example is if a reseller receives inventory price protection from the supplier. In these
cases, the inventory risk indicator may be less relevant or persuasive to the assessment
of control.
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The third principal indicator, in paragraph B37(c) of IFRS 15, is that the entity has
discretion in establishing the price of the specified good or service. Reasonable latitude,
within economic constraints, to establish the price with a customer for the product or
service may indicate that the entity has the ability to direct the use of that good or
service and obtain substantially all of the remaining benefits (i.e. the entity controls the
specified good or service). However, because an agent may also have discretion in
establishing the price of the specified good or service, the facts and circumstances of
the transaction need to be carefully evaluated.
The three indicators in paragraph B37 of IFRS 15 are similar to some of those included
in legacy IFRS. However, the indicators in IFRS 15 are based on the concepts of
identifying performance obligations and the transfer of control of goods or services.
That is, under IFRS 15, an entity must first identify the specified good or service and
determine whether it controls that specified good or service before evaluating the
indicators. The indicators serve as support for the entity’s control determination and
are not a replacement of it.
This is a change from IAS 18, under which an entity evaluated the indicators in order to
make its principal versus agent determination. In addition, IFRS 15 did not carry forward
some indicators from IAS 18 (e.g. those relating to exposure to credit risk and the form
of the consideration as a commission).
In the Basis for Conclusions, the IASB acknowledged that entities could reach different
conclusions under IFRS 15 than they did under IAS 18. [IFRS 15.BC385I]. Entities should
take a fresh look at their principal versus agent conclusions under the new standard,
focusing on their contracts and any terms that may influence their assessment of control.
5.4.3
Recognising revenue as principal or agent
The determination of whether the entity is acting as a principal or an agent affects the
amount of revenue the entity recognises. When the entity is the principal in the
arrangement, the revenue recognised is the gross amount to which the entity expects to
be entitled. [IFRS 15.B35B]. When the entity is the agent, the revenue recognised is the net
amount that the entity is entitled to retain in return for its services as the agent. The
entity’s fee or commission may be the net amount of consideration that the entity retains
after paying the other party the consideration received in exchange for the goods or
services to be provided by that party. [IFRS 15.B36].
After an entity determines whether it is the principal or the agent and the amount of
gross or net revenue that would be recognised, the entity recognises revenue when or
as it satisfies its performance obligation. An entity satisfies its performance obligation
by transferring control of the specified good or service underlying the performance
obligation, either at a point in time or over time (as discussed at 8 below). That is, a
principal would recognise revenue when (or as) it transfers the specified good or service
to the customer. An agent would recognise revenue when its performance obligation to
arrange for the specified good or service is complete.
In the Basis for Conclusions, the Board noted that, in some contracts in which the entity
is the agent, control of specified goods or services promised by the agent may transfer
before the customer receives related goods or services from the principal. For example,
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an entity might satisfy its promise to provide customers with loyalty points when those
points are transferred to the customer if:
• the entity’s promise is to provide loyalty points to customers when the customer
purchases goods or services from the entity;
• the points entitle the customers to future discounted purchases with another party
(i.e. the points represent a material right to a future discount); or
• the entity determines that it is an agent (i.e. its promise is to arrange for the
customers to be provided with points) and the entity does not control those points
(i.e. the specified good or service) before they are transferred to the customer.
In contrast, if the points entitle the customers to future goods or services to be provided
by the entity, the entity may conclude it is not an agent. This is because the entity’s
promise is to provide those future goods or services and, therefore, the entity controls
both the points and the future goods or services before they are transferred to the
customer. In these cases, the entity’s performance obligation may only be satisfied when
the future goods or services are provided.
In other cases, the points may entitle customers to choose between future goods or
services provided by either the entity or another party. For example, many airlines allow
loyalty programme members to redeem loyalty points for goods or services provided by
a partner (e.g. travel on another airline, hotel accommodation). In this situation, the
nature of the entity’s performance obligation may not be known until the customer
makes its choice. That is, until the customer has chosen the goods or services to be
provided (and, therefore, whether the entity or the third party will provide those goods
or services), the entity is obliged to stand ready to deliver goods or services. Therefore,
the entity may not satisfy its performance obligation until it either delivers the goods or
services or is no longer obliged to stand ready. If the customer subsequently chooses to
receive the goods or services from another party, the entity would need to consider
whether it was acting as an agent and would, therefore, only recognise revenue for a fee
or commission that it received for arranging the ultimate transaction between the
customer and the third party. [IFRS 15.BC383-BC385].
The above discussion illustrates that control of specified goods or services promised by
an agent may transfer before the customer receives related goods or services from the
principal. An entity needs to assess each loyalty programme in accordance with the
principles of the principal versus agent application guidance to determine if revenue
would be reported on a gross or net basis.
Although an entity may be able to transfer its obligation to provide its customer
specified goods or services, the standard says that such a transfer may not always satisfy
the performance obligation. Specifically, it states that ‘[i]f another entity assumes the
entity’s performance obligations and contractual rights in the contract so that the entity
is no longer obliged to satisfy the performance obligation to transfer the specified good
or service to the customer (i.e. the entity is no longer acting as the principal), the entity
shall not recognise revenue for that performance obligation. Instead, the entity shall
evaluate whether to recognise revenue for satisfying a performance obligation to obtain
a contract for the other party (i.e. whether the e
ntity is acting as an agent).’ [IFRS 15.B38].
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5.4.4
Examples of principal versus agent assessments
The standard includes six examples to illustrate the principal versus agent application
guidance discussed above. We have extracted four of them below.
The standard includes the following example of when the specified good or service
(see 5.4.1 above) is the underlying service, rather than the right to obtain that service.
The entity in this example is determined to be a principal. [IFRS 15.IE238A-IE238G].
Example 28.23: Promise to provide goods or services (entity is a principal) (office
maintenance service)
An entity enters into a contract with a customer to provide office maintenance services. The entity and the
customer define and agree on the scope of the services and negotiate the price. The entity is responsible for
ensuring that the services are performed in accordance with the terms and conditions in the contract. The
entity invoices the customer for the agreed-upon price on a monthly basis with 10-day payment terms.
The entity regularly engages third-party service providers to provide office maintenance services to its
customers. When the entity obtains a contract from a customer, the entity enters into a contract with one of
those service providers, directing the service provider to perform office maintenance services for the
customer. The payment terms in the contracts with the service providers are generally aligned with the
payment terms in the entity’s contracts with customers. However, the entity is obliged to pay the service
provider even if the customer fails to pay.
To determine whether the entity is a principal or an agent, the entity identifies the specified good or service
to be provided to the customer and assesses whether it controls that good or service before the good or service
is transferred to the customer.
The entity observes that the specified services to be provided to the customer are the office maintenance
services for which the customer contracted, and that no other goods or services are promised to the customer.
While the entity obtains a right to office maintenance services from the service provider after entering into
the contract with the customer, that right is not transferred to the customer. That is, the entity retains the
ability to direct the use of, and obtain substantially all the remaining benefits from, that right. For example,
the entity can decide whether to direct the service provider to provide the office maintenance services for that
customer, or for another customer, or at its own facilities. The customer does not have a right to direct the
service provider to perform services that the entity has not agreed to provide. Therefore, the right to office
maintenance services obtained by the entity from the service provider is not the specified good or service in
its contract with the customer.
The entity concludes that it controls the specified services before they are provided to the customer. The entity
obtains control of a right to office maintenance services after entering into the contract with the customer but
before those services are provided to the customer. The terms of the entity’s contract with the service provider
give the entity the ability to direct the service provider to provide the specified services on the entity’s behalf
(see paragraph B35A(b)). In addition, the entity concludes that the following indicators in paragraph B37 of
IFRS 15 provide further evidence that the entity controls the office maintenance services before they are
provided to the customer:
(a) the entity is primarily responsible for fulfilling the promise to provide office maintenance services.
Although the entity has hired a service provider to perform the services promised to the customer, it is
the entity itself that is responsible for ensuring that the services are performed and are acceptable to the
customer (i.e. the entity is responsible for fulfilment of the promise in the contract, regardless of whether
the entity performs the services itself or engages a third-party service provider to perform the services).
(b) the entity has discretion in setting the price for the services to the customer.
The entity observes that it does not commit itself to obtain the services from the service provider before
obtaining the contract with the customer. Thus, the entity has mitigated inventory risk with respect to the
office maintenance services. Nonetheless, the entity concludes that it controls the office maintenance services
before they are provided to the customer on the basis of the evidence in paragraph IE238E.
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Thus, the entity is a principal in the transaction and recognises revenue in the amount of consideration to
which it is entitled from the customer in exchange for the office maintenance services.
The standard also includes the following example of when the specified good or service
is the right to obtain a service and not the underlying service itself. The entity in this
example is determined to be a principal. [IFRS 15.IE239-IE243].
Example 28.24: Promise to provide goods or services (entity is a principal) (airline
tickets)
An entity negotiates with major airlines to purchase tickets at reduced rates compared with the price of tickets
sold directly by the airlines to the public. The entity agrees to buy a specific number of tickets and must pay
for those tickets regardless of whether it is able to resell them. The reduced rate paid by the entity for each
ticket purchased is negotiated and agreed in advance.
The entity determines the prices at which the airline tickets will be sold to its customers. The entity sells the
tickets and collects the consideration from customers when the tickets are purchased.
The entity also assists the customers in resolving complaints with the service provided by the airlines.
However, each airline is responsible for fulfilling obligations associated with the ticket, including remedies
to a customer for dissatisfaction with the service.
To determine whether the entity’s performance obligation is to provide the specified goods or services itself
(i.e. the entity is a principal) or to arrange for those goods or services to be provided by another party (i.e. the
entity is an agent), the entity identifies the specified good or service to be provided to the customer and
assesses whether it controls that good or service before the good or service is transferred to the customer.
The entity concludes that, with each ticket that it commits itself to purchase from the airline, it obtains control
of a right to fly on a specified flight (in the form of a ticket) that the entity then transfers to one of its customers
(see paragraph B35A(a)). Consequently, the entity determines that the specified good or service to be
provided to its customer is that right (to a seat on a specific flight) that the entity controls. The entity observes
that no other goods or services are promised to the customer.
The entity controls the right to each flight before it transfers that specified right to one of its customers because
the entity has the ability to direct the use of that right by deciding whether to use the ticket to fulfil a contract
with a customer and, if so, which contract it will fulfil. The entity also has the ability to obtain the remaining
benefits from that right by either reselling the ticket and obtaining all of the procee
ds from the sale or,
alternatively, using the ticket itself.
The indicators in paragraphs B37(b)–(c) of IFRS 15 also provide relevant evidence that the entity controls
each specified right (ticket) before it is transferred to the customer. The entity has inventory risk with respect
to the ticket because the entity committed itself to obtain the ticket from the airline before obtaining a contract
with a customer to purchase the ticket. This is because the entity is obliged to pay the airline for that right
regardless of whether it is able to obtain a customer to resell the ticket to or whether it can obtain a favourable
price for the ticket. The entity also establishes the price that the customer will pay for the specified ticket.
Thus, the entity concludes that it is a principal in the transactions with customers. The entity recognises
revenue in the gross amount of consideration to which it is entitled in exchange for the tickets transferred to
the customers.
In the following example, the entity also determines that the specified good or service
is the right to obtain a service and not the underlying service itself. However, the entity
in this example is determined to be an agent. [IFRS 15.IE244-IE248].
Example 28.25: Arranging for the provision of goods or services (entity is an agent)
An entity sells vouchers that entitle customers to future meals at specified restaurants. The sales price of the
voucher provides the customer with a significant discount when compared with the normal selling prices of the
meals (for example, a customer pays CU100 for a voucher that entitles the customer to a meal at a restaurant that
would otherwise cost CU200). The entity does not purchase or commit itself to purchase vouchers in advance
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of the sale of a voucher to a customer; instead, it purchases vouchers only as they are requested by the customers.
The entity sells the vouchers through its website and the vouchers are non-refundable.
The entity and the restaurants jointly determine the prices at which the vouchers will be sold to customers.
Under the terms of its contracts with the restaurants, the entity is entitled to 30 per cent of the voucher price
when it sells the voucher.
The entity also assists the customers in resolving complaints about the meals and has a buyer satisfaction
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