Reseller and distributor arrangements

Reseller and distributor arrangements describes the changes distributors and resellers might have to apply to their accounting for revenue, distribution arrangements and movements of products between for example dealers.

IFRS 15 changes practice for entities that sell their products through distributors or resellers.

IFRS 15 changes practice for entities that sell their products through distributors or resellers (collectively referred to in this section as resellers). It is common in the software industry for entities to provide resellers with greater rights than end-customers in order to maintain a mutually beneficial relationship and maximise future sales through the reseller. For example, an entity may provide a reseller with price protection and extended rights of return. Reseller and distributor arrangements

Under IFRS 15, entities will need to first evaluate when control of the product transfers to the end-customer. To do this, entities may need to assess whether their contracts with resellers are consignment arrangements, under which control would likely not transfer until delivery to the end-customer. The standard provides three indicators that an arrangement is a consignment arrangement: Reseller and distributor arrangementsReseller and distributor arrangements

  • The product is controlled by the entity until a specified event occurs (such as the sale of the product to a customer of the dealer) or until a specified period expires. Reseller and distributor arrangements
  • The entity is able to require the return of the product or transfer the product to a third party (e.g., another dealer).
  • The dealer does not have an unconditional obligation to pay for the product (although it may be required to pay a deposit).

An entity does not recognise revenue upon delivery of a product to a reseller if the delivered product is held on consignment because control of the product has not transferred. The entity would wait until the reseller sells the product to an end customer to recognise revenue, which would be considered the point in time that the entity has transferred control of the product. The result would be similar to old (IAS 18) IFRS requirements of deferring revenue recognition until the reseller sells the product to an end customer [IAS 18 IE2(c) and IE 6].

If an entity concludes its contract with a reseller is not a consignment arrangement, the reseller will likely be considered a customer of the entity. The entity would be required to recognise revenue upon the transfer of control of the promised goods in an amount that reflects the amount to which the entity expects to be entitled. Reseller and distributor arrangements

In determining the amount to which they expect to be entitled, software entities are required to consider whether they provide resellers with explicit or implicit concessions (e.g., price protection, expanded return rights) that make the transaction price variable. In these instances, an entity needs to estimate the transaction price and, considering the constraint, include only the amount for which the entity determines it is highly probable that a significant reversal will not occur. An entity needs to carefully consider whether it can include the variable consideration resulting from the concessions it offers to its reseller customer(s) in its transaction price. Reseller and distributor arrangements

IFRS 15 indicates that when an entity has a practice of either offering a broad range of price concessions or changing the payment terms and conditions of similar contracts in similar circumstances, this is a factor that could increase the likelihood (or magnitude) of a revenue reversal. Entities, periodically, need to assess the facts and circumstances of their contracts to determine whether current practice are properly recorded under IFRS 15. Reseller and distributor arrangements

What about distributors and resellers?

The role players

  • Vendor – the provider of products or services Reseller and distributor arrangements
    Reseller – acting as a distributor or agent (or hybrid) Reseller and distributor arrangements
    Customer – the end-user of the products or services, who has a relationship with the reseller Reseller and distributor arrangements

Reseller as Distributor

Distributors are typically dealers of commodity products who act as wholesalers and retailers for standard computer products. Reseller and distributor arrangements

One of the main distinguishing features which contrast distribution agreements from agency arrangements is that a distributor is an independent organisation, buying on its own behalf as a principal from the vendor and reselling accordingly. Here, the vendor does not have a direct relationship with the customer through the distribution contract, although sometimes the vendor licences the software directly to the customer through an end-user licence agreement. Reseller and distributor arrangements

The distribution agreement governs the reseller’s responsibilities and the terms on which it can acquire the vendor’s software. The reseller will then enter into separate contracts of supply with its own customers (end users) in relation to the products or services the vendor authorises the reseller to distribute. Reseller and distributor arrangements

Reseller as Agent

In contrast to this, the agent is a channel facilitating direct contractual relationships between the vendor and the customers. The precise nature of the agent’s responsibilities can vary greatly:

  • in one case enabling the agent to receive commissions for making introductions (but not doing much more) and Reseller and distributor arrangements
  • in another case undertaking a large number of responsibilities, including pre- and post-sales support, order administration and so forth.

The latter type of agent begins to look very much like a distributor. Reseller and distributor arrangements

The relationship between the vendor and an agent consists of rights and obligations implied by the law of agency as well as those defined in the contract. One of the disadvantages for a vendor appointing agents is that whatever the actual authority granted by the agreement, the agent has implied legal authority to bind the vendor as its principal. Put differently, the agent has the authority to create contracts between the vendor as principal and other parties, and thus obligations which the vendor has to abide by, whether or not the vendor was aware of these in advance.

The following questions need to be answered to assist us to determine whether the customer is an agent or a distributor?

  1. Does the customer buy the software from the vendor? Reseller and distributor arrangements
  2. Does the vendor grant the customer a licence to use the vendor’s software and then give the customer the right to sub-license the software?
  3. Does the vendor pay the customer commissions? Reseller and distributor arrangements
  4. If so, does the customer undertake any responsibilities for the vendor? Reseller and distributor arrangements
  5. Does the vendor have any dealings with end users (including post-sales support)? Reseller and distributor arrangements
  6. Does the vendor sign a (pen and ink) licence agreement with end users? Reseller and distributor arrangements
  7. Does the vendor include an end user licence agreement (EULA) with the software (opened on use by way of a “clickwrap”)?
  8. Does the customer licence the software separately to its customers? Reseller and distributor arrangements
  9. Does the customer “add to” the software” in any way (change it and add their bits and pieces)?

Reseller and distributor arrangements

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