If an arrangement involves three or more parties, an entity will have to determine whether it is acting as a principal or an agent in order to determine the amount of revenue to which it is entitled. For example, technology entities may offer a platform to sell virtual or digital goods on behalf of a third party or they may contract with an advertising agency to deliver advertising content to a website or mobile application. When the entity is the principal in the contract, the revenue recognised is the gross amount (i.e., the amount to which the entity expects to be entitled as the principal). When the entity is the agent, the revenue recognised is the net amount (i.e., the amount to which the entity is entitled in return for its services as the agent).
A principal’s performance obligations in a contract differ from those of an agent. IFRS 15 notes that a principal controls the goods or services before they are transferred to the customer. Consequently, the principal’s performance obligation is to transfer the goods and services to the customer.
However, an entity that momentarily obtains legal title of a product before legal title is transferred to the customer is not necessarily acting as a principal. In contrast, an agent does not control the goods or services before they are transferred to a customer. The agent is simply facilitating the sale of goods or services to the customer in exchange for a fee or commission. Therefore, the agent’s performance obligation is to arrange for another party to provide the goods or services to the customer.
Entities may find it difficult to determine which party controls an intangible good or service prior to its transfer to the customer. In addition, it is not always clear which party is the customer. For example, for an on-line game developer, the customer may be the intermediary that provides the social networking platform or it may be the end-customer. Depending on an entity’s conclusion, the amount and timing of revenue recognised could differ significantly. Principal versus agent considerations
As noted in IFRS 15, for the entity to conclude it is acting as the principal in the arrangement, it must determine that it controls the goods or services promised to the customer before those goods and services are transferred to the customer. Because this determination is not always clear, IFRS 15 provides indicators to assist the entity in making it. The indicators in IFRS 15 reflect concepts such as identifying performance obligations and the transfer of control of goods or services. Principal versus agent considerations
Appropriately identifying the entity’s performance obligation in a contract is fundamental to the determination of whether the entity is acting as a principal or an agent.
Judgement will be required to apply the indicators to intangible goods or services because they have been written in respect of tangible goods. There may be additional complexity if the entity does not know the gross amount charged to the end-customer. That might be the case when an intermediary contracts directly with the end-customer and the intermediary pays the entity its portion of the consideration under the arrangement, but does not provide full details of its transaction with the end-customer. Principal versus agent considerations