Recognition of revenue as principal or agent in IFRS 15

Recognition of revenue as principal or agent

That is a big question under IFRS 15. Recognise a large amount of revenue as a principal or only a fraction of that turnover as an agent. So the stakes are high!!

Royalty payments

Entity A has agreed to pay a royalty to Entity B for the use of intellectual property rights that Entity A requires to make sales to its customers. The royalty is specified as a percentage of gross proceeds from Entity A’s sales to its customers less contractually defined costs. Entity A is the principal in the sales transactions with its customers (i.e. it must provide the goods and services itself and does not act as an agent for Entity B).

The question is: In Entity A’s financial statements, should the royalty payments be netted against revenue or recognised as a cost of fulfilling the contract?

Because Entity A is the principal in respect of the sales to its customers, it should recognise its revenue on a gross basis and the royalty as a cost of fulfilling the contract. Guidance on the appropriate accounting for the costs of fulfilling a contract, including whether such costs should be capitalised or expensed, is provided in IFRS 15 95 – 104.

Principal versus agent

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IFRS 10 Principal versus agent considerations – Best complete read

Principal versus agent considerations

– Certain decision-makers may be obligated to exercise their decision powers on behalf of other parties and do not exercise their decision powers for their own benefit. IFRS 10 regards such decision-makers as ‘agents’ that are engaged to act on behalf of another party (the ‘principal’).

A principal may delegate some of its power over the investee to the agent, but the agent does not control the investee when it exercises that power on behalf of the principal (IFRS 10.B58).

Power normally resides with the principal rather than the agent (IFRS 10.B59). There may be multiple principals, in which case each of the principals should assess whether it has power over the … Read more

Overview IFRS 10 Consolidated Financial Statements

Overview IFRS 10 Consolidated Financial StatementsShort – To establish principles for the presentation and preparation of consolidated financial statements when an entity controls one or more other entities Overview IFRS 10 Consolidated Financial Statements

Longer – IFRS 10 replaces the part of IAS 27 Consolidated and Separate Financial Statements that addresses accounting for subsidiaries on consolidation. What remains in IAS 27 after the implementation of IFRS 10 is the accounting treatment for subsidiaries, jointly controlled entities and associates in their separate financial statements.Contingent consideration Contingent consideration Contingent consideration Contingent consideration Contingent consideration

The aim of IFRS 10 is to establish a single control model that is applied to all entities including special purpose entities. The changes require those dealing with the implementation of IFRS 10 to exercise Read more

Agency relationships in consolidation

Agency relationships in consolidation – An investor with decision making rights has to determine whether it is a principal or an agent. An ‘agent’ is defined as ‘a party primarily engaged to act on behalf and for the benefit of another party or parties (the principal(s)) and therefore does not control the investee when it exercises its decision making authority’.

Thus, sometimes a principal’s power may be held and exercisable by an agent, but on behalf of the principal. An investor that is an agent does not control an investee when it exercises decision making rights delegated to it. Agency relationships in consolidation

Principal versus Agent Agency relationships in consolidation

To determine whether a decision maker is an agent, it … Read more

Identify the performance obligations in the contract

Identify the performance obligations in the contract – This part relates to a complete explanation of IFRS 15 Revenue from contracts with customers in respect of Engineering & Construction contracts, see Revenue from Engineering & Construction contracts. Identify the performance obligations in the contract


Once an entity has identified the contract with a customer, it evaluates the contractual terms and its customary business practices to identify all the promised goods or services within the contract and determine which of those promised goods or services (or bundles of promised goods or services) will be treated as separate performance obligations.

IFRS 15 identifies several activities common to engineering & construction entities that are considered promised goods and services, including the construction, … Read more