Principal vs Agent, or Reporting Revenue Gross vs Net (IFRS 15)

Last updated: 15 January 2024

The concepts of ‘principal’ and ‘agent’ are commonly referred to when discussing the gross vs. net presentation of revenue. Under IFRS 15.B35-B36, a principal recognises revenue and expenses in gross amounts, whereas an agent merely recognises fees or commissions, irrespective of whether gross cash flows pass through the agent.

Understanding principal and agent roles

This is how these roles are defined in IFRS 15:

• Principal – the party that controls the goods or services before they are transferred to customers,
• Agent – the party that arranges for the goods or services to be provided by another party without taking control over those goods or services.

IFRS 15.B34 mandates entities to determine whether they are acting as a principal or an agent for each good and service provided to a customer.

Two-step framework

IFRS 15.B34A proposes a two-step framework to aid in this assessment:

1. Identify the specific goods or services to be provided to the customer.
2. Evaluate whether the reporting entity controls the identified goods or services before they are transferred to the customer.

The first step is particularly relevant for services and intangible assets.

As previously mentioned, a principal is a party that controls a good or service before it is transferred to a customer. In contrast, an agent merely arranges for the provision of goods or services by another party, without exercising control over those goods or services before their transfer to a customer.

Determining control over a good or service

IFRS 15.B37 provides useful indicators for determining if a reporting entity controls a good or service before its transfer to the customer. These include:

• Primary responsibility for ensuring the good or service meets customer specifications,
• Inventory risk, and
• Discretion in establishing the price for the specific good or service.

It’s important to note that exposure to credit risk is not considered a factor in this assessment. The IASB has concluded this to be mostly irrelevant, as agents, much like principals, often face credit risk.

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Use of subcontractors

IFRS 15.B35A provides further guidance to be applied when another party is involved in delivering goods or services to a customer.

Principal vs agent considerations in relation to services

Challenges often arise when assessing the principal versus agent considerations for services that the entity will not directly provide. For instance, when a travel agent sells an airline ticket to a tourist, is it always considered an agent under IFRS 15 since the flight will be delivered by the airline? The answer is not necessarily. IFRS 15.B34A clearly states that the good or service provided to the customer could be a right to a good or service to be provided in the future by another party. For example, if a travel agent purchases airline tickets in advance and then sells them to a tourist, it can consider itself a principal and recognise gross revenue.

Principal vs agent – examples

Refer to Examples 45, 46, 46A, 47, 48, and 48A accompanying IFRS 15 for further clarification. Additionally, refer to this agenda decision where the IFRS Interpretations Committee illustrates how to apply the above principles to software resellers.

More about IFRS 15

See other pages relating to IFRS 15: