Revenue – ifrs 15 handbook

Example 7 – Entity is a principal even though it does not take 
physical possession of goods
Carmaker M contracts with Supplier S to manufacture the bumper for its vehicle 
model. M owns the intellectual property (IP) rights for that bumper technology, 
which is specifically designed to fit its vehicles. Further, M owns the machinery, 
equipment and moulds used by S to produce the bumpers at S’s facilities. S 
may not use that machinery, equipment or moulds to produce bumpers for any 
other entities besides M. S only produces bumpers based on M’s orders. M 
uses the same bumpers from S in its own production facilities and for after-
market sales. 
Body Shop B orders a new bumper directly from M for an existing vehicle 
(e.g. for a repair). M then submits a purchase order to S and instructs S to ship 
the new bumper directly to B. S makes the bumper and ships it to B and then 
invoices M. 
In evaluating whether it is the principal for the sale of the bumper to B, M 
evaluates whether it controls the bumper before it is transferred to B. Even 
though the bumper is shipped directly to B from S, M concludes that it controls 
the bumper before it is transferred to B and therefore that it is the principal. 
M’s conclusion that it controls the bumper is based on the following factors. 
– M has the ability to direct the use of the bumper. M owns and controls 
the use of the IP and the equipment used to manufacture the bumper; no 
bumpers are produced other than from M’s orders. M decides whether to 
direct a particular unit to its own facilities (e.g. to install in a new vehicle) or to 
another customer (e.g. a different repair shop or auto parts retailer). S cannot 
sell the bumper to a customer not permitted by M or use it at its discretion 
(because S does not manufacture cars); it can only direct the bumper as 
instructed by M. 
– M has the ability to obtain substantially all of the remaining benefits from 
the bumper. M is entitled to all of the proceeds (the amount of which it 
determines) from the sale of the bumper to B or it could use the bumper to 
produce a new vehicle. As a result, M is able to obtain substantially all of the 
remaining benefits from each bumper. 
M does not need to consider the principal-agent indicators because it is apparent 
based on applying the general control requirements that M controls the bumper 
before it is transferred to B and therefore is the principal in the transaction.

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254 | Revenue – IFRS 15 handbook