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Dear Tutor
Please help with this following question
Inventory Marlos Co has recently negotiated arrangements with a new supplier. Included in the contract is a clause which allows the supplier to require return of the products at any time. Marlos Co can also return the products within a set period of time if they remain unsold. Inventory purchased from the new supplier with a value of $8·1 million is included in the company’s financial statements as inventory at 31 March 20X5. These amounts are recognised at cost which is lower than the net realisable value of the product
I understand that for consignment inventory unless it’s sold Marlos doesn’t have control. But I am confused as to what will be answer here
So for the benefit of anyone else coming across this post, this is a “matters to consider and audit evidence” Q set at the completion stage of an audit (7 marks) for inventory that you have correctly identified as consignment inventory.
For “matters”, the “ideas list” for your answer should include materiality (assess), relevant accounting (of IFRS), effect(s) on FS (if incorrectly accounted for), relevant professional (ISAs)/ethical requirements (in case of inability to obtain sufficient audit evidence, which doesn’t apply in this case).
In the case of Marlos, you have to know what IFRS 15 requires in the case of consignment inventory – which is that the buyer cannot recognise inventory in SoFP that it does not control.
As Marlos has included $8.1m in inventory, it has presumably recognised a purchase (Dr Purchase/Cr Payable). However, it can return them, so the inventory should be derecognised (Dr Inventory SoFP/Cr Inventory SoPL) and a receivable recognised instead (Dr Receivable/Cr Purchases). So the net effect of consignment inventory is “nothing” until it is sold on.
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