Timing of Posting Consigned Sales

[martymcfly]

I have a timing question, and for the life of me I can't remember how to handle it:

The company sells items on consignment (both physically and digitally), but it will be between 15 and 60 days after the month of sale when the company receives the detail for those sales.

Generally, these sales are entered in the period they are received from the customer. So if they sell product in June and give the the detail in August, the company posts it in August.

This leads to two questions:

1) Since the sale actually took place in June, should the company backdate the sales to be placed in June? That would more accurately represent the "True" timing of the sale, yet the other way is still when the company is made aware of the sale and avoids them from having to change sales figures quite a while after the end of the month.

2) Assuming that 1 is not true and the company is doing it correctly: if they normally receive an invoice at the end of the following month (so using the above example, they normally receive it in July) but instead receive it August 2nd, wouldn't it be incorrect to post it as July sales?

 

[Counterofbeans]

The recording of sales, be it consigned or owned, should be the same. Record sales when (1) persuasive evidence that an arrangement exists; (2) delivery has occurred or services have been rendered; (3) the seller’s price to the buyer is fixed or determinable; and (4) collectability is reasonably assured.

Please explain, "when the company receives the detail for those sales"

 

[martymcfly]

Thanks for the reply Counterofbeans.

1) Not an issue
2) They cannot be certain of this until they receive the information from the customer
3) same as 2
4) This is not an issue

The way it works is that the company sells goods both in physical form through consignment customers and digital form (which is consigned as well, since they don't pay for a limited number of licenses up front).

Until the customer (digital or physical) sends the company a spreadsheet detailing what they sold, there is no way for the company to know how much of any one item was sold nor the exact price (although price is contractual in most circumstances and can be assumed, there are variances).

My assumption then is what I had originally assumed: since the company cannot know 3 (since prices may change), nor 2 (since they cannot know what products were sold) until they receive the detail from the customer, the revenue should be counted in the period in which they receive the detail.

Would you agree?

 

[Counterofbeans]

So the company is a consignor who transfers product to a consignee, who sells them on behalf of the company, yes? And the company ultimately invoices the consignee, yes?

I'm a little confused as to why it takes so long for the consignee to inform the company about such sales. If I understand correctly, they invoice customers in June, but don't send the detail of such sales until August? Really? That seems far too long...

In theory, you should invoice the consignee in the period that the consignee recognizes revenue from selling the product to their customers.

What seems to be causing the problem is the length of time it takes to actually get the information from them. If it simply was not possible to get it from them on a more timely basis, I'd add one hell of a note to the financial statements, clearly establishing the company's policy in regards to exactly what the situation is and the company's response to it.

 

[martymcfly]

That is correct. Eventually the consignee sends the detail of what was sold and the company invoices them based on that detail.

I don't know what causes the delay exactly, but it's an industry wide issue to my knowledge, particularly concerning digital sales. Sometimes it's even longer than 60 days. Even for physical, it is unlikely the company will receive detail until at least 15 days after the month of sale.

There is also the issue that some digital only customers send detail quarterly. So all the sales from January through March will be counted as revenue for the company (consignor) no earlier than April.

It sounds that you agree that the revenue should not be accrued back to the actual month of sale due to the length of time it takes to get the information. Am I reading that correctly?

I would assume then that the company should institute a cutoff date for when they recognize revenue in the prior month? Obviously, the earliest the company could ever receive the detail from the consignee is the 1st of the following month, so in every case it would have to be posted in a prior month...the question is how far back do you go?

 

[Counterofbeans]

Well, the preferred option would be to record the sales when they actually happened, not when you receive the detail.

But, it depends on how long the company can wait before issuing financial statements. If you can keep the books open that long, I'd probably record them in the correct period. Many/most companies, however, need to close their books much earlier then that, so you'd have to develop/change your company policy.

If you need to close the books earlier, then you'll want to make a company policy that defines exactly how you record revenue. In this situation, I'd sit down with key management people and discuss the scenario. This discussion should include all reasons for the delays in information and how to invoice under each situation. This should be a glaring footnote in your financial statements.

If it were me, I'd really push the consignees as to why they have to wait so long to provide the related detail. It literally makes me shake my head that it takes them that long. That shouldn't be that brutal of a report to run.

 

[martymcfly]

If it were me, I'd really push the consignees as to why they have to wait so long to provide the related detail. It literally makes me shake my head that it takes them that long. That shouldn't be that brutal of a report to run.

I'm not sure why it does either, aside from there just being lots and lots of data in some cases. Unfortunately a lot of the consignees are pretty big fish in the pond, so the company doesn't have a lot of pull.

Thanks for the all the info. You were a great help.

 

[Counterofbeans]

I'm not sure why it does either, aside from there just being lots and lots of data in some cases. Unfortunately a lot of the consignees are pretty big fish in the pond, so the company doesn't have a lot of pull.

Thanks for the all the info. You were a great help.

Well, in my mind, the conversation that I'd have with them doesn't need to be contentious. I'd simply explain how important it is to your financial statements and see how they respond.