Principal or Agent? The great dilemma…………..

Agent-principal relationships are governed by the standard?Ind AS 115 Revenue from Contracts with Customers.

Ind AS 115 is clear and states that?an entity should NOT include the amounts collected on behalf of others into its own revenue, because it results in no increase in the equity.

In such a case you are acting merely as an agent and you need to keep only the commission and the rest is to be transferred to the entity who actually is responsible for that goods sold or services provided i.e. the Principal.

This rule seems pretty simple. But its practical application can give a hard time, because sometimes it’s extremely difficult and demanding to assess properly and conclude correctly whether an entity is acting as an agent or a principal.

Basically,?an entity is an agent if its responsibility is limited to arranging?or mediating the provision of goods or services for another party.

Thus, it’s NOT responsible for the provision of these goods or services – another entity is.

To sum it up shortly (but not exhaustively) an entity is ?acting as a principal?when:

• It is responsible?for a service or a good. It is this entity which guarantees quality of a good/service and is responsible for guarantee repairs, any corrections/modifications, or post-delivery service, as examples.
• It bears an?inventory risk. For example – if the goods are stored in some warehouse and burglars go and steal them, it’s the entity’s loss – and this applies even when the goods are stored in the warehouse of another entity (on rental basis)
• It deals with any unsold and obsolete inventory (i.e. it bears the losses for unsold and obsolete goods).
• It establishes the prices?for the goods or services. If it can influence or set the price of the goods/services, either directly or indirectly, then it indicates that the entity is acting as a principal.

Please mind that the above list is only indicative, and it can be met either individually or in combination.

Sometimes, one of them is met and the other is not met – in such a ?situation one 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 two very similar transactions may be treated in a different way.