Hi AWE readers,
In the Exposure Draft of Proposed Improvements to FRSs expiring Oct 3, 2008, I wish to share an interesting portion where ASC proposes guidance on determining whether an entity is acting as a principal or as an agent.
What is the big deal?
The clarification of the status of either principal/agent will determine how much of an invoice/contract you would record as your company’s turnover.
Allow me to illustrate
Let assume an IT system integrator has got a contract to deliver the following:-
1. Ten servers and 100 laptops – $3 millions
2. Consultancy service (including set up and integration) – $0.5 million
Upon completion of the contract, how much should the IT company record as its Sales Turnover? It could be just $0.5 million or seven times more ie. $3.5 millions. So which is it?
FRS 18 requires you to determine whether you are acting as a PRINCIPAL or as an AGENT.
ASC is proposing the following for adoption to help you.
When is an entity acting as a PRINCIPAL?
- the entity has the primary responsibility for providing the goods or services to the customer or for fulfilling the order, for example by being responsible for the acceptability of the products or services ordered or purchased by the customer;
- the entity has inventory risk before or after the customer order, during shipping or on return;
- the entity has discretion in establishing prices, either directly or indirectly, for example by providing additional goods or services;
- the entity bears the customer’s credit risk.
When is an entity acting as an AGENT?
- 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 indicating 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.
Source – ED – Proposed Financial Reporting Standard (Oct 3, 2008), ASC