A client provides corporate accommodation to corporate clients. Our client pays the guest houses and invoices and gets paid by the corporate clients. We have been showing the invoices to the corporates as the turnover but our client feels that they essentially earns only the gross profit which is very much like commission and which they would like to show as turnover. Their turnover amounts to R70 million and their gross profit R6Million. The high turnover places burdens on them from a BEE perspective. (Level 8 instead of level 4)The client suggested a trust account from where they would earn only a commision. Our view was that they can only do that if they register as estate agents and discloses their income to the guest houses. Is there any way in which their affairs could be arranged so that only their gross profit is the turnover?

 Please note that from an accounting perspective, there is no such thing as "turnover" - I am not sure if it equates to revenue but have presumed it does.

Essentially what you need to consider is whether your client is acting as an agent (in which case only commission would be recognised) or as a principal (in which case the revenue and the expenses would be recognised). This is in terms of IAS 18(AC 111) - Revenue which states:

"8

Revenue includes only the gross inflows of economic benefits received and receivable by the entity on its own account. Amounts collected on behalf of third parties such as sales taxes, goods and services taxes and value added taxes are not economic benefits which flow to the entity and do not result in increases in equity. Therefore, they are excluded from revenue. Similarly, in an agency relationship, the gross inflows of economic benefits include amounts collected on behalf of the principal and which do not result in increases in equity for the entity. The amounts collected on behalf of the principal are not revenue. Instead, revenue is the amount of commission."

IAS 18(AC 111) also provides some guidance on whether an entity is an agent or a principal. It states:

"21

Determining whether an entity is acting as a principal or as an agent (2009 amendment).

Paragraph 8 states that ‘in an agency relationship, the gross inflows of economic benefits include amounts collected on behalf of the principal and which do not result in increases in equity for the entity. The amounts collected on behalf of the principal are not revenue. Instead, revenue is the amount of commission.' 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 indicate that an entity is acting as a principal include:

(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;

(b)

the entity has inventory risk before or after the customer order, during shipping or on return;

(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."

You would therefore need to apply this to your facts and determine the correct answer.

Source : Saica