Identifying principal-agent arrangements – understanding what are binding arrangements

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 follows:

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]

The first step in considering whether an arrangement is a principal-agent arrangement is to assess whether the arrangement is a binding arrangement.

Why is it necessary for an arrangement to be a binding arrangement in GRAP 109?

In developing GRAP 109, the Board agreed that principal-agent arrangements exist as a result of a binding arrangement between the parties to the arrangement. It is unlikely that an entity undertakes activities on behalf of another entity without a binding arrangement because the arrangement requires the parties to perform in a specific way with third parties. Where no binding arrangement exists, it is assumed that an entity is acting for itself, rather than on behalf of another party.

As a result, there is no principal-agent arrangement in the absence of a binding arrangement.

When is an arrangement a binding arrangement?

GRAP 109 provides guidance on when an arrangement would be a binding arrangement, and how these arrangements could arise. An entity only considers the guidance in GRAP 109 to assess whether an arrangement is a binding arrangement.

For purposes of GRAP 109, a binding arrangement is any arrangement that confers enforceable rights and obligations on parties to the arrangement. These rights and obligations could arise from:

Contracts: Contracts may take various forms and include “service level agreements” and “memorandums of understanding”. They are often, but not always, in writing.

Legislation or similar means: These mechanisms include decisions by authorities such as cabinet, executive committees, boards, municipal councils and ministers.

Common law: Common law refers to legal precedent set through court rulings.

Variations of binding arrangements

An arrangement may arise from more than one of the above mechanisms. For example, an arrangement may arise from both legislation and contracts. Legislation may establish the overarching framework within which certain transactions occur. One or more contracts may establish the specific details of an arrangement between a principal and an agent, such as the activities to be undertaken, the fees to be paid to the agent, etc. In this instance, both mechanisms should be read together to assess the nature of the arrangement and the rights and obligations for the parties to the arrangement.

There may also be instances where one arrangement contains rights and obligations which may relate to both principal-agent arrangements and other types of arrangements. Where an arrangement includes multiple rights and obligations for the parties, the nature of the arrangement and roles of the parties are analysed based on these different rights and obligations. For example, a single arrangement may require an entity to represent another party in transactions with suppliers, as well as transactions with recipients of goods or services delivered by the suppliers (beneficiaries). The nature of the arrangement and role of the parties are analysed in the context of the supplier and beneficiary relationships respectively.

Stakeholders indicated that it may be particularly difficult to identify binding arrangements that are principal-agent arrangements when these variations 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.