Old FRS (January 2022)

Example 27 - Determining whether an entity is acting as a principal or as an agent

23A.37

Determining whether an entity is acting as a principal or as an agent requires judgement and consideration of all relevant facts and circumstances.

23A.38

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 principal include:

• (a) 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;
• (b) the entity has inventory risk before or after the customer order, during shipping or on return;
• (c) the entity has latitude in establishing prices, either directly or indirectly, for example by providing additional goods or services; and
• (d) the entity bears the customer’s credit risk for the amount receivable from the customer.

23A.39

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 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.

23A.40

When an entity has entered into a contract as an undisclosed agent, it is normally acting as principal. 

23A.41

The amounts collected by an agent on behalf of a principal are not revenue. Instead, revenue is the amount of commission

New FRS (September 2024)

Principal versus agent considerations

23.36 

When another party is involved in providing goods or services to a customer, an entity shall determine whether the nature of its promise is to provide the specified goods or services itself (ie the entity is a principal) or to arrange for those goods or services to be provided by the other party (ie the entity is an agent). A specified good or service is a distinct good or service (or a distinct bundle of goods or services) to be provided to the customer (see paragraphs 23.21 to ⁠23.25). An entity shall determine whether it is a principal or an agent for each performance obligation in a contract. 

23.37

An entity is a principal if it controls the specified good or service before that good or service is transferred to a customer. A principal might obtain control of any one of the following: 

• (a) 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 the entity the ability to direct that party to provide the service to the customer on the entity's behalf; or a good or service from the other party that it then combines with other goods or services in providing the specified good or service to the customer;
• (b) a right to a service to be performed by the other party, which gives the entity the
  ability to direct that party to provide the service to the customer on the entity's
  behalf; or
• (c) a good or service from the other party that it then combines with other goods or
  services in providing the specified good or service to the customer.

23.38

Indicators that an entity is a principal include, but are not limited to, the following:

• (a) the entity is primarily responsible for fulfilling the promise to provide the specified good or service; 
• (b) the entity has inventory risk before the specified good or service has been transferred to a customer or after transfer of control to the customer (eg if the customer has a right of return);or
• (c) the entity has discretion in establishing the price for the specified good or service.

23.39

An entity that is a principal shall recognise revenue in the gross amount of consideration to which the entity expects to be entitled in exchange for the specified good or service transferred as it satisfies its performance obligation.

23.40

An entity is an agent if the entity’s performance obligation is to arrange for the provision of the specified good or service by another party. When (or as) an entity that is an agent satisfies a performance obligation, the entity recognises revenue in the amount of any fee or commission to which the entity expects to be entitled in exchange for arranging for the specified goods or services to be provided by the other party.