Question
Sell-through approach/consignment arrangements The sell-through approach is used today for some arrangements with distribution companies where revenue is not recognized until the product is sold
Sell-through approach/consignment arrangements
The sell-through approach is used today for some arrangements with distribution companies where revenue is not recognized until the product is sold by the distributor to the end customer (that is, the consumer) because the distributor may be able to return the unsold product, rotate older stock, or receive pricing concessions. As a result, the risks and rewards of ownership have not transferred. Some entities sell products using consignment arrangements under which the buyer (a dealer or distributor) takes physical possession of the goods, but does not assume all of the risks and rewards.
Example 1 - Sale of products to a distributor using a sell-through approach
Facts:
Procter and Gamble (P&G) a consumer products company, uses Sanitex, a distributor network, to supply its product to the end customer. Sanitex receives legal title and is required to pay for the products upon receipt, but may return unsold product at the end of the contract term. Once the products are sold to the end customer, P&G has no further obligations for the product and Sanitex has no further return rights.
When does P&G recognize recognize revenue?
Example 2 - Sale of products on consignment
Facts:
Grindex, a pharmaceutical manufacturer, provides product to Benu and other pharmacies on a consignment basis (for example, scan-based trading). Grindex retains title to the products until they are scanned at the register. The Aptieka does not have an obligation to pay Grindex until a sale occurs and any unsold products may be returned to the Grindex. Grindex also retains the right to call back or transfer unsold products to another pharmacy company until the sale to the consumer. Once the retailer sells the products to the consumer, Grindex has no further obligations for the products, and the pharmacy has no further return rights.
When does Grindex recognize revenue?
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