Comments due by 1 September 2014
ACCOUNTING STANDARDS BOARD
EXPOSURE DRAFT OF A PROPOSED STANDARD
OF GRAP ON
ACCOUNTING BY PRINCIPALS AND AGENTS
(ED 122)
Issued by the
Accounting Standards Board
April 2014
ED 122
Commenting on this Exposure Draft
The Accounting Standards Board (the Board) seeks comment on the Exposure Draft of the
proposed Standard of GRAP on Accounting by Principals and Agents (ED 122). Entities in
the public sector work together to achieve common objectives and, as a result, often
perform activities on behalf of other entities. In these situations, it is difficult to assess
which entity should account for the activities as their own in its financial statements. The
objective of this proposed Standard is to outline the principles that should be used by an
entity to assess whether it acts as a principal or an agent in an arrangement where it has
activities undertaken by another entity on its behalf, or undertakes activities on behalf of
another entity.
The proposals in this Exposure Draft may be modified in the final documents in the light of
comment received. Comment should be submitted in writing so as to be received by 1
September 2014. Email responses are preferred. Unless respondents to this Exposure
Draft specifically request confidentiality, their comment is a matter of public record once
the Standard has been updated. Comment should be addressed to:
The Chief Executive Officer
Accounting Standards Board
P O Box 74219
Lynnwood Ridge
0040
Fax: +2711 697 0666
E-mail Address: [email protected]
Copyright © 2014 by the Accounting Standards Board.
All rights reserved. No part of this publication may be reproduced, stored in a retrieval
system, or transmitted, in any form or by any means, electronic, mechanical,
photocopying, recording, or otherwise, without the prior permission of the Accounting
Standards Board. Permission to reproduce limited extracts from the publication will usually
not be withheld.
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Contents
Standard of Generally Recognised Accounting Practice
Accounting by Principals and Agents
Paragraph
Introduction
Objective
.01 - .02
Scope
.03 – .04
Definitions
.05 - .09
Principal-agent arrangement
.06 - .08
Agent and principal
.09
Identifying whether an entity acts as a principal or agent
.10 - .34
Binding arrangement
.13 - .16
Beneficial control
.17 - .27
Application of beneficial control
.28 - .34
Accounting by a principal or agent
.35 - .49
Recognising revenue and expenses as a principal or agent
.37 - .41
Recognising assets and liabilities as a principal or agent
.42 - .49
Presentation
.50
Disclosure
.51 - .54
Disclosure by agents
.53
Disclosure by principals
.54
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Transitional provisions
.55
Effective date
.56
Appendix – Consequential amendments to other Standards of GRAP
Basis for conclusions
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Accounting by Principals and Agents
Introduction
Standards of Generally Recognised Accounting Practice (GRAP)
The Accounting Standards Board (the Board) is required in terms of the Public Finance
Management Act, Act No. 1 of 1999, as amended (PFMA), to determine generally
recognised accounting practice referred to as Standards of Generally Recognised
Accounting Practice (GRAP).
The Board must determine GRAP for:
(a)
departments (including national and provincial and government components);
(b)
public entities;
(c)
trading entities (as defined in the PFMA);
(d)
constitutional institutions;
(e)
municipalities and boards, commissions, companies, corporations, funds or other
entities under the ownership control of a municipality; and
(f)
Parliament and the provincial legislatures.
The above are collectively referred to as “entities” in Standards of GRAP.
The Board has approved the application of Statements of Generally Accepted Accounting
Practice (GAAP), as codified by the Accounting Practices Board and issued by the South
African Institute of Chartered Accountants as at 1 April 2012, to be GRAP for:
(a)
government business enterprises (as defined in the PFMA);
(b)
any other entity, other than a municipality, whose ordinary shares, potential ordinary
shares or debt are publicly tradable on the capital markets; and
(c)
entities under the ownership control of any of these entities.
The Board has approved the application of International Financial Reporting Standards
(IFRSs) issued by the International Accounting Standards Board to be GRAP for these
entities where they are applying IFRSs.
Financial statements should be described as complying with Standards of GRAP only if
they comply with all the requirements of each applicable Standard of GRAP and any
related Interpretations of the Standards of GRAP.
Any limitation of the applicability of specific Standards or Interpretations is made clear in
those Standards or Interpretations of the Standards of GRAP.
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The Standard of GRAP on Principal-Agent Activities is set out in paragraphs .01 to .56. All
paragraphs in the Standards of GRAP have equal authority. The status and authority of
appendices are dealt with in the preamble to each appendix. The Standards should be
read in the context of its objective, its basis for conclusions if applicable, the Preface to
Standards of GRAP, the Preface to the Interpretations of the Standards of GRAP and the
Framework for the Preparation and Presentation of Financial Statements.
Standards of GRAP and Interpretations of the Standards of GRAP should also be read in
conjunction with any directives issued by the Board prescribing transitional provisions, as
well as any regulations issued by the Minister of Finance regarding the effective dates of
the Standards of GRAP, published in the Government Gazette.
Reference may be made here to a Standard of GRAP that has not been issued at the time
of issue of this Standard. This is done to avoid having to change the Standards already
issued when a later Standard is subsequently issued. Paragraph .12 of the Standard of
GRAP on Accounting Policies, Changes in Accounting Estimates and Errors provides a
basis for selecting and applying accounting policies in the absence of explicit guidance.
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Objective
.01
The objective of this Standard is to outline principles to be used by an entity to
assess whether it acts as a principal or an agent in a principal-agent arrangement.
.02
This Standard does not introduce new recognition or measurement requirements
for revenues, expenses, assets and/or liabilities that result from principal-agent
arrangements. The Standard does however provide guidance on whether
revenue, expenses, assets and/or liabilities should be recognised by an agent or a
principal, as well as prescribe what information should be disclosed when an
entity acts as a principal or an agent.
Scope
.03
An entity that prepares and presents financial statements under the accrual
basis of accounting shall apply this Standard in determining whether it acts
as a principal or an agent in a principal-agent arrangement.
.04
An entity shall apply the principles in this Standard to assess whether it
acts as a principal or an agent before applying other Standards of GRAP
dealing with the recognition and measurement of revenue, expenses, assets
and/or liabilities.
Definitions
.05
The following terms are used in this Standard with the meanings specified:
An agent is an entity that has been mandated by a principal in a principalagent arrangement to carry out certain activities, where the principal has
beneficial control over those activities.
An entity has beneficial control over an activity (for the purposes of this
Standard) when it demonstrates all three of the following:
(a)
The entity has the power to direct the activities specified in a binding
arrangement.
(b)
The entity has the ability to use all, or substantially all, of the activityrelated resources in pursuing the activities specified in the binding
arrangement.
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(c)
The entity is exposed to variability in the results of the activity.
A principal is an entity that has beneficial control over the activities carried
out by an agent in a principal-agent arrangement.
A principal-agent arrangement results from a binding arrangement in which
one entity (an agent), acts on behalf of another entity (the principal), in
carrying out activities involving third parties.
Terms defined in other Standards of GRAP are used in this Standard with
the same meaning as in those other Standards of GRAP.
Principal-agent arrangement
.06
.07
In the public sector, entities work together to achieve common objectives. As a
result, entities frequently have certain activities executed by another entity, or
undertake activities on behalf of other entities. Where these arrangements exist, it
is important to identify which entity should account for the transactions arising
from these activities, and what resulting revenues, expenses, assets and/or
liabilities should be recognised. Examples of typical arrangements where one
entity undertakes activities on behalf of another entity in the public sector may
include:

The collection of revenues, including taxes, fees and other charges from
specific parties, e.g. motor vehicle license fees collected by municipalities for
the provincial government.

The construction of assets, e.g. houses built for beneficiaries of the
reconstruction and development programme, for national and/or provincial
housing departments and organisations.

The provision of goods and services to recipients, e.g. the provision of water
to specific communities by municipalities on behalf of water service
authorities.

Property management services, which may include the maintenance of
properties and collection of revenue, for the department of Public Works
and/or municipalities.
When an entity instructs another entity to act on its behalf, or undertakes an
activity on behalf of another entity, it must consider whether it is a party to a
principal-agent arrangement. The definition of a principal-agent arrangement
refers to an entity acting on behalf of another entity in relation to third parties. In
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the absence of any transactions or interactions with third parties, entities that act
on the instruction of an entity are seen to provide a service to that entity and act
as a service provider rather than an agent. The existence of third parties is linked
to the type of activities carried out by the agent in accordance with the binding
arrangement. This may include, for example, an expectation of the agent
transacting with others for the procurement or disposal of activity-related
resources, or the transfer of activity-related resources to another party.
.08
Principal-agent arrangements usually exist as a result of a binding arrangement
between the parties to the arrangement. It is unlikely that an entity would
undertake activities on behalf of another entity in the absence of a binding
arrangement as the arrangement imposes rights and obligations on the parties to
perform in a particular manner. Where no binding arrangement exists, it is
assumed that the entity is acting for itself, rather than on behalf of another entity.
As a result, no principal-agent arrangement exists in the absence of a binding
arrangement.
Principal and agent
.09
The definition of an agent and principal uses the term “entity” to broadly describe
a party to an arrangement. Although principals and agents are usually reporting
entities, an individual person may also be a principal or an agent. Legislation may
assign certain activities to a political office-bearer, such as a Minister of a
particular department, or the accounting officer of an entity, rather than to a
specific entity. Individuals may also carry out activities on behalf of public sector
entities. The requirements of this Standard apply equally to such arrangements
with individuals. However, since individuals are not reporting entities, it is
important to identify the reporting entity that the individual agent or principal
represents in such scenarios.
Identifying whether an entity acts as a principal or an
agent
.10
An entity shall assess whether it acts as a principal or an agent in
accounting for revenues, expenses, assets and/or liabilities resulting from
an activity undertaken in terms of a binding arrangement. The assessment
of whether an entity acts as a principal or an agent requires the entity to
assess whether it has beneficial control over that activity as a result of the
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binding arrangement.
.11
Where an entity is a party to a principal-agent arrangement, it shall assess
whether it acts as a principal or an agent by applying the principles in this
Standard. The assessment of whether an entity acts as a principal or an agent
requires that either party to the principal-agent arrangement determine whether
they have beneficial control over the activity.
.12
Where the terms of a binding arrangement are modified, the parties to the
arrangement shall re-assess whether they act as a principal or an agent in
accordance with this Standard.
Binding arrangement
.13
Principal-agent arrangements are governed by a binding arrangement. The
requirements of these binding arrangements, particularly the rights and
obligations established for the relevant parties, will inform entities‟ assessments of
whether they demonstrate beneficial control over a specific activity or not.
.14
For purposes of this Standard, a binding arrangement is any arrangement that
confers enforceable rights and obligations on the various parties in the
arrangement and may arise from the following means:
(a)
a contract concluded between the parties;
(b)
legislation or similar means including, but not limited to, laws, regulation,
policies, decisions concluded by authorities such as cabinet, executive
committees, boards, municipal councils and ministerial orders; or
(c)
through the operation of law, including common law.
.15
In the public sector, identifying a binding arrangement may be difficult and often
requires a significant degree of judgement due to a lack of formal agreements
between entities. In the absence of (a) to (c) above, an arrangement that
establishes rights and obligations, for the various parties to the arrangement,
through past actions which, over time, results in either party having no realistic
alternative but to act in a certain way in relation to the arrangement, may also give
rise to a binding arrangement.
.16
A binding arrangement may use the term “principal” or “agent” for specific parties
to the arrangement. Even if these terms are legally assigned to specific parties in
the arrangement, an entity should assess, based on the principles in this
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Standard, whether the arrangement is a principal-agent arrangement and whether
the entity acts as the principal or agent.
Beneficial control
.17
Based on an entity‟s analysis of the terms of the binding arrangement, in
particular the rights and obligations established for either party, it assesses
whether it has beneficial control over an activity. The definition of beneficial
control requires that an entity demonstrate the following three criteria:
(a) it has the power to direct the activities specified in a binding arrangement;
(b) it has the ability to use all or substantially all of the activity-related resources
in pursuing the activities specified in the binding arrangement; and
(c) it is exposed to variability in the results of the activity.
Beneficial control over an activity
.18
When an entity assesses beneficial control in a principal-agent arrangement, it
assesses whether or not it has beneficial control over an activity. An activity, in the
context of a principal-agent arrangement, is broadly a task or process that is
undertaken by one entity for another. The tasks or processes undertaken typically
give rise to specific transactions or events, or groups of similar transactions or
events.
.19
Assessing beneficial control at an activity level requires an entity to analyse the
principal-agent arrangements which it is party to, and identify the various activities
it undertakes in terms of those arrangements. It is important for an entity to
identify the various activities it undertakes in terms of a principal-agent
arrangement as it may demonstrate beneficial control over some activities and not
over others. This could mean that it acts as a principal for certain activities
undertake in a principal-agent arrangement, and acts as an agent for other
activities.
Power to direct the activities in the binding arrangement
.20
For an entity to demonstrate beneficial control over an activity, it must have the
power to direct the activity specified in the binding arrangement. An entity has the
power to direct an activity when it can make decisions that significantly affect the
results of the activity.
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.21
The results of the activity are the economic benefits or service potential generated
by the activity, which can be measured both quantitatively and qualitatively. An
entity has the ability to make decisions that affect the results of the entity when it
can specify the scope of the activity, how the activity should be undertaken
(including how the activity related resources should be used), and the output or
outcome of the activity. Where the activity specified in a binding arrangement
requires one entity to provide goods and services to third parties on behalf of
another, an entity has the power to direct the activity when it can make decisions
about:
(a)
what goods and services should be provided;
(b)
the resources that are required to provide the goods and services, for
example, infrastructure assets, and how these should be used and
maintained;
(c)
to whom goods and services should be provided;
(d)
the price charged for the goods and services (if any); and
(e)
the quality of the goods and services to be provided.
Additional factors may be relevant in analysing the rights and obligations
established in the binding arrangement.
.22
When an entity has limited decision-making powers and needs to defer significant
decisions that affect the results of the activity to another entity, this is an indicator
that it does not have the power to direct the activity. Certain activities, or aspects
of activities, may be regulated by another entity in the public sector, e.g.
establishing operational rules, or setting the price of certain goods and services.
This form of regulation, on its own, does not give an entity the ability to direct the
activities.
Ability to use all or substantially all the activity-related resources in pursuing the activity
specified in the binding arrangement
.23
The activity-related resources could include the inputs (e.g. labour, materials),
processes or outputs (e.g. completed work, goods or services) associated with the
activity, and are not limited to the cash or other proceeds generated by the
activity. An entity has the ability to use the activity-related resources when it has
unrestricted access to those resources and can use those resources for its own
benefit in undertaking the activities specified in the binding arrangement.
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.24
To assess whether an entity has unrestricted access to the activity related
resources, it must assess the rights and obligations of the parties specified in the
binding arrangement. Unrestricted access to the activity related resources does
not mean that an entity must presently have physical possession of those
resources since possession may have been granted to the other entity to enable it
to fulfil its obligations under the binding arrangement.
.25
The ability to use all or substantially all of the activity-related resources does not
mean that the entity must be the ultimate beneficiary of the activity. In the public
sector, entities are frequently required to pay the proceeds of certain activities to
the relevant Revenue Fund. This does not, by itself, mean that the entity is not
able to use all or substantially all of the activity related resources in undertaking
the activity in the binding arrangement. As activity related resources can be
inputs, processes or outputs, cash or any other proceeds merely comprise a part
of the resources which an entity could use.
.26
As noted in paragraph .19, an entity must identify the various activities in a
principal-agent arrangement and assess whether it has beneficial control over the
various activities identified. While it is possible that an entity demonstrates
beneficial control over some of the activities in the arrangement and not over
others, beneficial control over a single activity cannot be shared. As a result, an
entity is expected to demonstrate that it has this ability over all, or substantially all,
of the activity-related resources.
Exposure to variability in results of the activity
.27
As noted in paragraph .21 above, the results of the activity are the economic
benefits or service potential (or both) generated by the activity. An entity‟s
exposure to the results of an activity does not only refer to the receipt or sacrifice
of economic benefits or service potential. It also refers to the end result achieved
by undertaking a particular activity. Although results include the specific outputs of
the activity, they may also include exposure to broader consequences arising from
an activity. An entity is exposed to variability in the results of the activity when it
has exposure to both the positive and negative results associated with that
activity.
Application of beneficial control
.28
From the above discussion, it is clear that, for an entity to demonstrate beneficial
control, it must be able to demonstrate that is has the power to direct the activities,
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and the ability to derive benefits from the results (whether positive or negative) of
those activities. The paragraphs that follow discuss examples of principal-agent
arrangements in the public sector, and explain how the principles in the Standard
should be considered in assessing whether an entity has beneficial control. The
examples are illustrative only, and any conclusions reached are based on specific
fact patterns. Entities should consider all facts and circumstances when analysing
whether an entity has beneficial control.
Example 1 – Entities contracted to carry out services for another
.29
Entities may be contracted to perform certain functions or services on behalf of
other entities in the public sector. The entity performing the functions or services
could either be seen as providing a service to the other party to the binding
arrangement, or it might be seen as performing functions or services on behalf of
the other party.
.30
Consider the following two scenarios in relation to a contractual arrangement
concluded between two parties, Entity A and Entity B, that requires that Entity B
be involved in a project to construct houses for beneficiaries of Entity A‟s
reconstruction and development programme:
 Scenario 1: In terms of the binding arrangement, Entity A specifies the type of
houses that should be built, what related infrastructure needs to be developed,
and who will benefit from the programme. Entity B is responsible for the
procurement of all materials, ensuring that the completed works meet the
necessary building regulations, employing the construction team, and other
construction related processes for the duration of the project. A fixed fee is
received by Entity B for undertaking these activities. Based on the terms of the
arrangement, it can be concluded that Entity B directs the construction
activities for the duration of the contract, how the construction related
resources are utilised and, because it receives a fixed fee, is exposed to the
variability in the results of the construction activities as any increase in costs or
overspending is borne by Entity B. Entity B also does not represent Entity A in
contracting with suppliers and employees. Entity B also does not direct the
overall activities of providing houses to beneficiaries in the reconstruction and
development programme, as it cannot make decisions about the scope of
activities to be provided, how they should be provided, or who should benefit
from the activities. As a result, Entity B acts on its own behalf as a contractor in
providing the construction related activities, and therefore acts as a service
provider to Entity A.
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 Scenario 2: In terms of the arrangement, Entity B acts as the project manager
executing instructions received from Entity A for a monthly fee that is
calculated based on time spent on executing these instructions. In particular, it
acts on Entity A‟s behalf in relation to the employment of specialist contractors,
labourers, submission of building plans, etc. In this instance, Entity B does not
direct the activities of the activity, nor is it exposed to the results of
construction works. Entity B does however represent Entity A in relation to
contractors to the project. As a result, Entity B acts as an agent of Entity A in
relation to the construction of the building.
.31
In the above two scenarios, it is relatively simple to determine whether Entity B
acts as an agent. However, in more complex situations judgement may be
required, particularly where binding arrangements contain a variety of activities
and the entity has beneficial control over some, but not all of the activities. For
example, there may be a combination of the two scenarios, with Entity B having
beneficial control over the building activities, while also acting as an agent of
Entity A with respect to the submission of building plans to the local authority. In
these circumstances, Entity B would need to assess the role it plays in relation to
each of these activities.
Example 2 – Provision of a mandated service using assets of the principal
.32
A District Municipality is designated by legislation as the Water Authority for a
particular jurisdiction. Its legislative mandate is to ensure and oversee the
provision of sustainable water services to consumers in a particular area. The
Local Authority within that district already has the systems and resources in place
to manage the water supply. Although the District Municipality owns the water
infrastructure, it is not feasible for the District Municipality to manage the provision
of water and related services on a day-to-day basis. Consequently, it enters into a
binding arrangement with the Local Authority in terms of which the Local Authority
will operate the water infrastructure. In order to give effect to this, the District
Municipality transfers operational control of the water infrastructure to the Local
Authority. The Local Authority must, in terms of the arrangement, collect all
consumer debts in respect of water services and use this revenue to defray the
cost of providing this service on behalf of the District. The Local Authority is also
responsible for maintaining the infrastructure to the levels specified by the District
Municipality. However, as the designated Water Authority, the District Municipality
requires regular reports from the Local Authority on the operations of the water
services, monitors the overall performance of the water services, and must
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approve all major decisions with respect to the procurement, disposal and
upgrade of the infrastructure. The Water Authority also approves the tariff
changes recommended to it by the Local Authority, although such approval may
not be unreasonably withheld.
In order to determine whether an entity acts as a principal or an agent, it is
necessary to apply the definition of beneficial control to the distinct activities in the
arrangement. In the case of the mandate to oversee and monitor the provision of
water and related services, the District Municipality retains beneficial control over
the activity because it directs:

how the service should be provided - it appoints the water service provider
and, in doing so, is exposed to the service delivery success or failure of the
water service as a whole;

who should benefit from the services - it identifies which communities should
benefit from the activities;

it determines the price that must be charged and the quality of the water to be
provided; and

it directs what resources should be used – its infrastructure is used to provide
the service and is maintained as a particular level.
With regard to the physical provision of water and the collection of revenue, the
Local Authority has beneficial control as it can decide how best to deploy the
resources, it employs the staff, and it controls the systems, processes and
budgets used in providing the service. It is also exposed to variability in the
collection of consumer debtors. Consequently, the Local Authority will account for
the day-to-day operations (revenue and expenditure) as part of its own activities in
that it is essentially providing a service that it has beneficial control over. The
District Municipality will in turn account for the costs associated with ongoing
monitoring of the water service.
.33
Service concession arrangements may be a typical example of a principal-agent
arrangement. This is due to the fact that one party (the operator, which is usually
a private sector entity) carries out certain activities on behalf of the other (the
grantor, which is usually a public sector entity) in relation to third parties (the
public). In these instances, the grantor is the principal in the arrangement as it
specifies what services should be provided, to whom and at what price. Either
party should however still assess all the activities specified in the binding
arrangement to assess whether it has beneficial control over those activities.
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.34
Once an entity has established that it acts as an agent or a principal in relation to
specific activities in a binding arrangement, it applies the principles in paragraphs
.35 to .49 below.
Accounting by a principal or an agent
.35
An entity recognises revenue and expenses arising from activities over
which it has beneficial control as its own activities, in accordance with
requirements of other Standards of GRAP.
.36
An entity recognises assets and liabilities arising from principal-agent
arrangements in accordance with the requirements of other Standards of
GRAP.
Recognising revenues and expenses as a principal or an agent
.37
An entity determines, in accordance with this Standard, whether it acts as a
principal or agent and, in doing so, determines the elements that qualify for
recognition in accordance with the relevant Standards of GRAP. An entity that
has beneficial control over a particular activity in a principal-agent arrangement is
the principal in respect of that activity and accounts for revenues and expenses
arising from those activities as though they are its own transactions. Conversely,
when an entity does not have beneficial control over an activity that it carries out
in accordance with a principal-agent arrangement, it acts as an agent and would
not recognise revenues and expenses resulting from those activities other than
the compensation it receives.
.38
Agents are usually compensated for the activities they carry out on behalf of their
principals. Compensation can take a variety of forms, and may be fixed or
variable in amount. Compensation may be received directly from the principal in
the form of a commission or fee for the services it provides in an exchange
transaction, or it may receive compensation indirectly from a third party, such as
another level of government, in a non-exchange transaction. Such amounts
typically qualify for recognition as revenue by the agent where they compensate
the agent for work performed, because the agent would typically have beneficial
control over the activities that generates that compensation for it.
.39
Compensation should be distinguished from amounts that are paid to the agent to
reimburse it for specific costs incurred, or to be incurred on behalf of the principal.
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These amounts are not recognised as revenues and expenses of the agent
where the amounts are used in carrying out activities over which the agent does
not have beneficial control. Such amounts are merely spent on behalf of the
principal and do not reflect the financial performance of the agent.
.40
For example, a municipality is tasked to act as an agent to facilitate the
construction of low-cost houses on behalf of a national government department,
and the department directs the municipality to incur certain specific reimbursable
costs on its behalf. Such costs and the related recovery thereof should not be
recognised in the statement of financial performance of the municipality as they
are not incurred as part of activities under the beneficial control of the
municipality. However, any fee payable to the municipality in respect of the
arrangement over and above cost-recoveries may qualify for recognition in
accordance with the Standard of GRAP on Revenue from Exchange Transactions
where the municipality has beneficial control over the activities that generate that
fee.
.41
Some arrangements may stipulate that the entity is entitled to withhold certain
fees collected from third parties (e.g. consumers). In such cases, it is necessary
to establish whether the entity has beneficial control over the activity giving rise to
that revenue, as this will determine what proportion, if any, of the amounts
collected may be recognised as revenue of the entity that receives the payments.
Recognising assets and liabilities as a principal or an agent
.42
Whether an entity is a principal or an agent, it applies the principles in the
relevant Standards of GRAP and/or the Framework for the Preparation and
Presentation of Financial Statements in recognising assets and liabilities arising
from a principal-agent arrangement.
.43
A principal-agent arrangement often gives rise to the parties holding resources
on behalf of others, which may mean that an entity needs to recognise assets
and liabilities in relation to these activities. An agent may also need to recognise
assets and liabilities as a result of rights and obligations arising from principalagent arrangements. An entity refers to other Standards of GRAP and/or the
Framework for the Preparation and Presentation and Financial Statements in
determining whether or not assets and liabilities arising from (or related to)
principal-agent arrangements should be recognised.
Resources held on behalf of the principal
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.44
The Framework for the Preparation and Presentation of Financial Statements
requires, inter-alia, that an entity must control an asset, as a result of a past
event, before it can be recognised in the statement of financial position.
Consequently, an agent assesses whether the resources it holds in terms of
principal-agent arrangement are under its control and would otherwise meet the
definition and recognition criteria for such assets in accordance with other
Standards of GRAP.
.45
Where the assets held by an agent are indistinguishable from its own assets, for
example, certain types of inventory items are mixed together such as water
reserves, it may be appropriate for the agent to recognise such items as assets
under its control. However, a corresponding liability should also be recognised
where there is an obligation to transfer resources to the principal in respect of
the assets held.
Rights and obligations arising from principal-agent arrangements
.46
Where an agent holds cash or other monetary assets on behalf of its principal, it
is necessary to assess whether this should be recognised as an asset by the
agent, with a corresponding liability in respect of the obligation to transfer the
amounts to the principal. In making this assessment, the agent considers
whether it physically controls (even if this control is temporary) the cash or other
asset it holds, and consequently whether it meets the definition of an asset in
accordance with the Framework for Preparation and Presentation of Financial
Statements.
.47
Where an agent is required to collect amounts owing to a principal or another
entity, consideration should be given to whether or not it is appropriate for the
agent to recognise the amounts to be received as a receivable, along with the
corresponding liability to pay over the amounts still-to-be collected to the
principal.
.48
An agent should assess whether it is appropriate to recognise receivables and
payables based on the terms of rights and obligations established in the binding
arrangement, and after considering any relevant facts and circumstances. The
following indicators may be useful in assessing whether an agent should
recognise a receivable or a payable:
(a) The debt is due to, or due by, the agent, i.e. the agent is the counterparty in
the transaction with the 3rd party.
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(b) The agent has the legal right to enforce collection of the debt, or the agent
has the legal obligation to settle the debt.
(c) The agent determines the amount that must be paid by, or to, the 3rd party
based on the policies determined by the principal.
(d) The agent determines the manner and timing of settlement.
(e) The agent has the power and discretion to write off debts owing by 3 rd
parties.
(f) The agent has an obligation to undertake certain activities, which it is
required to do in terms of the binding arrangement.
Any receivables and payables should be recognised and measured in
accordance with the relevant Standards of GRAP and/or the Framework for the
Preparation and Presentation of Financial Statements.
Example 3 – Recognition of receivables by an agent for the collection of revenue on
behalf of a principal
.49
Consider the following example: A government entity is mandated to collect
certain types of penalties on behalf of the national government. It must pay all
amounts collected over to the National Revenue Fund.

Scenario 1: The entity has beneficial control over the activity of levying the
penalty (it can determine the amount of the penalty, who should pay it and
when it should be paid by, and it has the power to alter the ruling or waive
the government‟s rights to collect the amounts owed to it). Consequently,
the entity recognises the penalty amount as revenue in accordance with the
applicable Standard of GRAP. The recognition of the revenue will result in
the simultaneous recognition of a corresponding receivable.

Scenario 2: The entity does not have beneficial control over the activity of
levying the penalty (it cannot determine the amount of the penalty and who
should pay it). However, it has a degree of control over the collection
activities such as determining when and how it should be paid, and it is
mandated to receive the cash in its own bank account before transferring it
to the revenue fund. Despite the fact that the entity does not have beneficial
control over the revenue generating activity, it may be appropriate in certain
circumstances to recognise a receivable if the definition and recognition
criteria of an asset are met because it is legally mandated to recover the
funds on behalf of national government. However, instead of recognising
corresponding revenue, the entity recognises a liability for the amount that it
will need to pay over to the national government upon collection. In these
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instances, an entity uses the indicators in paragraph .48 to assess whether
recognition of a receivable is appropriate.
Presentation
.50
Where assets and liabilities are recognised, in accordance with other
Standards of GRAP, by an agent in respect of activities it undertakes on
behalf of its principal, it is inappropriate to offset the assets and liabilities
recognised, unless another Standard of GRAP permits the offsetting of
such amounts.
Disclosure
.51
In addition to the disclosure requirements set out in the paragraphs .52 to
.54, the disclosure requirements applicable to revenues, expenses, assets
and/or liabilities recognised in accordance with other Standards of GRAP,
shall also be applied.
.52
An entity shall disclose the following information for each principal-agent
arrangement and in aggregate for individually immaterial principal-agent
arrangements that are material collectively in each reporting period. An
entity that is a party to a principal-agent arrangement shall disclose:
(a) a description of the arrangement, including the activities undertaken;
(b) whether the entity is the principal or agent and any significant
judgement applied in making this assessment;
(c) significant terms and conditions of the arrangements and whether any
changes occurred during the reporting period; and
(d) an explanation of the purpose of the principal-agent relationship and
any significant risks (including any risk mitigation strategies) and
benefits associated with the relationship.
Disclosure by agents
.53
An entity that is the agent in a principal-agent arrangement shall disclose
the following:
(a) the name and a brief description of the nature of the principal in the
arrangement;
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(b) a description of any resources (including the carrying value and
description of any assets recognised) that are held on behalf of a
principal, but recognised in the agent’s own financial statements.
Such disclosure shall include:
(i) the expected timing of remittance to the principal; and
(ii) risks that are transferred from the principal to the agent (if any),
including risks flowing to the entity as a result of its
custodianship over the resources held on behalf of a principal;
(c) the aggregate amount of revenue that the entity recognises as
compensation for the activities carried out on behalf of the principal;
and
(d) a description of any liabilities incurred on behalf of a principal that
have been recognised by the entity, as well as any corresponding
rights of reimbursement that have been recognised as assets.
Disclosure by principals
.54
An entity that is the principal in a principal-agent arrangement shall
disclose the following:
(a) the resources (including assets and liabilities) of the entity that are
under the custodianship of an agent and whether or not those
resources have been recognised by the principal, along with and the
expected timing of remittance of those resources back to the entity
(where applicable); and
(b) a discussion of the resource or cost implications for the principal if
the principal-agent arrangement is terminated.
Transitional provisions
.55
The transitional provisions to be applied by entities on the initial adoption
of this Standard are prescribed in a directive(s). The provisions of this
Standard should be read in conjunction with each applicable directive.
Effective date
.56
An entity shall apply this Standard of GRAP for annual financial
statements covering periods beginning on or after a date to be determined
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by the Minister of Finance in a regulation to be published in accordance
with section 91(1)(b) of the Public Finance Management Act, Act No. 1 of
1999, as amended.
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Basis for conclusions
This basis for conclusions gives the Accounting Standards Board’s (the Board’s) reasons
for accepting or rejecting certain solutions related to the identification of, and accounting
for, principal-agent activities.
Introduction
BC1.
As a result of entities in the public sector working together to achieve common
objectives, they often enter into arrangements to undertake activities on behalf of
one another. Where these arrangements exist, it is often difficult to identify which
entity acts as the agent or the principal, and consequently, which entity should
account for the transactions that result from these activities. As a result, the Board
agreed to undertake a project to identify whether more comprehensive guidance
could be provided to assist entities in identifying when they act as a principal or an
agent, and what accounting and reporting requirements would be appropriate for
such arrangements.
BC2.
In its research, the Board noted that there is no authoritative pronouncement or
guidance available internationally (either from the International Public Sector
Accounting Standards Board or the International Accounting Standards Board)
dealing with the identification of principals and agents. The Board also noted that,
while the Standards of GRAP on Revenue from Exchange Transactions and
Revenue from Non-exchange Transactions (Taxes and Transfers) which are drawn
from the equivalent international standards, refer to accounting for revenue as an
agent or a principal, this guidance is insufficient to deal with the range and types of
arrangements in the public sector.
BC3.
Based on the need for more comprehensive guidance, the Board issued
Discussion Paper 8 on Accounting for Principal-Agent Activities in the Public
Sector in July 2012. Respondents to this Discussion Paper supported the need for
more detailed guidance and consistency in accounting for these arrangements. At
its meeting in May 2013, the Board agreed to develop a Standard of GRAP. Based
on this decision, this Standard of GRAP has been developed and prescribes the
principles that should be applied by an entity to identify whether it acts as a
principal or an agent in an arrangement, along with the accounting and disclosure
requirements for such arrangements. The Board agreed that this Standard should
be applied before considering the other Standards of GRAP and, as a result, this
Standard does not prescribe new recognition or measurement requirements in
respect of revenues, expenses, assets and/or liabilities.
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Scope
BC4.
As the objective of this Standard is to outline when an entity acts as a principal or
an agent, the Board agreed that entities should first assess in what capacity they
act in an arrangement, based on the principles in this Standard, before applying
other Standards of GRAP that deal with the recognition and measurement of
transactions arising from that arrangement.
BC5.
Entities that (a) mandate other entities to act, or undertake, activities on their
behalf, or (b) act, or undertake activities for, another entity, usually do so in the
form of a binding arrangement. The Board agreed that where a binding
arrangement exists that results in one entity (an agent) carrying out activities for
another (a principal), in relation to third parties, then they are part of a principalagent arrangement and are within the scope of this Standard. The Board
considered that both the existence of a binding arrangement and third parties are
critical in assessing whether an arrangement between parties is a principal-agent
arrangement.
BC6.
The Board agreed that, because an entity is unlikely to act on behalf of another
entity in the absence of a binding arrangement, a binding arrangement must be
present to meet the definition of a principal-agent arrangement. Binding
arrangements are further discussed in paragraph BC15. to BC17. below.
BC7.
As an agent represents or acts on behalf of a principal in an arrangement, the
Board agreed that a key factor in assessing whether an arrangement is a principalagent arrangement is the existence of third parties. Given the types of
arrangements in the public sector, the Board agreed that an agent may represent a
principal in relation to third parties that provide activity related inputs (e.g. suppliers
of materials or service providers), or are the recipients of activity related outputs
(e.g. recipients of goods or services).
Definitions
Principal and agent
BC8.
In the Discussion Paper, the Board had not proposed formal definitions of the
terms “principal” and “agent” and instead outlined descriptions of “own activities”
and “agency activities”. “Own activities” were described as those activities over
which an entity has beneficial control, that it carries out itself, or are carried out by
another entity on its behalf. “Agency activities” were described as those activities
carried out by an entity which are not its own activities. Respondents to the
Discussion Paper did not support these descriptions as they placed too much
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emphasis on the identification of “activities”. Respondents were also concerned
about the lack of clear definitions for principals and agents.
BC9.
Based on the comments received, the Board agreed to clearly define “principal”
and “agent” as they are central to identifying the relevant parties to a principalagent arrangement. The Board agreed that the definitions of a “principal” and an
“agent” should be based on the criteria used to determine when an entity acts as a
principal or an agent, which is whether an entity demonstrates beneficial control
over a specific activity.
BC10. When the Board analysed legislation that governs certain principal-agent
arrangements, it identified that an individual, such as a Minister, rather than an
entity, may be tasked with certain responsibilities. As a result, the Board
considered whether the definition of a principal and an agent should refer to an
“individual” or an “entity”. The Board agreed that, because an individual is not a
reporting entity, it should be established which entity the individual represents, and
consider whether that entity acts as a principal or an agent in that context.
Beneficial control
BC11. As noted in paragraph BC9., the Board agreed that the criteria used to distinguish
when an entity acts as a principal or an agent in an arrangement, is based on
whether an entity demonstrates beneficial control over a specific activity. The
rationale supporting an assessment based on beneficial control is outlined in
paragraphs BC18. to BC21. below.
BC12. Although “control” is used in existing Standards of GRAP, the Board was of the
view that this concept needed to be explained in the context of identifying a
principal and an agent. To ensure that there is clarity on the approach to be
followed in identifying a principal or an agent, the Board agreed to refer to this
concept as “beneficial control”.
Activity
BC13. The approach to identifying a principal and an agent in the Discussion Paper
explicitly required an entity to identify whether it acted as a principal or an agent in
relation to specific activities. The Discussion Paper also proposed a clear definition
of an activity. Respondents did not support the emphasis placed on the
identification of specific activities as the starting point in the identification of
principals and agents. The Board agreed that to do so would be too onerous, and
may restrict the recognition of individual transactions. As a result, the Board agreed
that “activity” should be used in the Standard, but not formally defined or used in
the manner proposed in the Discussion Paper.
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BC14. Transactions in the Standards of GRAP are assessed, and accounted for, on a
transaction-by-transaction basis. While individual transactions are still accounted
for on this basis in principal-agent arrangements, the Board agreed that an entity
could assess whether it has beneficial control over an activity, rather than an
individual transaction. Making this assessment at an activity level is considered to
be a practical expedient to assessing beneficial control at on a transaction-bytransaction basis, as activities are likely to generate repetitive transactions that are
similar in nature. However, as the Board did not wish to restrict entities from
assessing beneficial control for individual transactions, an “activity” is only
described in the Standard of GRAP, rather than being formally defined.
Binding arrangement
BC15. In the Discussion Paper, the Board considered whether a principal-agent
relationship could exist in practice outside of a binding arrangement. It concluded
that although this is not necessarily impossible, it is highly unlikely given that the
basis of principal-agent relationships is the granting of a mandate by the principal
to the agent to act on its behalf. In the public sector, entities would not act on
another entity‟s behalf unless there was an arrangement compelling them to do so.
Consequently, the Board agreed that the existence of a binding arrangement is
critical in identifying the rights and obligations conferred on the parties to the
arrangement. It also agreed that, in the absence of a binding arrangement, an
entity is considered to be undertaking activities for its own account and not part of
a principal-agent arrangement.
BC16. In describing what a binding arrangement means, the Board recognised the broad
range of arrangements that exist in the public sector that may give rise to a
principal-agent relationship, and in particular, that these may not necessarily be
reduced to a contractual arrangement. Consequently, the Board agreed to describe
binding arrangements as broadly as possible to ensure that entities also consider
arrangements governed by legislation or equivalent means, i.e. government policy,
directives, instructions or orders issued by ministers, councils or similar bodies, as
well as those created through the operation of law, including common law.
BC17. The Board observed that there is often no evidence of a formally documented
binding arrangement arising from the sources described in paragraph BC16. When
such instances exist, the Board agreed that an entity should consider whether an
entity‟s past actions indicate whether it acts as a principal or an agent.
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Approach to identifying principals and agents
BC18. Previously, the identification of a principal or an agent in an exchange transaction
was based on an analysis of risks and rewards. The Standard of GRAP on
Revenue from Exchange Transactions provided a list of indicators that preparers
used in making this assessment. These indicators were largely derived from
private sector scenarios and were often not relevant or appropriate for the types of
transactions entered into by public sector entities, particularly those transactions
where entities have similar mandates. Entities had to apply a significant degree of
judgement, which resulted in subjectivity in the preparation of financial statements
and a lack of comparability. Given the shortcomings with using “risks and rewards”
to assess whether an entity acts as a principal or an agent, the Board agreed that
the concept of “beneficial control” may be more relevant in identifying principals
and agents in the public sector.
BC19. The concept of “control” is used in the definition of an asset and the recognition
criteria in the Framework for Preparation and Presentation of Financial Statements,
and in other Standards of GRAP. The Board believed that using beneficial control
is less subjective in practice given the nature of the binding arrangements
frequently encountered in the public sector. This is particularly relevant where
entities have similar mandates or responsibilities, as only one entity can have
control over a particular activity, whereas in an assessment of risks and rewards,
both may be present for both parties in relation to a particular activity.
BC20. Consistent with the definition of an asset, and the concepts of control in the
Standards of GRAP dealing with consolidated financial statements, joint ventures
and associates, an entity recognises elements that belong to it (i.e. that it has the
ability to control, for its own benefit). Although this signifies a departure from the
risks and rewards approach that has been used historically in most accounting
frameworks to identify a principal or an agent, the Board acknowledged in the
Discussion Paper that an evaluation of risks and rewards may still be useful as an
indicator of whether an entity has beneficial control. However, it was agreed that,
for the purposes of this Standard, the three criteria for beneficial control
(incorporated into the definition of beneficial control) are robust enough to provide
preparers with the necessary guidance in determining beneficial control, rather
than also providing an additional list of indicators. As a result, risks and rewards is
not specifically mentioned in the Standard.
BC21. The Board agreed that an entity has beneficial control over an activity, and should
accounts for those activities as its own, when it can direct the activity, has the
ability to benefit from the activity related resources, and is exposed to the variability
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in the results of the activity. Consistent with how “control” is used in other
Standards of GRAP, the Board agreed that both a power element and a benefit
element must be present to demonstrate control.
Accounting by a principal and an agent
Revenue and expenses
BC22. The key accounting consideration in accounting by a principal and an agent is
whether an entity should account for the transactions undertaken on behalf of
another as its own or not. The Board agreed that the accounting principle
established in this Standard should follow the approach used to identify when an
entity acts as a principal or an agent, i.e. the existence of beneficial control. The
Board agreed that when an entity demonstrates that it has beneficial control over
an activity, it should account for revenues and expenses arising from those
activities as its own transactions and present these in the statement of financial
performance. This means that a principal would reflect revenues and expenses in
its statement of performance when it has beneficial control over an activity.
Similarly, an agent will not recognise transactions as its own statement of financial
performance where the principal has beneficial control over the related activities,
as doing so would distort the agent‟s own financial position and performance.
Assets and liabilities
BC23. The Board agreed that, while an explicit principle could be provided for the
recognition of revenue and expenses in the statement of financial performance
when an entity acts as an agent or a principal, similar explicit principles could not
be provided for the recognition of assets and liabilities arising from principal-agent
arrangements. The Board agreed that an assessment should be made by an entity
of whether any rights and obligations arising from the arrangement give rise to
assets and liabilities in the Framework, and whether they meet the recognition
criteria in the relevant Standards of GRAP.
BC24. The Board concluded that it should, however, provide guidance on when, or under
what circumstances, certain assets and liabilities that may arise from principalagent arrangements should be recognised. In particular, the Board agreed that
guidance should be provided where cash or another monetary asset is held by an
agent for a principal, or when assets such as inventories are held by agents to
execute the activities specified in the principal-agent arrangement. Given the
potential complexity of specific scenarios, the Board also agreed to provide
guidance on the recognition of receivables and payables arising from principal-
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agent arrangements. The Board‟s conclusions on this are outlined in the
paragraphs that follow.
BC25. The Board identified that, in the public sector, many principal-agent arrangements
require an agent to collect cash or pay cash on behalf of the principal. Some of the
arrangements examined by the Board required more than just the collection or
payment of cash, and posed specific rights and obligations on the agent. The
Board agreed that in specific circumstances, the rights and obligations outlined in
the binding arrangement may give rise to a receivable or a payable for the agent.
The Board noted that the principal is likely to have a receivable or a payable in all
circumstances. The identification of the counterparty should, however, be
considered carefully.
BC26. The Board is of the view that if all an agent is required to do in a binding
arrangement is collect (and/or pay) cash for a principal, then recognising a
receivable or a payable would be inappropriate. In these circumstances, the Board
concluded that it would be appropriate to recognise cash as an asset once it is
received, and recognise a corresponding liability to remit the cash to the principal.
BC27. However, if an agent is required to do more than collect (and/or pay) cash, the
Board agreed that a thorough examination of the rights and obligations in the
binding arrangement should be undertaken. In particular, the Board agreed that
where certain rights and obligations exist, recognition of a receivable or a payable
may be appropriate. These are as follows:






The debt is due to, or due by, the agent, i.e. the agent is the counterparty in
the transaction with the 3rd party.
The agent has the legal right to enforce collection of the debt, or the agent has
the legal obligation to settle the debt.
The agent determines the amount that must be paid by, or to, the 3rd party
based on the policies determined by the principal.
The agent determines the manner and timing of settlement.
The agent has the power and discretion to write off debts owing by 3rd parties.
The agent has an obligation to undertake certain activities, which it is required
to do in terms of the binding arrangement.
BC28.The Board considered whether more explicit guidance on the timing of the
recognition or receivables and payables in paragraph BC27. The Board agreed that
the principles in the relevant Standards of GRAP should be considered in
assessing when a receivable or payable should be recognised, and how it should
be measured.
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Presentation
BC29. Consistent with the principles in the existing Standards of GRAP on Presentation of
Financial Statements, the Board agreed that it is inappropriate for an agent to
offset amounts of assets and liabilities held under a principal-agent arrangement.
The Board did not support the offsetting of these amounts as they often represent
separate transactions. The Board did however note that if the requirements of
another Standard of GRAP permitted the offsetting of an asset and liability, then
the requirements in that Standard could be applied.
Disclosure
BC30. The Board proposed disclosures in respect of principal-agent arrangements in the
Discussion Paper on the basis that users of financial statements would be likely to
find the disclosure of information useful where it meets the following objectives:
Principals:
(i)
It provides information about the nature of the activities of the entity and its
role in relation to other entities (usually, but not always a related party).
(ii)
It provides information about the financial and non-financial risks associated
with the entity being a party to the principal-agent arrangement.
(iii)
It provides information about the entity‟s capacity to carry out its own
activities, including its reliance on other parties.
(iv)
It provides information about resources of the entity that are in the custody
of another party.
Agents
(i)
It provides information about the nature of the activities of the entity and its
role in relation to other entities (usually, but not always, a related party).
(ii)
It provides information about the financial and non-financial risks associated
with the entity being a party to the principal-agent arrangement.
(iii)
It provides information about the entity‟s custodial responsibilities and
financial performance as an agent (accountability).
(iv)
It provides information about the use and allocation of entity resources in
agency activities.
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BC31. Respondents to the Discussion Paper did not agree with the extent of the
disclosures proposed, particularly the reconciliation of the movements between
amounts owing between the parties at the beginning and end of the reporting
period, and describing disclosure requirements already required by other
Standards of GRAP. The Board agreed that the disclosures should be streamlined
to respond more specifically to the objectives outlined above, and should not
duplicate information already provided in other parts of the financial statements in
accordance with other Standards of GRAP.
BC32. During the comment process, a respondent indicated that it would be useful to
know whether any termination clauses existed in such arrangements, and what
their potential implications might be on the arrangement from the perspective of the
principal. The Board agreed that this disclosure meets the overall objectives
outlined in paragraph BC30. and agreed to include in the Standard.
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Appendix – Consequential amendments to other Standards
of GRAP
The purpose of the appendix is to identify the consequential amendments to other
Standards of GRAP resulting from the issue of the Standard of GRAP on Accounting by
Principals and Agents.
Amended text is shown with new text underlined and deleted text struck through.
Amendments to the Standard of GRAP on Revenue from Exchange
Transactions
Scope
A1.
Amend paragraph .13 as follows:
Revenue
.13
Revenue includes only the gross inflows of economic benefits or service
potential received and receivable by the entity for on its own account.
Amounts collected as agent of the entity or on behalf of other third parties,
for example, the collection of telephone and electricity payments by the
post office on behalf of entities providing such services, are not economic
benefits or service potential that flow to the entity and do not result in
increases in assets or decreases in liabilities. Therefore, they are
excluded from revenue. In a principal-agent arrangement, Similarly, in an
agency relationship, the gross inflows of economic benefits or service
potential include amounts collected on behalf of the principal and which do
not result in increases in net assets for the entity. The amounts collected
on behalf of the principal are not revenue. Instead, revenue is the amount
of any commission, fee or other compensation received or receivable for
the collection or handling of the gross flows. The Standard of GRAP on
Accounting by Principals and Agents sets out the criteria an entity applies
in assessing whether it acts a principal or agent in a principal-agent
arrangement.
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A2.
Amend the following paragraphs in the Appendix as follows:
Appendix
A19. Sales to intermediate parties, such as distributors, dealers or others
for resale
Revenue from such sales is generally recognised when the risks and
rewards of ownership have passed. However, when the purchaser is
acting, in substance, as an agent in accordance with the Standard of GRAP
on Accounting by Principals and Agents, the sale is treated as a
consignment sale.
Recognition and measurement
A25. Determining whether an entity is acting as a principal or as
an agent
Paragraph .13 states that „in an agency relationship, the gross inflows of
economic benefits or service potential include amounts collected on behalf
of the principal and which do not result in increases in net assets for the
entity. The amounts collected on behalf of the principal are not revenue.
Instead, revenue is the amount of any commission received or receivable
for the collection or handling of the gross flows.‟ Determining whether an
entity is acting as a principal or as an agent requires judgement and
consideration of all relevant facts and circumstances.
An entity is acting as a principal when it has exposure to the significant risks
and rewards associated with the sale of goods or the rendering of services.
Features that may indicate that an entity is acting as a principal include (but
are not limited to):
(a)
the entity has the primary responsibility for providing the goods or
services to the customer or for fulfilling the order, for example, by being
responsible for the acceptability of the products or services ordered or
purchased by the customer or, by being legally responsible for the provision
of certain goods or services;
(b)
the entity has inventory risk before or after the customer order,
during delivery or on return;
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(c)
the entity has latitude in establishing prices, either directly or
indirectly, for example by providing additional goods or services; and
(d)
the entity bears the customer‟s credit risk for the amount receivable
from the customer.
An entity is acting as an agent when it does not have exposure to the
significant risks and rewards associated with the sale of goods or the
rendering of services. One feature indicating that an entity is acting as an
agent is that the amount the entity earns is predetermined, being either a
fixed fee per transaction or a stated percentage of the amount billed to the
customer.
Example: Local municipality X provides water to the consumers of District
municipality Y in terms of an arrangement concluded between the two
entities. In terms of the arrangement:
1.
District municipality Y determines the tariff paid by consumers for
any water provided by Local municipality X. Consequently, if the tariff paid
by Local municipality X to purchase the water exceeds the tariff charged to
consumers, District municipality Y will compensate Local municipality X for
the shortfall.
2.
Local municipality X is responsible for certain losses:

Inventory losses and other losses relating to purchases of water that
occurred in the provision of the service to the consumers of District
municipality Y, which could have been prevented through adequate
maintenance of infrastructure or as a result of negligence; and

Amounts owing by consumers that are not collectible because of
customer disputes as a result of incorrect estimates or billing.
In terms of legislation, District municipality Y remains responsible for the
provision of water to its consumers.
Analysis
Local municipality X acts as an agent on behalf of District municipality Y
because District municipality Y remains exposed to the significant risks of
the supply of water to consumers, despite having transferred some risk to
Local municipality X. Specifically:

District municipality Y has a legal responsibility to supply water to
consumers in its jurisdiction.
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
Local municipality X acquires water on District municipality Y‟s
behalf, which it then sells to District municipality Y‟s consumers at a tariff
specified by District municipality Y. Losses related to water purchased for
District municipality Y, other than those specified in the agreement, are
borne by the district.

Non-payment by consumers of District municipality Y for water
supplied by Local municipality X, other than those specified in the
agreement, are borne by the district.
Example: An entity acts as an online seller from a website, where it
advertises tourism excursions. An analysis of the arrangement shows that
it acts as an intermediary between its customers and the ultimate sellers of
the tourism excursions and that it does not set the selling price. Its
contractual terms of business include an exclusion of any liability to its
customers once they have been put in touch with the ultimate sellers. The
seller is paid a fee for each customer that purchases a tourism excursion
from an ultimate seller and has no involvement in the transaction after it has
put the customer in touch with the ultimate seller. The seller is acting as
agent and its revenue should include only the fees it receives from the
ultimate seller.
Example: A government medical store provides space for concessionaires
to sell products and receives a fixed amount of rental from each
concessionaire. An analysis of the factors discussed in paragraphs above
show that the concessionaire is acting as principal in an exchange
transaction with its customers, and is entitled to the amounts received from
the sale of the goods and services.
In these circumstances, the
concessionaire should include within its revenue the amounts received or
receivable in respect of the sale of the goods and services. The
government medical store should not include within its revenue the value of
the concessionaire‟s sales.
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A3.
Amend the following paragraphs in the Comparison with the International Public
Sector Accounting Standard on Revenue from Exchange Transactions (July 2001)
as follows:
Comparison with the International Public Sector
Accounting Standard on Revenue from Exchange
Transactions (July 2001)

This Standard makes reference to the Standard of GRAP on Accounting by
Principals and Agents, which provides further public-sector specific
guidance on identifying when an entity acts as a principal or agent and
prescribes additional disclosure requirements.

The appendix to this Standard contains additional examples as adopted
from the United Kingdom Standard on ‘Reporting the Substance of
Transactions: Revenue Recognition’ (November 2003) that provides
guidance on when to recognise revenue for inception fees and the
presentation of revenue as principal or as agent.
Amendments to the Standard of GRAP on Revenue from Non-exchange
Transactions
A4.
Amend paragraph .10 as follows:
.10
Revenue comprises gross inflows of economic benefits or service potential
received and receivable by an entity, which represents an increase in net
assets, other than increases relating to contributions from owners.
Amounts collected as an agent of the government or other third parties will
not give rise to an increase in net assets or revenue of the agent. An entity
applies the principles in the Standard of GRAP on Accounting by Principals
and Agents to determine when it acts as an agent or principal in a nonexchange revenue transaction. This is because the agent entity cannot
control the use of, or otherwise benefit from, the collected assets in the
pursuit of its objectives.
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A5.
Amend the following paragraphs:
Taxes
.61
Governments typically make use of tax collection agencies for the purposes
of collecting taxation revenue. These entities assess whether they act as an
agent or principal in accordance with the Standard of GRAP on Accounting
by Principals and Agents to determine what proportion, if any, of the taxes
collected on behalf of government may be recognised as their own revenue.
Taxation revenue arises only for the government that imposes the tax, and
not for other entities. For example, where the national government imposes
a tax that is collected by South African Revenue Services (SARS), assets
and revenue accrue to the government, not SARS. Further, where the
national government imposes a tax, the entire proceeds of which it passes
to provincial governments, based on a continuing appropriation, the national
government recognises assets and revenue for the tax, and a decrease in
assets and an expense for the transfer to the provincial governments. The
provincial governments will recognise assets and revenue for the transfer.
Where SARS collects taxes on behalf of several other entities, it is acting as
an agent for all of them.
Fines
.89
Fines normally require an entity to transfer a fixed amount of cash to
government and do not impose on the government any obligation that may
be recognised as a liability. As such, fines are recognised as revenue when
the receivable meets the definition of an asset and satisfies the criteria for
recognition as an asset set out in paragraph .29. As noted in paragraph
.10, where an entity collects fines in the capacity of an agent, the fine will
not be revenue of the collecting entity. However, in some cases it may be
appropriate for the collecting agent to recognise the receivable, along with a
corresponding liability to pay the amounts collected over to the government.
The Standard of GRAP on Accounting by Principals and Agents provides
guidance on the recognition of receivables by an agent, when those
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receivables are held on behalf of the principal. Assets arising from fines are
measured at the best estimate of the inflow of resources to the entity.
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