Principal versus agent considerations

Learning objectives

• Determine, for each specified good or service, whether the entity controls it before it is transferred to the customer (principal, gross revenue) or arranges for it to be provided by another party (agent, net commission).L2, L3, L4
• Assess the indicators of control: primary responsibility for fulfilment, inventory risk, discretion in establishing the price.L3, L4
• Recognise gross revenue or the net commission.L2, L3

Normative references

• IFRS 15 §B34When another party is involved in providing goods or services to a customer, the entity determines whether the nature of its promise is to provide the specified goods or services itself (principal) or to arrange for those goods or services to be provided by the other party (agent), for each specified good or service; a single contract may involve both roles.
• IFRS 15 §B34ATo determine the nature of its promise, the entity identifies the specified goods or services to be provided (which may be a right to a good or service provided by another party) and then assesses whether it controls each of them before it is transferred to the customer.
• IFRS 15 §B35The entity is a principal if it controls the specified good or service before it is transferred to the customer; momentarily obtaining legal title is not necessarily sufficient. A principal may satisfy the obligation itself or engage another party (a subcontractor) to satisfy some or all of it.
• IFRS 15 §B35AWhen another party is involved, the principal controls: a good or another asset from the other party that it then transfers to the customer; a right to a service to be performed by the other party, which gives it the ability to direct that party to provide the service on its behalf; or a good or service from the other party that it combines with others in providing the specified good, in particular when it provides a significant service of integration.
• IFRS 15 §B35BThe principal recognises revenue in the gross amount of consideration to which it expects to be entitled in exchange for the specified good or service transferred.
• IFRS 15 §B36The entity is an agent if its performance obligation is to arrange for the provision of the specified good or service by another party, without controlling it before it is transferred. It then recognises as revenue the fee or commission to which it expects to be entitled, which may be the net amount retained after paying the other party.
• IFRS 15 §B37Non-exhaustive indicators that the entity controls the specified good or service before transfer: it is primarily responsible for fulfilling the promise; it has inventory risk before or after the transfer; it has discretion in establishing the price.
• IFRS 15 §B37AThe indicators in B37 may be more or less relevant to the assessment of control depending on the nature of the specified good or service and the terms of the contract; in different contracts, different indicators may provide more persuasive evidence.
• IFRS 15If another entity assumes the entity's performance obligations and contractual rights so that the entity is no longer obliged to transfer the good or service (it is no longer acting as principal), it does not recognise revenue for that obligation; instead, it assesses whether it is acting as an agent in obtaining a contract for that other entity.

Original summaries of the paragraphs (reference register), never a quotation of the standard.

17 questions

• Pivoine buys show tickets and immediately resells them to its customers; it holds legal title to them only for an instant before they are transferred to the customer. This momentary legal title alone is enough to establish that it acts as a principal.L2
• Within a single contract with a customer, an entity may act as a principal for some specified goods or services and as an agent for others.L2
• Orcival can conclude that it controls a specified service before it is transferred to the customer only if three indicators are all present: primary responsibility for fulfilment, inventory risk and discretion in establishing the price.L3
• Navigo arranges airport transfers for its customers, performed by taxi companies. Based on the case data, it has concluded that it acts as an agent. How does it recognise its revenue?L2
• Which of the following is not one of the indicators cited by IFRS 15 to show that an entity controls a specified good or service before it is transferred to the customer?L3
• Arvel involves third parties in its contracts with customers. In which of the following situations does Arvel control the specified good or service before it is transferred to the customer?L3
• The booking platform Hôtelia connects travellers with hotels. Based on the case data, it has concluded that it does not control the room nights before they are transferred to the travellers and that it acts as an agent. In 20X1, travellers pay {gross_collected} for room nights through the platform, of which Hôtelia remits {remitted_to_hotels} to the hotels. What revenue does Hôtelia recognise for 20X1?L2
• The online marketplace Artisane hosts jewellery designers who set their own prices, hold their own inventory and ship their orders; Artisane collects the price and deducts a commission of {commission_rate} on each sale. According to the analysis given by the case, Artisane does not control the jewellery before it is transferred. During May 20X1, the sales made by the designers on the marketplace amount to {seller_sales}. What revenue does Artisane recognise for May 20X1?L3
• Ébénis, a distributor of office furniture, buys chairs from a manufacturer, stores them in its warehouses, sets their selling price freely and is solely answerable to its customers for their compliance. It has concluded that it acts as a principal. In 20X1, it sells {units} chairs at a unit price of {sale_price}; it bought them at {purchase_price} each. What revenue does Ébénis recognise?L2
• Festivo organises a music festival in July 20X2: it rents the site, hires the artists for a fixed fee, alone sets the ticket price, bears the risk of unsold places and is answerable to the public for how the festival runs. According to the analysis given by the case, Festivo acts as a principal for access to the festival. It sells {tickets} tickets at a price of {ticket_price} and pays a total of {third_party_costs} to the artists and the site owner. What revenue does Festivo recognise?L3
• The travel agency Voyagis acts as an agent (conclusion given by the case) for the sale of tours organised by a tour operator. On 3 May 20X1, it collects {collected} from a customer for a tour and must pass {payable_to_operator} on to the tour operator. According to the case data, Voyagis's obligation, arranging for the tour operator to provide the tour, is satisfied on that date. Record Voyagis's entry on 3 May 20X1.L2
• The website Ludiboutique sells games online that are shipped directly by publishers, which set their price and handle delivery and after-sales service. Ludiboutique earns a commission of {commission_rate} of the selling price and has concluded, according to the case data, that it acts as an agent for these games. In June 20X2, it collects {collected} from buyers for games delivered during the month. Record the summary entry for June 20X2.L3
• The platform Domicilia offers gardening work performed by independent gardeners. Each gardener sets their own rate, accepts or refuses jobs and is solely answerable for the quality of their work; Domicilia makes no commitment to the customer to perform the work and holds no inventory. Domicilia collects the price, bears the risk of non-payment and passes 85% of the price on to the gardener. What conclusion should be reached?L3
• The tour operator Escalis buys 200 seats on charter flights at the start of the season, non-refundable and non-cancellable, which it then resells to travellers at a price it sets freely. Unsold seats remain at its cost, and it handles travellers' requests itself. The airline operates the aircraft and performs the flight. What analysis should be adopted for the seats sold?L3
• Construa undertakes to deliver to a hospital an operational air-conditioning system that meets a specification. It buys the chillers and ducts from suppliers, has the installation performed by a subcontractor that it directs and provides the engineering that integrates everything into a single system. The price invoiced to the hospital is 2,400,000; the purchases and subcontracting cost 1,900,000. What analysis should be adopted?L4
• Tessel had entered into a two-year maintenance contract with a customer. Halfway through, with the customer's agreement, Prima assumes all of Tessel's performance obligations and contractual rights, and Tessel is no longer obliged to provide the maintenance. Prima pays Tessel a fee for having brought it this contract. How does Tessel analyse the remainder of the contract?L3
• Netalis sells annual office-cleaning contracts to businesses. It commits to its customers to a level of quality, alone sets the prices and has the services performed by subcontractors that it selects and on which it imposes schedules, procedures and work sites; if a subcontractor fails, it must send another team at its own cost. Netalis holds no inventory. Its chief financial officer proposes to recognise only the margin, on the grounds that Netalis employs no cleaning staff. Write a memo concluding on the role of Netalis and on the amount of revenue.L4