If the same product reaches the same final consumer, why can the route to market change who recognises revenue and when?
In Brief
A retail sale can appear straightforward to the customer while creating different accounting records for the businesses involved. The rights and obligations under the arrangement, together with how it is carried out, help establish who the customer is, when control transfers and whose inventory the goods remain in. Mapping the route from brand to consumer provides a starting point for reading those contracts and reconciling the records.
During my years in audit, I worked with several retail and consumer goods companies. What interested me was that businesses selling similar products to similar customers could record revenue quite differently. Some sold through department stores; others through franchise stores, their own stores, outlets, wholesalers or online platforms.
At first, I thought the process would be straightforward: a customer buys a product and the company records revenue. In practice, the sales channel and contract affected the entries, the inventory movements and the documents we needed to examine. Before I could understand the accounting, I had to understand how the company sold its products.
This first article begins with that route from brand to customer. It sets out the arrangements and records that the rest of the series will use to examine revenue, inventory and settlement.
1. Deliveries and consumer sales
Retail businesses often distinguish between sell-in and sell-out. Here, sell-in means supplying goods to a distributor or store; sell-out means selling them to the final consumer. A warehouse dispatch record and a store’s sales record therefore describe different stages of the same product’s journey.
The diagram’s “own store” is part of the same legal entity as the brand, so that movement is an internal transfer.
The accounting question is when the customer obtains control. The location of the goods helps explain the transaction, but possession alone does not settle that question. [1] [2]
If a distributor buys the goods and obtains control on delivery, the brand can recognise its sale before a consumer buys them. If the store holds the goods on consignment and the brand retains control, dispatch alone does not create revenue. The same movement of goods can therefore require a different entry. [2]
2. The trading arrangement
A department store tells us where a product is sold. It does not tell us whether the retailer bought the goods, holds them on consignment or provides space for the brand to sell directly. The same uncertainty applies to franchise stores and online platforms.
The following arrangements help organise the contract review. They describe how the parties work together, and they can overlap. Goods may be held on consignment while the store acts as an agent. Each contract still requires its own accounting assessment.
| Arrangement | How it operates | What to examine in the contract |
|---|---|---|
| Consignment | Goods are sent to another party to sell, with settlement based on sales. | Control before sale, rights to recall or redirect unsold goods, and the distributor’s payment obligation. |
| Purchase based on consumer sales | The purchase or settlement amount is determined by the quantity sold to consumers. | Rights and obligations before sale, returns and payment conditions. Settlement mechanics alone do not determine whether the arrangement is consignment. |
| Lease / concession | The brand uses retail space to sell goods and pays the party providing that space. | The party contracting with the consumer, product responsibilities, and the distinction between payment for space and sales services. |
| Agency | A party arranges or performs sales activities for another party in return for a fee. | The roles of the brand and agent, the goods or services provided, and the fee arrangement. |
| Outright purchase / wholesale | A distributor purchases goods and resells them to its own customers. | When the distributor obtains control, together with payment and return terms. |
Whose accounts we are reading also matters. A brand that controls the goods before transfer and an agent that arranges their sale are providing different things. The principal recognises revenue for the goods on a gross basis; the agent recognises its fee. [2]
Consider a hypothetical clothing brand selling the same jacket through a department store, a franchise store, its own shop and an online marketplace. The consumer may see much the same purchase. For the brand, the obligations, costs and risks may differ. An identical selling price does not establish an identical margin.
3. Accounting and tax records
The channel map also helps explain why records do not always line up at the period end. A dispatch date, a consumer sale and a settlement may fall in different periods. Revenue recognition, VAT reporting and invoice issuance each require their own assessment.
| Record | Basis for the assessment | Records to reconcile |
|---|---|---|
| Accounting revenue | When control of the goods transfers to the customer. | Contracts, delivery and acceptance records, and sales data. |
| VAT | The relevant jurisdiction’s rules on taxable transactions, time of supply and taxable amount. | Taxable transaction data, tax returns and applicable legislation. |
| Tax invoices and other documents | The relevant jurisdiction’s rules on which documents must be issued, when and in what form. | Issued documents, supply records and settlement statements. |
IFRS 15 does not set the tax point or invoice date. Those questions depend on the applicable tax rules, which differ between jurisdictions. [3]
At closing, the task is to trace the same transaction across dispatch, sales, tax and settlement records. Once we know what each record represents, we can distinguish a timing difference from an error and decide whether an adjustment is needed.
4. Ten delivered, seven sold
A simple example makes the distinction more visible. Assume a brand sends ten units to a store and seven are sold to consumers. The figures below provide a common starting point for the series. They are hypothetical, not records from an audit client.
| Item | Assumption |
|---|---|
| Consumer price per unit including VAT | USD 11,000 |
| Consumer price per unit excluding VAT | USD 10,000 |
| Units delivered to the store | 10 |
| Units sold to consumers | 7 |
| Brand’s cost per unit (40% of the price excluding VAT) | USD 4,000 |
| Channel remuneration as a percentage of the price excluding VAT | 20% |
Ten units delivered and seven sold do not yet tell us the brand’s revenue. We need to know whether the store has bought the goods or is selling them for the brand. We also need to know whether the 20% is a commission or part of the purchase price.
A consignment example
Assume the brand controls the goods until they are sold to consumers, and the store acts as its agent for a 20% fee on sales excluding VAT. For the seven units sold and delivered to consumers, the brand recognises USD 70,000 of revenue. The agent earns a fee of USD 14,000.
Deducting the commission leaves USD 56,000 before VAT and other settlement adjustments. This is neither the brand’s revenue nor its profit: the cost of the goods sold has not yet been deducted.
The seven units sold have a cost of USD 28,000, which the brand recognises as cost of sales when the related revenue is recognised. The three unsold units remain in the brand’s inventory at a cost of USD 12,000. [4]
The example assumes no returns, discounts, loyalty points or reductions in inventory value, and that delivery and the agency service are complete. An outright purchase by the store would require a separate analysis of its contract.
Later articles examine the contract terms, returns and incentives that can change these calculations, before turning to closing procedures and financial statement analysis. Any change in an assumption needs to be carried through to the accounting.
5. From the contract to the records
The channel map gives the contract review a purpose. Pricing and return terms, rights over unsold goods and the distributor’s obligation to pay help explain what happened. Dispatch, sales and settlement records then show whether the entries reflect those terms.
It also helps determine which documents to request during an audit. Goods held at a store may still belong in the brand’s inventory. A receipt after commission has been deducted may differ from the revenue recognised. Looking at either record in isolation can leave part of the transaction unexplained.
These were among the differences I noticed in retail audit work. Understanding how the goods were sold made it clearer which contract terms mattered and which records needed to be read together. That is the starting point for the IFRS 15 questions in the next article.
Key Takeaways
- Separate the store format from the trading arrangement, and establish whose revenue you are analysing.
- Read dispatch, sales and settlement records alongside the contract. Do not assume that their dates and amounts will match.
- Distinguish revenue from net settlement receipts, and identify who controls the unsold inventory.
Next: Retail Industry 02: The IFRS 15 Lens. We will translate the channel structure into accounting questions: who is the customer, what is transferred, and when?
References
- IFRS Foundation. IFRS 15 Revenue from Contracts with Customers. Standard overview. Relevant requirements: paragraphs 6, 31 to 38 and 47; B34 to B38 and B77 to B78.
- Australian Accounting Standards Board. AASB 15 Revenue from Contracts with Customers. Compilation dated 31 December 2022. Public text of the corresponding IFRS 15 paragraphs cited above. This is a dated compilation, not a statement of the latest Australian edition; Australian additions are not applied in this article. See the AASB standards register for applicable editions and amendments.
- OECD. International VAT/GST Guidelines. OECD Publishing, 12 April 2017. Preface and Chapter 1. Background on national VAT systems; the tax rules of the relevant jurisdiction must be checked separately.
- IFRS Foundation. IAS 2 Inventories. Standard overview. Relevant requirements: paragraphs 9 and 34 on inventory measurement and recognising the cost of goods sold as an expense.