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5 Other considerations: principal versus agent,
costs
Publication date: 16 Dec 2022
GX Revenue Recognition : An IFRS 15 Guide for Software and SaaS sellers
5.1 Which party is the entity’s customer for sales of its software
product through the online marketplace?
Reference to standard: IFRS 15 App B para B37
Reference to standing text: 11.271
Industry: Software
Entity A sells its software product offering through multiple channels, including an online marketplace owned and operated
by entity B, an unrelated party. In arrangements with entity B, end consumers initiate a purchase of entity A’s product
through the online marketplace and are prompted to sign an agreement directly with entity A. Entity A determines the
selling price paid by the end consumer, which is collected by entity B and remitted to entity A less a 20% fee for use of the
marketplace. Entity A provides all customer service related to the use of its software product, while entity B provides
customer service for use of the online marketplace.
Question
Which party is entity A’s customer for sales of its software product through the online marketplace?
Answer
Entity A’s customer for sales through the online marketplace is the end consumer because entity B does not obtain control
of the software product and is therefore an agent providing services to entity A. Entity A should recognise revenue equal to
the price paid by end consumers and an expense for the amount retained by entity B.
The specified good or service provided to the end consumer is the software product. Entity B does not obtain control of
the software product before it is transferred to the end consumer; therefore, entity B is an agent arranging for entity A’s
sales to end consumers. This conclusion is supported by the following indicators of control:
Entity B is only responsible for its online marketplace and is not primarily
responsible for providing the software product to the end consumer. Also given
that the end consumers are prompted to sign an agreement directly with entity A,
end consumers will perceive entity A as the seller of the software product and not
entity B.
Entity B does not have inventory risk related to the software product.
Entity B does not have discretion in establishing the selling price of the
software product.
5.2 How to determine when software is sold through an intermediary
with an obligation for PCS?
Reference to standard: IFRS 15 para B37
Reference to standing text: 11.271
Industry: Software
Question
When software is sold through an intermediary, but the software vendor has an obligation to the end consumer to provide
PCS, is the end consumer the software vendor’s customer for PCS?
Answer
When an intermediary (for example, a reseller) is involved in transferring goods or services to an end consumer, a vendor
will need to assess whether the intermediary or the end consumer is the vendor’s customer.
Each distinct good or service in the arrangement should be assessed separately.
Accordingly, if the software and PCS are distinct, the vendor should determine which party is its customer separately for
the promises to licence software and provide PCS.
It is possible that a vendor could conclude the intermediary is the vendor’s customer for the software licence, but the end
consumer is the vendor’s customer for PCS. However, the conclusion will depend on the specific facts and circumstances
of the arrangement.
5.3 If a vendor distributes its software or SaaS offering through an
intermediary, is the reseller or the end consumer the vendor’s
customer?
Reference to standard: IFRS 15 para B37
Reference to standing text: 11.271
Industry: Software
It is commonplace in the software industry for vendors to distribute software or SaaS through a reseller (intermediary).
From the vendor's perspective, they must assess whether the intermediary or the end customer is the vendor’s customer:
If the intermediary is the vendor’s customer, the vendor will recognise as revenue
the amount it receives from the intermediary.
If the end consumer is the vendor’s customer, the vendor will recognise the price
paid by the end consumer as revenue, with an expense recognised for the
amount retained by the intermediary.
This assessment is also relevant to the intermediary, as the intermediary must assess whether they are principal or agent
in transferring the goods or services to the end customer:
If the intermediary is principal in transferring the goods or services to the end
customer, the intermediary will recognise revenue at the gross amount paid by
the end customer.
If the intermediary is an agent in transferring the goods or services to the end
customer, it will recognise a net amount in revenue, being the commission they
receive.
Therefore the assessment of principal versus agent is relevant to both the vendor and the intermediary. The guidance
below has been drafted from the vendor’s perspective, but the same indicators can be used to make the assessment from
the intermediary's perspective. In May 2022, IFRS IC issued an agenda decision considering the principal versus agent
assessment for a software reseller and the guidance below incorporates the key principles of this agenda decision.
Question
If a vendor distributes its software or SaaS offering through a reseller or digital marketplace (that is, an intermediary), is the
reseller or the end consumer the vendor’s customer?
Answer
The principal versus agent assessment is a two-step process.
The first step is to identify the specified good or service to be provided to the end consumer. It is common in this industry
for intermediaries to provide pre-sales advice to the customer (for example, advising them on which SaaS products to
purchase). As this advice takes place prior to a contract with a customer for the sale of SaaS being in place, it is not
considered as part of the assessment of whether the intermediary is acting as principal in the arrangement between the
intermediary and the vendor to deliver SaaS to the end customer.
The second step is to assess whether the intermediary controls the specified good or service before it is transferred to the
end consumer. The intermediary (for example, a reseller or digital marketplace) is the principal in the arrangement with the
end consumer (and therefore, the vendor’s customer) if it controls the software or SaaS offering before it is transferred to
the end consumer. The principal versus agent assessment should be performed separately for each specified (distinct)
good and service in a contract.
The assessment of whether the intermediary takes control of software or a SaaS offering is based on the definition of
control in paragraph 33 of IFRS 15 and the explanation of how an entity obtains control outlined in paragraph B35A of
IFRS 15. If additional evidence is needed to reach a conclusion, the vendor should evaluate the three indicators in
paragraph B37 of IFRS 15.
Examples of evidence that the intermediary controls the software or SaaS could include:
1. Primary responsibility for fulfilment
Contractual terms and other communications (for example, marketing
materials, website FAQs) indicate that the intermediary is responsible for
providing the software or the SaaS.
The vendor does not have the right to refuse an arrangement with an end
consumer (or the right is only protective in nature).
The vendor does not have a contractual relationship with the end
consumer and/or has little to no interaction with the end consumer, with
the intermediary being the party that engages with the customer before,
after and as the software or SaaS is transferred to the customer. In many
arrangements, the vendor will at a minimum have an end user agreement
with the customer setting out the terms of the licence. Therefore, in
assessing this indicator, the vendor should consider the substance of this
agreement and in particular, whether it is indicative of control passing
directly from the vendor to the customer or for example just provides
information on using the licence.
The intermediary (a) has the ability to redirect the vendor to fulfil a
different end consumer contract and/or (b) can prevent the vendor from
providing software or SaaS services to a specific end consumer.
The intermediary is primarily responsible for customer service issues,
including resolving complaints.
The intermediary provides service level agreements (SLA) or similar
guarantees to the end consumer.
2. Inventory risk
The intermediary obtains a pool of software or rights to receive the SaaS
before entering into a contract with the end customer, and can, for
example, direct the goods to another customer should it so choose to or
use it themselves.
The intermediary takes risk for software or SaaS that is not accepted by
the customer as it cannot return the software or SaaS to the vendor or
obtain a refund. However, inventory risk may be less relevant to the
assessment of control if, for example, the type of software or offering is
such that the reseller, in effect, has limited risk of return.
3. Pricing discretion.
The intermediary has discretion in establishing the price for the software
or SaaS. However, pricing discretion may be less relevant to the
assessment of control if, for example, the market is such that the reseller,
in effect, has limited flexibility in establishing the price.
The above indicators should not be used as a checklist and there may be other facts and circumstances that are relevant
to the assessment. Additional judgement may be required as the vendor may not have access to all the applicable
contractual relationships between the intermediary and the end consumer.
5.4 How should an asset recognised for commission expense be
amortised if it is related to a point in time licence of IP for which
revenue from sales-based royalties is recognised over time?
Reference to standard: IFRS 15 para 99
Reference to standing text: 11.284
Industry: Software
Assets recorded for costs to obtain a contract should be amortised on a systematic basis consistent with the transfer of
goods or services to the customer. In an arrangement that is a point in time licence of IP (for example, software), the
licence is transferred at a point in time. Therefore, the asset recognised for commission expense related to the licence
would be recognised as an expense at the point in time the licence is transferred.
The timing of amortisation of the asset is not impacted by the recognition of royalty revenue under the sales- and usage-
based royalty exception.
Capitalised costs could also relate to anticipated contracts, such as renewals. If management anticipates that a customer
will renew the licence, an entity should assess whether the commission paid on the initial licence relates only to the licence
provided under the initial contract or to both the initial and renewal periods. If there is a commission paid for the renewal
and the entity concludes that the renewal commission is commensurate with the commission paid on the initial contract,
this would indicate that the initial commission relates only to the initial contract. If a portion of the commission paid relates
to the renewal, the entity should recognise that portion when the control of the renewed licence transfers to the customer.
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