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Financial Reporting · Revenue

Principal vs Agent under IFRS 15 for ACCA FR

Updated 11 October 2026 · Fact-checked

An entity is a principal if it controls the good or service before it passes to the customer. It reports revenue gross, at the price the customer pays. An agent only arranges for another party to provide the goods or service. It reports revenue net, as its fee or commission.

Understand Principal versus Agent

Some businesses sell things they do not really supply. A travel website sells hotel rooms. An online marketplace sells goods made by others. The question is whether the business is the seller, or only a go-between. IFRS 15 calls the seller a principal and the go-between an agent.

The test is control. Before the good or service reaches the customer, does your entity control it? Control means you can direct its use and obtain substantially all of the remaining benefits. If you do, you are the principal. Your performance obligation is to provide the item itself, so you recognise revenue for the full amount the customer pays, and you record the amount paid to the supplier as a cost of sales.

If you do not control the item, you are an agent. Your performance obligation is to arrange for another party to provide it. Your revenue is only the fee or commission you keep. The amount collected on behalf of the other party is not your revenue. It is a liability to that party.

IFRS 15 gives indicators that suggest control. They are not a checklist and no single one decides the answer. The main ones are: you are primarily responsible for fulfilling the promise to the customer, you carry inventory risk before or after the customer order, and you have discretion in setting the price. Other facts in the scenario matter too, so weigh them all.

The effect is large. Gross and net treatments give the same profit, but very different revenue. Revenue is a key figure for margins and growth ratios, so getting this right matters.

Key rules to remember

Principal test
Controls the good or service before transfer to customer → principal → revenue = gross price to customer
Cost paid to the supplier goes to cost of sales. Gross profit equals the margin earned.
Agent test
Arranges for another party to provide → agent → revenue = commission or fee only
Amount owed to the supplier is a liability, not revenue or cost of sales.
Agent commission
Commission = Customer price − Amount payable to principal
Or a stated percentage of the price. Check which the question gives.
Indicators of principal
Primary responsibility + inventory risk + pricing discretion
These are indicators of control, not a mechanical checklist. Judge the whole scenario.

How to solve Principal versus Agent questions

Use this order for any principal versus agent question. It works for written answers and objective tests.

  1. 1Identify the three parties: the entity, the customer and the supplier of the goods or service.
  2. 2Ask what the customer is promised. Is it the item itself, or arranging for someone else to supply it?
  3. 3Test control before transfer. Look at primary responsibility, inventory risk and price discretion.
  4. 4Decide: principal (gross) or agent (net). State the reason in one sentence.
  5. 5Calculate revenue. Principal: the full price from the customer. Agent: the commission only.
  6. 6Calculate related costs. Principal: the supplier cost goes to cost of sales. Agent: no cost of sales for the item.
  7. 7Check the statement of financial position. An agent owes the supplier any cash it holds for them.
  8. 8Write the journal or the extract, and state the profit is the same either way.

Quickest way: Three-question control check

When to use it: Use in Section A and Section B objective questions where you have about three minutes per question.

  1. Who is responsible to the customer if the item is faulty or late? If the entity, lean principal.
  2. Does the entity hold inventory risk, or can it return unsold items to the supplier at no cost? Own risk leans principal; free return leans agent.
  3. Does the entity set the selling price freely? Yes leans principal; a fixed price or fixed percentage leans agent.
  4. Two or three yes answers: principal, gross. Mostly no: agent, net. Then compute the figure asked.

Common mistakes in Principal versus Agent

  • Treating the entity as a principal just because it invoices the customer and receives the cash.

    Collecting the cash feels like making the sale.

    Fix: Billing is not control. Ask who controls the item before transfer and who is responsible for fulfilment.

  • Recognising the full customer price as revenue for an agent.

    Students copy the sales figure from the question without testing the role.

    Fix: For an agent, revenue is the commission only. The rest is owed to the principal.

  • Using only one indicator, such as pricing, to decide.

    Students memorise the indicators as a checklist.

    Fix: Weigh all facts given. Control is the test. The indicators only support it.

  • Showing the amount owed to the supplier as an expense by an agent.

    Students treat it like a cost of sales.

    Fix: Credit a payable to the supplier. Only the commission goes to profit or loss.

  • Thinking the net treatment lowers profit.

    Revenue falls sharply, so profit seems to fall.

    Fix: Profit is the same under either treatment. Only revenue and cost of sales change.

  • Calculating commission on the wrong base.

    Students apply the percentage to the cost rather than the selling price.

    Fix: Read whether the percentage applies to the customer price or to the amount remitted, and apply it to the stated base.

Worked examples

Example 1

Zeta operates an online travel site. In the year it sold hotel rooms to customers for ₹80,00,000. Hotels set the room prices and are responsible for the stay. Zeta keeps 12% of the price as its fee and pays the rest to the hotels. Zeta never holds rooms as inventory. Determine the revenue and the amount payable to hotels.

Show the solution
  1. Hotels set the price, carry the responsibility for the stay and bear the inventory risk. Zeta does not control the rooms before transfer.
  2. Zeta is an agent. Revenue is its commission only.
  3. Commission = 12% × ₹80,00,000 = ₹9,60,000.
  4. Amount payable to hotels = ₹80,00,000 − ₹9,60,000 = ₹70,40,000.
  5. Cost of sales for the rooms is nil in Zeta's books.

Answer: Revenue is ₹9,60,000. ₹70,40,000 is a liability to the hotels, not revenue or cost.

Example 2

Brava buys furniture from makers and sells it from its own showroom. It sets its own prices, bears the loss on unsold items and handles customer complaints. In the year it sold items for ₹50,00,000 that cost it ₹35,00,000. Explain the treatment and give revenue, cost of sales and gross profit.

Show the solution
  1. Brava buys the items and bears inventory risk, so it controls them before transfer.
  2. It sets prices and is primarily responsible to customers. These indicators support control.
  3. Brava is a principal, so it recognises revenue gross.
  4. Revenue = ₹50,00,000.
  5. Cost of sales = ₹35,00,000.
  6. Gross profit = ₹50,00,000 − ₹35,00,000 = ₹15,00,000.

Answer: Brava is a principal: revenue ₹50,00,000, cost of sales ₹35,00,000, gross profit ₹15,00,000.

Exam tips

  • Always state the role and the reason in a sentence before calculating. Marks go for the judgement.
  • Quote the facts from the scenario, such as who sets the price or holds inventory. Do not just list the indicators.
  • In objective questions, find the figure asked for: revenue, cost of sales, commission or amount payable. They are all different.
  • Remember that profit is the same either way. Use this to check your answer.
  • Watch for scenarios with more than one performance obligation. An entity may be principal for one item and agent for another.

Practice questions from Revenue

Principal versus Agent in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Principal versus Agent: frequently asked questions

How do I know if I am a principal or an agent under IFRS 15?

Ask whether you control the good or service before it is transferred to the customer. If you do, you are a principal. If you only arrange for another party to provide it, you are an agent.

Does being an agent change profit?

No. Profit is the same under both treatments. An agent reports lower revenue and no cost of sales for the item, but the commission it earns equals the gross margin a principal would show.

Is inventory risk the deciding factor?

No. Inventory risk, primary responsibility and pricing discretion are indicators of control. None decides the answer alone, so you must weigh all the facts in the scenario.

How is principal versus agent examined in ACCA FR?

It appears in objective test questions and in the revenue part of constructed response questions. You may be asked to classify the entity, calculate revenue, or explain the treatment in writing.