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Consignment is the act of consigning, the act of giving over to another person or agent's charge, custody or care any material or goods but retaining legal ownership until the material or goods are sold. That may be done for the purpose of shipping the goods, transferring the goods to auction or intending the goods to be placed on sale in a store (a consignment store).
The verb "consign" means "to send" and therefore the noun "consignment" means "sending goods to another person". In the case of "retail consignment" or "sales consignment" (often just referred to as a "consignment"), goods are sent to the agent for the purpose of sale. The ownership of these goods remains with the sender. The agent sells the goods on behalf of the sender according to instructions. The sender of goods is known as the "consignor" and the agent entrusted with the custody and care of the goods is known as the "consignee".
- The relation between the two parties is that of consignor and consignee, not that of buyer and seller
- The consignor is entitled to receive all the expenses in connection with consignment
- The consignee is not responsible for damage of goods during transport or any other procedure
- Goods are sold at the risk of the consignor with profit or loss belonging to the consignor only
A consignor who consigns goods to a consignee transfers only possession, not ownership, of the goods to the consignee. The consignor retains title to the goods. The consignee takes possession of the goods subject to a trust. If the consignee converts the goods to a use not contemplated in the consignment agreement, such as by selling them and keeping the proceeds of the sale for the consignee, the crime of embezzlement has been committed.
The word consignment comes from the French consigner, meaning "to hand over or transmit", originally from the Latin consignare "to affix a seal", as it was done with official documents just before being sent.
"Consignment shop" is an American term for second-hand shops that sell used goods for owners (consignors), typically at a lower cost than new goods. Not all second-hand shops are consignment shops. In consignment shops, it is usually understood that the consignee (the seller) pays the consignor (the person who owns the item) a portion of the proceeds from the sale. Payment is not made until and unless the item sells. Such shops are found around the world. They can be chain stores, like the Buffalo Exchange or individual boutique stores. The consignor retains title to the item and can end the arrangement at any time by requesting its return. A specified time is commonly arranged after which if the item does not sell, the owner is expected to reclaim it (if it is not reclaimed within a specified period, the seller can dispose of the item at discretion).
Merchandise often sold through consignment shops includes antiques, athletic equipment, automobiles, books, clothing (especially children's, maternity, and wedding clothing, which are often not worn out), furniture, firearms, music, musical instruments, tools, paragliders and toys. eBay, drop-off stores and online sellers often use the consignment model of selling. Art galleries, as well, often operate as consignees of the artist.
The consignment process can be further facilitated by the use of vendor managed inventory (VMI) and customer managed inventory (CMI) applications. VMI is a business model that allows the vendor in a vendor-customer relationship to plan and control inventory for the customer, and CMI allows the customer in the relationship to have control of inventory.
Consignment shops differ from charity or thrift shops in which the original owners surrender both physical possession and legal title to the item as a charitable donation, and the seller retains all proceeds from the sale. They also differ from pawn shops in which the original owner can surrender physical possession (but not legal title) of the item in exchange for a loan and then reclaim the item upon repayment of the loan with interest (or else surrender legal title to the item), or alternatively can surrender both physical possession and legal title for an immediate payment; the pawn shop would retain all proceeds from any subsequent sale.
In the UK, the term "consignment" is not used, and consignment shops that sell women's clothing are called "dress agencies". Although the other types of consignment shop exist, there is no general term for them.
A consignor brings their second-hand items in to be reviewed.
After the review, the consignee will return those items deemed unsuitable for resale to the consignor (such as torn or dirty items or items deemed to be fakes, which cannot be sold in some jurisdictions), accept those to be resold, and establish the target resale price, the consignee's share of it, and the length of time the items will be held for sale.
When a consignor's items sell (or in some cases, after the agreed-upon period ends), the consignee takes a share of the profits and pays the consignor the share. Items that are not sold are returned to the consignor (who must retrieve them within a set time or forfeit title to them; in some cases, the consignor may agree ahead of time to allow the consignee to donate them to charity).
Accounting for Consignment Arrangements
When a vendor (consignor) provides goods on consignment to a distributor (consignee) then revenue cannot be recognized when control has transferred. This could occur at the expiration of a specified consignment period, or the sale of an item to an end-consumer. The SEC has provided examples of consignment arrangements in question 2 of SAB Topic 13.A.2 including the following:
- A customer’s obligation to pay is implicitly excused until consumption or sale
- The seller has an obligation to bring about resale
- A repurchase price exists that will be adjusted for holding costs and interest
Accounting Standards Codification (ASC) 606-10-55-80 (implemented for public companies December 15, 2017) provides three indicators of the presence of consignment arrangement that provides the principles behind the examples that the SEC has outlined. These indicators are as follows:
- The vendor controls the product until a specified event occurs, such as the sale to an end-customer, or until a specified period expires.
- The vendor is able to require the return of the product or transfer of the product to a third party.
- The consignee does not have an unconditional obligation to pay for the product (although it may be required pay a deposit).
This list of indicators of a consignment arrangement is not all-inclusive, so companies should also consider other indicators of the transfer of control found in ASC 606-10-25-30.
- Nissanoff, Daniel (2006). FutureShop: How the New Auction Culture Will Revolutionize the Way We Buy, Sell and Get the Things We Really Want. The Penguin Press. ISBN 1-59420-077-7. (Hardcover, 246 pages)
- "Codification of Staff Accounting Bulletins - Topic 13: Revenue Recognition". www.sec.gov. Retrieved 2016-03-03.
- "Consignment Arrangements | RevenueHub". RevenueHub. Retrieved 2016-03-03.
- "Determining the Transfer of Control | RevenueHub". RevenueHub. Retrieved 2016-03-03.
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