Identifying principal-agent arrangements – the role of third parties in a principal-agent arrangement

The Accounting Standards Board started its post-implementation review of GRAP 109 Accounting by Principals and Agents. ED 200 is published on the ASB website with a comment deadline of 15 September 2023.

GRAP 109 defines a principal-agent arrangement as:

A binding arrangement in which one entity (an agent), undertakes transactions with third parties on behalf, and for the benefit of, another entity (the principal) [own emphasis added]

From the definition it is clear that without transactions with third parties, an arrangement is not a principal-agent arrangement. A principal-agent arrangement requires at least three parties – a principal, an agent, and third parties with whom the principal transacts through an agent.

On the other hand, a misconception is that entities assume all binding arrangements with three or more parties are principal-agent arrangements. Only when all the elements of the definition are met is the arrangement a principal-agent arrangement. The definition requires the parties to act in a specific way – the agent represents the principal and administers the transactions between the principal and the third parties according to the specific direction given by the principal in the binding arrangement.

The relationships in a principal-agent arrangement

The Secretariat issued FAQ 4.11 on When should GRAP 109 be applied?. The FAQ includes the following diagram to illustrate the relationships that exist in a principal-agent arrangement:

As illustrated in the diagram, in a principal-agent arrangement, the agent facilitates the transactions between the principal and third parties. The rights and obligations between the principal and the third parties are likely to be substantive in nature. Although the agent facilitates or executes the transactions, the agent is not responsible for fulfilling the rights and obligations in the transaction. The agent’s rights and obligations in relation to the transactions between the principal and the third parties are likely to be protective or administrative in nature.

Although one of the parties to the transaction would be in the public sector and apply Standards of GRAP for GRAP 109 to be applied, the other parties to the transaction may be in the public or private sectors.

Examples of transactions with third parties that may not be principal-agent arrangements

GRAP 109 notes the assessment of transactions with third parties may be particularly relevant to the following two scenarios in the public sector:

• Collecting money for the relevant revenue fund

An entity may be required by legislative arrangements to collect money from other parties and to subsequently deposit the money into the relevant revenue fund. Although an entity may seem to undertake activities on behalf of the revenue fund, the legislative arrangements often do not provide specific direction in relation to the transactions with third parties and the arrangements may be administrative in nature. Such arrangements may not meet the definition of a principal-agent arrangement.

• Control relationships

An entity may control another entity in accordance with the Standard of GRAP on Consolidated Financial Statements. Although these control relationships mean that the controlling entity is able to direct the activities of the controlled entity to benefit from those activities, these relationships by themselves do not indicate the existence of a principal-agent arrangement. Only where a controlling entity specifically directs a controlled entity to undertake transactions with third parties on behalf of and for the benefit of the controlling entity may a principal-agent arrangement exist.

Comment to the Board on ED 200

The Board welcomes comment from all stakeholders on any aspect of GRAP 109.

Comment may be provided in writing through questionnaires (available on the ED 200 webpage on the ASB website) or in any other written format to info@asb.co.za. Comment may also be provided through roundtable discussions. Contact elizna@asb.co.za to be invited to a roundtable discussion.

Disclaimer

The article has been prepared by the Secretariat of the ASB for information purposes only. It has not been reviewed, approved, or otherwise acted on by the Board.