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Dear tutor,
In BPP kit, the answer says
“Revenue and inventory:
It is important that the group is clear about who owns the inventory at each point. There are many possible types of error here, which could lead to misstatements in both the group financial statements and those of the individual companies. For instance, Stow might consider the inventory as sold and thus recognise revenue that would need to be eliminated on consolidation. In its individual accounts, this would be considered consignment inventory and should not be recognised in revenue. If Zennor did not yet recognise the inventory, then it would be entirely missing from the group accounts, understating inventory and overstating revenue.”The seller should NOT make entry for revenue as its consignment inventory?
In consignment inventory, risks and rewards remains with the seller until sold to third party?
Zennor should recognise inventory as its in-transit inventory (assuming Zennor has received inventory as we do in group accounting)?Thanks,
Short answers – assuming there is a consignment contract – yes, yes and no.
S transfers cars to Z – Z then sells cars through its dealership network.
All cars on consignment remain the inventory of S until Z sells the cars. – in a consignment contract, Z would return unsold cars to S. (Though in practice, in the UK, according to good car dealerships “there is no such thing as an unsold new car”.)However, this was not the answer – this was covered by the tutorial note:
Tutorial note: Credit will also be awarded where answers discuss the issue of whether the arrangement is a consignment inventory arrangement, and the relevant risks of material misstatement.The original answer assumed that it is not consignment inventory but that S makes a normal sale when it transfers cars to Z. You don’t need to know this, but, for example, when selling overseas goods may be shipped “free-on-board” (FOB) or “carriage, insurance, freight” (CIF). If goods are lost/destroyed in transit, it is the seller who was responsible for them (and therefore suffers any loss) if CIF; if FOB it would be for the purchaser to have insured them.
Dear tutor,
Thank you for your comments.
I read the start of the last paragraph as “The answer as copied out by you is assuming that IT IS consignment inventory” Please correct me if I am wrong.
For any question in exam, if risks and rewards is mentioned, then I think the lease accounting will apply?
Regards,
My APOLOGIES – this is the original answer that I was referencing:
“There is a risk that cars which are in transit to Zennor Co at the year end may be omitted from inventory. The cars spend a significant amount of time in transit and awaiting delivery to Zennor Co, and without a good system of controls in place, it is likely that items of inventory will be missing from the Group’s current assets as they may have been recorded as despatched from the seller but not yet as received by Zennor Co.” …. i.e. no reference to consignment here.
Then in tutorial note:
“Tutorial note: Credit will also be awarded where answers discuss the issue of whether the arrangement is a consignment inventory arrangement, and the relevant risks of material misstatement.”I think the answer as copied out is combining two separate scenarios – it can’t be considered a sale AND treated as consignment inventory.
The mention of “risks and rewards” does NOT mean there is lease accounting – but concerns revenue recognition. Transfer of risks and rewards is an indicator of the transfer of control which is relevant to revenue recognition when a performance obligation is satisfied at a point in time.
“The customer has the significant risks and rewards of ownership of the
asset—the transfer of the significant risks and rewards of ownership of an
asset to the customer may indicate that the customer has obtained the
ability to direct the use of, and obtain substantially all of the remaining
benefits from, the asset.”This is relevant to leasing only in a sale and leaseback scenario – if the transfer is a sale, the leaseback gives rise to a right-of-use asset. If the transfer is not a sale, the “proceeds” are a loan secured on the asset.
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