Revenue recognition while an entity is acting as a Principal or as an Agent

Based on IAS 18, Revenue, in general term, revenue is recognized only when it is probable that the economic benefits associated with the transaction will flow to the entity and these benefits can be measured reliably.

Para. 8 of IAS 18 states that revenue includes only the gross inflows of economic benefits received and receivable by the entity on its own account. Amounts collected on behalf of third parties such as sales taxes, goods and services taxes and value added taxes are not economic benefits which flow to the entity and do not result in increases in equity. Therefore, they are excluded from revenue. Similarly, in an AGENCY relationship, the gross inflows of economic benefits include amounts collected on behalf of the PRINCIPAL and which do not result in increases in equity for the entity. The amounts collected on behalf of the principal are not revenue. Instead, revenue is the amount of commission.

Further, para. 21 of the Illustrative Examples of IAS 18 IE (Part B of IFRS 2010) provides guidance in determining whether an entity is acting as a PRINCIPAL or as an AGENT (as amended in IFRS 2009).

Such guidance states that determining whether an entity is acting as a principal or as an agent requires judgment and consideration of all relevant facts and circumstances.

An entity is acting as a PRINCIPAL when it has exposure to the significant risks and rewards associated with the sale of goods or the rendering of services. Features that indicate that an entity is acting as a principal include :

1. the entity has the primary responsibility for providing the goods or services to the customer or for fulfilling the order, for example by being responsible for the acceptability of the products or services ordered or purchased by the customer;
2. the entity has inventory risk before or after the customer order, during shipping or on return;
3. the entity has latitude in establishing prices, either directly or indirectly, for example by providing additional goods or services; and
4. the entity bears the customer’s credit risk for the amount receivable from the customer.

An entity is acting as an AGENT when it does not have exposure to the significant risks and rewards associated with the sale of goods or the rendering of services. One feature indicating that an entity is acting as an agent is that the amount the entity earns is predetermined, being either a fixed fee per transaction or a stated percentage of the amount billed to the customer.

Read also : FASB EITF Issue No. 99-19, Reporting Revenue Gross as a Principal versus Net as an Agent