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Get clear on ifrs 15 b34 principal agent rules. Learn how to classify revenue as principal or agent and avoid common mistakes in your financial reporting.
One accounting decision can make your company's revenue look ten times bigger—or smaller. Seriously. This is the reality of the principal versus agent assessment. It determines if you report the full sale (gross revenue) or just your cut (net revenue). This single choice ripples through your entire financial story, impacting ratios, covenants, and how investors see you. Getting this right is non-negotiable. The guidance in ifrs 15 b34 principal agent provides the framework, but the judgment calls are yours. We'll break down the key indicators from the ifrs 15 principal versus agent paragraphs b34-b38, helping you build a defensible position for your next audit.
Under IFRS 15 and ASC 606, figuring out if your business acts as a principal or an agent is a critical first step. This isn't just accounting jargon; it's a fundamental classification that dictates how you recognize and report revenue. The distinction can seem subtle, especially with complex supply chains or service agreements, but getting it right is essential for accurate financial reporting and compliance. The entire assessment boils down to one key question: which party has control over the goods or services before they are transferred to the end customer? Let's break down what each role means and why this classification has such a big impact on your financial statements.
At its core, the difference comes down to control and the nature of the promise you make to your customer. A principal is the company that controls the specified good or service before it gets to the customer. You're directly responsible for fulfilling that promise. Because of this, a principal recognizes the full amount of the sale as revenue. This is often called reporting revenue 'gross.'
An agent, on the other hand, acts as an intermediary. Your job is to arrange for another party—the principal—to provide the good or service. You don't control the item yourself. As a result, an agent only recognizes the fee or commission they earn for their arrangement services as revenue, which is known as reporting 'net.'
When you're an agent, it can feel like you have two customers: the end-user buying the product and the principal company you're representing. So, who is your actual customer? The key is to focus on the promise you are fulfilling. As an agent, your primary promise isn't to deliver the final product; it's to facilitate the sale. This means your true customer is the principal—the company that hired you to arrange the transaction. The fee they pay you is the revenue you recognize for fulfilling that specific service. This is a fundamental distinction in the principal versus agent evaluation and is central to reporting your revenue accurately.
To make this determination confidently, you can follow a clear, two-step process. First, identify the specific good or service being provided to the end customer. Is it a physical product, a subscription, or a service? Next, and most importantly, ask yourself: "Does my company control this good or service *before* it's transferred?" As PwC guidance suggests, this question of control is the deciding factor. If you simply arrange for another party to fulfill the order without ever taking control of the item yourself, you are acting as an agent.
This framework helps cut through the complexity, but applying it consistently across thousands of transactions is another challenge. For high-volume businesses, manually assessing every sale is not only time-consuming but also prone to error. This is where an automated system becomes essential for ensuring compliance and accurate reporting. By setting up rules that reflect your business model, you can classify revenue correctly every time, whether you're acting as a principal or an agent. This is especially true when you have multiple sales channels and need seamless integrations to pull all that data together for a clear, auditable financial picture.
The principal versus agent decision directly impacts your company's top line. How your business is classified greatly changes how much revenue it reports. Reporting the gross sale amount as a principal can make your company appear much larger in terms of revenue than if you were to report only your net commission as an agent. This isn't just a vanity metric; it influences key financial ratios, stakeholder perceptions, and even debt covenants.
An incorrect classification can lead to non-compliance with accounting standards, potentially requiring costly financial restatements and causing headaches during an audit. The entire framework is designed to ensure that revenue reflects the true economic substance of a transaction, which is why understanding who holds control over the good or service is the most important piece of the puzzle.
Figuring out if you're a principal or an agent can feel like a puzzle, but it doesn't have to be. This distinction is a core part of revenue recognition, and getting it right is essential for accurate financial reporting. The good news is that the entire assessment boils down to one central question: Who is in control? Understanding this concept and the key signs to look for will help you confidently classify your revenue. This isn't just about compliance; it's about creating a clear picture of your company's financial health for making smart decisions, passing audits, and building investor trust.
To bring clarity and consistency to revenue reporting, accounting bodies introduced IFRS 15. This standard provides a single, comprehensive framework that applies across different industries and business models. It’s built on a core principle: a company should recognize revenue to show the transfer of promised goods or services to customers in an amount that reflects the payment it expects to receive. The framework breaks this down into a five-step model that guides you from identifying the contract to recognizing the revenue. The principal versus agent assessment is a critical judgment you'll make within this structure, as it directly relates to identifying your promises and determining who has control.
Before you can figure out who is in control, you first need to know what *it* is. The first step is to pinpoint the "specified good or service"—the actual product or service that the end customer is promised in the contract. This might sound obvious, but in multi-party transactions, it’s easy to get this wrong. For example, if you run a platform that sells tickets to local workshops, the specified service is the workshop itself, not your booking service. Clearly defining this promise is the foundation of the entire assessment, as it sets the stage for analyzing who is ultimately responsible for delivering it to the customer.
This is the heart of the principal versus agent analysis. Control, under IFRS 15, means having the ability to direct the use of a good or service and obtain substantially all of its remaining benefits. If your company has control of the specified good or service *before* it is transferred to the customer, you are the principal. Key indicators that you have control include taking on inventory risk, having the authority to set the final price, and being primarily responsible for fulfillment. For businesses with high transaction volumes, manually assessing control for every sale is impractical. This is where automated revenue recognition systems, like those we build at HubiFi, become invaluable by applying these rules consistently at scale.
A performance obligation is a specific promise within a contract to transfer a distinct good or service to a customer. For a promise to be considered "distinct," the customer must be able to benefit from it on its own. Think of it as a standalone deliverable. The principal versus agent distinction is directly tied to the nature of this promise. A principal's performance obligation is to provide the specified good or service itself. In contrast, an agent's performance obligation is simply to arrange for that good or service to be provided by another party (the principal). Identifying your true obligation is essential for correctly classifying your role.
Once you've identified your performance obligations, you need to determine when to recognize the revenue. IFRS 15 outlines two methods: over time or at a point in time. You recognize revenue over time if the customer receives and consumes the benefits as you perform the work, like with a monthly software subscription. Otherwise, you recognize revenue at a point in time, which is when control of the good or service transfers to the customer, like in a retail sale. Your classification as a principal or agent impacts this timing. A principal recognizes gross revenue when they fulfill their obligation to transfer the main good or service, while an agent recognizes their net fee when their arrangement service is complete.
The single most important factor in this assessment is control. Think of it this way: if your company controls the good or service before it gets to the customer, you are the principal. If you are simply arranging for another party to provide that good or service, you are the agent. Control means you have the ability to direct the use of that good or service and get the benefits from it. For example, if you own the inventory sitting in your warehouse, you control it. This is the fundamental difference that guides the entire principal versus agent evaluation. It’s less about what your contract says and more about the substance of the relationship and who truly holds power over the product.
So, how do you know if you have control? The IFRS 15 standard doesn't provide a rigid checklist, but it does offer strong indicators to guide your judgment. Looking for these signs will help you make the right call.
Consider these key questions:
To get a clear answer, try looking at the transaction from your customer's perspective. Who do they believe is making the promise? When they make a purchase, are they counting on your company to deliver the goods or services, or do they see you as a facilitator? This viewpoint helps cut through the contractual jargon and gets to the heart of the matter. The key indicators of control—like who holds inventory risk, sets the final price, and is ultimately responsible for fulfillment—are all things the customer implicitly understands. If a customer would come to you to resolve an issue with the product, you are likely the one they see as being in control, making you the principal in the transaction.
Control isn't just about physical inventory; it applies just as much to services. For a service, control means you have the ability to direct how that service is provided and who provides it. For instance, if you hire a subcontractor to perform a service for your client, but you define the scope of work, manage the quality, and remain the primary point of contact, you are directing the use of that service. You are the one ensuring the promise to the customer is fulfilled, even if you aren't performing the labor yourself. In this scenario, you have control and would act as the principal, recognizing the full revenue from the service.
What happens when your company sells a bundle? It's common for a single transaction to include multiple goods or services, and you might be the principal for some and an agent for others. For example, you might sell a piece of software that your company developed (making you the principal) and also offer a third-party training package to go with it (making you an agent). In these cases, you must assess each distinct performance obligation separately. This granular approach is essential for accurate reporting. Manually tracking these distinctions across thousands of transactions can be challenging, which is why many high-volume businesses rely on automated revenue recognition solutions to ensure every component is classified correctly and compliantly.
Deciding whether you’re a principal or an agent isn’t just an accounting exercise; it fundamentally changes how your business’s performance is presented on your financial statements. This distinction directly determines whether you report the full value of a sale or just your cut. It’s the difference between showing the world a revenue of $1 million versus $100,000, even if your take-home profit is the same. Understanding this is the first step toward ensuring your financials accurately reflect your business model and comply with revenue recognition standards.
When you act as the principal in a transaction, you report revenue on a "gross" basis. This means the entire amount you receive from the customer for a good or service is recorded as your revenue. For example, if you sell a software license for $1,000 and you paid another company $700 for it, you report the full $1,000 as revenue. The $700 is then recorded separately as a cost of goods sold (COGS). This method reflects that you had control over the product before it was transferred to the customer and were primarily responsible for fulfilling the promise to them.
On the other hand, if you’re an agent, you report revenue on a "net" basis. This means you only record the fee or commission you earn for facilitating a sale as revenue. Let’s use the same example: you arrange the sale of a $1,000 software license for another company and earn a 10% commission. In this case, you would only report $100 as revenue. The remaining $900 is never reflected on your income statement. This approach is used when your role is simply to arrange for another party to provide the good or service to the end customer.
The choice between gross and net reporting has a major ripple effect across your financials. Reporting as a principal leads to a much higher top-line revenue figure, which can make your company appear larger and more established. In contrast, reporting as an agent results in lower revenue but can lead to higher-looking profit margins. It’s critical to remember this isn't a strategic choice but a classification based on the substance of your transactions under IFRS 15. Misclassifying your role can lead to misstated financials, audit complications, and poor strategic decisions. This is why many businesses rely on automated revenue recognition to ensure they get this right every time, giving them a clear and compliant view of their performance.
When you’re trying to figure out if you’re a principal or an agent, it’s less like a simple yes-or-no quiz and more like gathering evidence. There isn’t one single factor that decides it all. Instead, IFRS 15 asks you to look at a collection of indicators that, when viewed together, paint a clear picture of who truly has control over the goods or services before they reach the customer.
Think of yourself as a detective looking for clues in your contracts and business practices. Your main goal is to determine who is in the driver's seat. Who directs the use of the product or service and gets the majority of the benefits from it? The following questions are your guide to uncovering the answer. By working through them, you can build a strong case for your classification and ensure your revenue recognition practices are sound. Remember to look at the substance of the arrangement, not just what the contract says on the surface.
When a customer makes a purchase, who are they counting on to deliver? If your company is the one they hold responsible for getting the job done, you're likely the principal. This doesn't just mean physically shipping a box. It could mean you're the one integrating different components into a final product or directing another company to perform a service for the customer on your behalf. The core question is: Are you the one making the promise to the customer? If something goes wrong with the order, are you the one they'll call to make it right? If so, that’s a strong indicator that you are the principal in the transaction.
Imagine you have a warehouse full of products waiting to be sold. If a fire, flood, or even just a shift in trends makes that inventory worthless, who takes the financial hit? If the answer is your company, you are holding the inventory risk. This is a classic sign of being a principal. You have committed capital to the goods before they are sold to a customer. An agent, by contrast, typically doesn't own the inventory. They facilitate the sale but don't bear the loss if the product gets damaged, becomes obsolete, or is returned by the customer (unless it's for a reason like a faulty sale process).
Do you have the freedom to decide the final price a customer pays? If you can independently set prices, offer discounts, and run promotions, you have pricing discretion—a powerful indicator that you are the principal. An agent usually has little to no control over pricing. Their earnings are often a fixed fee or a percentage of a price that the principal sets. Having the authority to manage the price tag shows that you control a key commercial aspect of the transaction, which points directly to your role as the principal in the arrangement.
While fulfillment, inventory, and pricing are the heavy hitters, the analysis doesn't stop there. Sometimes the lines can be blurry, and you'll need to consider other factors. For instance, who bears the credit risk if a customer fails to pay? How is the product or service marketed—is your brand front and center? No single indicator is a silver bullet, and the entire picture requires careful professional judgment. Because these assessments can be complex, especially in multi-party arrangements, it's often wise to seek expert guidance to ensure you're applying the rules correctly and maintaining compliance. When in doubt, a professional consultation can provide the clarity you need.
The theory behind principal versus agent sounds simple enough, but applying it to real-world business models can feel like solving a puzzle. The lines often blur, especially when contracts are complex, multiple parties are involved, or pricing isn't fixed. These gray areas are where mistakes happen, leading to compliance issues and inaccurate financial reporting.
Understanding these common hurdles is the first step to getting your classification right. Many businesses find that their arrangements have layers of complexity that don’t fit neatly into one box. Your role can even change from one transaction to the next. Let's look at a few specific situations where the principal vs. agent assessment gets tricky and requires a much closer look.
It’s not always an all-or-nothing decision. Your business might act as a principal for one part of a contract and an agent for another. For example, a software reseller might be an agent for a third-party license but a principal for the implementation and support services it provides directly. In these mixed arrangements, you have to analyze each distinct promise to the customer—what IFRS 15 calls a "performance obligation"—to determine your role for each one.
This requires careful and consistent judgment. Deciding whether your company is a principal or an agent in these nuanced situations can be complicated, and it's often a good idea to seek professional help to ensure the accounting rules are applied correctly. The key is to break down the transaction into its core components and assess control for each part separately.
Things get even more complex when multiple companies work together to deliver a product or service to the end customer. This is especially true for online marketplaces, app stores, and other platform-based businesses. Figuring out who ultimately controls the goods or services before they are transferred to the customer can be a major challenge.
Think about a food delivery app. Is the app the principal, responsible for the entire meal experience, or is it an agent that simply connects the customer with the restaurant? To answer this, you have to go back to the indicators of control. Who sets the price? Who is responsible if the order is wrong? Answering these questions is critical, as it can be tricky to determine who is the principal when so many parties are involved in a single transaction.
Discounts, rebates, performance bonuses, and other forms of variable consideration add another layer of difficulty. When you are an agent, you recognize revenue based on your net fee or commission. But what happens when a discount is offered to the customer? You need to determine if that discount reduces the gross revenue collected from the customer or if it reduces your specific commission.
For instance, if a contract involves multiple customers, a discount might only apply to the part of the contract where you are the principal. This directly impacts your top-line revenue figures. Getting this wrong can lead to a material misstatement in your financials. You can find more insights on revenue recognition and other financial topics to help you manage these details accurately.
Theory is one thing, but applying the principal-agent framework to real-world transactions is where things get interesting. Certain business models and contract structures are notorious for creating confusion. How do you handle upfront fees, customer refunds, or long-term construction projects? Getting these specific situations right is crucial for compliance and accurate reporting. Let's walk through a few common scenarios and break down the correct accounting treatment, so you can see how the rules of control and performance obligations play out in practice.
Imagine you sell a plot of land and also sign a contract to build a house on it for a customer. Are you making one big sale or two separate ones? In most cases, the land and the construction are considered separate promises, or performance obligations. According to guidance from BDO on IFRS standards, this is because the builder's work on the house wouldn't fundamentally change if they weren't also the one who sold the land. You have to assess each promise individually. This means you would recognize revenue for the land when control transfers to the buyer, and then recognize revenue for the construction service over time as the house is built.
Many businesses charge non-refundable upfront fees, like an activation fee for a phone plan or a setup fee for a new software account. It’s tempting to recognize this cash as revenue the moment you receive it, but that’s usually incorrect. These initial activities are generally not a separate service delivered to the customer. Instead, they are administrative tasks required to fulfill the main service you’ve promised. Therefore, that upfront fee should be recognized as revenue over the period you provide the actual service, whether that’s a 12-month subscription or the average customer lifetime.
What happens when you have to pay a customer back for a service issue, like an airline compensating a passenger for a delayed flight? Even if this payment is required by law, it isn't treated as a separate operating expense. Instead, it's considered "variable consideration." This means the compensation directly reduces the transaction price of the original sale. So, if the flight ticket was $500 and the airline pays the customer $100 for a delay, the airline can only recognize $400 in revenue for that flight. It directly impacts your top-line revenue, which is why accurately tracking these adjustments is so important for your financials.
When you're working on a long-term project where revenue is recognized over time, like building a custom piece of machinery, you'll incur costs along the way. These costs, such as materials and labor for work already completed, should be recognized as expenses in the period they are incurred. These are considered costs of "past performance" and are matched against the revenue you're recognizing for that same period. They don't create a new asset on your balance sheet for future work. Properly aligning these costs with revenue is essential for an accurate picture of your project's profitability at every stage, a process that automated systems are designed to handle seamlessly.
The principal versus agent assessment is nuanced, and a few common myths can easily lead you down the wrong path. Getting this wrong isn't just a small error; it can misrepresent your company's revenue and overall financial health. Accurate classification is foundational for ASC 606 compliance, so let's clear up some of the most frequent points of confusion so you can make your assessment with confidence.
It’s easy to get bogged down in a contract’s legal language, but the substance of your promise is what matters. The core question is: what did you promise the customer? As guidance from Deloitte clarifies, if your company promised to provide the good or service itself, it's a principal. If the promise was to arrange for another party to provide it, you're an agent. Don't let complex wording distract you from this fundamental distinction. Focus on the performance obligation you've committed to fulfilling for your customer.
The term "inventory risk" often brings to mind warehouses of physical products, but it’s much broader than that. This risk applies to services, too. For example, if you’re obligated to pay a service provider even if you can’t find a customer for that service, you’re bearing the inventory risk. As PwC's guidance notes, this is a key indicator of being a principal, as you're the one who takes the financial hit if there's no demand. It shows you have control over the service before it's transferred.
While the risk of a customer not paying is a valid business concern, it has no bearing on the principal vs. agent analysis. Both principals and agents can face credit risk, so it’s not a useful indicator for telling the two apart. The IFRS Community confirms that this risk is irrelevant to the classification. Focusing on it can distract from the main issue: who controls the good or service before it gets to the customer? Keep your assessment centered on the control indicators to ensure your revenue recognition is accurate.
Getting the principal vs. agent distinction right is less about a single decision and more about a consistent process. Accuracy is your goal, not just for compliance but for ensuring your financial data gives you a true picture of your company’s performance. When your revenue figures are correct, you can make smarter strategic moves. The key is to be methodical. By breaking it down into clear steps—analyzing contracts, documenting your logic, and regularly reviewing your approach—you can create a reliable system that stands up to scrutiny.
First, you need to get granular with your contracts. This isn't about a quick once-over; it's about dissecting each one. For every good or service you promise a customer, you have to ask if you're acting as a principal or an agent. The guidance requires you to identify the specific good or service being provided to the end customer. A single contract might contain multiple promises, and your role could differ for each. For example, you might be a principal for your core product but an agent for an add-on service from a third party. This detailed analysis is the foundation of accurate revenue recognition.
Once you've made a decision, your work isn't done. The next step is to document why you made it. The principal versus agent assessment isn't a choice; it's a judgment based on the facts of each arrangement. Think of it as showing your work. For every contract, you should have a clear record of your thought process. Note which control indicators you considered and what conclusion you reached. This documentation is your best friend during an audit and ensures consistency across your team. It proves your classification is the result of careful, expert judgment and not a guess.
Your business evolves, and so should your accounting policies. This classification process can't be a "set it and forget it" task. As your business grows, you might change fulfillment processes or launch new offerings. Each change could shift your role from agent to principal, or vice versa. A company can be a principal for some items and an agent for others in the same contract. That’s why you need a regular review cycle. By continuously monitoring contracts and updating policies, you ensure ongoing compliance and accurate financial reporting. If managing this complexity feels overwhelming, exploring an automated solution can help keep everything on track.
Making the right call between principal and agent isn't something you have to do in a vacuum. Plenty of resources are available to guide your assessment, from official standards to specialized software and expert advice. Leaning on these tools can help you build a clear, defensible accounting policy that stands up to scrutiny and gives you confidence in your financial reporting. Think of it as building a support system for your compliance efforts, ensuring you have the right information and technology at your fingertips.
When in doubt, go straight to the source. The International Financial Reporting Standards (IFRS) Foundation provides the complete text and supporting documents for IFRS 15. The standard itself clearly states that an entity is a principal if it controls the good or service before it's transferred to the customer. The official guidance is dense, but it’s the ultimate authority on the matter. Reading the specific paragraphs on principal versus agent considerations (B34-B38) is a great first step to ground your understanding in the actual requirements. It’s the framework upon which all other interpretations and tools are built.
The official guidance from both IFRS 15 and ASC 606 provides a clear framework for this assessment. It’s not about memorizing endless rules, but about applying a logical, two-step process. First, you identify the specific good or service that is being provided to the end customer. This is the actual product or value they receive. Second, you determine if your company controls that good or service before it's transferred. This concept of control is the heart of the matter. The standards offer strong indicators to guide your judgment, but they stop short of a rigid checklist because every business arrangement is unique. This approach ensures the accounting reflects the economic reality of the transaction, not just its legal form.
For companies following US GAAP, the Financial Accounting Standards Board (FASB) provided additional clarification with its update, ASU 2016-08. This update was specifically designed to help companies figure out their role in increasingly common multi-party arrangements. It doesn't change the core principle of control but reinforces it, providing more detailed guidance to ensure everyone is on the same page. Think of it as an extra layer of detail that helps you apply the control framework consistently, especially when your business model involves partners, platforms, or other intermediaries. It’s all about bringing clarity to complex situations.
While accounting standards provide the main framework, you can't ignore the world outside your financial statements. This assessment must be done on a case-by-case basis, and the final decision can often depend on the specific jurisdiction where you operate. For example, the typical responsibilities of a landlord can vary a lot from one country to another based on local laws and common business practices. These local nuances can directly influence who is seen as having control. This is why it's so important to look at the complete picture, considering not just the accounting standards but also the legal and commercial environment your business works in.
Manually tracking revenue streams and applying complex IFRS 15 rules can quickly become overwhelming, especially for high-volume businesses. The right accounting software can streamline this entire process. Modern revenue recognition rules require a level of detail that legacy systems often can't handle. An automated solution helps you apply the control framework consistently across thousands of transactions, ensuring compliance without the manual headache. With the right integrations, you can pull data from your sales and operating systems to make accurate, real-time assessments and keep your financials audit-ready.
Sometimes, you need more than a standard or a piece of software—you need a person. The distinction between principal and agent can be incredibly nuanced, and the final decision often relies on professional judgment. If you’re dealing with complex contracts, multi-party arrangements, or simply feel out of your depth, it’s wise to seek professional help. An expert can review your specific circumstances, help you interpret the guidance correctly, and document a sound rationale for your accounting treatment. Getting an expert opinion isn't a sign of weakness; it's a smart business move that protects you from costly errors and compliance issues down the road.
Making the shift to IFRS 15 or simply ensuring your ongoing practices are compliant is more than an accounting exercise; it’s a fundamental operational change. Getting the principal versus agent distinction right isn’t a one-time task you can check off a list. It requires building a sustainable and repeatable process that lives within your organization. This involves creating a clear internal rulebook, empowering your team with the right knowledge, and communicating your financial story with clarity and transparency.
The stakes are high. An incorrect assessment can lead to misstated financials, which can trigger audit issues, erode investor confidence, and result in regulatory penalties. But the goal isn't just to avoid trouble. When you have a robust process for revenue recognition, you gain a much clearer view of your company’s actual performance. This clarity is what allows you to make smarter, data-driven strategic decisions about pricing, partnerships, and growth. The following steps provide a framework for managing this transition effectively and maintaining compliance over the long term. While the principles are straightforward, executing them, especially in a high-volume business, often requires automated solutions that can handle the complexity. You can find more insights on improving your financial operations on our blog.
Your internal accounting policies are the foundation of your compliance strategy. They need to be specific, actionable, and reflect the nuances of IFRS 15. Remember, the principal versus agent assessment is a judgment based on the specific facts of a deal, not a choice you get to make. Your policies should serve as a guide for your team, helping them make consistent and defensible judgments every time. Document exactly how your company evaluates the key indicators of control—primary responsibility for fulfillment, inventory risk, and pricing authority—for each of your revenue streams.
Once your policies are set, your systems need to be able to support them. Manually tracking these complex rules in spreadsheets is not only inefficient but also highly prone to error. You need technology that can automate these assessments and seamlessly integrate with your CRM and ERP to ensure the data is accurate and consistent across your entire organization.
A great set of policies is only effective if your team understands and applies them correctly. Deciding whether you're a principal or an agent can be complicated and often requires careful judgment. That’s why training is absolutely essential. Your sales, legal, and finance teams must all be aligned on how contracts are structured and the revenue implications of different terms. Regular training sessions can ensure everyone is speaking the same language and understands their role in maintaining compliance.
Alongside training, you should establish strong internal controls. This could include a mandatory review process for any new or non-standard contracts to ensure the principal-agent assessment is performed correctly before the deal is finalized. For the most complex situations, it’s wise to seek a professional consultation to validate your approach and prevent costly mistakes.
The final piece of the puzzle is transparency. IFRS 15 has specific disclosure requirements that you must meet in your financial statements. It’s not enough to get the accounting right behind the scenes; you have to communicate your position clearly to the outside world. This means explicitly stating whether you are acting as a principal or an agent for your significant revenue streams and reporting revenue on a gross (for principals) or net (for agents) basis.
Your disclosures should also briefly explain the significant judgments made during your assessment. This transparency shows investors and auditors that you have a thoughtful and rigorous process in place. It builds trust and demonstrates a commitment to financial accuracy—a core value for any successful business. At HubiFi, we believe this level of clarity is key to building a strong financial foundation.
Can I just choose to report as a principal to make my revenue look higher? That’s a common question, but unfortunately, the answer is no. This classification isn't a strategic choice you get to make. It’s a judgment you must make based on the facts of your transactions, guided by the accounting standards. The entire assessment hinges on who has control over the good or service before it gets to the customer. Misclassifying your role just to show a higher top-line revenue can lead to serious compliance issues and will likely be flagged during an audit.
What if my role is mixed? For some parts of a sale I feel like a principal, and for others, an agent. This is a very common scenario, especially in complex service agreements. In these cases, you have to break the contract down into its individual promises, or "performance obligations." You then need to assess your role for each distinct part. For example, you might be the principal for the software you developed but an agent for a third-party warranty you sell alongside it. This means you would report gross revenue for the software and net revenue for the warranty commission, all within the same customer contract.
My business provides services, not physical products. How does 'inventory risk' apply to me? Inventory risk isn't just about boxes in a warehouse. For a service business, it’s about having a financial obligation for a service before you've secured a customer for it. For instance, if you pay a contractor for a block of their time, you are on the hook for that cost whether you sell that time to a client or not. That financial exposure is your inventory risk. It’s a strong sign that you control the service and are therefore acting as the principal.
Why does this matter so much if my actual profit is the same either way? While your net income might not change, the way you get there tells a very different story about your business. Reporting gross revenue as a principal presents a much larger company in terms of sales volume, which impacts everything from financial ratios to how lenders and investors perceive you. Reporting net revenue as an agent results in a smaller top line but can show much higher profit margins. Getting it right is essential for accurate financial reporting, passing audits, and making sound strategic decisions based on a true picture of your operations.
Is there a single factor that decides if I'm a principal or an agent? There isn't one single "gotcha" factor that decides it all. While control is the central question, you determine it by looking at a collection of indicators together. The three main clues are who is primarily responsible for fulfillment, who holds inventory risk, and who sets the price. You have to weigh these factors to see what picture they paint as a whole. Sometimes one indicator might point one way while another points elsewhere, which is why careful, documented judgment is so important.
Former Root, EVP of Finance/Data at multiple FinTech startups
Jason Kyle Berwanger: An accomplished two-time entrepreneur, polyglot in finance, data & tech with 15 years of expertise. Builder, practitioner, leader—pioneering multiple ERP implementations and data solutions. Catalyst behind a 6% gross margin improvement with a sub-90-day IPO at Root insurance, powered by his vision & platform. Having held virtually every role from accountant to finance systems to finance exec, he brings a rare and noteworthy perspective in rethinking the finance tooling landscape.
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