Key Points
- The entity (consignor) does not recognise revenue when goods ship to the consignee because control has not transferred.
- Revenue is recognised only when the consignee sells the goods to the end customer (or another triggering event occurs).
- IFRS 15.B77 lists indicators including the consignor's ability to require return of the goods and the consignee's lack of unconditional obligation to pay.
- Misclassifying a consignment as a sale-on-delivery can overstate revenue by the full value of unsold consigned inventory.
What is Consignment Arrangement?
IFRS 15.B77 treats consignment as a form of bill-and-hold in reverse: the goods sit at the consignee's location, but the consignor keeps control. The standard provides indicators rather than a bright-line test. If the consignor can require the return of unsold goods, or if the consignee has no unconditional obligation to pay until the goods are sold (or consumed), the arrangement is likely a consignment. IFRS 15.B78 adds that the consignee's ability to return unsold stock without significant penalty reinforces the conclusion.
The auditor's task is to determine whether the entity correctly identified the point at which control transfers. ISA 315.12(f) requires the auditor to understand revenue recognition policies, and for consignment arrangements that means tracing the contractual terms back to the IFRS 15.B77 indicators. The risk sits in timing. A consignor that books revenue on shipment to the consignee rather than on the consignee's onward sale will overstate revenue for any period where consigned inventory remains unsold. This is why the transaction price allocation only becomes relevant after the control question is settled.
Consignment arrangements frequently overlap with variable consideration when the consignor offers the consignee pricing adjustments contingent on sell-through volumes.
Worked example
Client: Austrian retail company, FY2025, revenue EUR 12M, Austrian UGB reporter (applying IFRS 15 by analogy for revenue recognition). Kellner operates 14 home goods stores across Austria. A German ceramic tile manufacturer, Topfer Keramik GmbH, delivers EUR 380,000 of floor tiles to Kellner under a consignment agreement. Kellner displays the tiles in-store but does not pay until a tile is sold to a retail customer. Unsold tiles may be returned to Topfer at any time without penalty.
Step 1 — Identify the arrangement type
The auditor reviews the supply agreement. Clause 4.1 states Topfer retains title until the point of sale to a retail customer. Clause 4.3 permits Kellner to return unsold tiles within 12 months at no cost. Clause 5.2 confirms Kellner has no obligation to pay for unsold inventory.
Documentation note: record the IFRS 15.B77 indicator assessment. Flag: consignor can require return (B77(a) met), consignee has no unconditional payment obligation (B77(c) met). Conclusion: consignment arrangement.
Step 2 — Determine the point of revenue recognition for Topfer
Revenue transfers when Kellner sells a tile to a retail customer. At 31 December 2025, Kellner's POS system shows EUR 295,000 of tiles sold through to retail customers. The remaining EUR 85,000 sits on Kellner's shop floors.
Documentation note: reconcile consignment stock report from Topfer to Kellner's POS data. Confirm EUR 295,000 recognised as Topfer's revenue; EUR 85,000 remains as Topfer's inventory on Topfer's balance sheet, not Kellner's.
Step 3 — Audit the consignment inventory on Kellner's side
Kellner must not recognise the EUR 85,000 of unsold tiles as its own inventory. The tiles belong to Topfer. If Kellner's warehouse management system includes consignment stock in the inventory count, the balance sheet overstates inventory by EUR 85,000 and creates a corresponding fictitious payable.
Documentation note: obtain the consignment stock listing from Kellner's system. Confirm exclusion from Kellner's inventory valuation. Cross-reference physical count tags to distinguish owned stock from consignment stock per ISA 501.4.
Conclusion: Topfer recognises EUR 295,000 of revenue and retains EUR 85,000 as its own inventory; Kellner carries zero inventory and zero payable for the unsold consignment stock. The treatment is defensible because all three IFRS 15.B77 indicators point to consignment.
Why it matters in practice
- Teams sometimes accept the entity's classification without testing the contractual terms against the IFRS 15.B77 indicators. A supply agreement labelled "distribution agreement" may function as a consignment if the supplier retains the right of return and the buyer has no unconditional payment obligation. ISA 315.12(f) requires the auditor to look past the contract title to the substance of the revenue recognition policy.
- On the consignee side, inventory counts frequently include consignment stock alongside owned stock. ISA 501.4 requires the auditor to evaluate the existence of inventory held by third parties. When consignment goods sit on the entity's shelves but belong to a supplier, failing to segregate them overstates both inventory and liabilities.
Consignment arrangement vs bill-and-hold arrangement
| Dimension | Consignment arrangement | Bill-and-hold arrangement |
|---|---|---|
| Where the goods sit | At the consignee's premises | At the seller's premises (or a third-party warehouse) |
| When control transfers | When the consignee sells to the end customer | At the point the customer requests delayed delivery, if IFRS 15.B79–B82 criteria are met |
| Who bears obsolescence risk | The consignor (goods remain the consignor's inventory) | The customer (control has already transferred) |
| Revenue timing risk | Premature recognition on shipment to the consignee | Premature recognition before the bill-and-hold criteria are satisfied |
Both arrangements require the auditor to assess when control actually transfers rather than relying on physical delivery as a proxy. The consignment question is whether the consignee has gained control. The bill-and-hold question is whether the customer already has control despite not yet taking physical possession.
Related terms
Frequently asked questions
How do I identify a consignment arrangement during the audit?
Review the supply agreement for the indicators under IFRS 15.B77. The two most telling signs are whether the supplier can require return of unsold goods and whether the buyer lacks an unconditional obligation to pay until the goods are sold onward. If both are present, treat the arrangement as consignment and test the point of revenue recognition accordingly.
Does the consignee report consignment goods as inventory?
No. The consignee does not control the goods under IFRS 15, so the goods remain the consignor's inventory until sold to the end customer. IAS 2.6 defines inventories as assets held for sale in the ordinary course of business, and consignment goods do not meet that definition for the consignee because the consignee holds no risk of obsolescence or price decline on unsold stock.
Can a consignment arrangement include variable consideration?
Yes. If the consignment agreement ties the consignor's price to the consignee's sell-through rate or includes volume-based rebates, those elements are variable consideration under IFRS 15.50–54. The consignor estimates the variable amount at inception, applies the constraint, and updates the estimate at each reporting date per IFRS 15.59.