Proposed changes to IFRS 15 – principal versus agent

As we discussed here, the IASB has issued its exposure draft of clarifications to IFRS 15, with comments to be received by October 28, 2015.

The standard is built around a five-step framework, including the key step of identifying the performance obligations in a contract – that is, all the promises in a contract to transfer to a customer goods or services that are distinct. In some cases, it will be important for an entity to determine whether the nature of its promise is a performance obligation to provide goods or services that it controls itself (i.e. the entity is a principal) or rather to provide goods or services controlled by others (i.e. the entity is an agent). Of course, this distinction exists under current standards as well, but it’s more central to the structure of IFRS 15.

As in current IAS 18, the standard doesn’t provide a “bright line” for distinguishing between the two situations, but provides a list of indicators that an entity is acting as an agent. I remarked previously that IFRS 15 provides different wording for these indicators, in part reflecting that their relative importance and purpose within the standard is different from before, but they go to the same essential points as the current standard. This seems to have been too true for the comfort of some readers, because the IASB now acknowledges that the similarity between the new and old standard may have raised too many questions in this area. To address this and other related concerns, the new exposure draft proposes the following:

  • “(a) to reframe the indicators as indicators of when an entity controls a specified good or service before transfer, rather than as indicators that an entity does not control the specified good or service before transfer.
  • (b) to add guidance to explain how each indicator supports the assessment of control as defined in paragraph 33 of IFRS 15. This would help entities apply indicators that are similar to those in previous revenue recognition Standards but within the context of the control principle in IFRS 15.
  • (c) to remove the indicator relating to the form of the consideration. Although that indicator might sometimes be helpful in assessing whether an entity is an agent, the Boards concluded that it would not be helpful in assessing whether an entity is a principal.
  • (d) to clarify that the indicators are not an exhaustive list and merely support the assessment of control—they do not replace or override that assessment. Different indicators might provide more persuasive evidence to support the assessment of control in different scenarios.”

This adds up to a fairly significant rewrite of those portions of the standard, although the analysis will presumably turn out the same in most cases. For example, the exposure draft proposes to turn around and expand the indicator currently expressed as “another party is primarily responsible for fulfilling the contract” to say: “the entity is primarily responsible for fulfilling the promise to provide the specified good or service. This typically includes responsibility for the acceptability of the specified good or service. If the entity is primarily responsible for fulfilling the promise to provide the specified good or service, this may indicate that the other party involved in providing the specified good or service is acting on the entity’s behalf.” The other indicators would be expanded in a similar fashion.

The IASB also proposes to clarify that in making the principal/agent assessment, an entity shall “identify the specified goods or services to be provided to the customer (which, for example, could be a right to a good or service to be provided by another party” and “assess whether it controls…each specified good or service before that good or service is transferred to the customer.” The main point here is to better explain how the concept applies to intangible goods and services, such as a flight ticket, or a meal voucher. As the IASB comments: “The fact that the entity will not provide the goods or services itself is not determinative. Instead, the entity evaluates whether it controls the right to goods or services before that right is transferred to the customer. In doing so, it is often relevant to assess whether the right is created only when it is obtained by the customer, or if the right to goods or services exists before the customer obtains the right. If the right does not exist before the customer obtains it, an entity (that is an intermediary) would be unable to control that right before it is transferred to the customer.”

The exposure draft also makes changes to the related illustrative examples. I’ll end by making the same observation I always make on this topic, that this aspect of accounting for revenue will likely continue to attract particular interest from regulators…

More to come on other aspects of the exposure draft.

The opinions expressed are solely those of the author

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