Principal vs Agent

Analysis of Principal Vs Agent

The Company (especially Sonata Information Technology Limited) procures license from the various vendors such as Microsoft, Oracle, SAP, etc. and thereafter sells those in the territory. Following discussions with the management, we have reviewed these agreements to assess whether Sonata acts as an agent or Principal in the License Reselling business.

Ind AS Principle

Ind AS 18 advocate the analysis of Principal Vs Agent in order to determine the manner and timing of recognition of revenue. The determination as to whether an entity is acting as a principal or as an agent will always depend on the specific facts and circumstances and it will generally be necessary to exercise judgement. The indicators mentioned below is not intended to be exhaustive. Moreover, in any particular scenario, some of the indicators may be judged more important than others, so it is not appropriate to apply a ‘checklist’ approach that would give equal weight to each.

Indicators that an entity is an agent (and therefore does not control the good or service before it is provided to a customer) include the following:

a. another party is primarily responsible for fulfilling the contract;

b. the entity does not have inventory risk before or after the goods have been ordered by a customer, during shipping or on return;

c. the entity does not have discretion in establishing prices for the other party’s goods or services and, therefore, the benefit that the entity can receive from those goods or services is limited;

d. the entity’s consideration is in the form of a commission; and

e. the entity is not exposed to credit risk for the amount receivable from a customer in exchange for the other party’s goods or services.