The unit of analysis is the specified good or service
Ind AS 115 B34–B38 requires an entity that uses another party to decide whether it promises to provide each specified good or service itself or merely arrange for it. Identify the distinct good, service or bundle under the standard before testing whether the entity controls it before transfer. An entity may be principal for one promise and agent for another in the same contract. Total cash collected is not the unit of revenue recognition.
Read the applicable text: MCA: Ind AS 115, paragraphs 22–30, 73–86 and B34–B38.
Trace the ability to direct what reaches the customer
Under B35A, an entity may control a good or other asset it transfers, a right to a service it can direct the other party to provide on its behalf, or inputs it controls and combines into the specified output. A subcontractor may fulfil all or part of a principal's promise. The brief passage of legal title alone does not establish control. Distinguish a right the entity can direct before transfer from an arrangement under which an independent supplier directly provides its own service to the customer.
Use the indicators to support a control conclusion
Paragraph B37 points to primary responsibility for fulfilling the promise, inventory risk before transfer or after transfer in relevant cases, and discretion in establishing price. B37A explains that these indicators vary in relevance. Use the evidence together; they are neither a scorecard nor a substitute for the control test. Pricing discretion can exist even in an agency arrangement.
Keep gross and net lines separate in the close
Under B35B, a principal recognises the gross consideration to which it expects to be entitled for the transferred item. Under B36, an agent recognises its fee or commission when or as it satisfies its arranging obligation. Exclude amounts collected on behalf of third parties from the transaction price under paragraph 47. For an agent, track collections on behalf of suppliers separately from revenue and determine the related payable from the terms. Keep billing, cash collection and satisfaction of each obligation on separate timelines. When invoices cover several promises, apply the allocation requirements as applicable before using the amounts in the revenue bridge.
Document why the classification can be reproduced
Keep the customer promise map, both contracts, acceptance and refund terms, supplier substitution rights and reporting cut-off evidence. Record the conclusion by specified promise. Review changes to the contract or operating model before copying last year's conclusion. Under B38, if another entity assumes the performance obligations and contractual rights so the original entity is no longer obliged to supply the specified good or service, the original entity does not recognise revenue for that obligation. It assesses whether it has earned separate revenue for arranging the contract for the other party. The accounting assessment is distinct from the GST, invoicing and contract-law characterisation.
Six worked illustrations
All facts and amounts are fictional. Calculations illustrate the stated assumptions, not a predetermined legal outcome.
Illustrative example 1: Subcontracted maintenance delivered as principal
Assume the seller controls the right to direct maintenance to the customer and is responsible for delivery. On completed service of ₹1,20,000 with ₹75,000 subcontract cost, gross revenue is ₹1,20,000 and the margin before other costs is ₹45,000.
Illustrative example 2: Referral with a fixed commission
An entity merely arranges a third-party service and collects ₹80,000, of which ₹68,000 is payable to the supplier. With the arranging obligation satisfied, revenue is ₹12,000.
Illustrative example 3: One invoice contains two distinct promises
Assume the appropriately allocated customer charges are ₹90,000 for equipment provided as principal and ₹30,000 for arranging supplier cover, including ₹24,000 due to the supplier. With both promises satisfied, revenue is ₹96,000, even though billing is ₹1,20,000.
Illustrative example 4: Marketplace percentage fee
A marketplace arranges fulfilled transactions totalling ₹5,00,000. Assume the fee is 8% of that amount, with no returns or other consideration. Revenue is ₹40,000 and supplier amounts total ₹4,60,000.
Illustrative example 5: Year-end collection before arrangement is completed
Of ₹2,00,000 collected, assume ₹1,70,000 is owed to suppliers and a fixed ₹30,000 fee remains unearned until the arranging obligation is completed. Assume the arrangement is not satisfied over time and no portion of the fee is earned at year-end. Current revenue is nil, the supplier payable is ₹1,70,000, and the advance fee is a ₹30,000 contract liability, for total liabilities of ₹2,00,000.
Illustrative example 6: Control of inputs in a combined output
An integrator controls supplier inputs and uses them to deliver a single promised output. With ₹2,50,000 recognised on transfer and input costs of ₹1,10,000 and ₹50,000, gross revenue is ₹2,50,000, costs ₹1,60,000 and margin ₹90,000.
Ten-step verification table
| Step | Action | Evidence |
|---|---|---|
| 1 | Identify the applicable standard | Reporting framework and scope memo |
| 2 | Read both sides of the arrangement | Customer terms and supplier contract |
| 3 | Identify specified goods and services | Distinctness analysis and promise map |
| 4 | Test control before transfer | Rights, timing and operational evidence |
| 5 | Assess fulfilment responsibility | Remedy and acceptance terms |
| 6 | Assess risk and pricing discretion | Supplier commitments and price schedules |
| 7 | Apply allocation where necessary | Transaction price and allocation working |
| 8 | Test revenue recognition cut-off | Delivery or arrangement completion evidence |
| 9 | Reconcile billing to gross and net revenue | Revenue subledger and supplier payable |
| 10 | Review changed facts and presentation | Controller conclusion and reporting file |
Sixteen practitioner FAQs
1. Can one customer invoice contain both principal and agent revenue?
Yes. Assess the nature of each specified good or service.
2. Can a subcontracted service be principal revenue?
Yes, where the entity controls the specified service or qualifying right before transfer.
3. Does issuing the invoice establish control?
No. It is evidence of billing, not conclusive evidence of the ability to direct the specified good or service.
4. Does taking title briefly make the entity principal?
Not necessarily; B35 expressly cautions against that inference.
5. Can an agent choose the customer price?
It can have discretion in some circumstances. Consider pricing alongside other control evidence.
6. What if the entity bears a refund risk?
Analyse the source and nature of the risk and whether it supports control of the specified promise.
7. Does a fixed supplier cost automatically mean the entity is principal?
No. Review who controls the goods or services before transfer.
8. Should the indicator with the most contract clauses win?
No. Relevance varies by promise and terms.
9. How does a separately purchased right to a service differ from a referral?
The right may allow the entity to direct performance on its behalf. A referral generally arranges another party's delivery; verify the facts.
10. Does cash collected for another party appear as revenue?
For a genuine agency arrangement, recognise the fee or commission, rather than gross collections.
11. Can fee revenue be recognised on receipt?
Only if the revenue recognition requirements for the arranging obligation are met.
12. How does a single integrated output affect the unit of analysis?
Where inputs are combined into a distinct output, assess the control of inputs and the combined output in accordance with B35A and the performance obligation guidance.
13. Is gross margin generally identical if a fee arrangement is recorded gross by mistake?
A simple presentation error can leave absolute margin unchanged while inflating revenue and expense. Correct the presentation based on the control assessment.
14. What if the intermediary becomes directly responsible after a contract amendment?
Review the amendment and changed rights before applying the prior classification to future transactions.
15. Does the GST treatment settle the Ind AS conclusion?
No. Apply the Ind AS 115 control and presentation requirements independently.
16. Which evidence helps close a mixed contract?
Use the promise map, allocation, fulfilment dates and reconciliation of third-party amounts to recognised revenue.