Last updated: 27 December 2019
Principal vs. agent considerations are otherwise known as gross vs. net presentation of revenue. A principal recognises revenue and expenses in gross amounts, whereas an agent recognises only fees or commissions, even if gross cash flows go through the agent (IFRS 15.B35-B36).
Principal and agent – definitions
The two key definitions are as follows:
- Principal – the party that controls the goods or services before they are transferred to customers,
- Agent – the party that arranges for the goods or services to be provided by another party without taking control over those goods or services.
Paragraph IFRS 15.B34 requires entities to assess whether they act as a principal or an agent for each good and service provided to a customer.
Two-step framework
Paragraph IFRS 15.B34A provides an important two-step framework in making such an assessment:
- identify the specified goods or services to be provided to the customer
- assess whether the reporting entity controls identified good or service before that good or service is transferred to the customer
Step no.1 is especially important in relation to services and intangible assets.
As mentioned earlier, principal is a party that controls a good or service before it is transferred to a customer. Conversely, an agent only arranges for the provision of goods or services by another party without taking control over those goods or services before they are transferred to a customer.
Control over a good or service
Paragraph IFRS 15.B37 provides helpful examples in assessing whether a reporting entity controls a good or service before it is transferred to the customer:
- primary responsibility for the good or service meeting customer specifications
- inventory risk
- discretion in establishing the price for the specified good or service
It is worth noting that exposure to credit risk is not listed above as a factor to be considered. It was concluded by the IASB that it is mostly irrelevant as agents are often exposed to credit risk as well as principals.
Use of subcontractors
Paragraph IFRS 15.B35A provides additional guidance to be applied in situations when another party is involved in providing goods or services to a customer.
Principal vs. agent considerations in relation to services
Particular difficulties in principal vs. agent considerations relate to services when the entity will not itself provide a final service. For example, when a travel agent sells an airline ticket to a tourist, will it always act as an agent in IFRS 15 meaning because the service (the flight) will be provided by an airline? The answer is no. Paragraph IFRS 15.B34A clearly states that the good or service provided to the customer could be a right to a good or service to be provided in the future by another party. For example, when a travel agent buys airline tickets in advance and then sells them to a tourist, it can consider itself a principal and recognise gross revenue.
Principal vs agent – examples
See Examples 45, 46, 46A, 47, 48 and 48A accompanying IFRS 15.
More about IFRS 15
See other pages relating to IFRS 15:
Identify a Contract
Performance Obligations and Timing of Revenue Recognition
Transaction Price
Principal vs Agent, or Reporting Revenue Gross vs Net
Revenue from Licensing of Intellectual Property
Revenue from Customers’ Unexercised Rights (Breakage)
Customer Loyalty Programmes and Other Options for Additional Goods or Services
Warranties
Contract Assets and Contract Liabilities
Contract Costs
Disclosure