installation services. Because the equipment and the installation services do not each significantly affect
the other, they are not highly interdependent or highly interrelated.
On the basis of this assessment, the entity identifies two performance obligations in the contract for the
following goods or services:
(i) the equipment; and
(ii) installation
services.
The entity applies paragraphs 31–38 of IFRS 15 to determine whether each performance obligation is
satisfied at a point in time or over time.
Case D – Promises are separately identifiable (contractual restrictions)
Assume the same facts as in Case C, except that the customer is contractually required to use the entity’s
installation services.
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The contractual requirement to use the entity’s installation services does not change the evaluation of whether
the promised goods and services are distinct in this case. This is because the contractual requirement to use
the entity’s installation services does not change the characteristics of the goods or services themselves, nor
does it change the entity’s promises to the customer. Although the customer is required to use the entity’s
installation services, the equipment and the installation services are capable of being distinct (i.e. they each
meet the criterion in paragraph 27(a) of IFRS 15) and the entity’s promises to provide the equipment and to
provide the installation services are each separately identifiable, i.e. they each meet the criterion in
paragraph 27(b) of IFRS 15. The entity’s analysis in this regard is consistent with that in Case C.
Case E – Promises are separately identifiable (consumables)
An entity enters into a contract with a customer to provide a piece of off-the-shelf equipment (i.e. the
equipment is operational without any significant customisation or modification) and to provide specialised
consumables for use in the equipment at predetermined intervals over the next three years. The consumables
are produced only by the entity, but are sold separately by the entity.
The entity determines that the customer can benefit from the equipment together with the readily available
consumables. The consumables are readily available in accordance with paragraph 28 of IFRS 15, because they
are regularly sold separately by the entity (i.e. through refill orders to customers that previously purchased the
equipment). The customer can benefit from the consumables that will be delivered under the contract together
with the delivered equipment that is transferred to the customer initially under the contract. Therefore, the
equipment and the consumables are each capable of being distinct in accordance with paragraph 27(a) of IFRS 15.
The entity determines that its promises to transfer the equipment and to provide consumables over a three-year
period are each separately identifiable in accordance with paragraph 27(b) of IFRS 15. In determining that the
equipment and the consumables are not inputs to a combined item in this contract, the entity considers that it is
not providing a significant integration service that transforms the equipment and consumables into a combined
output. In addition, neither the equipment nor the consumables are significantly customised or modified by the
other. Lastly, the entity concludes that the equipment and the consumables are not highly interdependent or
highly interrelated because they do not significantly affect each other. Although the customer can benefit from
the consumables in this contract only after it has obtained control of the equipment (i.e. the consumables would
have no use without the equipment) and the consumables are required for the equipment to function, the
equipment and the consumables do not each significantly affect the other. This is because the entity would be
able to fulfil each of its promises in the contract independently of the other. That is, the entity would be able to
fulfil its promise to transfer the equipment even if the customer did not purchase any consumables and would be
able to fulfil its promise to provide the consumables, even if the customer acquired the equipment separately.
On the basis of this assessment, the entity identifies two performance obligations in the contract for the
following goods or services:
(a) the equipment; and
(b) the
consumables.
The entity applies paragraphs 31–38 of IFRS 15 to determine whether each performance obligation is
satisfied at a point in time or over time.
5.3
Promised goods or services that are not distinct
If a promised good or service does not meet the criteria to be considered distinct, an
entity is required to combine that good or service with other promised goods or services
until the entity identifies a bundle of goods or services that, together, is distinct. This
could result in an entity combining a good or service that is not considered distinct with
another good or service that, on its own, would have met the criteria to be considered
distinct (see 5.2.1 above). [IFRS 15.30].
The standard provides two examples of contracts with promised goods or services that,
while capable of being distinct, are not distinct in the context of the contract because of
a significant integration service that combines the inputs (the underlying goods or
services) into a combined output – see Example 28.20 at 5.2.3 above.
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5.4
Principal versus agent considerations
When more than one party is involved in providing goods or services to a customer, the
standard requires an entity to determine whether it is a principal or an agent in these
transactions by evaluating the nature of its promise to the customer. An entity is a principal
(and, therefore, records revenue on a gross basis) if it controls a promised good or service
before transferring that good or service to the customer. [IFRS 15.B35]. An entity is an agent
(and, therefore, records as revenue the net amount that it retains for its agency services)
if its role is to arrange for another entity to provide the goods or services. [IFRS 15.B36].
In the Basis for Conclusions, the Board explained that in order for an entity to conclude
that it is providing the good or service to the customer, it must first control that good or
service. That is, the entity cannot provide the good or service to a customer if the entity
does not first control it. If an entity controls the good or service, the entity is a principal
in the transaction. If an entity does not control the good or service before it is
transferred to the customer, the entity is an agent in the transaction. [IFRS 15.B36, BC385D].
In the Basis for Conclusions, the Board noted that an entity that itself manufactures a
good or performs a service is always a principal if it transfers control of that good or
service to another party. There is no need for such an entity to evaluate the principal
versus agent application guidance because it transfers control of or provides its own
good or service directly to its customer without the involvement of another party. For
example, if an entity transfers control of a good to an intermediary that is a principal in
providing that good to an end-customer, the entity records revenue as a principal in the
sale of the good to its customer (the intermediary). [IFRS 15.BC385E].
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Consistent with practice under legacy IFRS, entities need to carefully evaluate whether
a gross or net presentation is appropriate. IFRS 15 includes application guidance on
determining whether an entity is a principal or agent in an arrangement that is similar to
legacy IFRS. However, the key difference is that the standard focuses on control of the
specified goods or services as the overarching principle for entities to consider in
determining whether they are acting as a principal or an agent. That is, an entity first
evaluates whether it controls the specified good or service before reviewing the
standard’s principal indicators. This could result in entities reaching different
conclusions than they did under legacy IFRS.
The standard states that when other parties are involved in providing the specified goods
or services to an entity’s customer, the entity must determine whether its performance
obligation is to provide the specified good or service itself (i.e. the entity is a principal) or
to arrange for another party to provide the specified good or service (i.e. the entity is an
agent). An entity makes this determination for each specified good or service promised to
the customer. The standard also notes that, if a contract includes more than one specified
good or service, an entity could be a principal for some and an agent for others. [IFRS 15.B34].
In order to determine the nature of its promise (as a principal or an agent), the entity
must (a) identify the specified goods or services to be provided to the customer; and (b)
assess whether it controls each specified good or service before that good or service is
transferred to the customer. [IFRS 15.B34A]. As noted above, an entity is a principal if it
controls a promised good or service before transferring that good or service to the
customer. However, an entity may not necessarily control a specified good if it only
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momentarily obtains legal title to that good before legal title is transferred to a customer.
Furthermore, the standard notes that a principal may satisfy its performance obligation
to provide the specified good or service itself or it may engage another party to satisfy
some, or all, of the performance obligation on its behalf. [IFRS 15.B35].
Figure 28.10 illustrates the process for performing a principal versus agent evaluation.
Figure 28.10:
Principal versus agent evaluation
Is more than one party involved in providing
goods or services to a customer?
Yes
No
Identify the specified goods or services
to be provided to the customer
No principal/agent evaluation.
(see 5.4.1 below).
For each specified good or service, does the
entity control it before it is transferred to
the customer (see 5.4.2 below)? As part of
this analysis, entities are required to
Indicators
consider the definition of control in
paragraph 33 of IFRS 15 and, as additional
support, may find it helpful to consider
the indicators in paragraph B37 of
IFRS 15.
If it is unclear whether the entity
controls a specified good or service
Yes
No
after consideration of the definition of
Recognise
Recognise
control in paragraph 33 of IFRS 15,
revenue gross as
revenue net as
consider the following indicators from
the principal for
the agent for the
paragraph B37 of IFRS 15 as additional
the specified good
specific good
or service.
or service.
support (see 5.4.2.A below):
• The entity is primarily
responsible for fulfilment and
acceptability.
• The entity has inventory risk
before or after transfer to
customer.
• The entity has discretion in
setting the price.
The principal versus agent application guidance applies regardless of the type of
transaction under evaluation or the industry in which the entity operates. Entities that: (a)
do not stock inventory and may employ independent warehouses or fulfilment houses to
drop-ship merchandise to customers on their behalf; or (b) offer services to be provided
by an independent service provider (e.g. travel agents, magazine subscription brokers and
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retailers that sell goods through catalogues or that sell goods on consignment) may need
to apply significant judgement when applying this application guidance.
5.4.1
Identifying the specified good or service
In accordance with paragraph B34A of IFRS 15, an entity must first identify the specified
good or service (or unit of account for the principal versus agent evaluation) to be
provided to the customer in the contract in order to determine the nature of its promise
(i.e. whether it is to provide the specified goods or services or to arrange for those goods
or services to be provided by another party). A specified good or service is defined as ‘a
distinct good or service (or a distinct bundle of goods or services) to be provided to the
customer’. [IFRS 15.B34]. While this definition is similar to that of a performance obligation
(see 5.2 above), the IASB noted in the Basis for Conclusions that it created this new term
because using ‘performance obligation’ would have been confusing in agency
relationships. [IFRS 15.BC385B]. That is, because an agent’s performance obligation is to
arrange for goods or services to be provided by another party, providing the specified
goods or services to the end-customer is not the agent’s performance obligation.
A specified good or service may be a distinct good or service or a distinct bundle of
goods or services. In the Basis for Conclusions, the Board noted that if individual goods
or services are not distinct from one another, they may be inputs to a combined item
and each good or service may represent only a part of a single promise to the customer.
For example, in a contract in which goods or services provided by another party are
inputs to a combined item (or items), the entity would assess whether it controls the
combined item (or items) before that item (or items) is transferred to the customer.
[IFRS 15.BC385Q]. That is, in determining whether it is a principal or an agent, an entity
should evaluate that single promise to the customer, rather than the individual inputs
that make up that promise.
Appropriately identifying the good or service to be provided is a critical step in
determining whether an entity is a principal or an agent in a transaction. In many
situations, especially those involving tangible goods, identifying the specified good or
service is relatively straightforward. For example, if an entity is reselling laptop
computers, the specified good that is transferred to the customer is a laptop computer.
However, the assessment may require significant judgement in other situations, such as
those involving intangible goods or services. In accordance with paragraph B34A(a) of
IFRS 15, the specified good or service may be the underlying good or service a c
ustomer
ultimately wants to obtain (e.g. a flight, a meal) or a right to obtain that good or service
(e.g. in the form of a ticket or voucher). [IFRS 15.B34A(a)]. In the Basis for Conclusions, the
Board noted that when the specified good or service is a right to a good or service that
will be provided by another party, the entity would determine whether its performance
obligation is a promise to provide that right (and it is, therefore, a principal) or whether
it is arranging for the other party to provide that right (and it is, therefore, an agent). The
fact that the entity does not provide the underlying goods or services itself is not
determinative. [IFRS 15.BC385O].
The Board acknowledged that it may be difficult in some cases to determine whether
the specified good or service is the underlying good or service, or a right to obtain that
good or service. Therefore, it provided examples in the standard. Example 28.24 at 5.4.4
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below involves an airline ticket reseller. In this example, the entity pre-purchases airline
tickets that it will later sell to customers. While the customer ultimately wants airline
travel, the conclusion in Example 28.24 is that the specified good or service is the right
to fly on a specified flight (in the form of a ticket) and not the underlying flight itself.
The entity itself does not fly the plane and it cannot change the service (e.g. change the
flight time or destination). However, the entity obtained the ticket prior to identifying a
specific customer to purchase the ticket. As a result, the entity holds an asset (in the
form of a ticket) that represents a right to fly. The entity could, therefore, transfer that
right to a customer (as depicted in the example) or decide to use the right itself.
Example 28.23 at 5.4.4 below involves an office maintenance service provider. In this
example, the entity concludes that the specified good or service is the underlying office
maintenance service (rather than a right to that service). While the entity obtained the
contract with the customer prior to engaging a third party to perform the requested
services, the right to the subcontractor’s services never transfers to the customer.
Instead, the entity retains the right to direct the service provider. That is, the entity can
direct the right to use the subcontractor’s services as it chooses (e.g. to fulfil the
International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards Page 409
