CIMAPRA19-F02-1 practice question 1 of 35

LM is a car dealer that is supplied inventory by car manufacturer SQ. Trading between LM and SQ is subject to a contractual agreement. This agreement…

Choose your answer, then check it against the explanation.

LM is a car dealer that is supplied inventory by car manufacturer SQ. Trading between LM and SQ is subject to a contractual agreement. This agreement states the following: • Legal title of the cars remains with SQ until they are sold by LM to a third party. • Upon notification of sale to a third party by LM, SQ raises an invoice at the price agreed at the original date of delivery to LM. • LM has the right to return any car at any time without incurring a penalty. • LM is responsible for insuring all of the cars on its property. When considering how these cars should be accounted for, which THREE of the following statements are true?

Answer options

Correct Answer:

B, C, F

Explanation

This scenario constitutes a consignment arrangement under IFRS 15. The key factor is that control of the assets (cars) has not transferred from the manufacturer (SQ) to the dealer (LM). LM's unconditional right to return the cars at any time means SQ retains the most significant risk of ownership—the risk of non-sale and obsolescence. Therefore, the cars remain SQ's inventory until sold to a third party. Revenue is recognized by SQ only when its performance obligation is satisfied, which occurs when control passes to the final customer upon sale by LM. At this point, SQ has a right to payment from LM.

Why Incorrect

A. LM holds custodial risk (insurance), but SQ retains the more significant commercial risks (obsolescence, non-sale) due to the unconditional right of return.

D. LM acts as an agent and does not control the cars; therefore, it cannot recognise them as its inventory.

E. Revenue cannot be recognised on delivery to LM because control has not transferred; the conditions for revenue recognition under IFRS 15 are not met.

References

1. International Accounting Standards Board (IASB). (2014). International Financial Reporting Standard 15: Revenue from Contracts with Customers. Appendix B

Paragraphs B77-B78. These paragraphs explicitly define consignment arrangements and state that revenue should not be recognized upon delivery if the product is held on consignment because control has not been transferred.

2. International Accounting Standards Board (IASB). (2014). International Financial Reporting Standard 15: Revenue from Contracts with Customers. Paragraph 38. This section lists indicators of the transfer of control

noting that legal title

physical possession

and risks/rewards of ownership are key considerations. In this case

SQ retains legal title and significant risks.

3. International Accounting Standards Board (IASB). (2003). International Accounting Standard 2: Inventories. Paragraph 6. This standard defines inventories as assets held for sale. Since SQ retains control over the cars

they remain SQ's assets and are correctly classified as its inventory.

4. PwC. (2021). IFRS 15: Revenue from contracts with customers - Global guide. Section 5.4.1

Consignment arrangements. This guide

based on the official standard

clarifies that in consignment arrangements

"the consignor should not recognise revenue and should continue to recognise the inventory" until it is sold to the end customer.

Question 1 of 35

Keep practicing

Take the free CIMAPRA19-F02-1 practice test

Ten exam-style questions with answers and explanations, plus the exam facts and study guides.

Start the free practice test