IFRS 15 Principal vs Agent Assessment

IFRS 15 Principal vs Agent Assessment — Core Rule

Under the IFRS 15 Principal vs Agent Assessment, an entity is a principal if it controls the specified good or service before transferring it to the customer, and therefore recognises revenue on a gross basis; an agent arranges for another party to provide the good or service, recognises only its fee or commission on a net basis (IFRS 15.B34–B35).

How IFRS 15 Principal vs Agent Assessment Works

The assessment is performed for each specified good or service (or bundle of goods/services) promised to the customer, not at the contract level as a whole. The core sequence is:

• Step 1 – Identify the specified good or service (IFRS 15.B34A). Determine exactly what has been promised to the customer: a good, a service, or a right to those goods or services. This scoping step prevents misclassifying the unit of analysis and must precede any control assessment.

• Step 2 – Assess control before transfer (IFRS 15.B35–B36). The entity is a principal when it obtains control of the specified good or service before it is transferred to the customer. Control means the ability to direct the use of, and obtain substantially all of the remaining economic benefits from, the asset (IFRS 15.33).

• Step 3 – Evaluate the three control indicators (IFRS 15.B37). IFRS 15 provides three non-exhaustive indicators that support a principal conclusion:

- The entity is primarily responsible for fulfilling the promise (i.e., it is responsible to the customer if the good/service is unsatisfactory).

- The entity has inventory risk before the specified good or service is transferred, or after transfer (e.g., right of return).

- The entity has discretion in establishing the price for the specified good or service.

No single indicator is determinative; all facts and circumstances must be weighed together (IFRS 15.B37 note).

• Revenue presentation (IFRS 15.B35). A principal recognises gross revenue equal to the consideration it is entitled to receive from the customer. An agent recognises only its net fee or commission — typically the margin retained after remitting amounts owed to the supplier/principal.

• Disclosure requirement (IFRS 15.114). Entities must disclose the judgements made in applying IFRS 15, including principal vs agent conclusions where material, because this directly affects whether revenue is presented gross or net — a figure frequently scrutinised by investors and auditors.

IFRS 15 Principal vs Agent Assessment — Practical Example

Scenario: An online marketplace (Platform Co) sells electronic goods on behalf of Vendor Ltd. The customer pays Platform Co €1,000. Platform Co remits €850 to Vendor Ltd and retains a €150 commission. Vendor Ltd holds inventory risk, is responsible for product quality, and sets the retail price.

Assessment: Platform Co does not control the goods before transfer — Vendor Ltd bears inventory risk, is primarily responsible, and sets pricing. Platform Co is an agent; Vendor Ltd is the principal.

Journal entries at sale (Platform Co — agent)

Journal entries at sale (Vendor Ltd — principal)

Vendor Ltd also records the commission payable to Platform Co as a selling expense, not a deduction from revenue.

IFRS 15 Principal vs Agent Assessment — Common Pitfalls

• Conflating legal title with control. Practitioners sometimes assume that momentary legal title transfer makes an entity a principal. IFRS 15.B35A explicitly notes that an entity can be an agent even if it temporarily obtains legal title; the substance of control is what matters, not the legal form.

• Applying old IAS 18 "risks and rewards" logic. Under IAS 18 Appendix, the focus was on risks and rewards of ownership. IFRS 15 replaced this with a control-based model. Teams that default to a risks-and-rewards checklist risk misclassifying arrangements — particularly in digital marketplace and platform business models.

• Treating the three indicators as a scoring test. IFRS 15.B37 indicators are supportive evidence, not a pass/fail checklist. Auditors frequently challenge entities that mechanically count indicators without a holistic, fact-specific rationale documented in accounting memos.

IFRS 15 Principal vs Agent Assessment — Key Paragraphs

• IFRS 15.B34 — Core definition: when an entity is a principal vs agent and the obligation to provide the specified good or service.
• IFRS 15.B34A — Requirement to first identify the specified good or service before assessing control.
• IFRS 15.B35–B36 — The control-before-transfer test and the distinction between gross and net revenue recognition.
• IFRS 15.B37 — The three control indicators (primary responsibility, inventory risk, pricing discretion) and guidance on their application.
• IFRS 15.33 — Definition of control as the ability to direct use and obtain substantially all remaining economic benefits.
• IFRS 15.114 — Disclosure of significant judgements, including principal vs agent conclusions.