Repurchase, consignment and bill-and-hold arrangements

Learning objectives

• Determine the treatment of a repurchase agreement (forward, call option, put option): a lease or a financing arrangement depending on the repurchase price, or a sale with a right of return.L3, L4
• Identify the indicators of a consignment arrangement and the criteria for a bill-and-hold arrangement.L3, L4

Normative references

• IFRS 15 §B64A repurchase agreement is a contract in which an entity sells an asset and also promises, or has the option, to repurchase it, either in the same contract or in another contract. The repurchased asset may be the asset originally sold, an asset that is substantially the same, or another asset of which the asset originally sold is a component.
• IFRS 15 §B65Repurchase agreements generally take three forms: (a) an obligation of the entity to repurchase the asset (a forward); (b) a right of the entity to repurchase the asset (a call option); (c) an obligation of the entity to repurchase the asset at the customer's request (a put option).
• IFRS 15 §B66If the entity has an obligation or a right to repurchase the asset (a forward or a call option), the customer does not obtain control of the asset: its ability to direct the asset's use and obtain substantially all of the remaining benefits is limited, even if it has physical possession. The entity then accounts for the agreement: (a) as a lease under IFRS 16 if it can or must repurchase the asset for less than its original selling price (except for a sale and leaseback, where the entity keeps recognising the asset and recognises a financial liability under IFRS 9); (b) as a financing arrangement under paragraph B68 if the repurchase price is equal to or higher than the original selling price.
• IFRS 15 §B67When comparing the repurchase price with the original selling price, the entity considers the time value of money.
• IFRS 15 §B68If the repurchase agreement is a financing arrangement, the entity continues to recognise the asset and recognises a financial liability for the consideration received from the customer; the difference between the consideration received and the consideration to be paid to the customer is recognised as interest and, if applicable, as processing or holding costs (for example, insurance).
• IFRS 15 §B69If the entity's repurchase option lapses unexercised, the entity derecognises the liability and recognises revenue.
• IFRS 15If the entity has an obligation to repurchase the asset at the customer's request (a put option) at a price lower than the original selling price, it assesses at contract inception whether the customer has a significant economic incentive to exercise that right. If the customer has a significant economic incentive to exercise the option, it is in effect paying for the right to use the asset for a period of time; the agreement is then accounted for as a lease in accordance with IFRS 16, unless it is part of a sale and leaseback.
• IFRS 15In assessing the economic incentive, the entity considers various factors, including the relationship of the repurchase price to the expected market value of the asset at the date of the repurchase and the amount of time until the right expires; a repurchase price significantly higher than the expected market value may indicate a significant incentive.
• IFRS 15If the customer does not have a significant economic incentive to exercise its right at a price lower than the original selling price, the agreement is accounted for as the sale of a product with a right of return (B20 to B27).
• IFRS 15 §B73If the repurchase price is equal to or greater than the original selling price and is more than the expected market value of the asset, the contract is in effect a financing arrangement accounted for in accordance with B68.
• IFRS 15 §B74If the repurchase price is equal to or greater than the original selling price, but less than or equal to the expected market value, and the customer does not have a significant economic incentive to exercise its right, the agreement is accounted for as a sale with a right of return (B20 to B27).
• IFRS 15 §B75When comparing the repurchase price with the selling price, the entity considers the time value of money.
• IFRS 15 §B76If the option lapses unexercised, the entity derecognises the liability and recognises revenue.
• IFRS 15 §B77When the entity delivers a product to another party (a dealer or distributor) for sale to end customers, it evaluates whether that other party has obtained control of the product at that point. No revenue is recognised on delivery of a product held on consignment to the consignee.
• IFRS 15 §B78Indicators of a consignment arrangement include: (a) the entity controls the product until a specified event occurs (sale to a customer of the dealer, expiry of a specified period); (b) the entity is able to require the return of the product or transfer it to a third party; (c) the dealer does not have an unconditional obligation to pay for the product (although it might be required to pay a deposit).
• IFRS 15A bill-and-hold arrangement is a contract under which the entity bills a customer for a product but retains physical possession of it until it is transferred at a later date; the customer may request it, for example because of a lack of space or delays in its production schedules.
• IFRS 15The entity determines when it has satisfied its obligation by evaluating when the customer obtains control of the product (paragraph 38). Generally, control transfers on delivery or shipment, but in some contracts the customer may obtain control even though the entity retains physical possession.
• IFRS 15 §B81In addition to paragraph 38, the customer obtains control only if all of the following criteria are met: (a) the reason for the arrangement is substantive (for example, requested by the customer); (b) the product is identified separately as belonging to the customer; (c) the product is ready for physical transfer; (d) the entity cannot use the product or direct it to another customer.
• IFRS 15If the entity recognises revenue for the sale under this arrangement, it considers whether it has remaining performance obligations (for example, a custodial service) in accordance with paragraphs 22 to 30, to which part of the transaction price is to be allocated (paragraphs 73 to 86).

Original summaries of the paragraphs (reference register), never a quotation of the standard.

19 questions

• Brasserie des Combes delivers kegs to a bar under a consignment arrangement: the brewery keeps the kegs until they are sold on to consumers and can require their return. The brewery must recognise revenue as soon as the kegs are delivered to the bar, since the bar has physical possession of them.L2
• Agromat sells six combine harvesters to a farming cooperative. Lacking space in its sheds, the cooperative asks Agromat in writing to keep the machines until spring. On 20 November 20X1, the machines are complete, tagged in the cooperative's name, stored separately and ready for delivery; Agromat can neither use them nor sell them to another customer. Legal title passes and the invoice is due on that date. Which analysis applies to the sale of the machines?L3
• At 30 September 20X1, Ventis is analysing several deliveries of equipment. Which of the following situations indicate that the customer (or the third party) has not yet obtained control of the delivered equipment?L3
• Agrimat sells a combine harvester to a farmer for EUR 300,000 and retains the right to repurchase it in two years for EUR 220,000; the transaction is not part of a sale and leaseback. True or false: Agrimat does not recognise a sale, and the arrangement is accounted for as a lease in accordance with IFRS 16, because the repurchase price is lower than the original selling price.L3
• Vinéa sells a stock of ageing brandies to a spirits merchant for EUR 1,000,000 and undertakes to repurchase it in two years for EUR 1,100,000. Case data: even after taking into account the time value of money, the repurchase price exceeds the original selling price. True or false: Vinéa recognises revenue of EUR 1,000,000 when the casks are transferred to the merchant.L3
• The Navalis shipyard sells a workboat to a shipowner for EUR 2,000,000 and holds an option allowing it to repurchase the boat in one year for EUR 2,100,000. Case data: even after taking into account the time value of money, the repurchase price exceeds the original selling price. How does Navalis reflect the transaction at the date of sale?L3
• Grues Atlas sells a crane to a civil engineering company for EUR 800,000. The customer can require Atlas to repurchase the crane in three years for EUR 450,000, whereas the expected market value of the crane at that date is EUR 250,000; Atlas concludes (professional judgement) that the customer has a significant economic incentive to exercise its option. The transaction is not part of a sale and leaseback. How does Atlas account for the arrangement?L3
• Clinéquip sells 50 medical beds to a clinic for EUR 400,000. The clinic can ask Clinéquip to repurchase the beds in one year for EUR 120,000; the expected market value of the beds at that date is EUR 180,000 and Clinéquip concludes (professional judgement) that the clinic has no significant economic incentive to exercise its option. How is the arrangement accounted for?L3
• Cristallerie Morvan delivers tableware sets to home decoration shops. Which of the following clauses are indicators of a consignment arrangement?L3
• Tôlerie Brivoise invoices a customer for electrical cabinets that it keeps in its warehouses until a later delivery. In addition to the general indicators of transfer of control, which criteria must all be met for the customer to obtain control of the cabinets in this bill-and-hold arrangement?L4
• Orfèvra sold a collection of silverware to a museum while retaining an option to repurchase it at a price higher than the selling price; the arrangement was accounted for as a financing arrangement, with a financial liability. At maturity, Orfèvra lets its option lapse unexercised. What does it do?L3
• Ventoux Cycles delivers 40 electric bikes to an independent retailer. The retailer only pays for a bike after selling it to an end customer; Ventoux can at any time recall unsold bikes to send them to another shop, and the retailer can return unsold bikes after six months. The retailer pays a flat security deposit. How does Ventoux treat the delivery to the retailer?L4
• Métallis manufactures ten stainless steel tanks for Hydra. At the request of Hydra, whose construction site is delayed, the completed tanks are kept for six months in Métallis's warehouse, which provides custody. The tanks bear Hydra's name, are stored separately, ready for shipment, and Métallis can neither use them nor deliver them to another customer. The price invoiced covers the tanks and their custody. How does Métallis account for the contract when the tanks are completed?L4
• At the request of a hotel chain short of space, Textilia invoices it on 20 December 20X1 for a batch of 5,000 bathrobes, paid immediately, and keeps the batch in its warehouse until March 20X2. The bathrobes remain mixed with Textilia's general inventory, from which it allows itself to draw to fill urgent orders from other customers, replacing them before shipment. Can Textilia recognise the revenue in 20X1?L4
• Gastronova, a manufacturer of kitchen robots, delivers 300 robots to a network of dealers at the end of the reporting period. The terms provide that: the dealers pay a 10% deposit on delivery; the balance is only due on resale to the end consumer; Gastronova can transfer unsold robots from one dealer to another; unsold robots can be returned to it at any time, the deposit then being refunded. Management wishes to recognise revenue on delivery, arguing that the robots are physically at the dealers' premises and that the deposit has been collected. Write a judgement memo.L4
• Aérolis sells a flight simulator to a flying school for EUR 500,000. The school can require Aérolis to repurchase the simulator after four years for EUR 260,000, an option that can be exercised during one month only. According to the market studies available at contract inception, the expected market value of such a simulator after four years is around EUR 300,000. The transaction is not part of a sale and leaseback. Write a memo analysing the accounting for the arrangement at contract inception.L4
• Forges Ardoise sells industrial presses. Which of the following clauses, included in its sales contracts, make the sale a repurchase agreement within the meaning of IFRS 15?L3
• The shipyard Navires Corail sells a sailing yacht to a rental company for EUR 2,000,000. The contract requires Navires Corail to repurchase the yacht in 2 years for EUR 2,100,000 if the rental company so requests. At contract inception, the expected market value of the yacht at the repurchase date is estimated at EUR 1,500,000 (case data). The transaction is not part of a sale and leaseback. How does Navires Corail account for this arrangement?L4
• Grues Atlas sells a mobile crane for EUR 800,000 to a public works company. The contract requires Grues Atlas to repurchase the crane in 3 years for EUR 800,000 if the customer so requests. At contract inception, Grues Atlas estimates (case data) that the market value of the crane at the repurchase date will be EUR 950,000, owing to strong demand and rising prices for new cranes. Write a reasoned memo on the classification of this arrangement and on the resulting accounting treatment at the date of sale, distinguishing what is a rule from what is judgement.L4