Principal vs Agent Considerations

Gross versus net revenue reporting, and why the label on a contract is not the answer

We close our IFRS 15 series with a question that sounds deceptively simple but drives one of the largest single line-item differences you will find between two companies with genuinely comparable underlying businesses: should revenue be reported gross, at the full amount the end customer pays, or net, at only the margin or fee the entity retains? This is the principal versus agent assessment, and it is the subject of our eleventh and final article.

Why This Distinction Matters So Much

Two companies can generate identical cash profit from facilitating the same transaction and report wildly different revenue figures depending on this single classification. A travel booking platform that arranges a 2,000 dirham hotel stay and earns a 200 dirham commission could, depending on the facts, report either 2,000 dirhams of revenue with 1,800 dirhams of cost, or simply 200 dirhams of revenue with no corresponding cost line. Both approaches can produce the same 200 dirham gross profit, but the revenue figure itself, a number investors, lenders, and regulators all scrutinise closely, differs by a factor of ten. This is exactly why the principal versus agent assessment attracts such close audit and regulatory attention, particularly in platform, marketplace, and intermediary business models.

The Core Question: Who Controls the Good or Service?

IFRS 15 frames the assessment around control, consistent with the theme running through this entire series. An entity is a principal if it controls a promised good or service before that good or service is transferred to the customer. An entity is an agent if its role is to arrange for another party to provide the goods or services. A principal recognises revenue on a gross basis, for the full consideration it is entitled to in exchange for the goods or services transferred. An agent recognises revenue on a net basis, for the fee or commission it is entitled to for arranging the transaction.

Indicators of Control

Because control can be difficult to assess directly, particularly for services or intangible goods that are hard to physically observe, IFRS 15 provides indicators that support, but do not individually determine, the conclusion that an entity controls a good or service before it is transferred to the customer, and is therefore acting as principal.

• Primary responsibility for fulfilment: The entity is primarily responsible for fulfilling the promise to provide the specified good or service, including responsibility for its acceptability to the customer.
• Inventory risk: The entity has inventory risk before the specified good or service is transferred to the customer, or after transfer in the case of a right of return.
• Pricing discretion: The entity has discretion in establishing the price for the specified good or service.

These indicators work alongside, rather than instead of, the fundamental control assessment; they do not form a mechanical checklist where a majority score determines the outcome. An entity should first ask whether it controls the good or service before transfer, and use these indicators as supporting evidence for that judgment, particularly in situations where control is not obvious from the transaction structure alone.

Worked Examples

E-Commerce Marketplace

An online marketplace lists products from thousands of independent third party sellers. Customers order and pay through the marketplace platform, but the marketplace never takes physical possession of the goods, which ship directly from the seller to the customer. The seller sets the price, bears responsibility for product quality and returns, and the marketplace's role is limited to processing the transaction and taking a percentage fee. Here, the marketplace does not control the goods before transfer, has no inventory risk, and has no pricing discretion, so it is acting as agent and recognises only its commission as revenue, not the full transaction value.

Retailer Selling Through Its Own Store

Contrast this with a retailer that purchases inventory from suppliers, takes it into its own warehouses, sets its own retail prices, and bears the risk of unsold or damaged stock. The retailer clearly controls the goods before they are transferred to the end customer, has full inventory risk, and has complete pricing discretion. This is a textbook principal relationship, and the retailer recognises the full sale price as revenue.

Travel Booking Platform

Return to the travel booking example from the introduction. The specific facts matter enormously here. If the platform pre-purchases a block of hotel rooms, bears the risk of unsold inventory, and sets its own price to travellers, it looks far more like a principal for that inventory, even though it never physically operates the hotel. If, instead, the platform simply facilitates a booking, the hotel sets the room rate, retains responsibility for the guest's stay, and the platform earns a fixed commission regardless of what the hotel ultimately charges, the platform is acting as agent. Many real world platforms operate hybrid models, acting as principal for some categories of inventory and agent for others within the same business, which means the assessment often needs to be performed at a more granular level than the business as a whole.

Software Reseller

A value-added reseller sells third party software licences to end customers. If the reseller purchases the licence from the software vendor, holds responsibility for supporting the customer, and sets its own resale price with no visibility to the customer of the underlying vendor cost, it likely controls the licence before transfer and acts as principal. If instead the reseller simply passes through orders to the vendor, who directly fulfils and supports the licence, with the reseller earning a fixed referral fee, the reseller is more likely acting as agent, regardless of how the commercial relationship is labelled in the reseller agreement.

Judgment, Not Labels

A recurring theme across all these examples is that contractual labels do not determine the outcome. Calling an arrangement an agency agreement in the contract title does not make the entity an agent if, in substance, it controls the good or service before transfer, bears meaningful inventory or fulfilment risk, and sets its own pricing. IFRS 15 requires an assessment of the substance of the arrangement,