When examining revenue, it isn’t always obvious whether the business is a principal or an agent. This difference is important as if a business is a principal, it needs to recognise revenue on a gross basis and if it is an agent, it needs to recognise revenue on a net basis. This article gives clear definitions and shows how to determine principals and agents, followed by some practical complexities and real life case studies.

Definitions of a principal and an agent

According to the guidance provided by IASB (International Accounting Standards Board), a principal is an entity which controls the specified good or service before it is transferred to the customer.

How to assess whether the entity controls the specified good or service?

In paragraph B34 – B 38, per IFRS 15 Revenue from Contracts with Customers, there are some indicators to assess whether the entity is a principal.

· Indicator one: the entity is primarily responsible for fulfilling the contract, for instance, the entity is primarily responsible in making the products.

· Indicator two: the entity bears inventory risk both before and after the goods have been ordered by a customer, for instance, a car dealer may have the right to return the unsold cars back to the car manufacturer and in this case, the car manufacturer bears the inventory risk.

· Indicator three: the entity has discretion to establish prices and receives benefit. However, in some industries, the entity may not have the absolute right to determine the selling price. For example, book publisher has its freedom to determine the selling price for each book, however, the bookstore or retailer also has the right to cap the selling price or to discount those books if they are not popular.

· Indicator four: the consideration received is not in the form of a commission. For instance, a restaurant in a large cruise may offer attractive coupons to customers and cruise company can buy those coupons in advance at a low price and resell them to customers at a higher price. Even though, in this case the cruise company may receive a commission from the restaurant for each coupon used by its customer, the cruise company also earns income with gains from selling those coupons.

· Indicator five: the entity has exposure to credit risk for the amount receivable from a customer. However, in retail industries, we do not normally focus on this criteria since customers are often required to pay in advance before they can get goods or services.

An entity is a principal even though not all the above indicators are fully met.

Accounting treatment

To simplify the idea, let’s say company A is a book publishing company the selling price for each book is $10 to the company B which is a book retailer business. Company B will then need to sell each book to the end customer at $15.

If company B is a principal and this means it controls the books before they are transferred to customers, the accounting journals would be to recognise the gross revenue and the associated acquisition costs paid to company A.

Step 1: recognise gross revenue

Dr Bank $15

Cr Sales revenue $15

Step 2: Recognise acquisition costs:

Dr Costs of sales $10

Cr Inventories $10

If company B is an agent, it can only recognise the net revenue as follows:

Dr Bank $15

Cr Trade payables $10

Cr Revenue $5

Real companies

  1. Uber

Uber is a high-tech car platform offering a network of independent taxi drivers who use their platform. Customers use an app to pre-order pick-up. Uber sets the fares and receive a share of fees from each hailing service. It currently recognises revenue on a net basis since it mainly receives commission from each taxi driver although there are lots of arguments that it should change to gross basis as it controls the service such as setting the fare before it is delivered to customers.

  1. Napster

Napster provides music downloading services to users and pays artists based on the number of song plays. It currently recognises revenue on a gross basis because it regards itself as a principal in most transactions, although we could argue songs from most artists can also be found on other sources and therefore, they are not unique to Napster. However, users may primarily rely on playlists recommended by Napster and therefore, it is reasonable to be a principal in this case.

  1. Tencent Holdings Limited

Tencent provides live broadcast, video streaming subscription and online games to users. It recognises revenue on a gross basis as it has freedoms to set prices and it is primarily responsible for delivering those services to customers.

  1. Groupon

Groupon is an e-commerce website allowing subscribers to purchase products or services online. It currently reports the direct sales on a gross basis as it is primarily responsible for fulfilling the contract and therefore, it also includes costs of inventory and shipping. Third party revenue such as the sales of flight ticket is reported on a net basis as it is not primarily responsible for fulling the contract.

  1. Google Apps - in apps purchases through Google Play store

It currently reports revenue from in apps purchases through Google Play store on a net basis because Google only provides a platform enabling developers to develop applications and earns a commission income based on that.


The net profits impact would be the same regardless of whether the entity is a principal or an agent. Often, ratios such as asset turnover and profit margins would tend to be higher for the entity if it is an agent rather than a principal. However, the total revenue would tend to be lower instead. Different policies will also affect the key performance indicators in the business and therefore, the bonuses paid to management.

The article link can be found here on the ACCA's website:


Banker’s acceptances with more than three months’ maturity are at risk of changes in value

Steve Chen ACCA is a freelance accounting consultant

As an IFRS Standards consultant, I was asked by a client – a finance director of a Germany company complying with IFRS – whether it was possible to reclassify a banker’s acceptance (BA) with a maturity date of less than three months from the end of the reporting period, from other receivables into cash equivalents. The BAs have an original six-month maturity date from the acquisition.

Looking at the definition of cash equivalents in IAS 7, Statement of Cash Flows, the quick answer is no. But let’s examine the definition of cash equivalents again: ‘Cash equivalents are short-term, highly liquid investments that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value’ (IAS 7, paragraph 6).
The definition seems scary because we often interpret cash equivalents as short-term government bonds. However, in terms of other marketable securities, judgment needs to be applied.

Let’s look at the three key elements in the definition in turn.

Short-term, highly liquid
The standard suggests a short maturity would be three months or less from the acquisition date. So, to qualify as cash equivalents, BAs should have a three-month or less maturity period from the acquisition date, not the reporting date.

After my client was informed of this requirement, she replied that, to meet this requirement, the company has the policy of negotiating BAs with longer maturity in the secondary market, usually with 5% off their face value. According to their experience, BAs with longer maturity periods were usually redeemed within a month if they were sold at such a discount, ie they are highly liquid.

This makes sense, but to convert BAs with longer maturity into cash equivalents, risks of changes in value should also be considered. This leads us to the next element.

Banker’s acceptances should have a three-month or less maturity period from acquisition date not reporting date

Changes in value
To redeem a longer maturity date, BAs with a larger discount would mean that there is an increased risk of changes in value. In other words, if the company wants to redeem BAs into cash, discounts must be offered with less cash being received. This requirement is not therefore met.

Another example is when the price of equity shares fluctuates a lot and these shares are highly liquid, ie equity shares can be redeemed into cash whenever an investor wants to. However, the investor bears the significant risk of changes in share price.

Readily convertible
‘Readily’ usually means without delay and easily. BAs are usually guaranteed by the banks, which are generally considered to be risk-free. As such, an active market usually exists for BAs. But be careful, as they still bear a risk because smaller commercial banks could go bankrupt. BAs generally meet the third requirement.

So, in summary, BAs held by my client should not be reclassified from other receivables to cash equivalents because they did not have three months or less maturity date from acquisition and also suffered from significant risk of changes in value. Although these are readily convertible to known amounts of cash, all criteria must be met for cash equivalents to be recognised in the account.

In terms of disclosure, companies usually need to disclose the policy of the judgment they applied in defining cash equivalents in the disclosure note. Here is an example from the Bank of England’s annual report:

For the purposes of the statement of cashflows, cash and cash equivalents comprise balances with less than three months’ maturity from the date of acquisition, consisting of cash and balances with other central banks, loans and advances to banks and other financial institutions, amounts due from banks and short‑term government securities.
Cash and cash equivalents held by the subsidiary may not be available for use by the group entity, particularly for those subsidiaries operating in countries with exchange control. This also needs to be disclosed in the note.

The IFRS Interpretations Committee believes that the standard is clear when the three-month criterion is applied by various entities when classifying cash equivalents. However, some complex financial instruments, such as investments in open-ended funds, may still be qualified as cash equivalents if the substance meets the principles in the standard.

This is Steve Chen, Fellow member of ACCA and today, I want to share with you the top tip of how to pass ACCA AFM Paper.

AFM paper is tough but adorable as it really mixes all strategic issues with practical financial management applications into exam questions. The syllabus looks quite scary but exam questions are not.

Here are the steps you can follow to pass this paper easily:

  1. Make sure you cover the ACCA AFM syllabus - things not on the syllabus such as working capital management - spend less time but just remind yourself of what is working capital - this is enough.
  2. Practise all published ACCA AFM past exam questions
  3. To be honest, I do not think technical articles are quite helpful in this exam, so if you do not have much time to prepare for the paper, you can skip all those technical articles.
  4. Read the examiners report - vital to this paper
  5. Please do make sure you are aware there are about 50 marks for WORDS/Comments - Please make sure you do not simply focus on calculation, but also focus more on comments.

If you follow the above steps, I am sure you will find this paper easier to pass.

In 2017, one of my students Martin Valent has won the first prize in AFM in Slovakia

This is Steve Chen, FCCA. Recently I got a question from my student who is a financial manager in a large retail business.

The question is, can we apply the concept of 'recoverable amount' when determining whether inventories are impaired?

The quick answer is no as the recoverable amount is the concept in IAS 36 Impairment of assets - specifically to non-current assets rather than inventories. Inventories impairment should be accounted for under IAS 2 Inventories by applying the concept of net realisable value.

However, the NRV concept is different from the fair value per IFRS 13 Fair Value Measurement - as NRV would be based on the value/input from management (largely level three input per IFRS 13) whereas IFRS 13 requires level 1 and 2 input to be used before the level 3 input.

My name is Steve Chen, and I am the course director at APC and I am also a fellow ACCA member.

I am sure you are aware the 10-year US government bond yield has increased by 4 basis point to 1.61%. This means we may be confident about the long term economic health but at the same time, it has inflation pressure on costs in the goods and services.

Please note that yield curve is quite important to financial manager - one of the vital points in the ACCA exam. Some financial managers would even use different financial strategies, for example, by borrowing in the short term when yield is low and to invest the sum to the long term investment projects - however, this creates higher risks to the business.