Principal versus Agent: Software Reseller (IFRS 15)

Date recorded:


The Committee received a submission asking whether a reseller of software licences is a principal or agent in respect to the standard software licences provided to the customer. In the fact pattern described, the reseller has a distribution agreement with a software manufacturer that: (i) gives the reseller the right to grant (sell) the manufacturer’s standard software licences to customers; (ii) requires the reseller to provide pre-sales advice to each customer; and (iii) provides the reseller with discretion in pricing the software licences for sale to customers. The software manufacturer provides the customer with the software licences ordered. If the reseller advises the customer to order an incorrect type or number of software licences, the customer may not accept the licences. The reseller is unable to return unaccepted licences to the software manufacturer or sell them to another customer.

Staff analysis

The staff did not perform outreach because the submitter provided publicly available financial statements of resellers in various jurisdictions and the staff had informal discussions with stakeholders. From these, the staff concluded that the matter is common in software sector. They understood that the recognition of revenue as a principal or agent has a material effect on many entities affected because this distinction is frequently discussed.

IFRS 15:B34-B38 set out a framework for how an entity makes the determination whether an entity is a principal or an agent. The staff analysed that the first step is to assess the goods and services promised in the contract with the customer applying IFRS 15:27-30. The staff concluded that the promised goods in the contract are standard software licences only. The pre-sales advice is neither explicit nor implicit in the contract because the reseller has already provided that advice and there is no further advice to be provided by the reseller. In the submitter's view, the pre-sale advice is a consulting service implicitly promised because the reseller is liable for damages in the event of providing wrong advice. However, the staff disagrees with this and said the reseller should apply IAS 37 when accounting for its obligation arising under legislation.

The second step is to assess whether the reseller controls the standard software licences before they are transferred to the customer by applying IFRS 15:33 and consider the indicators in IFRS 15:B37(a) to (c) in assessing control. In the fact pattern described, the software manufacturer is responsible for fulfilling the promise (IFRS 15:B37(a)) to provide the licence because it has the responsibility for the software's functionality and has discretion in accepting or rejecting the order. However, the reseller is the party that engages with the customer and takes responsibility for the unaccepted licences. It could therefore also be responsible for fulfilling the promise (IFRS 15:B37(a)). It is considered that the reseller has no inventory risk before the licences are transferred to the customers but would have such risk in the event of non-acceptance by the customer (IFRS 15:B37(b)). Although the reseller has the discretion in establishing the price for the licences, it may be less relevant if the software is standardised and. The reseller has limited flexibility in establishing the price (IFRS 15:B37(c)).

The staff found that the fact pattern is highly specific and even small or subtle differences in the specific facts and circumstances could change the conclusion when applying the requirements about principal versus agent considerations in IFRS 15. The staff were therefore of the view that it would be inappropriate for the Committee to conclude whether the reseller is a principal or agent in the fact pattern submitted. Instead, the tentative agenda decision should only set out the applicable requirements in IFRS 15 and explain how a reseller might apply those requirements.

Staff recommendation

Based on the above analysis, the staff concluded that the principles and requirements in IFRS Standards provide an adequate basis for a reseller to determine whether it is a principal or agent in the fact pattern described and the matter should not be added to the Committee's standard-setting agenda. Instead, a tentative agenda decision should be published.  


Committee members agreed with the analysis on the steps and factors to consider in assessing principal versus agent in the fact pattern described and most of them supported the suggestion that no conclusion should be given on the fact pattern submitted.

A number of the Committee members commented that the steps of doing the assessment discussed in the agenda paper are critical but are missing in the agenda decision. The staff paper mentioned that the first step in assessing principal versus agent is to apply the control principles to determine whether the reseller has control over the licences before they are transferred to the customers. If those principles do not give clear assessment, an entity considers the indicators as set out in IFRS 15:B37. They suggested that these steps should be emphasised in the agenda decision because IFRS 15:BC382 clearly explains the steps. The staff agreed with the addition.

Another point that some Committee members raised is related to the "pre-sale service". They were of the view that the service provides much information about the licence and the quantity of order to the customer which may give a right of future orders. There was detailed analysis in the agenda paper that the service is distinct but there are other reasons for concluding that it is not considered another separate performance obligation in the contract. However, this analysis is missing in the agenda decision and the current drafting may imply it is bundled in the goods transferred. The staff responded that an agenda decision aims at giving a precise analysis on a specific fact pattern rather than analysis of all related fact patterns. Therefore, after concluding that such service has been provided before entering into the contract of sale of licences, no extensive analysis on such service is considered necessary.

Some Committee members suggested the Committee emphasise the importance of the relevant disclosures in financial statements in circumstances where significant judgment is required in assessing the principal versus agent issue. The staff considered this as meaningful information and decided to add this in the tentative agenda decision.

One Committee member said that although there is no explicit conclusion drawn in the agenda decision, it would suggest that the reseller is an "agent" due to the low inventory risk (return is not considered material) and the limited room for the price determination of standard licences. He was of the view that diversity in practice may arise if the Committee did not give a conclusion even in such "highly specific" fact patterns. However, all other Committee members disagreed with this. Nonetheless, they had concerns that saying "the Committee is not in a right position to conclude on…" may be misinterpreted as an accounting policy choice. Also, they said if the fact pattern is "highly specific" (as drafted in the tentative agenda decision), a conclusion should be provided after the information gap has been filled. The staff accepted the comments and decided to amend the drafting to mention that additional information and a holistic assessment is required on the specific fact and circumstances.

The Committee decided, by a unanimous vote, not to add the matter to the standard-setting agenda. Also, by a vote of 12 out of 13, the Committee members agreed with the suggested edits to the tentative agenda decision.

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