Kōwhai Collective: Gross or Net Revenue on a Marketplace
Kōwhai Collective Ltd operates an online marketplace for 420 New Zealand artisan food producers. For the year ended 31 March 2025, gross merchandise value (GMV) was $48.0 million. Kōwhai charges producers an 18% commission, collects customer payment, handles refunds and customer service, and arranges courier delivery through a contracted network. Producers set their own prices within a narrow band, but Kōwhai may run promotions only with producer approval. Kōwhai does not hold inventory; producers ship directly, although Kōwhai’s terms allow it to arrange replacement or refund for lost parcels. Returns average 6% of GMV. The CFO currently recognises the full $48.0 million as revenue and the 18% commission as cost of sales. The draft accounts show revenue of $48.0 million and an operating margin of 3.0%. The bank covenant requires revenue of at least $30.0 million and an operating margin of at least 8.0%. The auditor has questioned whether Kōwhai is principal or agent and has asked for a memo before the audit committee.
1. Apply the IFRS 15 principal-versus-agent indicators to Kōwhai. Recommend gross or net recognition and quantify the effect on revenue and operating margin.
Read the worked answer
Start with control indicators, not the contract label. Kōwhai does not hold inventory, does not set the producer’s selling price except through approved promotions, and is not primarily responsible for the product meeting specification because producers ship directly. Kōwhai does handle payment, refunds and customer service, and can arrange replacement for lost parcels. Those are fulfilment and credit-support activities, but they do not by themselves give Kōwhai the ability to direct the use of the goods before transfer. On balance Kōwhai is an agent.
Agent accounting means commission revenue of 18% × $48.0m = $8.64m, with amounts collected for producers treated as pass-through liabilities rather than cost of sales. Operating profit is unchanged at 3.0% × $48.0m = $1.44m, but the margin becomes $1.44m ÷ $8.64m = 16.7%. The revenue covenant fails ($8.64m < $30.0m); the margin covenant passes. The accounting conclusion must not be reversed to protect the covenant, but the breach needs prompt discussion with the bank.
2. Explain how the gross-versus-net distinction affects users and the covenant, and recommend disclosures and communication.
Read the worked answer
Gross revenue overstates Kōwhai’s scale and understates its margin. A user comparing Kōwhai with a retailer would misread its economics unless the agent judgement, GMV, take rate and refund rate are clear. IFRS 15 requires disclosure of significant judgements, including the principal-versus-agent conclusion and the indicators considered. Kōwhai should disclose GMV, commission revenue, refunds and the basis on which it concludes it is agent. The audit committee should approve the memo and require consistency with the covenant certificate. Management should tell the bank before the covenant certificate is signed, explain the accounting change, and seek a waiver or reset. Structuring contracts solely to keep gross presentation would be a red flag; the commercial facts, not the covenant, must drive the judgement.