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IAS 18 — Guidance on identifying agency arrangements

Date recorded:

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 Revenue.

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:

  • 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.
  • The entity has inventory risk before or after the customer order, during shipping or on return.
  • The entity has discretion in establishing prices directly or indirectly, such as by providing additional goods or services.
  • 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).

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