often use these arrangements to improve the marketability of their products, to transfer products closer to the consumer, or to facilitate distribution by reducing risk for distributors. ASC 606-10-55-80 provides three indicators that a consignment arrangement exists:

The vendor controls the product until a specified event occurs, such as the sale of the product to an end-customer, or until a specified period expires.
The vendor can require the return of the product or transfer of the product to a third party.
The consignee does not have an unconditional obligation to pay for the product (although it may be required to pay a deposit).

These indicators are not exhaustive and don’t all need to be present; they are intended to help evaluate whether the vendor has retained control of the product. The standard notes that this list is not all-inclusive. It is therefore appropriate for entities to consider these indicators of consignment arrangements in conjunction with the overall indicators and definition of the transfer of control, as there may be times when an indicator of a consignment arrangement is present, and control has nevertheless transferred (see Example 2 below). However, when the indicators of a consignment are present, and control has not been transferred to the customer, the arrangement is a consignment. Consequently, the vendor will not record revenue for consigned goods that have been shipped until control is transferred. This may occur on the subsequent sale of a consigned good or the expiration of a specified period.

Under legacy guidance in ASC 605 and SAB Topic 13, revenue recognition focused heavily on the transfer of risks and rewards of ownership and the fixed or determinable nature of the sales price. Consignment guidance was more rules-based and emphasized whether the buyer was obligated to pay and whether return rights existed. ASC 606 shifts the analysis to a broader principle of control, integrating consignment evaluation into the transfer-of-control framework rather than treating it as a standalone rule set.

Example 1

Con-Sign Industries (CSI) is a manufacturer of large electronic signs and billboards. Many advertising shops acquire signs from CSI for their customers. CSI ships the signs with full payment due immediately. Legal title does not transfer, and CSI retains the right to require shipment of any unsold electronic signs to other sign shops. When this right is exercised, a full refund is provided. Similarly, sign shops may return any unsold signs to CSI for a full refund.

Issues – Is this a consignment arrangement? How does this impact the recognition of revenue when CSI ships electronic signs to sign shops?

Analysis: CSI receives cash and transfers physical possession of the signs, which are indicators that control may have transferred. However, because the payment is fully refundable and CSI retains the ability to require the return or redirection of the goods, CSI does not have a substantive present right to payment. In addition, legal title remains with CSI, and CSI retains decision-making authority over the disposition of the signs. Accordingly, the sign shops do not obtain the ability to direct the use of the signs or obtain all their remaining benefits substantially. Therefore, control has not transferred.

Furthermore, all three indicators of a consignment arrangement (control by the vendor, vendor’s ability to require return or transfer, and no unconditional obligation of the consignee to pay) are present. Consequently, this arrangement is a consignment. Because of this, revenue recognition must be deferred until the subsequent sale to the end-consumer. Likewise, the consignee may be required to recognize revenue on a net basis. For additional analysis of this topic, see Principal/Agent Considerations (Gross vs. Net) in ASC 606.

Example 2

Buy Back Books (B3) sells wholesale books to university bookstores with a customer put option. Universities are generally able to sell books at a significant markup from B3’s wholesale prices, but B3 will repurchase any unsold books for the initial sale price, less a nominal restocking fee if a university exercises the option.

Issues – Considering that universities do not have an unconditional obligation to pay for the product, is this a consignment arrangement? How does a sale with a customer put option differ from a consignment arrangement?

Analysis: Because the put option is exercisable at the discretion of the university and not B3, the university controls the books upon delivery. B3 no longer has the ability to redirect the books or require their return unless the university elects to exercise the put option. Consequently, despite the presence of one indicator that this is a consignment arrangement, it is not considered a consignment. The difference between a consignment arrangement and a sale with a customer put option is that in a consignment arrangement, the vendor retains all of the remaining benefits from an asset, and can direct its use, while in a sale, the customer obtains such benefits and the ability to direct the use of the asset. For more details regarding customer put options, see Repurchase Agreements in ASC 606.

Summary

ASC 606 provides three indicators that a consignment arrangement may exist. These indicators provide a starting point for determining whether a vendor maintains control of a product after it is shipped. Additionally, the general ASC 606 process for determining the transfer of control should be consulted. Ultimately, the ability to obtain substantially all of the remaining benefits from an asset and to direct its use determines control. In a consignment arrangement, revenue cannot be recognized until control of the product has transferred, which may be when a specified event occurs, such as the sale of the product to an end-consumer or the expiration of a specified period. Until that point, the vendor continues to recognize the consigned goods as inventory on its balance sheet, and no revenue is recorded.

Editor’s Note

This article reflects guidance under ASC 606, Revenue from Contracts with Customers, as currently codified, including subsequent amendments. Although originally published in April 2016, the technical analysis has been updated to clarify the principle-based transfer-of-control framework, refine the discussion of the present right to payment (including refundable consideration), expand the comparison to legacy ASC 605 guidance, and include reference to the repurchase agreement guidance in ASC 606-10-55-22 through 55-29. These updates enhance precision and alignment with current codification without altering the overall conclusions.

Resources

ASC 605-10-S99-SAB 13.A.2-Q2
ASC 606-10-25-25, 25-30, and 55-79 through 55-80
EY, Financial Reporting Developments: "Revenue from Contracts with Customers." August 2025. Section 4.5.
KPMG, Issues In-Depth: "Revenues from Contracts with Customers." September 2014. Section 5.5.6.
PWC, "Revenue from Contracts with Customers." March 2025. Section 8.6.