Principal versus Agent: Software Reseller (IFRS 15)

Date recorded:


In its November 2021 meeting, the Committee discussed 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. Most of the 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.

15 comment letters were received. Most respondents agreed with the Committee's analysis and conclusions but provided comments on various aspects of the tentative agenda decision. A few respondents only agreed with the analysis that the licences are the only promised goods in the contracts but suggested the Committee provide a conclusion or additional guidance on whether the entity is a principal or an agent. One respondent disagreed with the conclusion that the licences are the only promised goods in the contracts.

Staff analysis

The staff continues to support the view that the pre-sale advice is not a separate performance obligation because such service has already been provided by the reseller prior to the inception of the sale contract and there is no valid expectation by the customer that the reseller will transfer a good or service other than the licence. In respect of the respondents' suggestion of adding to the tentative agenda decision that the advisory services with respect to the type and number of licences ordered is a distinct performance obligation (which was discussed in the agenda paper), the staff decided not to do so because including this hypothetical discussion may bring confusion when the Committee has concluded that there is only one promise in the reseller's contract with the customer.

Many respondents agreed that it is appropriate for the agenda decision to include discussion of the indicators in IFRS 15:B37 and how the reseller would consider those indicators, but a few respondents considered this inappropriate and said it may bring confusion when there is incomplete information on the fact pattern. The staff were of the view that the Committee’s observations about applying the indicators are not definitive and that the Committee did not conclude on whether any indicator is more or less relevant to the assessment of control. Although some respondents requested adding more guidance on weighting of different indicators when assessing control, the staff considered that the agenda decision should not address this because it is not discussed in IFRS 15. Overall, the staff continues to recommend this approach considering that it would be helpful in explaining how to "walk through" the applicable requirements in IFRS 15.

Respondents generally agreed with the conclusion that determination of whether the reseller is a principal or agent depends on the specific facts and circumstances and that judgement is involved. Only a few respondents requested that the Committee provide a conclusion on the fact pattern submitted. The staff decided not to give a conclusion but to provide observations on the relevant facts to consider when applying the indicators in IFRS 15:B37 in assessing "control".  Those indicators help determining whether the reseller in the fact pattern meets the criteria of a principal in IFRS 15:B35A (i.e. the reseller obtains control of a good from the other party that it then transfers to the customer).

Respondents had mixed views on whether the reseller has inventory risk in the submitted fact pattern. Some respondents considered that the reseller has no inventory risk because the reseller cannot resell the licences, i.e. cannot control the licences, while some respondents considered that inventory risk arises for the reseller at the point that the licence is created and transferred by the manufacturer until the customer accepts the inventory. The staff continued to agree with the latter view (i.e. the reseller has inventory risk for any unaccepted licences) given that the reseller takes responsibility of the unaccepted items and this will be clarified in the agenda decision.

Furthermore, the staff acknowledged respondents’ comments that there may be other indicators to consider besides those identified in IFRS 15:B37. Accordingly, the tentative agenda decision would be amended to better reflect this.  

Staff recommendation

The staff recommended finalising the agenda decision with some changes to the drafting.

Committee discussion

All the Committee members agreed with the staff's analysis and publishing the agenda decision without giving a conclusion on whether the reseller is a principal or an agent and some of them made suggestions on the drafting of the agenda decision to make various areas clearer.

Most of the Committee members supported using a roadmap approach to lay out the direction when analysing the indicators in IFRS 15:B37. They agreed that it should be a principles-based assessment which guides the reader to the relevant guidance and which requires judgement.

The question of whether the reseller has inventory risk was discussed extensively. Committee members appreciated the staff's amendments made to the agenda decision to state that the reseller has inventory risk only after the licences are transferred by the manufacturer to the customer until the customer accepts the inventory. This could address the concern of some respondents to the tentative agenda decision and Committee members who questioned why inventory risk would arise from the wrong pre-contract advice by the reseller and whether a penalty is really considered inventory risk. The amendments make it clear and precise when and what kind of inventory risk arises. Committee members agreed that whether the reseller is a principal would be based on the degree of control of the licences by the reseller and other facts and circumstances which require judgment. Therefore, no conclusion should be given in the agenda decision.

In addition, a number of the Committee members commented on the drafting around the licences being "transferred" to customers by the reseller. This is in light of the reseller not having inventory risk before the licenses are provided to the customer by the manufacturer. Committee members suggested changing the word “transferred” to "issued". All Committee members agreed with this.

Committee decision

The Committee decided, by a unanimous vote, to finalise the tentative agenda decision with some suggested edits.

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