Principal vs Agent under IFRS 15: Gross vs Net Revenue (B34 to B38)

Why does principal vs agent matter if it does not change profit?

State that plainly at the start of any discussion with management, because it removes the emotional content from the argument. Nobody is being asked to earn less. They are being asked to describe accurately what they sold. If the conversation still gets difficult after that point, the difficulty is telling you something about the motivation rather than about the accounting.

The arithmetic is worth seeing before the mechanics. Take an entity that facilitates CU200m of transactions in a year, keeps CU30m and remits CU170m, and incurs CU22m of its own operating costs. As a principal it reports revenue of CU200m, cost of sales of CU170m and operating profit of CU8m. As an agent it reports revenue of CU30m, no cost of sales for the goods, and operating profit of CU8m. Same profit. Revenue differs by 6.7 times.

Three practical consequences follow, and they are the reason management cares.

First, valuation. Enterprise value to sales is the default multiple for platform and marketplace businesses precisely because many of them are not yet profitable. A company presenting gross revenue on an agency arrangement is being valued on a number that overstates its economic scale by whatever the supplier remittance is. This is not a theoretical concern. It has been the subject of investor scrutiny and of restatements.

Second, growth. Revenue growth rates behave differently on gross and net presentations. If commission rates are rising, net revenue grows faster than gross revenue. If commission rates are falling because of competition, gross revenue can grow while net revenue is flat. Presenting on the wrong basis does not just misstate the level, it misstates the trend.

Third, contracts and thresholds. Revenue-based covenants, royalty and licence fee calculations, revenue-linked incentive schemes, distributable profits calculations in some jurisdictions, and the size thresholds that determine whether an entity must be audited or must prepare consolidated accounts all key off revenue. A gross versus net change can flip an entity across a statutory threshold without any change in its economics.

Local FAQs

Does the conclusion affect the cash flow statement? Not in total. Cash from operating activities is the same. The gross presentation shows larger receipts from customers and larger payments to suppliers within operating cash flows, so gross cash flow line items differ even though the operating subtotal does not.

Does it affect deferred tax or the tax charge? No, because taxable profit is driven by profit, not by presentation. Indirect tax is a separate question and is driven by the legal supply chain rather than by the IFRS 15 conclusion, which is why VAT treatment and IFRS 15 treatment sometimes point in different directions in the same arrangement.

Does it affect segment reporting? Segment revenue follows the IFRS 8 measure reported to the chief operating decision maker, but IFRS 15.115 requires an entity to disclose sufficient information for users to understand the relationship between disaggregated revenue under IFRS 15.114 and segment revenue, so an inconsistency between the two becomes visible.

Potential risks

The commercial pressure runs one way. In practice almost every contested principal versus agent case involves an entity arguing for gross presentation, not for net. That asymmetry should raise the level of professional scepticism applied to the memo, and it should be documented in the audit file as a fraud risk consideration where revenue presentation is material to the entity's key performance indicators or to management remuneration.

What does IFRS 15.B34 actually ask?

There is a useful discipline in restating IFRS 15.B34 as a promise question rather than as a control question, before you get to control at all. What did the customer believe it was buying from this entity? If the customer thinks it bought a holiday from the tour operator, that is a different promise from thinking it bought a booking service that put it in touch with a hotel. The customer's understanding is not determinative, because IFRS 15.B35 resolves the question by control and not by perception, but it is a good first orientation and it usually points the same way as the control analysis when the contract has been drafted honestly.

Note also where IFRS 15 places this guidance. It sits in Appendix B, which IFRS 15 states is an integral part of the Standard and describes the application of paragraphs 1 to 129 with the same authority as the other parts of the Standard. Principal versus agent considerations are listed at item (e) of the application guidance categories. This is not interpretive commentary. It carries the same weight as the five steps.

Local FAQs

Does IFRS 15.B34 apply to a simple wholesale-to-retail chain? Usually not in the way people expect. If a manufacturer sells to a distributor and the distributor sells on to end customers, there are two separate contracts with two separate customers. The manufacturer's customer is the distributor. Unless the distributor is selling on the manufacturer's behalf, so that the manufacturer retains control until the end sale, each entity is a principal in its own contract. The consignment guidance in IFRS 15.B77 and B78 is the place to test that, not IFRS 15.B34.

Is the question asked at contract inception or continuously? At contract inception, consistently with IFRS 15.32 which requires the entity to determine at contract inception whether each performance obligation identified under IFRS 15.22 to 30 is satisfied over time or at a point in time. A change in the arrangement is dealt with as a contract modification rather than as a free reassessment.

Does the legal form of the arrangement decide it? No. A document titled "Agency Agreement" is evidence, and so is a document titled "Supply Agreement", but IFRS 15.B35 tests control and not labels. Where the legal form and the substance diverge, the file needs to explain why.

Potential risks

The most damaging error at this stage is defining the question at the level of the business rather than the transaction. Groups with several revenue streams frequently write one memo, conclude "principal", and apply it to arrangements that are economically different. Where the group operates a marketplace alongside a first-party retail operation, the two must be assessed separately, and the disaggregation required by IFRS 15.114 should make the split visible in the accounts.

How do you identify the specified good or service under IFRS 15.B34A?

The parenthesis in IFRS 15.B34A(a) is where the real work is. "which, for example, could be a right to a good or service to be provided by another party". That single clause changes the answer in a large proportion of travel, ticketing, voucher, capacity and reseller arrangements, and it is dealt with at length in unit 7 below. The point to fix here is structural: the specified good or service is whatever the customer contracted to receive, which is not necessarily the underlying physical item or the underlying performed service.

A practical procedure

The following sequence works on almost every fact pattern and produces a defensible file.

Step 3 deserves emphasis because it links this article back to step 2 of the model. The specified good or service is a distinct good or service or a distinct bundle. That means the performance obligation analysis has to be done first, and done properly, because it defines the units on which the principal versus agent question is then asked. Running the two exercises in the wrong order, or running the principal versus agent test on a unit that would not survive the IFRS 15.27 and 29 analysis, produces an answer with no foundation.

Local FAQs

Can the specified good or service be a service rather than a good? Yes, and most contested cases are services. IFRS 15.33 notes that goods and services are assets, even if only momentarily, when they are received and used, as in the case of many services, which is why a service can be controlled at all.

What if the customer buys a bundle where one element is third party and one is not? Test them separately under IFRS 15.27 and 29. If they are distinct, IFRS 15.B34 expects you to reach a conclusion on each. If they are not separately identifiable under IFRS 15.29, IFRS 15.30 combines them and you assess control of the combined bundle, which usually points to principal because the entity is providing the integration.

Does the customer's perception matter at all? It is corroborative evidence about the nature of the promise, particularly about primary responsibility under IFRS 15.B37(a). It is not the test. The test is control under IFRS 15.B35.

Potential risks

Watch for a unit defined at a level that conveniently supports the desired presentation. If the memo defines the specified good or service as "the end to end customer experience" in an arrangement where a third party performs everything the customer values, that is unit definition working backwards from the answer. Equally, defining the unit narrowly as "the booking service" in an arrangement where the entity bought inventory at risk understates the promise. Both errors happen and both should be challenged with the same question: what did the customer contract to receive.

What does control mean in IFRS 15.B35, B35A and B35B?

Take them in turn, because each has a distinct evidential footprint.

IFRS 15.B35A(a): control of a good or asset that is then transferred. This is the classic resale case. The entity buys, holds, and sells. The evidence is ordinary inventory evidence: purchase orders placed for the entity's own account, title and risk passing to the entity on shipment, the entity carrying the item on its statement of financial position, the entity bearing obsolescence and shrinkage, and the entity absorbing the loss if the item is never sold. Note that physical possession is not required. Drop-shipping can satisfy IFRS 15.B35A(a) where the entity genuinely obtains control before directing the supplier to ship to the customer, but the evidence has to show control and not merely a purchase order raised at the instant of the sale.

IFRS 15.B35A(b): control of a right to a service, giving the ability to direct the other party to provide it on the entity's behalf. This is the route that most people miss, and it is the most useful of the three in service businesses. The entity does not control the service directly, because a service cannot be warehoused. What it controls is a right to that service, and the test of that right is whether the entity can direct the other party to perform. The phrase "on the entity's behalf" is the giveaway. If the entity can tell the supplier where to go, when, and to whom, and the supplier answers to the entity rather than to the customer, IFRS 15.B35A(b) is engaged. If the supplier is performing on its own account, and the entity is merely passing on the customer's instructions, it is not.

IFRS 15.B35A(c): control of inputs that are combined into the specified good or service. This ties directly to IFRS 15.29(a) and the significant integration service. The logic in the standard is set out expressly: the entity first obtains control of the inputs and directs their use to create the combined output, which is the specified good or service. This route works only if there genuinely is a combined output. Assembling a list of third party services under one invoice is not integration. Designing a solution, taking responsibility for how the pieces fit, and being answerable for whether the combined output performs, is.

Local FAQs

Is physical possession necessary for control? No. IFRS 15.38(c) lists physical possession as an indicator of transfer of control, and IFRS 15.38 itself notes that possession may not coincide with control, which is why bill and hold arrangements under IFRS 15.B79 to B82 and consignment arrangements under IFRS 15.B77 to B78 exist as separate guidance.

Can an entity control a service it never touches? Yes, through IFRS 15.B35A(b). It controls the right to that service and directs the other party to perform on its behalf.

What if control is obtained and transferred at the same instant? That is the situation IFRS 15.B35 sentence two is aimed at. Simultaneity is not fatal in itself, particularly for services under IFRS 15.33 where assets exist only momentarily, but where the only evidence of control is a momentary legal title in a documentary chain, the analysis fails.

Potential risks

Beware of memos that establish control of the wrong asset. A payment processor may genuinely control the funds it holds in transit. That tells you nothing about whether it controls the goods the cardholder bought. The asset over which control must be demonstrated is the specified good or service identified at step 2, and nothing else.

What do the three IFRS 15.B37 indicators do, and what do they not do?

What the 2016 amendments changed

The 2014 text of IFRS 15 carried a list of five indicators that an entity is an agent, drawn closely from the old IAS 18 appendix, and it read as a risks and rewards weighing exercise. Clarifications to IFRS 15, issued April 2016, rewrote IFRS 15.B34 to B38, added IFRS 15.B34A, B35A, B35B and B37A, and made three deliberate changes to how the indicators work.

They were reoriented. The 2014 list described indicators that the entity is an agent. The current IFRS 15.B37 describes indicators that the entity controls the specified good or service, and is therefore a principal. That is not cosmetic. It anchors the indicators to control instead of leaving them as a free-standing weighing exercise.

They were reduced. Credit risk was removed. So was the "form of consideration is a commission" indicator. Credit risk in particular is worth dwelling on, because it is still cited constantly. An entity that collects the full amount from the customer, carries the receivable, and absorbs the loss if the customer does not pay, has taken a financial risk. It has not thereby obtained the ability to direct the use of the specified good or service or to obtain substantially all its remaining benefits, which is what IFRS 15.33 requires. Credit risk can be managed, insured, factored and sold. Control cannot. The IASB's removal of credit risk from the list is not an oversight, it is the point.

They were demoted. IFRS 15.B37A did not exist before 2016. Its insertion, together with the "include, but are not limited to" framing in IFRS 15.B37 itself, converts the list from a checklist into a body of evidence to be weighed on the facts.

Local FAQs

Can one indicator be enough? Yes, if it is persuasive on the facts. IFRS 15.B37A contemplates exactly that. What cannot happen is a conclusion resting on an indicator that does not speak to control in the arrangement in question.

Are there indicators outside the list? IFRS 15.B37 says the indicators "include, but are not limited to" the three listed. Other evidence about control is admissible. What is not admissible is reviving an indicator the IASB deliberately removed, such as credit risk, and giving it the weight of a listed indicator.

What about who bears foreign exchange risk, or who holds the customer relationship? Both can be corroborative, neither is in the list, and neither speaks directly to control of the specified good or service. Treat them as colour, not as evidence.

Potential risks

Two failure patterns recur. The first is the indicator applied to the wrong asset, most often pricing discretion over the entity's own fee being presented as pricing discretion over the specified good or service. The second is the indicator that exists on paper only. Contractual primary responsibility that is never exercised, and that carries no economic consequence when something goes wrong, is a drafting artefact. Ask what actually happened the last ten times a customer complained, and who paid.

How does agent accounting work under IFRS 15.B36, and what is B38 for?

The mechanics follow from that. On the sale, the agent recognises revenue for its fee and a liability for the amount it must pass on. The amount collected on behalf of the supplier never touches revenue. This is not merely an application of IFRS 15.B36, it is also required by the transaction price definition itself.

The agent's journals

Take a straightforward agency arrangement. An agent sells a service priced at CU1,000 on behalf of a supplier, collects CU1,000 from the customer, retains a 12 per cent commission of CU120 and remits CU880. All figures are an illustrative example prepared for this article.

Revenue recognised is CU120. Cash flowing through the entity is CU1,000, of which CU880 was never the entity's to begin with. The CU880 payable is a financial liability within IFRS 9, not a contract liability under IFRS 15, because it is an obligation to pay cash to the supplier rather than an obligation to transfer goods or services to a customer. That distinction matters for the contract asset and contract liability disclosures under IFRS 15.116 to 118, which should not be inflated by supplier payables.

Compare the same transaction if the entity were the principal. Revenue CU1,000, cost of sales CU880, and a trade payable of CU880 to the supplier. Gross profit CU120 in both cases. That is the whole difference, and it is why the debate has no effect on profit.

Local FAQs

Can an agent's fee be variable? Yes, and frequently is. Volume-based commission tiers, performance bonuses and clawbacks are all variable consideration and are estimated under IFRS 15.50 to 54 and constrained under IFRS 15.56 to 58. The agent conclusion determines what the fee is for. It does not exempt the fee from the variable consideration machinery.

Does an agent have a performance obligation at all? Yes. IFRS 15.26(f) lists "providing a service of arranging for another party to transfer goods or services to a customer" as a promised good or service. The agent's performance obligation is the arranging service, and the timing of its satisfaction is tested under IFRS 15.35 and 38 like any other.

When is an agent's arranging service satisfied? Usually at the point the arrangement is made, but not automatically. If the agent has continuing obligations, for example ongoing support for the duration of the underlying service, part of the fee may relate to a separate performance obligation satisfied over time. Test it under IFRS 15.22 to 30 first.

What if the agent collects nothing and simply invoices a fee? The accounting is the same. Revenue is the fee. There is no payable to the supplier because no cash passed through. The phrase "net amount retained" in IFRS 15.B36 describes one way an agent's fee arises, not the only way.

Potential risks

Agent arrangements generate large gross cash flows that never touch revenue. That creates two exposures. The first is presentation of those flows in the cash flow statement, where receipts from customers and payments to suppliers are both operating flows and should not be netted arbitrarily. The second is client money risk: where the agent holds the supplier's cash, whether that cash is the agent's asset at all, and whether it should sit on the statement of financial position, depends on the terms of the arrangement and on IFRS 9 recognition principles rather than on IFRS 15.

When is the specified good or service a right, and why does that flip the answer?

This is the most powerful and least understood mechanism in IFRS 15.B34 to B38. It is the reason two travel businesses with apparently similar operations can properly report revenue on entirely different bases, and it is the reason a great many principal versus agent memos reach the wrong answer while applying the indicators impeccably. They apply them to the wrong asset.

Why a right can be controlled when the underlying service cannot

Consider a flight. The entity that will fly the aircraft is the airline. No intermediary can control a flight in any meaningful sense. It cannot direct the aircraft, choose the crew, or prevent the airline from operating. If the specified service were the flight, no intermediary could ever be a principal, and the analysis would be trivial.

But that is not necessarily what the intermediary sold. If the intermediary bought a block of seats from the airline for its own account, at its own risk, before any customer existed, and can price them, bundle them, resell them, or eat the loss if they go unsold, then what it holds is a right to carriage. That right is an asset. The intermediary can direct its use, which is exactly the IFRS 15.33 test, and it obtains substantially all of its remaining benefits, because whatever the right realises is the intermediary's. On those facts the specified good or service is the right, the intermediary controls it before transferring it, and IFRS 15.B35 makes the intermediary the principal.

Change one fact. The intermediary has no allocation. It searches airline inventory in real time, the airline sets the fare, the airline issues the ticket in its own name, unsold capacity is the airline's problem, and the intermediary takes a booking fee. Now the intermediary holds no right at any point. There is nothing to control. It is an agent under IFRS 15.B36 and reports the booking fee.

Same industry, same customers, same screen. Opposite answers, correctly.

Vouchers, gift cards and prepaid credits

Vouchers are the same problem in a smaller package. An entity that buys vouchers from a retailer at a discount, holds them, prices them and bears the risk that they expire unsold holds a right and is normally the principal for that right. An entity that lists a retailer's vouchers, issues them on demand from the retailer's system and takes a commission holds nothing.

Two further points arise on vouchers. First, where the entity issues its own voucher redeemable for third party goods, the customer's contract is with the entity, and the analysis must run on what that voucher entitles the customer to. Second, breakage on unredeemed rights is governed by the customers' unexercised rights guidance in IFRS 15.B44 to B47, which is a separate question from principal versus agent and is answered only after the gross or net conclusion has been reached, because it determines whose breakage it is.

Local FAQs

Does the right have to be legally transferable to be controlled? Transferability is strong evidence but is not stated as a requirement. IFRS 15.33 asks about the ability to direct the use of and obtain substantially all of the remaining benefits from the asset. Practically, a right that cannot be allocated to a customer of the entity's choosing is hard to describe as directed by the entity.

What if the entity buys capacity but can return it? A full return right with no economic cost removes the inventory risk that IFRS 15.B37(b) is looking for and generally means the entity never took on the burdens of the right. A return right with a meaningful cost, or a limited return window, is a matter of degree and needs to be quantified rather than described.

Does IFRS 15.26(c) settle it? No. IFRS 15.26(c) confirms that a resold right can be a promised good or service, and its parenthesis assumes the entity is acting as a principal. It does not tell you whether this entity controls this right. That still comes from IFRS 15.B35.

Potential risks

The right analysis can be abused in both directions. Overstated, it turns every booking into a purchase of a right and every intermediary into a principal, which is exactly the outcome the 2016 amendments were written to prevent. Understated, it turns genuine wholesale buyers of capacity into agents and understates revenue. The discipline is the same either way: identify what the entity actually acquired, when it acquired it, and what it stood to lose. If the answer to the last question is nothing, there was no right.

What happens in chains, layers and mixed contracts?

Chains: everyone can be a principal

A frequent confusion is the belief that in any supply chain only one party can be the principal, so that if the manufacturer is a principal the distributor must be an agent. That is not how IFRS 15 works. Each entity applies IFRS 15 to its own contract with its own customer, and the definition of a customer in Appendix A of IFRS 15 is a party that has contracted with the entity to obtain goods or services that are an output of the entity's ordinary activities.

So a manufacturer sells to a distributor. The distributor is the manufacturer's customer, and the manufacturer is a principal. The distributor sells to a retailer. The retailer is the distributor's customer, and if the distributor controls the goods before transfer it is also a principal. The retailer sells to a consumer and is a principal too. Three principals, three contracts, three gross revenues, no contradiction. Consolidated group revenue is not the sum of the chain because intra-group transactions are eliminated, but between unrelated entities each reports its own gross.

The chain question only becomes an IFRS 15.B34 question where one entity is selling on behalf of another to the same ultimate customer. That is where the consignment guidance is the right diagnostic.

Mixed contracts: principal for one obligation, agent for another

IFRS 15.B34 states it directly: "If a contract with a customer includes more than one specified good or service, an entity could be a principal for some specified goods or services and an agent for others." This is not an edge case. It is the ordinary position in several very large industries.

A delivery platform typically sells two things in one order. The food is prepared, priced and warranted by the restaurant, which is a principal for its own product; the platform arranges the sale and is an agent. The delivery is arranged, priced and performed under the platform's own contracts with riders, whom it directs; on those facts the platform controls a right to the courier's service under IFRS 15.B35A(b) and is the principal for delivery. One order, two answers, and the revenue line contains a net figure for the food commission and a gross figure for delivery.

Worked through on a single order, with all amounts an illustrative example prepared for this article:

The platform remits CU22.50 to the restaurant, being CU30.00 less the CU7.50 commission, and pays the rider CU3.20. Revenue is CU13.00 and cost of sales is CU3.20, giving CU9.80. Had the platform incorrectly presented everything gross it would report revenue of CU35.50 and costs of CU25.70, being CU22.50 plus CU3.20, again giving CU9.80. Identical margin, revenue nearly three times larger. That is the whole prize being fought over.

Layered platforms and the two-sided customer question

Platforms often have two counterparties who both pay: a seller paying commission and a buyer paying a fee. Both can be customers under the Appendix A definition if each contracts with the entity to obtain a service that is an output of the entity's ordinary activities. Where that is so, the entity has two contracts, or one contract with two customers, and it should identify the specified good or service promised to each. The seller is buying access to demand and a completed sale. The buyer is buying a search, selection and transaction service. Neither of those promises is the underlying item, which is precisely why the platform is normally an agent for the item and a principal for its own services to each side.

Local FAQs

Can two entities in a chain both be principals for the same end customer? Not for the same specified good or service to the same customer, no. They can both be principals in their own contracts with different customers, which is the ordinary chain. If both are contracting with the same end customer for the same item, one of them is arranging.

How is the consideration split in a mixed contract? By allocating the transaction price on a relative stand-alone selling price basis under IFRS 15.73, 74 and 76 to 80, applied to the amounts within the entity's own transaction price. Amounts collected on behalf of the supplier are excluded from the transaction price altogether by IFRS 15.47 and so never enter the allocation.

What if a sub-agent is involved? Each entity assesses its own contract. A sub-agent arranging on behalf of an agent is still an agent, and reports its own fee. The existence of two arranging layers does not make either of them a principal.

Potential risks

Mixed conclusions create a control risk as well as a technical one. Systems must be able to record two presentation bases within one order, and to keep them aligned when commercial terms change. A change in the delivery contracting model, from marketplace delivery to own-fleet delivery, changes the accounting for every affected order. Where the finance system holds a single revenue flag per merchant rather than per order line, that change is very likely to be missed.

How does the analysis play out sector by sector?

Marketplaces and platforms

The default outcome is agent for the underlying item. The seller lists, prices, describes and warrants the item. The platform never acquires it and never bears the loss if it does not sell. There is no right to control because nothing was ever acquired. Under IFRS 15.B37(a) the customer's contractual remedy for a defective item runs against the seller, with the platform's buyer protection scheme typically operating as a discretionary or insurance-backed arrangement rather than as primary responsibility for the acceptability of the goods.

Two fact patterns move a platform towards principal. First, a first-party inventory operation running alongside the marketplace, where the platform buys stock for its own account. That is straightforward IFRS 15.B35A(a) and gross presentation, and it should be disaggregated from the marketplace stream under IFRS 15.114. Second, a managed or curated model where the platform takes title, sets the price, holds the stock and bears returns. Look for the economics rather than the branding: managed marketplace, fulfilled-by, and similar labels cover both models.

The specific argument to resist is the "we guarantee the transaction" argument. Buyer protection, escrow, dispute resolution and refund guarantees are all real services, and they may be performance obligations of the platform in their own right. None of them is control of the seller's goods.

Travel and ticketing

Covered at length in unit 7. In short: identify whether the entity acquired a right to carriage, accommodation or admission for its own account before it had a customer. Tour operators and consolidators that contract allocation in advance are commonly principals for the rights they hold. Booking platforms and metasearch businesses that transmit a booking into the supplier's system are commonly agents. Many businesses run both models and must present both, which makes the disaggregation disclosure under IFRS 15.114 and the judgement disclosure under IFRS 15.123 particularly important.

Advertising and media buying

An agency buys media inventory on behalf of a client. The specified service to the client is normally the planning, buying and management service, not the media space itself. Where the agency buys as a disclosed agent, is reimbursed for the media cost and earns a fee, IFRS 15.B36 applies and the media cost is not revenue. Where the agency buys principal media inventory for its own account, at its own risk, and resells it, the analysis can go the other way. In practice the two coexist within the same group, and the sector's response has been to report a pass-through-free measure alongside statutory revenue.

Logistics and freight forwarding

Forwarders own no ships and often no trucks, which makes them a favourite counter-example to the assumption that physical performance decides the answer. It does not. IFRS 15.B35 states expressly that a principal may engage another party to satisfy some or all of the performance obligation on its behalf. The forwarder contracts with the shipper for door to door delivery, buys ocean, air, road and customs services, integrates them into a single movement, prices the whole at its own risk, and answers to the shipper if the cargo is late or lost. That is IFRS 15.B35A(b) for the carrier services and IFRS 15.B35A(c) for the integration, supported by IFRS 15.29(a).

The contrast is a pure booking agent that introduces a shipper to a carrier for a commission, where the carrier contracts directly with the shipper and issues the bill of lading in its own name. There the forwarder never holds a right to capacity and is an agent.

Delivery aggregators

Dealt with in unit 8. The reliable framing is: agent for the merchant's goods, principal for what the platform contracts, directs and prices itself. Watch for models that change over time, and for hybrid models within one merchant relationship.

Payment processors, and gross versus net on interchange

Payments is where the analysis is hardest, because the flows are enormous and the fee structure is layered. Three distinct amounts move through an acquirer or payment service provider on a card transaction: the value of the underlying goods, which belongs to the merchant; interchange payable to the card issuer; and scheme fees payable to the card network. Against that sit the processor's own fees.

The value of the goods is straightforward. The processor never controls the merchant's goods, has no right to them and is not primarily responsible for their acceptability. It is not revenue on any analysis, and IFRS 15.47 excludes it as an amount collected on behalf of a third party.

Interchange and scheme fees are the contested items. The question under IFRS 15.B34A is whether the processor's promise to the merchant is to provide a complete payment acceptance service, of which access to the card networks is an input that the processor procures and integrates, or whether the processor is merely arranging for the issuer and the scheme to provide their services and passing their charges through. Where the processor negotiates network access on its own account, is exposed to the cost whether or not it recovers it from the merchant, and prices the merchant a single blended rate at its own risk, the IFRS 15.B35A(c) integration route is a serious argument for gross presentation with interchange as a cost. Where the processor operates on interchange-plus terms, passing the exact interchange through and adding a stated margin, the pass-through element looks much more like an amount collected on behalf of a third party.

Sector practice has converged on presenting a net revenue measure alongside statutory revenue so that the scale of pass-through is visible either way. That is a useful disclosure response, but it does not remove the need to reach and document the IFRS 15.B35 conclusion.

Telecoms and handset distribution

An operator selling a subsidised handset with a 24-month airtime plan has at least two specified goods or services: the handset and the network service. The operator is normally a principal for the network service, which it provides itself. For the handset the analysis depends on the model. An operator that buys handsets into its own inventory, holds stock, bears obsolescence and sets the retail price is a principal under IFRS 15.B35A(a) and IFRS 15.B37(b). An operator whose retail partner sells the manufacturer's handset with the operator merely facilitating the connection, or that arranges a direct sale from a manufacturer to the customer for a fee, may be an agent for the handset while remaining a principal for the airtime.

Two complications follow, and both are separate from the principal versus agent question but interact with it. First, the transaction price must be allocated between the handset and the airtime on a relative stand-alone selling price basis under IFRS 15.74 and 76 to 80, not at the stated contract prices, which is a well-known IFRS 15 issue in the sector and is dealt with in the allocation article. Second, an agent conclusion on the handset removes the handset value from revenue entirely, which changes the allocation base as well as the presentation.

Drop-shipping and consignment

Drop-shipping is the fact pattern IFRS 15.B35 sentence two was written about. The retailer takes the customer's order, places a matching order with the supplier, and the supplier ships directly to the customer. Legal title may pass through the retailer for an instant. IFRS 15.B35 says that momentary title does not necessarily establish control. What matters is whether the retailer had the ability to direct the use of the goods and obtain substantially all their remaining benefits at any point.

Genuine drop-ship principals do exist. Look for: the retailer selecting and specifying the product, the retailer setting the price and keeping the spread, the retailer bearing the cost of a return that the supplier will not accept, the retailer being contractually and practically responsible for defects, and the retailer being exposed if the supplier fails to deliver. Where the supplier sets the price, accepts all returns, deals with the customer's complaints and can decline an order, the retailer is arranging.

Consignment runs on the parallel guidance in IFRS 15.B77 and B78 set out in unit 8. A consignee that cannot be required to pay unless it sells, must return unsold goods, and can have the goods recalled by the consignor, does not control them.

Local FAQs

Is there a sector where gross is presumed? No. IFRS 15 contains no presumption in either direction. Industry practice is evidence about typical fact patterns, not about the answer.

Can an entity change its conclusion when its business model changes? Yes, and it should. A change in the commercial arrangement is a change in facts, not a change in accounting policy, so it is applied prospectively to the affected contracts. A change in conclusion on unchanged facts is a correction of an error under IAS 8 and requires restatement.

How do you handle a group with hundreds of contract variants? Group them into populations with genuinely homogeneous terms, assess each population, and document the criteria that assign a contract to a population. Then control the assignment. Most failures in large groups are population drift rather than a wrong technical conclusion. More sector-specific fact patterns are worked through in the IFRS 15 industry examples article.

Potential risks

Sector benchmarking is a legitimate sense check and a dangerous conclusion. "Our competitors present gross" is not an argument under IFRS 15.B35, and the competitors may have different contracts, or may be wrong. Where an entity's presentation differs from close peers, the file should be able to explain the difference in contractual terms. Where it matches peers on materially different terms, that is the more worrying position.

Worked example 1: a marketplace platform, concluding agent

The facts

All amounts are an illustrative example constructed for this article. They are not any company's figures.

Step 1: identify the specified good or service, IFRS 15.B34A(a)

The consumer contracts to obtain a physical item. That item is the specified good. It is capable of being distinct under IFRS 15.27(a) because the consumer can use it on its own, and it is separately identifiable under IFRS 15.27(b) because M provides no integration, modification or interdependent service in relation to it. Applying IFRS 15.29, none of the factors indicating a combined output is present.

Is the specified good instead a right to the item, under IFRS 15.B34A(a)? No. M acquired nothing before the consumer bought. There is no right in existence at any point that M held, priced or could have redirected. The right question is asked and answered, and the answer is recorded in the file, which is the discipline the paragraph is asking for.

Separately, M promises the seller a listing, checkout and settlement service, and promises the consumer a buyer protection scheme. Both are M's own promises and M is a principal for each of them, but they are not the item.

Step 2: assess control, IFRS 15.B34A(b), B35 and B35A

Run the three IFRS 15.B35A routes.

B35A(a), a good it obtains and then transfers. M never obtains the item. No title, no possession, no risk of loss in transit, no exposure to unsold stock. Not met.

B35A(b), a right to a service it can direct. The relevant promise is a good, not a service, and in any event M cannot direct the seller to ship to a consumer of M's choosing at a price of M's choosing. M can only transmit the order the consumer placed. Not met.

B35A(c), inputs it combines into the specified good or service. M does not modify, bundle or integrate the item. The buyer protection scheme sits alongside the item rather than being integrated into it, and would fail IFRS 15.29(a) as a combined output. Not met.

None of the three routes to control is met, so under IFRS 15.B35 M does not control the specified good before it is transferred, and under IFRS 15.B36 M is an agent for the item.

Step 3: test the conclusion against the IFRS 15.B37 indicators

All three indicators corroborate the control conclusion. Note the order in which the file records this: the conclusion comes from IFRS 15.B35 and B35A, and the indicators are evidence supporting it. Reversing that order would be the scorecard error.

Step 4: measure and present

Under IFRS 15.B36, revenue is the fee to which M expects to be entitled for arranging the sale. The fee is the net amount retained, being 15 per cent of the item price. Under IFRS 15.47 the CU170.0m collected for the sellers is excluded from the transaction price altogether as an amount collected on behalf of third parties.

Journals for a single CU200 item

Presentation for the year: the wrong answer and the right answer

Check the arithmetic. Gross column: 200.0 less 170.0 equals 30.0; 30.0 less 22.0 equals 8.0. Net column: 30.0 less nil equals 30.0; 30.0 less 22.0 equals 8.0. Margin 8.0 divided by 200.0 is 4.0 per cent; 8.0 divided by 30.0 is 26.7 per cent. Overstatement 170.0 divided by 30.0 is 5.67 times, or 567 per cent.

Local FAQs

Does buyer protection change the answer? Not on these facts. It is a separate promise by M, and M is the principal for it. If M funded it itself, absorbed the losses and did not recover from sellers, it would move IFRS 15.B37(a) somewhat, but a guarantee against a counterparty's non-performance is closer to a financial guarantee or an insurance arrangement than to control of goods.

What if M runs promotions at its own cost? Funding a discount out of M's own commission is consideration payable to a customer or a reduction in M's fee, dealt with under IFRS 15.70 to 72. Funding a discount below the seller's price at M's own expense, on many transactions, starts to look like pricing discretion under IFRS 15.B37(c) and should be quantified rather than dismissed.

Is the CU170 payable a contract liability? No. It is an obligation to pay cash to a supplier and falls within IFRS 9. Contract liabilities under IFRS 15 arise where consideration is received for goods or services still to be transferred to a customer.

Potential risks

The population risk is the real one. A marketplace that later launches a first-party retail line, or a "fulfilled by M" service where M takes title, must present those streams gross while continuing to present the marketplace net, and must disaggregate them under IFRS 15.114. The system change that introduces the new model is the point at which the accounting most often fails to follow.

Worked example 2: ticketing, where the specified good or service is a right

The facts

All amounts are an illustrative example constructed for this article. Entity T resells tickets for a six-week theatre run.

Step 1: identify the specified good or service, IFRS 15.B34A(a)

This is the step that decides the case, and it is the step that a careless memo skips.

If the specified service is "attendance at the performance", then T can never be a principal. T cannot direct the actors, cannot cancel or reschedule, and cannot prevent the venue from performing. Control of the performance is impossible for anyone other than the venue.

But that is not what T holds. IFRS 15.B34A(a) states that the specified good or service "could be a right to a good or service to be provided by another party", cross-referring to IFRS 15.26. IFRS 15.26(c) then lists as a promised good or service the "resale of rights to goods or services purchased by an entity (for example, a ticket resold by an entity acting as a principal, as described in paragraphs B34–B38)". The standard names this exact transaction.

The specified good or service is therefore the right of admission. It is distinct under IFRS 15.27: the customer can benefit from it on its own, and it is separately identifiable because T promises nothing else that is integrated with it.

Step 2: assess control of the right, IFRS 15.B35 and B35A

IFRS 15.B35A(a) is satisfied: T obtains an asset from the venue, the right of admission, which it then transfers to the customer. IFRS 15.B35A(b) is also engaged, because the right gives T the ability to direct the venue to admit a person of T's choosing.

Applying the IFRS 15.33 definition directly. T has the ability to direct the use of the right: it decides who gets which seat, at what price, in what bundle. It obtains substantially all of the remaining benefits: whatever the right realises on resale is T's, and if the right expires unused the loss is T's. Control is established before the right is transferred to the customer, because T held it from the moment the venue contract was signed.

Step 3: the IFRS 15.B37 indicators

Step 4: journals and presentation

Inventory check: 60,000 acquired, less 54,000 released on sale, less 6,000 written off, leaves nil. Correct.

Check the arithmetic. 900 at CU95 is CU85,500. 900 at CU60 is CU54,000. 85,500 less 54,000 is 31,500. 100 unsold at CU60 is CU6,000. 31,500 less 6,000 less 12,000 is 13,500. Margin 13,500 divided by 85,500 is 15.8 per cent; 13,500 divided by 31,500 is 42.9 per cent. The write-off of unsold rights appears in both columns, which is itself instructive: an entity that has genuine inventory risk cannot present a clean net margin, because the cost of what it failed to sell has nowhere to hide.

The same industry, different contract: agent

Now change three facts and nothing else. T holds no allocation. It lists the venue's seats in real time, the venue sets the CU95 price and issues the ticket in its own name, unsold seats are the venue's loss, and T retains CU8 per seat sold. T's other operating costs are still CU12,000.

Step 1: the specified service is the right of admission, but T never holds one. The right is created in the customer's name at the point of sale and never belongs to T. Step 2: none of the IFRS 15.B35A routes is met. There is no asset T obtains, no right T can direct, and nothing T integrates. Step 3: T bears no inventory risk, does not set the customer price, and the venue is responsible for admission. Conclusion: agent under IFRS 15.B36.

Check: 900 seats at CU8 is CU7,200. The venue's share is 900 at CU87, being CU95 less CU8, which is CU78,300. 85,500 less 78,300 is 7,200. 7,200 less 12,000 is a loss of 4,800. Again the profit is identical on both presentations within the scenario. Note that the two scenarios produce different profits because they are different commercial bargains, not because of any presentation choice.

Local FAQs

Is the right inventory under IAS 2? In substance it is held for sale in the ordinary course of business, and presenting it within inventories is common. Whether it meets the IAS 2 definition, or is better described as a prepaid right, depends on its legal form. What matters for IFRS 15 is that T controls it, not what line it sits on.

When is revenue recognised, on sale of the ticket or on the night? That is the separate timing question under IFRS 15.31 to 38. Where the specified good is the right itself, control of the right typically transfers when the ticket is issued to the customer. Where the promise is attendance, revenue follows the performance. The unit of account decides the timing as well as the presentation, which is another reason to get IFRS 15.B34A(a) right.

What if T can return a proportion of unsold seats? A partial return right reduces but does not necessarily eliminate inventory risk. Quantify it. If T can return 90 per cent of unsold seats, its exposure is on 10 per cent, and IFRS 15.B37(b) becomes weak evidence rather than strong. The control analysis under IFRS 15.B35 then has to carry more of the weight.

Potential risks

Rights-based principal conclusions depend entirely on the contract being what management says it is. The audit response is documentary: read the venue or supplier agreement, confirm the payment obligation is unconditional, confirm there is no return or cancellation right, and trace the cost of unsold rights through to the income statement. An arrangement described as an outright purchase but settled only on each individual customer sale is not an outright purchase.