GRAP 109 on Accounting by Principals and Agents explains that a principal-agent arrangement is governed by a binding arrangement that establishes the rights and obligations of the parties to the arrangement. There needs to be a binding arrangement for a principal-agent arrangement to exist as it is unlikely that an entity undertakes transactions with third parties on behalf of, and for the benefit of another entity in the absence thereof.

A new Frequently Asked Question (FAQ) clarifies what a binding arrangement means in the context of a principal-agent arrangement. The FAQ explains that a contract is a type of binding arrangement, but enforceable rights and obligations for a particular transaction may be established by a combination of legislation or similar means and a contract. An entity needs to assess the rights and obligations from a contract(s)and the related legislation or similar means to conclude if a principal-agent arrangement exists.

The new FAQ can be accessed here : Frequently asked questions – ASB