Revenue recognition for drop shipping fulfilment operations

The challenges, such as:

• Eliminating the need for storing inventory 
• Removing the burden of managing shipping 
• Reducing issues related to sourcing packaging materials

However, the accounting treatment of revenue under such a business model must take into account the control of goods ordered.

Under TFRS 15, ‘Revenue from Contracts with Customers’, dealers providing drop shipping fulfilment services must carefully consider their revenue recognition practices under a bill and hold arrangement. The key determinant for revenue recognition is whether control of the goods has been transferred to the dealer (buyer).  

In a typical drop shipping fulfilment operation, dealers can place purchase orders and have products stored at a company’s warehouse. The company manages several aspects of the operation:  

• Shipping directly from the company’s warehouse to customers  
• Charging actual shipping costs  
• Managing product expiration dates  
• Maintaining a consolidated inventory system  

However, two critical factors affect revenue recognition:  

1. The company does not separate each dealer’s products from the overall inventory.  
2. The company maintains the right to send products to any dealer’s customer.  

These factors indicate that control of the goods remains with the company (seller), not the dealer. Consequently, under TFRS 15:  

• Revenue should not be recognized until goods are shipped to customers.  
• Payments received from dealers must be recorded as ‘unearned revenue’.  
• Inventory remains on the company’s balance sheet until the goods have been shipped.  

References (in Thai):  

• TFRS 15. Retrieved from Thailand Federation of Accounting Professions.