A manufacturer delivers goods to a dealer's showroom and retains, under the terms of the arrangement, the ability to require the dealer to return any unsold units or to redirect them to a different dealer at any point before those units are sold to an end customer. Under ASC 606-10-55-80, which fact would support treating this arrangement as a consignment arrangement, such that the manufacturer should not recognize revenue upon delivery to the dealer?
- The manufacturer retains the ability to require the dealer to return the product, or to transfer it to a different dealer, at any time before the product is sold to an end customer
- The dealer takes physical possession of the product and displays it prominently in its own showroom
- The dealer must pay the manufacturer the full invoice price 90 days after delivery, unconditionally, regardless of whether the product has been sold to an end customer
- The dealer purchases insurance covering loss of or damage to the product from the moment of delivery
Why A? And why not the others?
Correct answer: A. The manufacturer retains the ability to require the dealer to return the product, or to transfer it to a different dealer, at any time before the product is sold to an end customer
ASC 606-10-55-80 lists indicators that an arrangement is a consignment arrangement rather than a sale, one of which is that the entity is able to require the return of the product or to transfer the product to a third party, such as another dealer; retaining that ability shows the manufacturer has not surrendered control of the product to the dealer merely by delivering it, so revenue should not be recognized until the product is sold onward to an end customer or another triggering event occurs. The dealer taking physical possession and displaying the product is a normal feature of many consignment arrangements precisely because the dealer holds the goods while the manufacturer retains control, so physical possession by itself is not one of the indicators the guidance points to and does not by itself show consignment. An unconditional obligation to pay the full price on a fixed date regardless of whether the product has sold points the other way: ASC 606-10-55-80 lists the absence of an unconditional payment obligation (though a deposit may still be required) as a consignment indicator, so a dealer that must pay in full regardless of sale looks like a purchaser, not a consignee. The dealer insuring the product against loss or damage says nothing about who controls the product or has the ability to redirect or reclaim it, so it is not one of the indicators the standard identifies.
Source: FASB Accounting Standards Codification: ASC 606-10-55-80, Revenue from Contracts with Customers — Consignment Arrangements