Principal versus agent assessment for tenant service charge recharges

The principal-versus-agent conclusion can materially change reported revenue and cost of sales scale (though not cash flow or profit), so landlords who default to gross presentation without testing control overstate both revenue and cost of sales, misleading readers benchmarking revenue growth, margins, and portfolio scale.

For each recharge line (electricity, cleaning, security), does the landlord control the service before it is transferred to the tenant, or merely arrange it? Does the landlord have discretion in setting the price charged to tenants, or does it pass through the third-party cost with no markup? Is the principal/agent conclusion made recharge-by-recharge rather than as a single blanket policy across all service charges? Is the conclusion revisited whenever a service contract is renegotiated in a way that changes control indicators?

1) Identify the specified good or service to be provided to the tenant (e.g., electricity, cleaning, security) and confirm whether the landlord or the third-party provider is obliged to fulfil that promise to the tenant.
2) Assess whether the landlord controls the specified service before it is transferred to the tenant, using the control indicators: primary responsibility for fulfilment, inventory risk before or after the service is ordered, discretion in setting the price charged to the tenant, and whether the landlord's consideration is a fee/commission versus the gross amount billed.
3) If the landlord controls the service before transfer (acts as principal), recognize the gross amount billed to tenants as revenue and the amount paid to the provider as cost of sales.
4) If the landlord merely arranges for the third party to provide the service (acts as agent), recognize as revenue only the net fee, commission, or margin retained; the amount collected on behalf of the provider and passed through is not revenue.
5) Perform this assessment recharge-by-recharge (electricity, cleaning, security, etc. can have different conclusions) rather than adopting a single blanket policy for all service charges.
6) Revisit the conclusion if contract terms change, since the principal/agent conclusion is contract-specific and can change over time.

Under principal (gross) presentation, measure revenue at the full amount charged to tenants for the service and measure cost of sales at the amount paid to the third-party provider. Under agent (net) presentation, measure revenue only at the fee, commission, or margin the landlord is entitled to retain for arranging the service; amounts collected from tenants and remitted to the provider are recognized as a receivable/payable movement (a pass-through), not as revenue and cost. Reassess the measurement basis if the contract is renegotiated in a way that changes control indicators.

Disclose the accounting policy applied to service charge recoveries (gross versus net) and the principal-versus-agent judgement reached for each significant category of recharge; the effect on the scale of revenue and cost of sales; any changes in the conclusion period over period and the reason; the nature of the landlord's obligation (arranging versus directly providing the underlying service).

• Defaulting to gross presentation for all recharges without performing a documented control assessment for each category
• grossing up pass-through utility or municipal costs that the landlord merely arranges and has no pricing discretion or inventory risk over
• applying inconsistent treatment of similar recharges across different properties in the same portfolio, undermining comparability
• treating the mere act of invoicing the tenant as evidence of principal status, when the substantive control indicators point to agent
• failing to reassess the conclusion when a service contract is renegotiated and the landlord gains or loses pricing discretion or supplier selection control.