Last update: July 2023

A few weeks ago I published an article about top 3 dilemmas with your auditors and I wrote the story about a company selling mobile phone credits via its machines.

I explained that the company served as a medium of sale and was not responsible for providing telecom services to the end users, but still this company accounted the revenues on the gross basis.

That was totally wrong.

I received a lot of e-mails asking me to write more about it, because sometimes we are not so sure whether the company should account the revenue on the gross or net basis.

In other words – are you acting as an agent or as a principal?

Let’s take a look.

What do the rules say?

Agent-principal relationships are governed by the standard IFRS 15 Revenue from Contracts with Customers.

IFRS 15 is pretty clear and states that you should NOT include the amounts collected on behalf of others into your revenue, because they are not increasing your equity.


Well, because you keep only the commission and transfer the rest to the entity responsible for that service, or a principal.

Now, this rule seems pretty simple.

But, its practical application can give us a hard time, because sometimes it’s extremely difficult and demanding to assess properly and conclude correctly whether we are an agent or a principal.

Basically, you are an agent if your responsibility is limited to arranging or mediating the provision of goods or services for another party.

Thus, you are NOT responsible for the provision of these goods or services – another party is.

I tried to illustrate it in the following scheme:


The standard IFRS 15 gives us a guidance that you can use for your own assessment.

To sum it up shortly (but not exhaustively, you need to look directly to the standard if interested), you are acting as a principal when:

  • You are responsible for a service or a good.
    So, it’s you who guarantees quality of a good/service and it’s you who is responsible for guarantee repairs, any corrections/modifications, or post-delivery service, as examples.
  • It’s YOU who bears an inventory risk.
    For example – if your goods are stored in some warehouse and burglars go and grab them, it’s your damage – and this applies even when the goods are stored in the warehouse of another entity.
    Or, you are going to deal with any unsold and obsolete inventory (=you carry the losses).
  • It’s YOU who establishes prices for the goods or services.
    If you can influence or set the price of the goods/services, either directly or indirectly, then it indicates you’re a principal.

IFRS 15 adds that an agent gets its remuneration in the form of a commission.

Let me stress here that these are just indicators and they can be met individually or in combination.

Sometimes, one of them is met and the other one is not met – in a similar situation you should really think carefully whether significant risks and rewards of ownership, or control over goods or services was transferred or not.

It’s not so easy and in reality it can happen that 2 almost the same transactions are treated in a different way.

Let me give you a couple of examples to illustrate.

Example #1 – Goods

GreatGear is a shop selling bicycles, both new and used. There are 2 main selling procedures:

  1. New bikes

    GreatGear buys new bikes from their manufacturers. Once the bikes are bought, they are delivered to GreatGear’s warehouse or store and are offered to the end customers.

    Normally, GreatGear pays for these bikes within 30 days from their delivery to the suppliers.

    The bikes remain in the GreatGear’s store or warehouse until they are sold. As the value of bike inventories is quite high, GreatGear took an insurance policy to cover all risks.

    It’s GreatGear who sets the price of the new bikes and decides about any discounts or promotions.

    New bikes come with 2-year guarantee for the main parts. It’s a producer who makes guarantee repairs, but it’s GreatGear who deals with the end customer and provides post-delivery support.

  2. Used bikes

    GreatGear gets the used bikes from their previous owners (let’s call them “sellers”). The seller brings a bike to GreatGear’s store and leaves it there to offer them to customers. At that point, seller does not get any cash.

    Selling prices of the used bikes are usually set by the seller, but GreatGear has the right to adjust the price by pre-approved percentage and seller must be informed about the adjustment.

    When GreatGear sells the bike to the new customer, he informs the seller about the transaction. The seller visit GreatGear’s store and gets 90% of revenue from the sale of his used bike (remaining 10% is for GreatGear).

    When the bike is not sold within 180 days, seller must take it back from GreatGear.

    Used bikes are also covered by the same insurance policy as the new bikes. The sellers do not pay any insurance premium – instead, it is included in the remuneration for the GreatGear (10% of selling price).

    Used bikes do not come with any guarantee whatsoever.

How should GreatGear recognize revenues from sales of new and used bikes?

Solution #1- Goods

  1. New bikes

    Now, we should assess the criteria to determine whether GreatGear acts as an agent or as a principal.

    The primary question here is whether all, or at least majority of risks and rewards of ownership of the new bikes were transferred to GreatGear or not. In line with IFRS 15 we examine whether control over new bikes was transferred.

    It seems yes, because:

    • Inventory risk sits clearly with GreatGear – if something happens to bikes, it’s GreatGear’s loss. That’s also why GreatGear took an insurance policy.
    • Producers are no more involved in control of new bikes, as it’s GreatGear who sets prices, provides post-delivery service, etc.
      Yes, the producers make guarantee repairs and for that purpose, they probably recognize some provision based on past statistics, but it only means that minor risks were retained by the producers. It does NOT mean that producers retained control over the bikes.
    • Customer credit risk is probably out of question here, as we may reasonably assume that end customers pay for the bikes immediately when taking them from the store.

    Conclusion – GreatGear accounts for the revenue from sale of bikes in gross amounts as it acts as a principal.

    Let’s say GreatGear bought the new bike from a producer for CU 100 and sold it for CU 130.

    The accounting treatment of the sale is:

    • Debit Cash: CU 130

    • Credit Revenue from goods sold: CU 130

    Plus, GreatGear must recognize cost of goods sold:

    • Debit Cost of sales: CU 100

    • Credit Inventories: CU 100

  2. Used bikes

    The things are different at used bikes because clearly, it seems that not all the risks and rewards of ownership / control were transferred to GreatGear when sellers brought their used bike to the store.

    Let’s assess the agent/principal criteria:

    • Here, it’s difficult to say who is responsible for the goods sold, as there is no guarantee and nothing said about the post-delivery service, but we can assume that GreatGear would not take any responsibility (of course, in reality, it’s necessary to examine it).
    • Inventory risk is borne by the sellers. The reason is that the bikes are returned to sellers if not sold. Also, bikes are insured, but sellers pay for the insurance within the remuneration to GreatGear.
    • Sellers have the major word when setting the prices.
    • Again, customer credit risk is out of question here as customers pay cash.


    Conclusion – GreatGear accounts for the sale from used bikes as for the “agency” transaction – i.e. in net amounts, as it acts as an agent.

    Let’s say that the used bike was sold for CU 100 to the end customer, GreatGear paid CU 90 to the seller and kept CU 10 for itself.

    Journal entry is:

    • Debit Cash: CU 100

    • Credit Payables to sellers: CU 90

    • Credit Revenue from commission: CU 10


    Example #2 – Services

    For the second example, I picked the one asked by my reader (thanks, B.K., for this excellent question!) after I published an article about auditors.

    Plus, I’m adding something more to the original question to explain a bit more. Let me quote:

    “There is a company (let’s call it Songer) whose main activity is selling artist songs through Internet (if you want to download an artist song you have to enter through their web site and you download).

    The contract between an artist and Songer is that when the end user downloads a song for CU 1, then an artist gets CU 0.60 and the company keeps CU 0.40.

    How should Songer record its revenue?”

    Let me add to this: Would the situation change if Songer paid to artists to compose and produce songs and music exclusively for Songer?

    This is a very classical issue for telecom operators, too, because they sell lots of applications, music and other files together with their monthly pre-paid plans or on “pay-as-you-go” basis.

    So what to do?

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    It depends on the circumstances of a specific transaction. Here again, we need to assess agent/principal criteria to make appropriate conclusion.

    Inventory risk is out of question for the services and customer credit risk will not be that high as the customers actually pay before they can download the song.

    So we need to focus on 2 things here:

    1. Who has the primary responsibility for providing the services to customer? Or, who is responsible for a service being acceptable or wanted by the customer?
    2. Who sets the prices here?

    The answer depends on what the content is.

    If Songer sells music created by independent artists and these songs are available elsewhere, then Songer is only a medium or a platform for distributing these services and not their creator.

    In other words, Songer is not primarily responsible for these services and is responsible only for their delivery.

    In this case, Songer would account for the revenue on the net basis (acting as an agent):

    • Debit Cash: CU 1.00

    • Credit Payables to artists: CU 0.60

    • Credit Revenue from sale of songs (commission): CU 0.40

    If Songer sells music or other files created exclusively for the brand “Songer” by other artists and these products are not available elsewhere, then the things are different.

    In this case, Songer needs to account for the revenue on the gross basis (acting as the principal):

    • Debit Cash: CU 1.00

    • Credit Revenue from sale of songs (commission): CU 1.00

    In this case, remuneration to artists is accounted in line with the agreement with them (e.g. as a fixed fee for song creation, or as a percentage of sales as shown above at bikes’ example).

    Why does it matter?

    You might ask: Why do we care whether it’s gross or net – the profit or loss impact is still the same!

    Yes, you are right, in both cases, the profit or loss effect is the same.

    However, it matters a lot due to other financial issues and indicators, such as:

    • Financial rations might be affected;
    • Bank covenants dependent on the revenues from sales might be affected;
    • Bonuses to management calculated based on the sales revenue might be affected; and you can go on.

    If you experienced the similar situation and you’d like to share it with others, please do so in the comment right below this article. Thank you!