ACCA Strategic Business Reporting (SBR) Practice Exam

How is revenue recognised for consignment inventories?

1. When the inventory is purchased

2. At the time of shipment to the dealer

3. When control passes to the dealer or distributor

4. When the dealer sells the inventory

The correct answer is: When control passes to the dealer or distributor

Revenue recognition for consignment inventories is determined by the principle of control transfer. In a consignment arrangement, the consignor (the party sending the goods) retains ownership of the goods until certain conditions are met. Revenue is recognized when control passes to the dealer or distributor. Control is considered to have passed when the dealer has the ability to direct the use of the inventory and obtain substantially all of the remaining benefits from it. This typically occurs when the dealer has taken physical possession of the goods, but it does not necessarily mean the revenue is recognized at this moment since control might be assessed based on various other contractual agreements involved in the consignment. Consignment sales also mean that the dealer is acting primarily as an agent for the consignor until the inventory is sold to the end customer. Therefore, recognizing revenue at the point of control passing aligns with the financial reporting standards, ensuring accuracy in revenue recognition and reflecting the actual economic transaction that has occurred.