Agent vs Principal Accounting

In terms of IFRS 15 a principal recognises gross revenue and expenses, whereas an agent merely recognises fees or commissions, irrespective of whether gross cash flows pass through the agent. For this reason, it is important to understand whether the entity is acting
as an agent or a principal when goods or services are transferred to a customer.

It is often difficult to determine whether an entity is acting as a principal or an agent and whether the entity should recognise revenue at a gross amount or at a net amount.  This is usually also difficult to determine where the entity uses a third party to deliver goods or services to the customer.

The Two step process [IFRS 15.B34A]

To determine whether the entity is the principal or the agent in a transaction the entity must follow two steps:

  • Identify the specific goods or services to be provided to the customer
  • Evaluate whether the entity controls the identified goods or services before it is transferred to the customer

Who is the principal?

The principal is the party that controls the goods or services before it is transferred to the customer.

Who is the agent?

The agent is the party that arranges for goods or services to be provided by another party without taking control over the goods or services.

Determining control [IFRS 15.B37]

Indicators that an entity controls the goods or services before it is
transferred to the customer include, but are not limited, to:

  • who takes primary responsibility for ensuring the goods or services meets customer specifications?
  • who takes inventory risk?
  • who has discretion in establishing the price for the goods or services?

EXAMPLE 1: Entity as an Agent

Entity X operates a warehouse where different suppliers display their appliances for sale Entity X requires payment before orders are placed with the suppliers for the delivery of the goods to the customers and keeps a predetermined percentage as sales commission Once the order is placed with the supplier, the supplier ensures that the goods are delivered to the customer Entity X concludes that it does not control the goods before they are transferred and only recognises the commission earned as revenue

EXAMPLE 2: Entity as a Principal

Entity Y enters into a contract with a customer to deliver specialised equipment Entity Y negotiate with a sub contractor to build and install the equipment directly at the customer’s premises Entity Y negotiates the selling price with the customer and agrees cost with the supplier The contract between Entity Y and the customer requires the customer to seek supplier warranty in case of defects, but Entity Y is responsible for ensuring correct  specifications to the supplier The supplier has no ability to re direct the use of the equipment to another customer and entity Y obtains the remaining benefits of the asset Therefore, Entity Y controls the goods before it is delivered to the customer.

EXAMPLE 3: Entity as a Principal

Travel Agent Z negotiates with a major airline to buy a number of air tickets at a discount Travel Agent Z resells the tickets to its customers at the “normal price” If Travel Agent Z is not able to sell the tickets, it will not be able to obtain any refund from the airline. Although the airline will ultimately deliver the service to the customers, inventory risk is with Travel Agent Z and revenue is recognised on the gross basis.

Belinda van der Merwe (CA)SA
Email: belinda.v@nexia-sabt.co.za

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