When acting as an agent selling another company's goods, it is generally not appropriate to recognize revenue on a gross basis under the IFRS 5-step revenue recognition model. Instead, revenue should typically be recognized on a net basis, reflecting only the commission or fee earned for the service provided.
Here's a breakdown based on the IFRS 5-step model:
- Identify the contract with a customer: This step confirms a valid contract exists.
- Identify the performance obligations in the contract: When selling another company's goods as an agent, your performance obligation is typically to facilitate the sale and transfer the goods to the end customer. The actual goods are provided by the principal (the owner of the goods).
- Determine the transaction price: The transaction price is the amount of consideration the entity expects to be entitled to in exchange for transferring promised goods or services to a customer. As an agent, you are usually entitled to a commission or fee, not the full sales price of the goods.
- Allocate the transaction price to the performance obligations: If there are multiple performance obligations, the transaction price is allocated. In this scenario, the primary performance obligation is the sale facilitation.
- Recognize revenue when (or as) the entity satisfies a performance obligation: Revenue is recognized when control of the goods or services is transferred to the customer. For an agent, control of the goods typically transfers from the principal to the end customer. The agent's performance obligation is satisfied when the sale is completed and the commission is earned. Therefore, the revenue recognized by the agent should be the commission earned, not the total sales price of the goods.
Key Indicator for Gross vs. Net Revenue Recognition:
The crucial factor in determining whether to recognize revenue on a gross or net basis is whether the entity has control over the goods or services before they are transferred to the customer. If the entity primarily acts as an agent and does not have control over the goods (e.g., does not bear the risks and rewards of ownership, does not set the price, or does not have the primary obligation for fulfillment), then revenue should be recognized on a net basis (commission earned). If the entity has control and is the principal in the transaction, then gross revenue recognition might be appropriate.
