When is an arrangement a principal-agent arrangement (Part 1)?

We have recently observed that entities – mistakenly – apply GRAP 109 on Accounting by Principals and Agents to any transaction with more than two parties. Most entities focus on assessing whether they are a principal or an agent in an arrangement instead of assessing whether they are party to a principal-agent arrangement at all.

What are the requirements of GRAP 109?

To determine if GRAP 109 should be applied, an entity needs to determine if the arrangement is a “principal-agent arrangement”. A “principal-agent arrangement” is defined as follows in GRAP 109.05:

“A principal-agent arrangement results from a binding arrangement in which one entity (an agent), undertakes transactions with third parties on behalf of, and for the benefit of, another entity (principal)”.

There are two aspects to consider in assessing whether a principal-agent arrangement exists:

• The existence of a binding arrangement between the principal and the agent.
• The arrangement is such that one entity (the agent) represents the interests of another party (the principal), in dealing with identified third parties.

The definition refers to undertaking transactions with third parties “on behalf of, and for the benefit of, another entity (principal)”. The entity on whose behalf the activities are being undertaken and who ultimately benefits (or bears losses), is the principal in the arrangement. The assessment of whether an entity is a principal or an agent in an arrangement is not undertaken as part of the initial assessment of whether a principal-agent arrangement exists.

In a series of posts this month, we will explore when GRAP 109 should be applied:

• Step 1 – When is an arrangement a principal-agent arrangement?
• Step 2 – When is an entity a principal or an agent?

The Secretariat has issued FAQ 3.12 on accounting by principals and agents. Access it here.