Principal vs. agent analysis under AASB 15

Principal vs. agent analysis under AASB 15

AASB 15 Revenue from Contracts with Customers is here for 31 December 2018 year-ends onward. But have you fully considered all the implementation issues? Your application of the standard, should consider a range of different issues around revenue recognition and measurement, capitalisation of costs, disclosures, transition and flow on impacts to other standards. This article provides insights on whether companies should recognise revenue gross (as a principal) or net of costs paid (as an agent) to other parties involved in delivering on their obligations to their customers.


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New revenue standard – Recognition & measurement

Even though the indicators of whether an entity is acting as a principal or an agent have not changed significantly from the old standard[1], companies are finding the analysis more complex and the outcome possibly different under the new standard. This is largely due to changing from a risks and rewards analysis at a contract level, to a control analysis at an individual performance obligation (PO) level.

Why does it matter?

Being a principal or agent impacts both the timing and amount of revenue recognised.

Timing of revenue recognition

Agents typically arrange for something to happen, therefore once it is arranged, revenue can be recognised. For example, a travel agent will recognise commission on a flight on the date they sell the plane ticket. A principal will not recognise revenue until they have provided the underlying good or service. In that same transaction, as the principal, the airline generally will recognise revenue on the date of the flight, which could be significantly after the ticket sale.

Amount of revenue recognised

A principal in an arrangement will recognise gross revenue with an expense from the cost of purchasing from the supplier, whereas an agent will have net ‘agent fee’ revenue (amounts from customers less cost of purchasing from the supplier). 

Therefore, if you are changing whether you are a principal or agent as a result of this new standard, there will be a significant change in the makeup of the income statement. An explanation of this change to your stakeholders will be crucial to a successful transition.

A question of control

Central to the principal v agent assessment under AASB 15 is whether an entity controls the good or service requested by the customer, before they are passed to the customer. You have control when you are able to direct the use of, and obtain substantially all of the remaining benefits from the good or service. This new approach may result in a different outcome which significantly impacts the income statement. For example, some local distributors of overseas parents, especially in the IT industry, have significant questions as to whether they actually control their parent’s product before they provide it to their local customers.

Assessed at a performance obligation level

Another reason the assessment is having a bigger impact than expected is because it is now performed at a PO level. Previously companies thought about principal vs. agent at a contract level, which means there are now more opportunities for companies to end up with a different conclusion.

For example, it makes sense that miners have a PO to sell a commodity, say iron ore. However where control of that ore transfers to the customer when it is put on the ship, then there will now likely be a second PO for the freight services, to ship the ore to the customer. When this freight service is provided by a third party, there has been much discussion on whether the miner is a principal or agent in providing the freight service. The answer unfortunately depends of specific facts and circumstances. Similar issues could arise for manufacturing and engineering companies where control of a product passes to the customer before it is delivered to them.

If to date you have assumed your previous principal v agent analysis still holds on adoption of the new standard, then you should reconsider those assessments.

If you wish to discuss this further, or any other aspects of the implantation of AASB 15, please contact your KPMG adviser or the contacts on this page.

1 The only change is the removal of credit risk as an indicator that an entity is a principal.

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