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Principal or agency under IFRS 15

Forums › ACCA Forums › General ACCA Forums › Principal or agency under IFRS 15

  • This topic has 4 replies, 2 voices, and was last updated 8 months ago by RobertLangdon.
Viewing 5 posts - 1 through 5 (of 5 total)
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  • September 11, 2024 at 12:18 pm #711328
    RobertLangdon
    Participant
    • Topics: 5
    • Replies: 4
    • ☆

    Hi everyone, please help me with this case. The entity operates in print on demand industry, it owns the shirt inventory. It implements a website where the seller can advertise our product to the buyer. The seller has the right to set the selling price. Once the buyer orders, the entity prints the image on the shirt and transfers it to the customer. The seller’s net profit is the selling price deducted by the entity’s processing fee and shirt cost.
    I cannot determine whether the entity is a principal or agent under IFRS 15, as the entity owns the legal physical control of inventory, but the right to set prices and seek customers belongs to the seller.

    September 11, 2024 at 12:22 pm #711329
    Kim Smith
    Keymaster
    • Topics: 133
    • Replies: 8293
    • ☆☆☆☆☆

    This is the “general” forum for non-exam specific (more admin-type) queries.

    You need to ask on the FR or SBR tutor or student forum

    September 11, 2024 at 12:25 pm #711330
    RobertLangdon
    Participant
    • Topics: 5
    • Replies: 4
    • ☆

    Thank you for your response but, it doesn’t seem like I will get the answer from the less active forum.

    September 11, 2024 at 5:13 pm #711333
    Kim Smith
    Keymaster
    • Topics: 133
    • Replies: 8293
    • ☆☆☆☆☆

    This is what ChatGPT suggests:
    Under IFRS 15, determining whether an entity is acting as a principal or an agent involves assessing various factors related to control and performance obligations. The key aspects to consider are:

    Control of Goods or Services: IFRS 15 defines a principal as one who controls the specified goods or services before they are transferred to the customer. Control means having the ability to direct the use of and obtain substantially all of the remaining benefits from the goods or services.

    Performance Obligations: The principal is responsible for fulfilling the promise to deliver the goods or services to the customer. An agent, on the other hand, arranges for the goods or services to be provided by another party.

    Let’s break down the specifics of your scenario:

    Ownership of Inventory: The entity owns the physical inventory (shirts). Ownership of inventory can be an indicator of control, as it suggests the entity has the ability to direct the use and obtain benefits from the shirts before they are delivered to the customer.

    Right to Set Prices: The seller (who is the customer of the entity) sets the selling price. This typically indicates that the entity is not in control of the transaction price, which might suggest an agency role. However, the right to set prices alone is not determinative.

    Fulfillment of Performance Obligation: The entity prints the image on the shirt and ships it to the customer. This suggests that the entity is responsible for fulfilling the performance obligation of delivering the customized shirt to the customer.

    Financial Risks and Rewards: The seller earns a profit that is calculated as the selling price minus the entity’s processing fee and shirt cost. The entity assumes financial risk related to the inventory and the production process.

    In summary, based on the information provided:

    The entity owns and controls the physical inventory (shirts).
    The entity is responsible for printing, fulfilling the order, and transferring the shirt to the customer.
    The entity bears the cost of the shirt and the processing fee, and thus assumes financial risk related to the inventory and production.
    Therefore, given that the entity controls the goods before they are transferred to the customer and is responsible for fulfilling the performance obligation, it would generally be considered a principal under IFRS 15. The entity’s role in controlling the inventory and performing the fulfillment activities aligns with the characteristics of a principal rather than an agent.

    September 12, 2024 at 4:41 am #711341
    RobertLangdon
    Participant
    • Topics: 5
    • Replies: 4
    • ☆

    It’s very helpful, thanks for your response!

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