Nyika AgriConnect: gross versus net revenue and guarantee exposure
Nyika AgriConnect Ltd operates a digital marketplace and a fertiliser trading division. For the year ended 31 December 2025, marketplace gross merchandise value was MWK 480m. Farmers set produce prices, Nyika earns a 6% commission, collects buyer cash and pays farmers after 14 days. The marketplace contract states that Nyika guarantees payment to farmers if a buyer defaults, but Nyika does not hold produce, cannot return unsold produce and cannot set prices. Buyers may reject substandard produce; Nyika must then refund the buyer and recover from the farmer. Commission received was MWK 28.8m. A buyer owing MWK 12m went into liquidation in January 2026, before the financial statements were approved; Nyika must pay the farmer under its guarantee. In the fertiliser division, Nyika buys in bulk, holds stock, sets retail prices and bears obsolescence risk. Fertiliser sales were MWK 150m and cost of sales MWK 110m; expected returns are MWK 5m and returned goods can be resold at full cost.
1. Apply IFRS 15 to decide whether Nyika is principal or agent for the marketplace and fertiliser division. Compute the revenue Nyika should recognise for 2025 and explain the control indicators you relied on.
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Marketplace Nyika is an agent. It does not control the produce before transfer: farmers set prices, Nyika holds no inventory, cannot return unsold produce and does not direct the use of the goods. The payment guarantee gives Nyika credit exposure, but credit risk alone does not transfer control. Refund and recovery obligations also sit with the farmer as the supplier. Revenue is therefore the commission earned, not the gross merchandise value.
Commission revenue = 6% x MWK 480m = MWK 28.8m. Gross merchandise value of MWK 480m is not Nyika revenue.
Fertiliser division Nyika is principal. It buys in bulk, controls inventory before sale, sets retail prices and bears obsolescence risk. Revenue is recognised gross. Expected returns of MWK 5m reduce revenue and create a refund liability. A right-to-recover asset is recognised at the former carrying amount of the returned goods: cost ratio = 110/150 = 73.33%, so recovery asset = 5m x 73.33% = MWK 3.67m.
Fertiliser revenue = 150m - 5m = MWK 145m. Cost of sales = 110m - 3.67m = MWK 106.33m.
Total 2025 revenue = 28.8m + 145m = MWK 173.8m. The key judgement is control, not legal title or cash collection.
2. Explain the accounting for the buyer liquidation and for the fertiliser returns. Include amounts and the IAS 10 and IFRS 15 treatment.
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Buyer liquidation The liquidation occurred after the reporting date but before approval of the financial statements. Under IAS 10, it is an adjusting event if it provides evidence of conditions existing at 31 December 2025. The buyer's financial deterioration and the guarantee mean Nyika had a present obligation at year-end. Payment to the farmer is probable and can be estimated, so recognise a provision or guarantee liability of MWK 12m and an expense. Do not offset an expected recovery from the buyer unless recovery is virtually certain; in liquidation it is not. Any commission receivable from the same buyer should be assessed separately for expected credit loss under IFRS 9.
Fertiliser returns Under IFRS 15, expected returns reduce revenue. Recognise a refund liability of MWK 5m and a right-to-recover asset of MWK 3.67m. Revenue becomes MWK 145m and cost of sales becomes MWK 106.33m. When goods are returned, reverse the refund liability against cash or payable, bring the returned inventory back at MWK 3.67m, and recognise any additional loss if the goods are damaged. The net profit effect of the expected returns is 5m - 3.67m = MWK 1.33m, not the full MWK 5m.
3. The finance director argues that because Nyika guarantees farmer payment, it controls the produce and should report MWK 480m marketplace revenue. Evaluate this argument and state the correcting adjustment.
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The guarantee is a credit-support obligation, not evidence of control of the produce. IFRS 15 requires an evaluation of whether Nyika obtains control of the goods before transfer to the buyer. Nyika cannot direct the use of the produce, does not set the price, holds no inventory and cannot prevent the farmer from supplying other buyers. The guarantee creates financial risk and a possible provision, but it does not make Nyika the principal.
Reporting MWK 480m revenue would overstate revenue by 480m - 28.8m = MWK 451.2m and would also require a matching fictitious cost of sales. The correction is to remove the gross sale and purchase entries, recognise commission revenue of MWK 28.8m, and recognise the MWK 12m guarantee provision. The finance director's argument confuses gross transaction value with revenue and credit risk with control. The correction is material and should be discussed with those charged with governance.