In Brief
The arrival of goods at a store does not, by itself, determine a brand’s revenue. This article connects the five steps of IFRS 15 to retail contracts and compares outright purchase with consignment to examine the customer, performance obligations, transfer of control and gross or net revenue presentation.
Consider a brand that has sent goods to a department store. The goods have left the warehouse, and the store is preparing to sell them to consumers. Should the brand record a sale to the department store, or wait until a consumer buys the product?
In Part 1, we traced the movement of goods from the brand through its distribution channels to the consumer. In Part 2, we will read that flow through the contracts behind it. Even when goods arrive at the same store, what the brand provides—and to whom—depends on whether the department store purchases the goods or arranges their sale on the brand’s behalf.
1. Contracts and customers
IFRS 15 uses five steps to assess revenue from contracts with customers. In retail, it helps to establish which facts to examine at each step before deciding on a revenue entry from a dispatch record. [1]
| Step | Assessment | Questions for a retail transaction |
|---|---|---|
| 1. Identify the contract | Identify the contract with the customer. | Whose revenue are we analysing? With whom have rights and obligations been agreed? |
| 2. Identify performance obligations | Identify the distinct goods or services promised to the customer. | Have points or separate services been promised as well as the product? |
| 3. Determine the transaction price | Determine the consideration the entity expects to be entitled to for the goods or services provided. | Which discounts are fixed, and which items, such as returns or rebates, require estimation? |
| 4. Allocate the transaction price | Allocate the transaction price to the performance obligations. | If there is more than one performance obligation, how much is allocated to each? |
| 5. Recognise revenue | Recognise the allocated amount as each performance obligation is satisfied. | When does the customer obtain control of the goods, or over what period is the service provided? |
A customer is a party that contracts to obtain goods or services arising from the entity’s ordinary activities in exchange for consideration. When we examine a brand’s product revenue, its customer may therefore be the distributor purchasing the goods or, depending on the sales arrangement, the final consumer. The store’s name or the identity of the party remitting cash cannot settle the question alone. [2]
After identifying the customer, we also check the criteria for accounting for the contract: approval, each party’s rights, payment terms, commercial substance and collectability of the consideration. The contract is an important source of evidence about those rights and obligations. Its label needs to be read alongside its actual terms. [2]
2. Control and revenue timing
The next question is when control of the goods passes to the customer. Control is broader than physical possession. We need to consider the ability to direct the use of the goods and obtain their remaining benefits. [3]
The following hypothetical comparison examines two contracts from the perspective of the brand’s product revenue. Under outright purchase, assume that the distributor obtains control on delivery, must pay even for unsold goods, and has no return or repurchase arrangement. Under consignment, assume that the brand retains control until the consumer sale, can recall or redirect unsold goods, and that the distributor has no obligation to pay for the goods before sale.
| Point of comparison | Outright purchase / wholesale — assumptions above | Consignment / sales agency — assumptions above |
|---|---|---|
| Customer for the brand’s product revenue | The distributor purchasing the goods. | The final consumer purchasing the goods. |
| Delivery to the store | The brand recognises revenue because control passes to the distributor. | The brand does not recognise product revenue because the goods are held on consignment. |
| Sale to the consumer | The distributor records its consumer sale. The brand does not record another sale of the same goods. | The brand recognises product revenue because control passes to the consumer. |
| Unsold goods before the consumer sale | Remain in the distributor’s inventory. | Remain in the brand’s inventory. |
Sell-in and sell-out describe different business events. Which event gives rise to the brand’s revenue depends on the customer and the terms governing the transfer of control. Sending goods to a department store does not automatically establish revenue, just as the absence of a consumer sale does not require every brand to defer it.
For an individual transaction, we connect delivery terms, customer inspection and acceptance conditions, and the right to payment to the contract and evidence of performance. Where a sale carries a right of return, expected returns need to be reflected when revenue is first recognised, rather than adjusted only when goods physically come back. Part 3 examines the calculation in more detail. [2]
3. Promises and performance obligations
Once we have identified the customer, we examine what has been promised to that customer. For an ordinary product sale without additional benefits, the central promise is to transfer the product. If points, gift cards or membership benefits are involved, their relationship to the product sale needs further consideration.
| Transaction or benefit | Promise to examine | Distinction to make |
|---|---|---|
| Ordinary product sale | A promise to provide the product to the customer. | Focus on the product sale if there are no other promises of distinct goods or services. |
| Purchase points / future discounts | A right to receive an additional benefit on a later purchase. | Assess whether it provides a material right that the customer would not receive without entering into the purchase contract. |
| Prepaid gift card | A promise to provide, or stand ready to provide, goods or services later. | An advance received for a gift card redeemable for the issuer’s products is normally recorded as a contract liability. Issuing it does not immediately create product revenue. |
| Membership benefits | Products, discount rights or services over a period, as promised in the contract. | Identify the actual benefits and distinct promises rather than assigning performance obligations from the programme’s name. |
Points do not always create a separate performance obligation. A general discount available to everyone needs to be distinguished from a material right obtained only through a particular purchase. For gift cards, we first examine whether payment is received in advance of the goods being provided. All these items affect revenue, but describing them collectively as variable consideration mixes together different assessments. [2]
4. Transaction price and allocation
Consider a simple example. A customer buys a jacket for USD 100. Assume this is the price before tax, with no returns, additional benefits or separate promises. The transaction price is USD 100, and the company recognises that amount as revenue when it transfers the product and satisfies the performance obligation. This example illustrates the pricing assessment separately from the common numerical example in Part 1.
Different conditions change the amount to examine. A discount fixed at the point of sale is reflected in the discounted price. Conditions that can change the final consideration, such as returns or volume rebates, require an estimate of variable consideration and an assessment of how much can be included in revenue. The estimate is included in the transaction price only to the extent that it is highly probable that resolving the uncertainty will not cause a significant reversal of cumulative revenue already recognised. [2]
Coupons also differ according to how they work. We need to distinguish a coupon that reduces the price of the current purchase from a material right to a discount on a later purchase earned through the current transaction. The latter may also raise questions about performance obligations and allocation. Points and gift cards cannot all be accounted for by deducting the same percentage from revenue.
Definition — Stand-alone selling price
Stand-alone selling price (SSP) is the price at which a promised good or service would be sold separately to a customer. Where there are several performance obligations, the transaction price is generally allocated on the basis of their relative stand-alone selling prices. [1]
If the arrangement includes products and points that provide a material right, separate membership services or a bundle of distinct products, examine each promise. Where there is only one performance obligation, the full transaction price is allocated to it, so no calculation across several obligations is needed.
It helps to keep two questions separate at this stage. First, determine the consideration for the contract as a whole. Then determine the share allocated to each promise. If cash is received at a different time from the performance of those promises, the timing of revenue recognition may also differ.
5. Principal and agent
When several companies participate in a sale, we also need to establish each company’s role. A principal controls the specified good or service before it is transferred to the customer and presents the corresponding consideration as gross revenue. An agent fulfils a promise to arrange for another party to provide it and records its fee as revenue. The assessment is made for each specified good or service, rather than assigning one label to the company as a whole. [2]
Whether the brand sets prices and promotions or bears inventory risk matters to the assessment. But a conclusion cannot be reached by marking each factor Yes or No and counting the answers. Control before transfer remains the central question, and the relevance of the indicators below varies with the contract. [3]
| Indicator | Question to examine | Connection to control |
|---|---|---|
| Primary responsibility for fulfilment | Who is responsible for providing the promised product and ensuring that it meets the contractual requirements? | Distinguish operating the sales outlet from having primary responsibility for providing the product. |
| Inventory risk | Who bears inventory risk before sale or after a return? | Use the contract and inventory records to identify which risks are borne, and when. |
| Pricing discretion | Who can set selling prices and discount terms? | Assess pricing discretion alongside other rights and obligations; some discretion alone does not establish that the entity is a principal. |
Example — Connecting Part 1 to revenue presentation
Return to the consignment and sales agency arrangement in Part 1. Assume that the brand controls the goods until sale to the consumer, that seven units have been delivered to consumers at a price before tax of USD 10,000 each, and that the agent earns a 20% commission. There are no returns, discounts or points, and both product delivery and the sales agency service are complete.
The brand records USD 70,000 of product revenue, while the agent records USD 14,000 of fee revenue. The USD 56,000 remaining after the commission is deducted is a settlement calculation before VAT and other adjustments; it is not the brand’s product revenue. USD is the presentation currency, and the tax assumptions are the same as in Part 1.
When comparing revenue and gross margin ratios, we therefore need to understand which company provides the goods and which arranges the sale. Revenue reported by a company that records the product consideration gross represents a different scope of activity from revenue reported by a company that earns only a fee. Cash receipts or the final amount on a settlement statement cannot resolve that distinction alone.
In practice, the assessment needs to connect the contract to purchase orders, dispatch records, sales, returns and settlements. If the conclusion is that the distributor obtains control on delivery, delivery and acceptance records should support it. Under consignment, consumer sales data and unsold stock need to reconcile to the brand’s revenue and inventory records.
Key Takeaways
- Identify the company being analysed and its customer first. Outright purchase and consignment can create different contractual relationships within the same store.
- Separate dispatch, consumer sale and settlement, and connect the terms governing control to evidence of performance.
- Distinguish transaction price assessments for discounts and returns from performance obligation and allocation assessments for points and services.
- Assess principal and agent roles through control before transfer, without relying on pricing discretion or inventory risk alone.
Part 1 mapped the movement of goods; Part 2 connected that flow to customers and promises. Part 3 — Variable Consideration examines estimates arising from returns and rebates, while distinguishing how points and gift cards affect revenue recognition.
References
- [1] IFRS Foundation. IFRS 15 Revenue from Contracts with Customers. Issued May 2014; clarified April 2016. Standard overview, five-step model. Accessed 18 October 2026.
- [2] Australian Accounting Standards Board. AASB 15 Revenue from Contracts with Customers. Compilation dated 30 June 2022, prepared 15 September 2022. Paragraphs 6, 9–10, 22–38, 47–59, 73–80 and 106; B20–B27, B34–B51 and B77–B78. Public IFRS-equivalent text used to check the cited requirements; Australian-specific provisions are not applied in this article.
- [3] IFRS Interpretations Committee. Principal versus Agent: Software Reseller (IFRS 15 Revenue from Contracts with Customers). Agenda decision, May 2022, pp. 1–3. Used for the control framework and the relevance of indicators; the software-specific conclusion is not applied to retail contracts.