Principal vs Agent - Cost plus reimbursement

[AQS]

Hi Members,

Need your help to clarify a transaction.

We have an arrangement with another company "A" whereby we refer our members to "A" which help them to sell their product to our members (in substance we perform all due diligence and back end work before referring it to "A" that means it's a confirm revenue for "A". Please note we can refer only those members who pass the criteria set by "A" ), but "A" still have the right to reject & not to sell its product to our members in which case we will not receive any thing against our services.

What is going to be the "Performance obligation" under this contract, is it the work we have performed or the sale of product by "A"?

"A" will reimburse 100% of our marketing cost(say $100) plus $10/member referral, now the questions is should we record revenue gross or net i.e. $110 or $10 .


Thanks

[anandrocker]

Ill like to weigh in...

Simply put unless the contract existing between your company "Service Company X" and Company A which explicitly contains each referral has a charge of "x amount", no revenue can be recognized. IFRS 15 requires you to identify the contract with the customer. i.e. Company A. Once the contract has nothing binding then it doesn't meet the revenue recognition criteria.

Contract Criteria- Only when the sales referral is confirmed\acknowledged by Company A as a confirmed Sale or similar(internal control to be designed).

Recognition- The marketing costs incurred are our costs as the marketing materials and services are consumed by us to fulfill the service therefore 100 + 10 recognized as gross sales. i.e. Cost + Markup method




Sidenote- It means also company X is incurring a cost to refer confirmed sales leads to a client who doesn't have any obligation to reward you in return. Sounds bad on your end. Contract should be renegotiated atleast for some of the marketing costs based on a performance criteria.

Cheers

[AQS]

Thanks Anand!

Reimbursement of marketing cost is fixed i.e. irrespective whether “A”accept the referral or refuse it. The only thing we lose is additional $10. ( which in other words you can say comprises of our other expenses (excl. mkt) & profit)

“A”will reimburse 100% of marketing expense. Plus any customer refused by “A” can receive services from us i.e. we can serve that customer ourself.

[anandrocker]

I see however, im still leaning towards a principal relationship. I mean i understand the terminology for contract is 'reimbursable cost' but in for accounting purposes the reality is that all the costs incurred by your company are billed to you and not your client. Therefore cost of sales arises. There's a thin line to consider there.

Lets look at your clients books- In his books he receives a bill from your company saying marketing reimbursable costs. There is nothing to be reimbursed. Its a straight marketing cost to that company.

Cheers

[AQS]

Make sense. Do you think the reimbursable marketing expense should be a part of COS & not an operating expense.

Thanks

[Marek Muc]

I guess your marketing services are a performance obligation charged on a cost plus margin basis (recognised gross)
and then, the success fee can be considered to be variable consideration for these services (if I understand right, they are connected to the referral process)

useful links:
https://ifrscommunity.com/knowledge-bas ... sideration
https://ifrscommunity.com/knowledge-bas ... e-customer