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IAS 18 Revenue: Guidance on Identifying Agency Relationships

Go To List of IFRIC Issues Issue Description: When does a seller act as an agent, and therefore should recognise only commission revenue and not revenue from selling goods or services, under IAS 18? Discussion at July 2006 IFRIC Meeting: The IFRIC, although noting that it did not see evidence that there is currently widespread divergence in this area, agreed to add a project to develop guidance at the level of general principles in IAS 18 on identifying whether an entity is acting as an agent in an agency relationship. At the same time, it noted that, because it was unaware of diversity in practice, the project should not be considered a high priority project. Discussion at the May 2007 IFRIC Meeting The IFRIC discussed a request for guidance from the staff about how best to proceed with this project. Some IFRIC members were in favour of developing an Interpretation on this pervasive accounting issue. There is existing guidance in some jurisdictions (flor example, the UK and US) that is not inconsistent with IAS 18. An Interpretation would reduce a perceived diversity in practice. Other IFRIC members saw the issue as one that could potentially lead to a rule-based interpretation. Identifying agency relationships is often difficult in practice and this would not change as a result of anything that IFRIC could hope to achieve. However, to the extent that there is useful guidance that might command the support of a majority of IFRIC, some guidance might be worthwhile. The IFRIC members agreed to share any existing guidance of which they are aware (including internal guidance) with the staff. If the staff determined that there is a high degree of consistency around that guidance, it might indicate that either (a) no Interpretation is necessary; or (b) an Interpretation could be developed quite quickly. If the staff concluded that there is little consistency, an Interpretation project might be necessary. The IFRIC will return to this issue at a subsequent meeting. Discussion at the July 2007 IFRIC Meeting At the May 2007 meeting the IFRIC asked the staff to analyse existing guidance on this issue to determine whether such guidance was consistent and could be used to help to assess the level of diversity in practice. The IFRIC was nearly equally split between two views. View A: The project should be removed from the IFRIC agenda on the basis that: Existing guidance, including that issued by some international audit firms, is consistent with this guidance being mainly based on EITF 99-19 (US GAAP) and FRS 5 (UK GAAP). Determining whether a seller is an agent or principal requires judgement and will depend on the particular facts and circumstances of each arrangement and that this would not change as a result of any guidance. Under IAS 8 GAAP hierarchy, an IFRS preparer may wish (although it is not obliged to do so) to consider other guidance. Any guidance in this area is more in the nature of implementation guidance and should not be issued by the IFRIC. View B: The IFRIC should proceed with its work on this project on the basis that: The issue is widespread and has practical relevance. Whereas the guidance in US GAAP and UK GAAP is useful outside of their respective jurisdiction, it is likely that some preparers around the world may not be aware of it. An Interpretation should be issued based on this existing guidance and it should not be difficult for the IFRIC to reach a consensus on this issue on a timely basis. Finally the IFRIC came to the conclusion that 'there should be something in the IFRS book' in order to avoid being required to look at the guidance of other standard setter. The IFRIC reached a tentative decision that this matter should be addressed by the IASB by adding an example to the appendix of IAS 18 and should not be added to the IFRIC agenda. The staff was asked to prepare a proposal for such an example whereby the example should be based on indicators. The IFRIC will return to this issue at a subsequent meeting. Discussion at the September 2007 IFRIC Meeting At the July 2007 meeting the IFRIC decided not to add this issue to its agenda but asked the staff to develop guidance that might be recommended to the Board for inclusion in the appendix of IAS 18. The IFRIC reaffirmed that an entity is acting as a principal when it has exposure to the significant risks and rewards associated with the sale of goods or the rendering of services. It was noted that determining whether an entity is acting as a principal or an agent depends on facts and circumstances and requires judgement. Mainly based on the existing guidance in EITF 99-19 (US GAAP), the staff proposed the following features that, individually or in combination, may indicate that an entity is acting as a principal: (a) The entity has the primary responsibility for providing the goods or services desired by the customer or for fulfilling the order. Indications that the entity has such primary responsibility include, for example: the entity modifies the product or performs part of the services; the entity has discretion in selecting the supplier used to fulfil an order from a customer; the entity is involved in the determination of products or services specifications. (b) The entity has inventory risk before or after the customer order, during shipping or on return. (c) The entity has discretion in establishing prices directly or indirectly, such as by providing additional goods or services. (d) The entity has credit risk. Accordingly, an entity is acting as an agent when it does not have exposure to the significant risks and rewards associated with the sale of goods or the rendering of services. One feature that may indicate that an entity is acting as an agent is that the amount the entity earns is predetermined, being either a fixed fee per transaction or a stated percentage of the amount billed to the customer. The IFRIC tentatively decided to remove the sub-indicators under indicator (a) above. In addition to other editorial amendments, the IFRIC tentatively decided to include following guidance from paragraph 7 of EITF 99-19 in indicator (a): 'If a company is responsible for fulfilment, including the acceptability of the profit(s) or service(s) ordered or purchased by the customer.' The IFRIC tentatively agreed to recommend the revised indicators to the Board for consideration. The IFRIC also confirmed its decision not to take this item to the Agenda (see below 'Review of tentative Agenda Decisions' published in July 2007 IFRIC Update). Removed from IFRIC agenda.