Principal versus agent – the ‘dark horse’ in the race to the Revenue TRG
25 July 2014
The IASB and FASB joint transition resource group met for the first time last week to look at potential implementation issues relating to the new revenue standard. My guest blogger Andrea Allocco, Global Accounting Consulting Services director, considers the group's first discussions.
I look forward to hearing your thoughts on the subject.
The IASB and FASB’s new revenue standard IFRS 15 has been out for only two months but application questions have already started to flock in. The Revenue Transition Resource Group (a.k.a. TRG) met for the first time last week to start the debate on these issues. The TRG includes equal representation from both the US and international accounting worlds – although the US side seemed like an army compared to the small gathering at Cannon Street this time around.
So what were the first questions out of the gate? Well, one of them was not surprising. The question of how to apply the ‘exception’ which delays revenue from sales and usage based royalties from licences of intellectual property until the sales or usage occurs was inevitable. Any exception is going to create debate about how widely or narrowly it should be applied. The TRG discussion was not conclusive – and for now, we can only say that it won’t be the end of this debate.
More surprising is that two of the four papers related to the question of principal versus agent. You might be wondering why. Many probably looked at the guidance in IFRS 15, discovered that the indicators for determining if an entity acts as an agent are the same as in current IFRS and quickly decided the accounting would be the same.
What they might not have noticed is that the recognition model itself has changed from a risk and rewards model to one based on control. The question is, does that change anything? One thing clear from the TRG’s discussion is that working out who is principal in transactions other than those involving tangible goods remains challenging. It is challenging today and it will remain so. But the boards knew that. They knew that a control model is hard to apply for services and intangibles. That is why we have pages of guidance on determining when a performance obligation is transferred over time and accounting for licences. So why didn’t they revisit principal versus agent? That is not clear.
Why does it matter? Being an agent can take an entity’s revenue line and reduce it to a mere fraction of its former self. Just look at the US listed entity Group On that went from annual sales of $713m to $313m as a result of restating its 2010 accounts on the basis it is an agent. But did anyone really care? That could be debated, but there is no sign that management, investors and regulators are losing interest in the revenue line.
So why two papers at the TRG? Did the IASB get it wrong? Perhaps the IASB should have simply stated that an entity is principal if it controls the good or service before transfer to the customer. There is already enough guidance in IFRS 15 about evaluating control. But some might argue that the indicators of principal versus agent are still helpful even though the model has changed.
I think that during the next few years, the IASB will often wonder whether we need more guidance. Given that the TRG discussions were inconclusive, more guidance might not be an easy solution and in my view, could create diversity rather than reduce it. We have been living with this judgment for a long time – why not carry on?
What do think?