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customer contract, to fulfil another customer contract, to service its own facilities).
Furthermore, the customer in Example 28.23 is indifferent as to who carries out the
office maintenance services. This is not the case in Example 28.24, in which the
customer wants the ticket reseller to sell one of its tickets on a specific flight.
If a contract with a customer includes more than one specified good or service, IFRS 15
clarifies that an entity may be a principal for some specified goods or services and an agent
for others. [IFRS 15.B34]. Example 28.26 at 5.4.4 below provides an illustration of this.
As discussed above, appropriately identifying the specified good or service to be provided
to the customer is a critical step in identifying whether the nature of an entity’s promise is
to act as a principal or an agent. Entities need to carefully examine their contract terms
and may need to apply significant judgement to determine whether the specified good or
service is the underlying good or service or a right to obtain that good or service.
5.4.2
Control of the specified good or service
In accordance with paragraph B34A of IFRS 15, the second step in determining the
nature of the entity’s promise (i.e. whether it is to provide the specified goods or services
or to arrange for those goods or services to be provided by another party) is for the
entity to determine whether the entity controls the specified good or service before it
is transferred to the customer. An entity cannot provide the specified good or service
to a customer (and, therefore, be a principal) unless it controls that good or service prior
to its transfer. That is, as the Board noted in the Basis for Conclusions, control is the
determining factor when assessing whether an entity is a principal or an agent.
[IFRS 15.BC385S].
In assessing whether an entity controls the specified good or service prior to transfer to
the customer, paragraph B34A(b) of IFRS 15 requires the entity to consider the
definition of control that is included in Step 5 of the model, in accordance with
paragraph 33 of IFRS 15 (discussed further at 8 below). [IFRS 15.B34A(b)].
If, after evaluating the requirement in paragraph 33 of IFRS 15, an entity concludes that
it controls the specified good or service before it is transferred to the customer, the
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entity is a principal in the transaction. If the entity does not control that good or service
before transfer to the customer, it is an agent.
Stakeholder feedback indicated that the control principle was easier to apply to tangible
goods than to intangible goods or services because intangible goods or services generally
exist only at the moment they are delivered. To address this concern, the standard
includes application guidance on how the control principle applies to certain types of
arrangements (including service transactions) by explaining what a principal controls
before the specified good or service is transferred to the customer. Specifically, the
standard states that ‘[w]hen another party is involved in providing goods or services to
a customer, an entity that is a principal obtains control of any one of the following:
(a) a good or another asset from the other party that it then transfers to the customer.
(b) a right to a service to be performed by the other party, which gives the entity the
ability to direct that party to provide the service to the customer on the entity’s behalf.
(c) a good or service from the other party that it then combines with other goods or
services in providing the specified good or service to the customer. For example,
if an entity provides a significant service of integrating goods or services (see
paragraph 29(a)) provided by another party into the specified good or service for
which the customer has contracted, the entity controls the specified good or
service before that good or service is transferred to the customer. This is because
the entity first obtains control of the inputs to the specified good or service (which
includes goods or services from other parties) and directs their use to create the
combined output that is the specified good or service.’ [IFRS 15.B35A].
In the Basis for Conclusions, the Board observed that an entity can control a service to
be provided by another party when it controls the right to the specified service that will
be provided to the customer. [IFRS 15.BC385U]. Generally, the entity then either transfers
the right (in the form of an asset, such as a ticket) to its customer, in accordance with
paragraph B35A(a) of IFRS 15 (as in Example 28.24 at 5.4.4 below involving the airline
ticket reseller that is discussed at 5.4.1 above), or use its right to direct the other party to
provide the specified service to the customer on the entity’s behalf, in accordance with
paragraph B35A(b) of IFRS 15 (as in Example 28.23 at 5.4.4 below involving the office
maintenance services that is discussed at 5.4.1 above).
The condition described in paragraph B35A(a) of IFRS 15 includes contracts in which an
entity transfers to the customer a right to a future service to be provided by another
party. If the specified good or service is a right to a good or service to be provided by
another party, the entity evaluates whether it controls the right to the goods or services
before that right is transferred to the customer (rather than whether it controls the
underlying goods or services). In the Basis for Conclusions, the Board noted that, in
assessing such rights, it is often relevant to assess whether the right is created only when
it is obtained by the customer or whether the right exists before the customer obtains
it. If the right does not exist before the customer obtains it, an entity would not be able
to control right before it is transferred to the customer. [IFRS 15.BC385O].
The standard includes two examples to illustrate this point. In Example 28.24 (discussed
at 5.4.1 above and included at 5.4.4 below) involving an airline ticket reseller, the
specified good or service is determined to be the right to fly on a specified flight (in the
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form of a ticket). One of the determining factors for the principal-agent evaluation in
this example is that the entity pre-purchases the airline tickets before a specific
customer is identified. Accordingly, the right existed prior to a customer obtaining it.
The example concludes that the entity controls the right before it is transferred to the
customer (and is, therefore, a principal).
In Example 28.25 (included at 5.4.4 below), an entity sells vouchers that entitle
customers to future meals at specified restaurants selected by the customer. The
specified good or service is determined to be the right to a meal (in the form of a
voucher). One of the determining factors for the principal-agent evaluation is that the
entity does not control the voucher (the right to a meal) at any time. It does not pre-
purchase or commit itself to purchase the vouchers from the restaurants before they are
sold to a customer. Instead, the entity waits to purchase the voucher until a customer
requests a voucher for a particular restaurant. In addition, vouchers are created only at
the time that they are transferred to a customer and do not exist before th
at transfer.
Accordingly, the right does not exist before the customer obtains it. Therefore, the
entity does not at any time have the ability to direct the use of the vouchers or obtain
substantially all of the remaining benefits from the vouchers before they are transferred
to customers. The example concludes that the entity does not control the right before
it is transferred to the customer (and is, therefore, an agent).
In the Basis for Conclusions, the IASB acknowledged that determining whether an entity
is a principal or an agent may be more difficult when evaluating whether a contract falls
under paragraph B35A(b) of IFRS 15. That is, it may be difficult to determine whether
an entity has the ability to direct another party to provide the service on its behalf (and
is, therefore, a principal) or is only arranging for the other party to provide the service
(and is, therefore, an agent). As depicted in Example 28.23 (as discussed at 5.4.1 above
and included at 5.4.4 below), an entity could control the right to the specified service
and be a principal by entering into a contract with the subcontractor in which the entity
defines the scope of service to be performed by the subcontractor on its behalf. This
situation is equivalent to the entity fulfilling the contract using its own resources.
Furthermore, the entity remains responsible for the satisfactory provision of the
specified service in accordance with the contract with the customer. In contrast, when
the specified service is provided by another party and the entity does not have the
ability to direct those services, the entity typically is an agent because the entity is
facilitating, rather than controlling the rights to, the service. [IFRS 15.BC385V].
In accordance with paragraph B35A(c) of IFRS 15, if an entity provides a significant
service of integrating two or more goods or services into a combined item that is the
specified good or service the customer contracted to receive, the entity controls that
specified good or service before it is transferred to the customer. This is because the
entity first obtains control of the inputs to the specified good or service (which can
include goods or services from other parties) and directs their use to create the
combined item that is the specified good or service. The inputs would be a fulfilment
cost to the entity. However, as noted by the Board in the Basis for Conclusions, if a third
party provides the significant integration service, the entity’s customer for its good or
services (which would be inputs to the specified good or service) is likely to be the third
party. [IFRS 15.BC385R].
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5.4.2.A Principal
indicators
After considering the application guidance discussed above, it still may not be clear
whether an entity controls the specified good or service. Therefore, the standard
provides three indicators of when an entity controls the specified good or service (and
is, therefore, a principal):
‘Indicators that an entity controls the specified good or service before it is transferred
to the customer (and is therefore a principal (see paragraph B35)) include, but are not
limited to, the following:
(a) the entity is primarily responsible for fulfilling the promise to provide the specified
good or service. This typically includes responsibility for the acceptability of the
specified good or service (for example, primary responsibility for the good or
service meeting customer specifications). If the entity is primarily responsible for
fulfilling the promise to provide the specified good or service, this may indicate
that the other party involved in providing the specified good or service is acting on
the entity’s behalf.
(b) the entity has inventory risk before the specified good or service has been
transferred to a customer or after transfer of control to the customer (for example,
if the customer has a right of return). For example, if the entity obtains, or commits
itself to obtain, the specified good or service before obtaining a contract with a
customer, that may indicate that the entity has the ability to direct the use of, and
obtain substantially all of the remaining benefits from, the good or service before
it is transferred to the customer.
(c) the entity has discretion in establishing the price for the specified good or service.
Establishing the price that the customer pays for the specified good or service may
indicate that the entity has the ability to direct the use of that good or service and
obtain substantially all of the remaining benefits. However, an agent can have
discretion in establishing prices in some cases. For example, an agent may have
some flexibility in setting prices in order to generate additional revenue from its
service of arranging for goods or services to be provided by other parties to
customers.’ [IFRS 15.B37].
The above indicators are meant to support an entity’s assessment of control, not to
replace it. Each indicator explains how it supports the assessment of control. As
emphasised in the Basis for Conclusions, the indicators do not override the assessment
of control, should not be viewed in isolation and do not constitute a separate or
additional evaluation. Furthermore, they should not be considered a checklist of criteria
to be met or factors to be considered in all scenarios. Paragraph B37A of IFRS 15 notes
that considering one or more of the indicators will often be helpful and, depending on
the facts and circumstances, individual indicators will be more or less relevant or
persuasive to the assessment of control. [IFRS 15.B37A, BC385H]. If an entity reaches
different conclusions about whether it controls the specified good or service by
applying the standard’s definition of control versus the principal indicators, the entity
should re-evaluate its assessment, considering the facts and circumstances of its
contract. This is because an entity’s conclusions about control and the principal
indicators should align.
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The first indicator that an entity is a principal, in paragraph B37(a) of IFRS 15, is that the
entity is primarily responsible for both fulfilling the promise to provide the specified
good or service to the customer and for the acceptability of the specified good or
service. We believe that one of the reasons that this indicator supports the assessment
of control of the specified good or service is because an entity generally controls a
specified good or service that it is responsible for transferring control to a customer.
The terms of the contract and representations (written or otherwise) made by an entity
during marketing generally provide evidence of which party is responsible for fulfilling
the promise to provide the specified good or service and for the acceptability of that
good or service.
It is possible that one entity may not be solely responsible for both providing the
specified good or service and for the acceptability of that same good or service. For
example, a reseller may sell goods or services that are provided to the customer by a
supplier. However, if the customer is dissatisfied with the goods or services it receives,
the reseller may be solely responsible fo
r providing a remedy to the customer. The
reseller may promote such a role during the marketing process or may agree to such a
role as claims arise in order to maintain its relationship with its customer. In this
situation, both the reseller and the supplier possess characteristics of this indicator.
Therefore, other indicators likely need to be considered to determine which entity is
the principal. However, if the reseller is responsible for providing a remedy to a
dissatisfied customer, but can then pursue a claim against the supplier to recoup any
remedies it provides, that may indicate that the reseller is not ultimately responsible for
the acceptability of the specified good or service.
The second indicator that an entity is a principal, in paragraph B37(b) of IFRS 15, is that
the entity has inventory risk (before the specified good or service is transferred to the
customer or upon customer return). Inventory risk is the risk normally taken by an entity
that acquires inventory in the hope of reselling it at a profit. Inventory risk exists if a
reseller obtains (or commits to obtain) the specified good or service before it is ordered
by a customer. Inventory risk also exists if a customer has a right of return and the
reseller will take back the specified good service if the customer exercises that right.
This indicator supports the assessment of control of the specified good or service
because when an entity obtains (or commits to obtain) the specified good or service
before it has contracted with a customer, it likely has the ability to direct the use of and
obtain substantially all of the remaining benefits from the good or service. For example,
inventory risk can exist in a customer arrangement involving the provision of services
if an entity is obligated to compensate the individual service provider(s) for work
performed, regardless of whether the customer accepts that work. However, this
indicator often does not apply to intangible goods or services.
Factors may exist that mitigate a reseller’s inventory risk. For example, a reseller’s
inventory risk may be significantly reduced or eliminated if it has the right to return to
the supplier goods it cannot sell or goods that are returned by customers. Another