One hundred items leave for a showroom, while another hundred leave for customers who bought through an online store. The quantities match, but “left the warehouse” is not enough to account for both movements identically. The showroom may hold goods on consignment without an unconditional purchase obligation, while retail customers may have bought with a defined return right. The difference affects revenue, inventory and liabilities, not merely document names.
Consider two separate educational cases. Taxes, commissions and shipping charges are excluded to focus on the underlying treatment. Review each agreement rather than assuming that every contract using the words “consignment” or “return” has the same accounting outcome.
A return right: not all consideration is settled revenue
A retailer sells 100 items at SAR 200 each, with a cost of SAR 120 each. Appropriate evidence supports an expectation that five will be returned. Assume the variable-consideration estimate meets the relevant accounting constraints and that items will be recovered unchanged, without material recovery costs or impairment.
Under these assumptions, consideration for 95 items, SAR 19,000, is the revenue expected to be retained. There is a SAR 1,000 refund liability and a SAR 600 asset representing the right to recover products. Cost of sales is SAR 11,400, rather than the entire cost of all hundred items without considering expected recovery.
| Amount monitored | Illustrative amount |
|---|---|
| Total customer consideration | SAR 20,000 |
| Revenue after expected returns | SAR 19,000 |
| Refund liability | SAR 1,000 |
| Recovery right under the assumptions | SAR 600 |
| Cost of sales | SAR 11,400 |
IFRS 15 addresses a sale with a return right through revenue, a refund liability and a right to recover products. The recovery asset does not mean five physical items are already back in the warehouse. They should not become available-to-sell stock before arrival and inspection.
If only three have arrived by the review date, that does not automatically mean the other two will never return: the return window may still be open. Review remaining rights, customer experience and new information, updating the estimate where necessary. If returned products arrive damaged or require significant transport and inspection expenditure, do not use the original SAR 120 cost without further analysis.
Showroom stock: possession does not establish a purchase
In the second case, a supplier sends 100 items to a showroom but can require their return or redirect them elsewhere. The showroom pays only as the agreed sales condition is fulfilled. Assuming the substance is consignment and control has not passed to the showroom, dispatch alone does not create revenue.
The goods require location and movement tracking, but they do not cease to be the supplier's responsibility merely because the shelf is in another building. Obtain a periodic reconciliation of opening quantities, receipts, sales, returns and remaining units. Match sales reports with evidence and contractual terms before recording revenue rather than waiting for an aggregate bank transfer that does not identify products.
Maintain three distinguishable operational records: consignment stock at the showroom, sales that have met the relevant conditions, and amounts receivable or collected. Combining them into a single “showroom sales” figure obscures goods displayed, goods sold and sales actually paid. Returning unsold goods should not be used to correct revenue that should never have been recognised initially.
Also examine returns after the showroom sells to the final customer. Who bears the return, who inspects it and when is notice sent? These are not peripheral logistics details: they may change amounts due and how a sales report should be understood. Define the approval trail so that each party does not independently record its preferred figure, leaving disagreements until settlement.
Distinguishing the cases gives sales, warehouse and accounting staff a common vocabulary. Before creating an entry, name the event accurately: consignment dispatch, sale with a return right, cash refund or receipt of a returned product. Precise descriptions make reconciliation easier and reduce both inflated revenue and the premature availability of goods not yet recovered.
Sources & further reading
Visit the original source to explore the concept and its wider context.
General educational content. Appropriate treatment depends on your business and accounting policies; consult your accounting professional when applying it to business records.
