## Learning Outcomes

After reading this article, you will be able to distinguish between principal and agent arrangements under IFRS 15, determine when an entity acts as a principal or agent, explain the correct presentation of revenue, and account for modifications to contracts with customers. You will also be able to apply these concepts to exam-style scenarios and identify common errors tested at ACCA FR.

## ACCA Financial Reporting (FR) Syllabus

For ACCA Financial Reporting (FR), you are required to understand the application of IFRS 15 to determine the correct treatment of complex revenue contracts. This article focuses on:

- Explain and apply the principles of revenue recognition for principal vs agent arrangements
- Identify indicators to distinguish principal and agent under IFRS 15
- Apply the criteria for the recognition of revenue as principal or agent
- Explain the accounting for contract modifications and determine when these should be treated as separate or combined contracts
- Prepare financial statement extracts reflecting principal, agent, and contract modification scenarios

## Test Your Knowledge

_Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, look more closely at that area during your revision._

1. Under IFRS 15, which indicator most strongly suggests that an entity is acting as an agent in a transaction?
   a) The entity has primary responsibility for fulfilling the contract
   b) The entity sets the price of the goods or services
   c) The entity does not have inventory risk
   d) The entity provides after-sales service

2. True or false? When an entity acts as an agent, it should recognise the gross amount received from the customer as revenue.

3. Briefly explain how a contract modification that adds distinct goods or services at their stand-alone selling price should be accounted for under IFRS 15.

4. In a travel agency scenario, what revenue is recorded if the agent collects \$1,000 from a customer on behalf of a tour operator and earns a 12% commission?

## Introduction

Many real-life contracts involve more than just the transfer of goods directly from supplier to customer. Sometimes, companies act as intermediaries—arranging provision of goods or services by another party. In these cases, it becomes important to determine whether the company is acting as a **principal** or an **agent**. This distinction affects not only how much revenue is shown in the statement of profit or loss, but also whether the performance obligations are correctly recognised.

Additionally, contracts with customers are often modified—new goods or services might be added, or terms might be changed after inception. IFRS 15 sets out specific rules for dealing with modifications, to ensure that revenue continues to reflect the economic reality.

Getting these distinctions correct is critical for the FR exam, as misclassifying principal and agent relationships or contract modifications is a common source of error.

> **Key Term: principal**
> An entity that controls the specified goods or services before transferring them to the customer, recognising revenue at the gross amount received from the customer.
> **Key Term: agent**
> An entity that arranges for goods or services to be provided by another party, without obtaining control, and recognises only the amount of fee or commission as revenue.

### Principal Versus Agent—IFRS 15 Criteria

When determining whether an entity is a principal or agent, IFRS 15 requires an assessment of whether the entity **controls** the goods or services before they are transferred to the customer. The essence is: does the company provide the goods or services itself (principal), or does it arrange for another party to provide them (agent)?

Indicators that an entity is a principal:

- Bears the primary responsibility for fulfilling the contract
- Bears inventory risk before or after the customer order
- Has discretion in setting the sales price
- Directs another party to fulfill the contract on its behalf

Indicators that an entity is an agent:

- Does not control the goods or services before transfer
- Earns a fixed fee or a commission
- Does not have inventory risk
- Does not set the price or has limited discretion over it

IFRS 15 requires an entity to apply judgement, considering all facts and circumstances. No single indicator is decisive; the key is whether the entity obtains control of the goods or services before transfer.

### Worked Example 1.1

A mobile phone retailer sells handsets and also recharges for a mobile network. When a customer tops up \$20, the retailer receives \$2 commission from the network provider.

**Question:** How much revenue should the retailer recognise in respect of the recharge sale?

> **Answer:**
> The retailer is an agent for the top-up credit, as it never controls the service. Only the \$2 commission earned should be recognised as revenue—not the gross \$20 received from the end customer.

### Accounting Implications

If acting as **principal**:
Recognise revenue at the gross amount charged to the customer. Cost of sales is separately recorded.

If acting as **agent**:
Recognise only the amount of fee or commission as revenue. Any amounts collected on behalf of the principal are not revenue.

> **Test Tip:**
> Read scenario wording closely. “On behalf of” or “arranges for” are strong hints that agency accounting may be appropriate.

### Worked Example 1.2

QuickBooks Ltd arranges hotel bookings for clients. For each \$800 booking, it collects the payment up front, remits \$700 to the hotel, and keeps \$100 as a service fee.

**Question:** What amount of revenue does QuickBooks Ltd record?

> **Answer:**
> QuickBooks Ltd is an agent, only arranging the service. It does not control the hotel stay. Revenue should be \$100—the fee earned—rather than the \$800 collected.
>
> **Exam Warning:**
> A frequent exam error is to record the total value collected from customers as revenue when only a commission should be recognised, or to fail to adjust cost of sales accordingly.

### Contract Modifications Under IFRS 15

A contract modification is any change in scope or price that changes the parties’ rights and obligations. IFRS 15 provides strict requirements for when a contract modification should be treated as a separate contract or as a continuation of the original contract.

> **Key Term: contract modification**
> A change in the scope or price of a contract that changes the parties’ rights and obligations.

![IFRS 15 contract modification decision process based on distinct goods or services and stand-alone selling price, determining separate, prospective, or catch-up accounting.](https://static.pastpaperhero.com/images/acca-fr-revenue-from-contracts-with-customers-ifrs-15-principal-vs-agent-and-contract-modifications_00.png)

_Contract modification accounting under IFRS 15 is classified by distinctiveness and pricing into separate-contract, prospective, or cumulative catch-up treatment._

- If the contract adds distinct goods/services at their stand-alone selling price:
  Treat as a separate contract, account for the additional items under normal IFRS 15 5-step procedures.

- If the modification does not add distinct goods/services, or pricing is not at stand-alone selling price:
  Combine the old and new contract and adjust revenue recognition using either a cumulative catch-up or a prospective basis, based on the modification details.

### Worked Example 1.3

Ralco Ltd enters a contract to deliver 400 printers at \$150 each. Midway, the customer adds 100 more printers at the current stand-alone price of \$150 per printer.

**Question:** Should Ralco account for the modification as a new contract or adjust the existing one?

> **Answer:**
> Because the added items are both distinct from the original and priced at their stand-alone selling price, account for the 100 extra printers as a new, separate contract.

### Worked Example 1.4

AutoBuild Co agrees to construct a car wash for \$40,000. Construction begins. Afterwards, the customer requests a new entrance driveway, which is not distinct and is priced at a discount.

**Question:** How should AutoBuild account for the contract modification?

> **Answer:**
> As the additional driveway is not distinct and not priced at its stand-alone selling price, AutoBuild must treat the updated contract as a combined contract and adjust revenue on a cumulative catch-up basis.
>
> **Exam Warning:**
> For contract modifications, always check whether the new goods or services are distinct and whether the additional price is at their stand-alone selling price.

### Summary

Under IFRS 15, determining whether an entity acts as a principal or agent is based on control—only the principal recognises gross revenue. Agents record only their commission or fee. For contract modifications, new, distinct goods/services at stand-alone prices are accounted for as separate contracts; otherwise, revenue is adjusted for the combined contract.

## Key Point Checklist

_This article has covered the following key knowledge points:_

- The distinction between principal and agent under IFRS 15 depends on control before transfer to the customer
- Principals recognise gross revenue; agents recognise only their commission or fee
- Judgement is needed based on all facts and circumstances—no single indicator is decisive
- Contract modifications are accounted for as separate contracts only if new goods/services are distinct and priced at stand-alone value; otherwise, adjustment to prior revenue is required
- Present only the revenue that accurately reflects the entity’s relationship with the customer

## Key Terms and Concepts

- principal
- agent
- contract modification


Revenue from contracts with customers (IFRS 15) - Principal vs agent and contract modifications