Key Points
- The principal recognises gross revenue; the agent recognises only its fee or commission as revenue.
- IFRS 15.B37 lists three indicators of control: primary responsibility, inventory risk, and pricing discretion.
- Misclassifying an agent as a principal overstates revenue without changing profit, inflating revenue-based metrics.
- The assessment applies separately to each performance obligation in a contract, not to the contract as a whole.
Side-by-side comparison
| Dimension | Principal | Agent |
|---|---|---|
| Revenue recognised | Gross amount of consideration | Fee, commission, or net margin only |
| Control before transfer | Obtains control of the good or service (or a right to a service) before the customer receives it | Never controls the good or service; arranges the transfer between supplier and customer |
| Inventory risk | Bears the risk of loss, damage, or returns before transfer | No inventory risk; supplier retains risk until customer delivery |
| Pricing discretion | Can set the price charged to the customer | Price is set by the supplier or fixed by the arrangement; agent has limited or no pricing latitude |
| Primary responsibility | Responsible for fulfilling the promise to the customer | Responsible for arranging fulfilment, not for the fulfilment itself |
| Typical examples | Retailer purchasing goods from a manufacturer and reselling them | Online marketplace connecting buyers to independent sellers for a commission |
Decision rule: If the entity obtains control of the specified good or service before that good or service transfers to the customer, the entity is a principal and recognises gross revenue. Otherwise, the entity is an agent.
What is Principal vs Agent?
The classification determines the top line. An entity acting as agent on a €50M transaction stream reports only its 8% commission (€4M) as revenue. If the same entity incorrectly classifies itself as principal, revenue jumps to €50M with no change to gross profit. That inflated top line feeds directly into revenue-based loan covenants, earn-out calculations, and size-category thresholds for statutory audit requirements.
IFRS 15.B35 requires the entity to identify the specified good or service and then assess whether it controls that good or service before transfer. The assessment is not a checklist exercise. IFRS 15.B37 provides indicators (primary responsibility, inventory risk, pricing discretion), but none is individually determinative. The auditor's task under ISA 315.12(f) is to understand how management applied these indicators, particularly for arrangements where the entity performs logistics or billing functions that can look like control without meeting the IFRS 15.33 definition.
Platform businesses and drop-ship arrangements create the highest classification risk. When the entity never takes physical possession, the inventory-risk indicator weakens, and the analysis pivots to whether the entity holds a right to direct the use of the good or service before the customer obtains it.
Worked example: Fernández Distribución S.L.
Client: Spanish wholesale distribution company, FY2025, revenue €34M, IFRS reporter. Fernández operates two business lines: (a) traditional wholesale, purchasing consumer electronics from Asian manufacturers and reselling to Spanish retailers; (b) a recently launched online marketplace connecting European retailers directly with the same manufacturers for a 6% commission on each transaction.
Step 1 — Identify the specified good or service for each line
For the wholesale business, the specified good is the electronic product delivered to the retailer. For the marketplace, the specified good is the same electronic product, but the arrangement is structured differently.
Step 2 — Assess control indicators for the wholesale line
Fernández purchases inventory on 60-day supplier terms, holds it in its Valencia warehouse (average 45 days), and resells at a 22% markup. Fernández bears inventory risk (damage, obsolescence, returns), sets the resale price, and is the contractually responsible seller to the retailer. All three IFRS 15.B37 indicators point to principal status.
Step 3 — Assess control indicators for the marketplace line
Retailers order through Fernández's platform. Fernández transmits the order to the manufacturer, who ships directly to the retailer. Fernández never takes title or physical possession. The manufacturer sets the base price; Fernández adds only its 6% commission. If the product is defective, the manufacturer handles returns. Fernández has no inventory risk, no pricing discretion beyond the commission rate, and no primary fulfilment responsibility.
Step 4 — Quantify the impact
In FY2025, the marketplace processed €8.2M of gross merchandise value. As agent, Fernández recognises €492,000 (6% of €8.2M) in revenue. If Fernández incorrectly classified itself as principal for this line, reported revenue would increase by €7.7M (from €34M to €41.7M) with zero effect on gross profit.
Conclusion: the same entity acts as principal on one business line and agent on another, producing two different revenue recognition treatments for economically similar products. If the auditor failed to assess each line separately, the €7.7M gross-up would distort revenue without any offsetting profit change, misleading users who rely on revenue as a size or growth indicator.
Why it matters in practice
The FRC's 2023/24 thematic review of revenue recognition found that entities with mixed business models (combining resale with marketplace or drop-ship operations) frequently applied a single principal classification to all revenue streams without performing a line-by-line IFRS 15.B34 assessment. The finding appeared most often in technology and distribution sectors.
Teams sometimes treat the IFRS 15.B37 indicators as a scoring exercise (two out of three means principal). IFRS 15.B37 states explicitly that the indicators are not a checklist and that no single indicator is determinative. ISA 500.9 requires the auditor to evaluate whether the evidence obtained (including the indicator analysis) is sufficient to support the classification conclusion for each distinct arrangement.
Related terms
Frequently asked questions
How do I document the principal vs agent assessment in the audit file?
Prepare a separate analysis for each revenue stream where the classification is not obvious. Record which party controls the specified good or service before transfer, assess each IFRS 15.B37 indicator with supporting evidence (contracts, shipping terms, pricing authority), and conclude per stream. IFRS 15.123 requires disclosure of significant judgments affecting revenue timing and amount, and the principal/agent assessment qualifies.
Does the principal vs agent classification affect materiality or the risk assessment?
Yes. Gross revenue drives benchmark-based materiality calculations. If an entity switches from principal to agent (or vice versa), overall materiality recalculated on the restated revenue figure may change by a factor of ten. ISA 320.10 requires the auditor to select an appropriate benchmark, and a misstated top line produces a misstated benchmark.
Can an entity be principal for some performance obligations and agent for others in the same contract?
IFRS 15.B34A confirms that the assessment applies to each specified good or service promised in the contract. A single contract can contain performance obligations where the entity acts as principal and others where it acts as agent. The entity recognises gross revenue for the former and net commission for the latter.