Reimbursed payroll costs under management agreements: principal vs agent

Getting the principal-vs-agent call wrong on reimbursed payroll either overstates revenue and cost by millions of riyals (gross presentation) or understates the scale of the managed operation (net presentation), and can also silently distort the GOP base used to calculate incentive fees under HOSP-022, turning an operational judgment into a driver of both top-line and fee-revenue errors.

Does the operator control the employment relationship and bear employer risk (recruitment, termination, wage-setting discretion), or is it merely administering payroll as an agent while the owner bears the substantive cost and risk? Is the payroll reimbursement contractually and economically separable from the base and incentive management fee, or is it effectively part of a single blended fee? Does the operator have genuine discretion over staffing levels and pay scales, or does the owner's approval effectively direct these decisions, pointing to agent rather than principal treatment?

1. Identify all costs the operator recovers from the owner beyond the base/incentive fee (payroll, GOSI, EOSB, other recharges) and treat each cost category separately for the principal-vs-agent test.
2. Apply the control-based principal-vs-agent assessment specifically to the payroll reimbursement: ask who controls the service (the labor) before it is provided to the owner, does the operator direct staffing levels, set pay, and bear the economic risk of employment costs, or does the owner set budgets/headcount and bear that risk with the operator only administering payment?
3. Determine primary responsibility: is the operator primarily responsible for fulfilling the employment/staffing promise, or is it fulfilling the owner's obligation as agent?
4. Assess discretion in setting price: does the operator have any latitude over payroll cost passed to the owner, or is it a dollar-for-dollar recharge of actual cost with no margin?
5. Based on steps 2-4, conclude principal (gross: recognize reimbursement as revenue and the payroll as an operator cost) or agent (net: exclude both from revenue and expense, recording only a receivable/payable pass-through).
6. Cross-check the conclusion against the management agreement's definition of the GOP or 'gross revenue' base for incentive fee purposes, ensuring payroll reimbursement is included/excluded consistently with that definition regardless of the gross/net revenue presentation conclusion.
7. Reassess the conclusion whenever staffing responsibilities, GOSI/Nitaqat obligations, or contract terms are restructured.

If concluded principal (gross): measure reimbursed revenue and matching cost at the actual payroll cost incurred (salaries, statutory benefits, GOSI, EOSB accruals) per the agreement, with no markup unless the contract provides one. If concluded agent (net): no revenue/expense is recognized; only a receivable from the owner and a corresponding payable/cash outflow for payroll are recorded, effectively a balance-sheet pass-through with no income statement impact. Subsequent measurement: EOSB accruals embedded in payroll reimbursement should be remeasured periodically consistent with the entity's EOSB accounting policy (a defined benefit-like obligation), regardless of gross/net presentation, since the underlying employer cost still needs correct measurement even if presented net.

Disclose the gross versus net presentation policy applied to reimbursed payroll and other recharged costs under management agreements; disclose the principal-vs-agent judgment and the key indicators considered (control, discretion, primary responsibility); disclose the amount of payroll reimbursement recognized gross (if any) as a separate revenue/cost line, or the net pass-through amount if presented net; disclose consistency (or reconciling adjustment) between the payroll treatment and the GOP base used for incentive fee calculations; disclose any change in presentation following a staffing/contract restructuring and its effect on reported revenue.

• Automatically grossing up all reimbursed costs as revenue without performing a control-based assessment
• treating the legal '
• employer of record'
• status (often driven by GOSI/Nitaqat registration requirements) as conclusive of principal status, when the owner in substance directs and bears the cost
• inconsistently including payroll reimbursements in the GOP base used to calculate incentive fees while presenting them net (or vice versa) in the income statement, understating or overstating incentive fees
• failing to reassess the presentation when staffing arrangements are restructured between owner and operator
• ignoring EOSB/GOSI accrual measurement because the amount is '
• just a pass-through'
• .