IFRS 115/IND AS 115 — Revenue from Contracts with Customers - Are you Principal or Agent ?(Relevant Extract)
IFRS 115/IND AS 115 provides policy and guidance on revenue recognition. The standards also throws light on the way/role you play while selling your product/services to the end users. Really, Yeah! It categories the role of seller either as a principal or as a agent.
1. Why it is important to know whether you are selling as a principal or agent?
- It is important because the amount of revenue to be recognized depends on your role is of principal or agent.
2. And how is the amount different in case you are principal or agent?
- If you are,
Principal - Gross amount of consideration
Agent - Fee or commission/in similar lines
3. Do you mean your top line item is impacted by it?
- Yes
4. What if it impacts the top line item? Profit or loss will remain the same?
- Maybe, but there are numerous other implications of it.
-You are showing increased revenue which is not your revenue.
-You are inflating your equity/net-worth here.
-Financials are required to be submitted for various purposes, for instance, financing where in funding depends on revenue. So it will impact the overall economics.
-Stakeholders will not be able to see the correct revenue position.
Main question still remains unanswered, yes, you are right?
5. How to decide whether you are acting as a Principal or mere Agent?
- Below are few indicators/factors which needs to be taken into consideration while evaluating the role your company/you play in the overall sales.
In a simplest way, Principal is someone who has control of the goods/services and the related risk is also borne by him. Agent on the other way, is a third party who helps to arrange for other party to provide goods/services. If risk and rewards are borne by you then you are Principal otherwise agent. For agent mere importance is arrangement of the supply chain and his reward is fee/commission in it. So it needs to be decided on the case to case basis as to who is obliged to perform on the contract.
Thank you👍✔
