Revenue recognition by software resellers - Agent versus principal considerations

Determining whether a software reseller is acting as an agent or principal in revenue transactions is extremely important because it can have such a significant impact on the amount of revenue a reseller can recognise under IFRS 15 Revenue from Contracts with Customers. If a software reseller is acting as principal, it recognises revenue on a gross basis, and if acting as agent, on a net basis, usually just recognising its net commission.

This is a hot topic now, with the Australian Securities and Investments Commission (ASIC) investigating instances where software resellers have not applied the appropriate analysis from the May 2022 agenda decision, Principal versus agent: Software reseller - IFRS 15. While there is no impact on net profit, restatements have wiped millions from revenue of these entities.

Agenda decision for software resellers

We remind software resellers of the agenda decision published by the IFRS Interpretations Committee (Committee) in May 2022, Principal verses agent: Software reseller – IFRS 15. The agenda decision outlines the analysis required to determine whether a software reseller is acting as agent or principal for a specific fact pattern. Our previous article provides more detail on this.

Why are agenda decisions important?

IFRS Interpretations Committee (the Committee) agenda decisions are those issues the Committee has decided not to take onto its agenda. Although not authoritative guidance, in practice these decisions are regarded as being highly persuasive as they explain how the relevant principles and requirements in IFRS® Accounting Standards apply. All entities reporting under IFRS Accounting Standards should be aware of these decisions as they could impact how particular transactions and balances are accounted for.

Timing for implementing agenda decisions

Unlike changes to accounting standards and new interpretations, agenda decisions do not have start dates because they are intended to clarify the appropriate accounting treatments on various topics based on existing standards and related guidance. They should be applied as soon as possible after publication, usually by the next reporting date or soon after that. The International Accounting Standards Board has clarified that entities should be given sufficient time to implement new policies, but as a rule of thumb, this should be months, not years.

Need help?

Determining whether a software reseller is acting as a principal or agent is complex and involves significant judgement. Given ASIC’s recent focus on this, software resellers should revisit revenue contracts and ensure revenue recognition is appropriate for the 30 June 2024 year-end. Please contact our IFRS & Corporate Reporting team if you need help.