Consigned raw materials held on-site but owned by the supplier

Misclassifying consigned raw materials as owned inventory inflates both inventory and payables, distorting working-capital ratios, current ratio, and inventory turnover - metrics closely watched by lenders under manufacturing borrowing-base facilities. Conversely, failing to control which consigned items have actually been consumed can lead to unrecorded liabilities to the supplier and disputes at physical count time, since consigned and owned stock sit side by side in the same warehouse.

Under the vendor-managed inventory/consignment-in agreement, who bears the risk of loss, obsolescence and price changes while goods sit on the manufacturer's premises? Is the contractual point of control transfer (typically physical withdrawal for production use) clearly documented and used as the recognition trigger, rather than receipt? Are consigned-in goods correctly excluded from the manufacturer's inventory and payables until that trigger occurs, with only quantities actually withdrawn recognized?

1. Obtain and read the vendor-managed inventory / consignment-in agreement to identify who bears the risk of loss, obsolescence and price changes while the goods are on the manufacturer's premises.
2. Confirm the contractual point of control transfer - typically physical withdrawal for use in production, but occasionally receipt if risks and rewards pass earlier - and document it as the trigger for recognition.
3. Until control transfers, exclude the goods entirely from the manufacturer's inventory and from any corresponding trade payable; track quantities held on-site in memorandum (off-balance-sheet) stock records only.
4. At the point of withdrawal/consumption, recognize the raw material as the manufacturer's own inventory (or direct expense to production) at the agreed transfer price, together with the corresponding payable to the supplier.
5. Reconcile physical warehouse counts against both the manufacturer's owned-inventory records and the supplier's consigned-stock records regularly, since both populations sit in the same physical location.
6. Reassess the arrangement if terms change (e.g., the manufacturer gains unilateral right to use goods without supplier authorization), as this may shift the control-transfer point earlier.

Measurement basis: the manufacturer recognizes no asset for consigned-in goods before control transfer; on withdrawal/consumption, it recognizes raw material inventory (or a direct production cost) at the transfer price stipulated in the agreement, not at the supplier's original cost if different. Included at recognition: only quantities actually withdrawn/consumed in the period. Excluded: quantities still physically on-site but not yet released for use, which remain the supplier's asset and are tracked only in memorandum quantity (and often value) records for control purposes. Re-measurement/reclassification triggers: renegotiation of the transfer price or payment terms; a change in the contractual control-transfer point; supplier default or contract termination requiring return of unconsumed stock; and period-end reconciliation differences between physical count and recorded consumption that require investigation and correction.

No recognition of supplier-owned consigned inventory or a related payable on the manufacturer's balance sheet prior to control transfer; disclosure of material consignment-in / vendor-managed-inventory arrangements as part of significant accounting policies or commitments; description of the point at which control is deemed to transfer and the basis for that judgment; quantification of consigned inventory physically on-site but excluded from the balance sheet, where material, to give users visibility over off-balance-sheet stock exposure; disclosure of any related warehousing, insurance or indemnity obligations the manufacturer has assumed over goods it does not own.

• Recording all physically received consigned goods as owned inventory and a corresponding payable on arrival, before control has actually transferred, overstating both inventory and payables
• omitting consigned inventory from physical count reconciliations entirely, so warehouse counts do not tie to either the manufacturer'
• s or the supplier'
• s records
• using the same warehouse location codes for owned and consigned stock without a distinguishing flag, causing consigned goods to be swept into inventory valuation and obsolescence provisioning
• failing to update the balance sheet when contract renegotiation changes the control-transfer point (e.g., moving from '
• on withdrawal'
• to '
• on receipt'
• )
• treating consigned raw materials as available for a general obsolescence or lower-of-cost-or-NRV write-down analysis performed on the manufacturer'
• s own inventory, when they are not the manufacturer'
• s asset at all.