Determination as to whether an entity is selling goods as the principal or as an agent for the ultimate supplier can be area of conjecture that requires the application of judgement to arrive at an appropriate accounting treatment.  Accounting as a principal leads to the recognition of gross sales revenues and cost of sales whilst agency accounting results in the recognition of net selling commissions only.

AASB 118 Revenue has been amended to include additional guidance in relation to this issue.  Acting as a principal creates exposures to the significant risks and rewards associated with the goods or services and the act of providing them to customers.  For instance, the principal will generally assume responsibility for, or derive the benefits from, the following elements:

• provision of the goods or services to the customer, executing the purchase order, and ensuring satisfactory quality thereof
• safekeeping and administration of inventory prior to delivery or upon return from custome
• ability to negotiate, set prices or other terms and conditions relation to the provision of goods or service
• late or non payment of customers.

On balance, where the risks and benefits relating to the aforementioned elements appear to lie with the entity, gross sales revenues can be recognised.

Examples of areas where difficulties have been found in the past in determining the nature of the sale transaction are:

• consignment stock arrangements
• ticketing agencies such as the selling of airline tickets by non-airline entities
• entities conducting selling activities in primary production industries such as the selling of pooled grain and wool on behalf of growers.