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SUMMARY: ACCOUNTING BY PRINCIPALS AND AGENTS Modified Cash Standard

ContentsIntroduction........................................................................................................................................2

1. Terminology alignment...........................................................................................................2

2. PPP arrangement that meets the definition of a Principal-Agent Arrangement........3

3. Inclusion of third party in the definition of principal-agent arrangement...................3

4. Typical items accounted for by the principal and agent.................................................5

5. Retention of documents substantiating payments made...............................................6

6. Supply chain management processes to be used............................................................7

7. Money collected by a department and surrendered to the revenue fund...................7

8. Money collected by a department’s entity..........................................................................8

9. Transitional provisions...........................................................................................................9

10. Comments on the checklist and decision tree............................................................10

11. Comments on principal-agent arrangements note.....................................................11

12. Two principals in the same inter-government arrangement....................................12

13. Effective date of the revised MCS chapter on Accounting by Principals and Agents...............................................................................................................................................12

Annexure A: Checklist to determine whether or not the arrangement is a principal- agent arrangement.........................................................................................................................13

Annexure B: Note on Principal-agent arrangement...............................................................14

Annexure C: Practical examples.................................................................................................18

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Introduction

The following is a summary of principal-agent arrangements issues discussed at a MCS Workshop held on 09 September 2015. When departments were preparing annual financial statements for the year ended 31 March 2015 issues pertaining to principal-agent arrangements were raised as areas requiring clarity. Therefore NT saw it appropriate to obtain input on these from the departments. Departments were required to provide responses on specific items listed below during the session based on the Invitation to comment document and were given an opportunity to comment on other principal-agent arrangements matters. Departments were also given an opportunity to send their comments by no later than 25 September 2015. Timeous submission of comments allows NT to adhere to planned timeframes with activities such as collating the comments, analysing them, conducting research, liaising with other stakeholders and subject matter experts, then publishing updated MCS, AMD, AFS Template and Specimen AFS for further comment on changes only.

The planned publication of the final MCS, AMD, AFS Template and Specimen AFS is 30 November 2015.

NT wishes to express appreciation to the departments during the MCS update process through participating at the workshop, sending written comments and continued involvement in addressing the MCS matters.

1. Terminology alignment

1.1 Background

The Accounting Standards Board recently approved the Standard of GRAP on Accounting by Principals and Agents. The terminology used in the MCS chapter on Agent-Principal Disclosures for the year ended 31 March 2015 is not in line with the GRAP terminology.

Although the Standard of GRAP on Accounting by Principals and Agents is not yet effective, the question was posed if the MCS terminology on Agent-Principal disclosures should be aligned to the terminology in the Standard of GRAP on Accounting by Principals and Agents.

1.2 Discussion

Comments from Respondents:

All the respondents agreed that the terminology MCS terminology on Agent-Principal disclosures should be aligned to the terminology in the Standard of GRAP on Accounting by Principals and Agents.

Analysis of comments:

MCS terminology on Agent-Principal disclosures should be aligned to the terminology in the Standard of GRAP on Accounting by Principals and Agents.

1.3 Resolution

MCS, AMD, AFS Template and Specimen should be updated with the GRAP 109 terminology:

MCS Terminology GRAP 109 Terminologya) Agent-principal disclosures Accounting by Principals and Agentsb) Agent-principal relationship Principal-agent arrangement

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2. PPP arrangement that meets the definition of a Principal-Agent Arrangement

2.1 Background

A PPP arrangement may meet the definition of a principal-agent arrangement. Should a department disclose the arrangement on both the PPP Note and the principal-agent arrangements Note OR, disclosure in the PPP arrangement note will suffice?

2.2 Discussion


a) The purpose and type of information that is required for each note should be considered. If these are different, then both notes should be completed. However, if the purpose and type of information required are the same, only the PPP note should be completed and a narrative should be provided on the principal-agent arrangement in the PPP note.

b) Using the checklist as a guideline, the PPP for the department does not meet the definition of a principal agent arrangement. Therefore disclosure in the PPP note only will suffice.

c) It is highly unlikely that PPP arrangement will meet the definition of a principal-agent arrangement.


A principal-agent arrangement that is also a related party relationship should be disclosed in both notes to the financial statements as the purpose and type of information required for each note are different. However, if the purpose and type of information required for a PPP arrangement that also meets the definition of a principal-agent arrangement are different, then both notes should be completed.

For a PPP arrangement that contains a lease, only the PPP note needs to be completed as the PPP note and lease purpose and requirements are similar. This supports the requirement that if the purpose and type of information required are the same, only the PPP note should be completed. The principal-agent arrangement should be mentioned in the PPP note narrative.

2.3 Resolution

AMD: Add guidance stated below 2.2 Analysis of comments above.

3. Inclusion of third party in the definition of principal-agent arrangement

3.1 Background

In the MCS applicable for the year ended 31 March 2015, the definition of an agent-principal arrangement (principal-agent arrangement) did not have a requirement for a third party to be part of the transactions specified in the arrangement.

According to the Standard of GRAP on Accounting by Principals and Agents the definition of principal-agent arrangement is as follows:

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“A principal-agent arrangement results from a binding arrangement in which one entity (an agent), undertakes transactions with third parties on behalf, and for the benefit of, another entity (the principal).”

The question posed to the departments was should transactions relating to principal-agent arrangements involve an agent undertaking transactions with third parties?

3.2 Discussion


a) Respondents agreed that it is necessary to make it a requirement for a third party to be part of the arrangement in a principal-agent arrangement with a respondent further specifying that, although substance over legal form will prevail in terms of international accounting principles, in terms of the law of agency, a third party is always involved and aligning legal and accounting principles where possible, will ensure better understandability in its application. However the rest of the requirements (summarised in a checklist) should still be considered before concluding if the arrangement is a principal-agent arrangement. A comment from a respondent was as follows:

“The nature of an agent is such that it will act on behalf of a principal. To act on behalf of a principal, there needs to be a third party involved. Without a third party involved, one party is simply delivering goods / services to another party.”

b) A respondent was of the view that also agreed to a) above and added that the arrangement between the agent and third party must be independent from the arrangement between the principal and agent.

c) A respondent suggested that principal-agent arrangements should exclude arrangements between departments (national and provincial) and public entities. It should be limited to arrangements between departments and public entities that have arrangements with service providers, implementing agents, local government, contractors etc.


Despite the rest of the criteria to be considered in determining of an arrangement is a principal-agent arrangement, introduction of transactions with third parties as a requirement is supported. This means that most ordinary department-supplier arrangements will not end up being principal-agent arrangements is the intention of the chapter.

Most inter-governmental principal-agent arrangements are material and if these are excluded from the scope, the full picture of arrangements used to fulfil the mandates of government entities. Therefore excluding any inter-governmental principal-agent arrangements is not recommended.

3.3 Resolution

MCS: Update the definition of principal-agent arrangement to include third party in alignment with the GRAP definition.

AMD: Update the definition of principal-agent arrangement to include third party in alignment with the GRAP definition. Provide guidance on what constitutes a “third party”.

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4. Typical items accounted for by the principal and agent

4.1 Background

Once the department has established that they are a principal or an agent in a principal-agent arrangement, they should disclose the necessary amounts in the financial statements and related notes. Typical items disclosed by a principal or an agent in a principal-agent arrangement can be identified.

4.2 Discussion


The principal should account for revenue and expenses arising from the transactions with third parties in its statement of financial performance as the benefits accrue to the principal as part of its service delivery mandate.

The department responsible for the function will report the following items in the financial statements irrespective of whether or not there is a principal-agent arrangement:

Revenue - Amount received from the agent for the fees collected from third parties on behalf of the principal (the department).

Conditional grant – To address the issue around budget processes this transactions should be treated as a conditional grant however this relinquish all the rights of the department over the assets and also some control. It shouldn’t be a transfer payment because this meets the definition of a principal agent arrangement.

Expenditure – Amount transferred to agent, for example, for construction of houses. This should be reported as capital expenditure in the PER and the relevant WIP disclosure note/annexure.

Administration fee paid to agent for a function that the principal is responsible for. This should be reported as goods and services in the PER

Advance – If raised in the POS it may have a severe impact on the budget process as the disbursement may only happen at a later stage e.g. new financial year


Revenue, Expenditure, Assets and Liabilities Disclosure in Primary, Secondary Financial Information and Annexures

Disclosure ExamplesPrincipalRevenue and Expenses

Principal accounts for revenue and expenses arising from the transactions with third parties in its statement of financial performance.

Revenue - Amount received from the agent for the fees collected from third parties on behalf of the principal.Expense: Amount transferred to agent to construct property on the principal’s behalf such as fee paid as compensation to the agent

PrincipalAssets and Liabilities

Refer to other MCS chapters in determining whether assets and liabilities arising from principal-agent arrangement.

Asset: Capital asset constructed by the agentLiability: Fee owing to the agent

AgentRevenue and Expenses

Agent accounts for the revenue and expenses associated with undertaking the transactions on behalf of the principal.

Revenue: Fee received as compensation from the principalExpenditure: Costs incurred in providing administration service such as employee costs

AgentAssets and Liabilities

Refer to other MCS chapters in determining whether assets and liabilities arising from principal-agent arrangement.

Asset: Cash held in agent’s bank account for amounts to be remitted to the principal.Liability: Cash held in agent’s bank account for amounts to be remitted to the principal. This

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Assets and Liabilities relating to resources held on behalf of the principal in order to undertake transactions with the relevant third parties.Assets and liabilities as a result of rights and obligations arising from principal-agent arrangements.

amount is owed to the principal

4.3 Resolution

AMD: Add guidance specified below 4.2 Analysis of comments above.

5. Retention of documents substantiating payments made

5.1 Background

Substantiating documents should be retained. There is uncertainty pertaining to which entity in a principal-agent arrangement should retain the substantiating documents.

5.2 Discussion


a) The agent transacts on behalf of the principal. Therefore the principal should retain the original supporting documentation for the transactions pertaining to revenue and expenditure recognised by the principal. There may be an agreement that the agent should retain original supporting documents but at least copies should be availed to the principal for monitoring and oversight.

b) The ASB guideline on Accounting for Housing Schemes (currently in draft) should be consulted and aligned to the MCS principles.

c) The agreement may specify the extent of documents to be submitted to the principal.

d) If supply chain management processes of the agent are utilised then there is no need for the agent to submit the substantiating documents pertaining to the payment made by the agent.

e) Originals should be given to the principal.

f) For audit purposes, the AGSA can liaise with their colleagues to verify existence of original documents kept by the agent.


The binding arrangement may specify document management requirements pertaining to the arrangement and such requirements should be adhered to. Where the binding arrangement is silent about document management requirements, it is advised that the agent avails copies of the supporting documents after considering the practicality of sending documents to the principal and cost implications. Where the agent has not sent source documents to the principal, the agent should ensure that the source documents can be availed for inspection.

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5.3 ResolutionAMD: Add guidance specified below 5.2 Analysis of comments above.

6. Supply chain management processes to be used

6.1 Background

Uncertainty exists regarding which entity’s supply chain management processes should be used in a principal-agent arrangement.

6.2 Discussion


a) If the agent is also a public sector entity that needs to comply with SCM legislation, the agent can procure according to its own policy. If the department used a private sector entity instead of a public sector entity, the agreement would have needed to include a requirement for the private sector entity to use the department’s SCM policy as it would not otherwise be subject to “government” SCM legislation.

b) Ordinarily when the agent enters into contracts with suppliers they will use their own supply chain processes and not the principal’s unless so stated in the principal-agent arrangement.

c) The challenges that the department encounter is when they appoint an implementing agent, usually 3C public entities, who are not required to follow the SCM processes of departments in terms of section 16A of the Treasury Regulations (TR). This results in irregular expenditure as the payment is incurred by departments.


Various types of arrangements will require various types of SCM processes. The requirements stipulated by legislation with regards to the relevant SCM processes to be applied by the parties in an arrangement should be adhered to. SCM processes to be applied by the agent should be stated in the terms of the binding arrangement. These should not contradict legislation. If the binding arrangement is silent, the NT can be consulted to obtain clarity on the most appropriate SCM processes to be followed.

6.3 Resolution


7. Money collected by a department and surrendered to the revenue fund

7.1 Background

PFMA states:

s11 (a) “all money received by the national government must be paid into the Fund, except money reasonably excluded by this Act or another act of Parliament”.

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s 21(a) “all money received by the provincial government must promptly be paid into the Fund, except money reasonably excluded by this Act or another Parliament”.

PFMA requires that all money received by the national and provincial departments be surrendered to the relevant revenue fund. A question raised is whether money collected by a department and surrendered to the revenue fund meets the definition of a principal-agent arrangement.

7.2 Discussion


a) Departments are not all acting on behalf of the revenue fund when they perform their “normal” duties, each has its own mandate that it is fulfilling in its own capacity. The fact that it is funded via the revenue fund is just the nature of government finances. This is also in line with GRAP 109 on Accounting by Principals and Agents.

b) In terms section (b) of the checklist, “benefit” should be interpreted as activities performed in line with a departments mandate as any money received cannot be used for any other benefit. This is further emphasised in the cost containment measures where activities such as team building exercises etc are not allowed. Therefore monies received from the revenue fund (equitable and conditional) will not benefit the department in any way other than the use thereof to perform its mandate. Considering section c) of the checklist, a department can never transfer its mandatory functions in totality to a third party. The department will forever be in control of a project.


If the department collects money as part of its mandate, it should treat it as its own revenue even though ultimately the department must surrender money collected to the revenue fund as required by the PFMA.

7.3 Resolution


8. Money collected by a department’s entity

8.1 Background

A question posed states “How should money collected by the department’s entity then required to be transferred to the department that will in turn transfer the money to the Revenue Fund be accounted for? Would this constitute a principal-agent arrangement?”

8.2 Discussion


a) We propose that department continue with the disclosure as per NT’s FAQ issued in 2014-15. It is not the department’s revenue and it should simply be an “in-and-out” in the department’s general ledger. If the money was paid by year-end, there would be no balances in the department’s financial statements and only a narrative disclosure on the amount received and paid over during the year will be made. Otherwise the amount not yet paid over will be included as a payable.

b) If a department is simply a conduit for its entity and the flow of money to the revenue fund from the entities reporting to its Minister it does not constitute a principle-agent relationship.

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c) No principal-agent arrangement as there is no binding arrangement and the surrender of funds are governed by the PFMA

d) Monies to be surrendered to the revenue fund must be treated as a payablee) Yes. These arrangements are principal-agent arrangements.


It depends on legislation that governs the entity and who is the principal. If, according to the mandate, the public entity is the principal then the department will not account for a principal-agent arrangement as the department is merely a “conduit”. In a “conduit” arrangement the department receives the money from its entities and simply passes it on to the revenue fund without playing other roles such as monitoring, oversight, etc.

If the legislation gives the department the overarching mandate pertaining to collection of money, then the department should account for the money as departmental revenue and this is potentially a principal-agent arrangement. All the criteria of a principal-agent arrangement should be met before the department accounts for the arrangement as a principal-agent arrangement.

8.3 Resolution


9. Transitional provisions

9.1 Background

GRAP’s ED 133 Proposed Transitional Provisions for initial adoption of the standard of GRAP on Accounting by Principals and Agents states the following:

“The approaches in the previous guidance and the newly issued Standard are vastly different and may result in transactions being classified differently. Given the difference in approaches and the potential outcome of applying these, the Board is of the view that GRAP 109 should be applied retrospectively. Retrospective application ensures that (a) comparable information is made available in the financial statements, and (b) provides users with relevant information to measure the performance of entities and to hold them accountable for the activities they undertake.”

For MCS purposes is retrospective or prospective application on initial adoption of the revised Chapter on Agent-Principal Disclosures (Accounting by Principals and Agents) most appropriate? Also specify transitional provisions that should be considered for MCS.

9.2 Discussion


a) Most respondents stated that prospective application is the most appropriate in a MCS environment.

b) For MCS purposes the prospective application is the most appropriate for the initial adoption of the disclosure. It is impractical to apply the retrospective approach if the existing relationship between a department and a specific entity was not previously disclosed / treated as principal–agent relationship. The retrospective approach may only be appropriate for new contracts going forward.

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c) A respondent indicated that ED 133 does not provide for transitional provisions for departments, which is an omission. Therefore Directive 2 (transitional provisions for public entities, municipalities) should also apply for departments.

d) Any revision in the MCS standard even if vastly different from the one already in place should be treated as a change in accounting policy since this policy was already in place in the last two years.

e) Prospective application. Departments still have difficulty in applying retrospective principles. Departments tend to appoint consultants that will not be cost effective.

f) There should be transitional provisions for departments that are treating payments to service providers as a transfer payment. These would need to be now treated as payment from goods and services. Transitional provision is needed since this is a budget issue and would need to be approved by Parliament which could be time consuming


Prospective application is proposed. There may be classification challenges. For example, a department might have budgeted and classified an item as departmental revenue although it does not meet the definition of departmental revenue as the department might have assessed that they are an agent rather than a principal. With regards to expenditure, there is a possibility that the department budgeted for and classified an item as transfer payment instead of goods and services. Therefore there will be a classification difference. Where comparatives are different, the department will have to specify reasons for differences.

9.3 Resolution

MCS: Specify that changes will be applied prospectivelyAMD: Prospective application guidance to be addedDiscussions to be held with budget office to conclude on instances where the budget differs from classification required for accounting purposes.

10. Comments on the checklist and decision tree

10.1 Background

In order to ease the process of determining if an arrangement meets the definition of a principal-agent arrangement a decision tree and a checklist were developed and availed to the respondents to comment on.

10.2 Discussion


For Checklist, refer to Annexure A

a) The following updates are suggested: Is there a third party that will benefit from the arrangement?

This should be reworded. The third party is not necessarily receiving benefit. The following wording is suggested “Is there a third party involved?”

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Does the entity (the agent) to the binding arrangement have all three of the following criteria:Remove “the agent” as it not yet confirmed to be an agent. It will only be confirmed as an agent once all criteria are met.

Does the entity (the agent) to the binding arrangement have all three of the following criteria:There should be a “yes” or “no” answer after each criterion a), b) and c)

b) The questions in the decision tree should not be in the negative statement as this may confuse the reader in determining the answer, i.e. two “no’s” will be a yes.

c) Is it only assets and liabilities or is it also other disclosure items such as contingent liabilities, commitments etc?

d) The questions in the checklist should not be in the negative statement as this may confuse the reader in determining the answer, i.e. two “no’s” will be a yes.


For Checklist, refer to Annexure A

a) The following updates are suggested: Is there a third party that will benefit from the arrangement?

The question will be reworded as follows: “Is there a third party with whom transactions to the binding arrangement will be undertaken?”

Does the entity (the agent) to the binding arrangement have all three of the following criteria:The words “entity (the agent)” will be replaced with the words “entity (possible agent)”.

Does the entity (the agent) to the binding arrangement have all three of the following criteria:There should be a “yes” or “no” answer after each criterion a), b) and c)

b) The questions in the decision tree will not be updated to be positive statements as doing so will change the mean the questions should not be posed from the agent as done in GRAP 109.

c) The words “and other disclosure items” will be added so that items such as irregular expenditure are covered as part of the checklist and decision tree.

10.3 Resolution


11. Comments on principal-agent arrangements note

11.1 Background

Respondents were requested to comment on the principal-agent arrangements note disclosure requirements as per Annexure B. Updates to the note are aligned to GRAP 109 as far as possible and highlighted in red.

11.2 Discussion


a) Aligning the disclosure to GRAP 109 is appropriate and will ensure that departments and entities are not contradicting when reporting.

b) This note is more detailed and will assist the Department to be accountable for existing relationships with agents. However, based on GRAP 109 specific guidance should be provided related to the column “Resources (including assets and liabilities) under custodianship of agent”.

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Where assets are constructed by an agent on behalf of a department such asset under construction (i.e. work in progress) is not an asset of the principal.


The recommended updates should be updated on the AFS Template and Specimen AFS, provided they are aligned to the updated MCS chapter on Accounting by Principals and Agents.

11.3 Resolution

AFS Template and Specimen: Update the principal-agent arrangement note

12. Two principals in the same inter-government arrangement

Entities should consider the criteria in determining if they are a principal or an agent in an arrangement. Should two government entities each reach the conclusion that they are both principals whereas a principal-agent arrangement exists, it is suggested that discussions are held between the two entities and minutes kept of the deliberations. If the two entities are still not in agreement after the deliberations, OAG’s Accounting Support and Reporting (ASR) can be contacted to assist the entities in making a determination on which entity is the principal and which an agent.

13. Effective date of the revised MCS chapter on Accounting by Principals and Agents

13.1 Background

The Standard of GRAP on Accounting by Principals and Agents is not yet effective. The proposed effective date that the Minister of Finance is yet to approve is for the financial years starting from April 2017. When should the updated MCS chapter on Accounting by Principals and Agents be effective?

13.2 Discussion

The MCS chapter on Agent-Principal Disclosures, (term revised to Accounting by Principals and Agents – refer to item 1. Titled Terminology alignment above), was already effective from the year ended 31 March 2014. The revised chapter clarifies what constitutes a principal-agent arrangement in line with GRAP. In doing so, introducing the requirement that a “third party” has to be part of the transaction also lessens the number of items that might have been reported using the requirements of the chapter before revision. Therefore implementing the updated chapter is envisaged to reduce the number of arrangements that will meet the definition of a principal-agent arrangement.

13.3 Resolution

MCS: The effective date of the revised MCS chapter on Accounting by Principals and Agents is for year ends beginning 1 April 2015.

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Annexure A: Checklist to determine whether or not the arrangement is a principal- agent arrangement.

1. Is there a binding arrangement?2. Is the binding arrangement for one entity to perform work on behalf of another entity?3. Is there a third party that with whom transactions to the binding arrangement will be undertaken?4. Does the entity (the agent) to the binding arrangement have all three of the following criteria:

a) It does not have the power to determine the significant terms and conditions of the transaction (criterion not relevant where legislation or equivalent gives powers to the entity to determine the t’s and c’s of particular transactions

Where an entity (an agent) provides goods and services to third parties or procures goods and services from third parties, it does not determine the following (list not exhaustive):

i. What goods and services should be provided to third partiesii. What goods and services should be procured from third partiesiii. What taxes, levies or other charges should be levied on third partiesiv. What payments should be made to third partiesv. To whom goods and services should be providedvi. From whom goods and services should be procuredvii. To whom taxes, levies or other charges should be levied onviii. To whom payments should be madeix. The price, amount of tax, levies or other charges to be paid by third partiesx. The price to be paid to third partiesxi. The amount of payment to be made to third partiesxii. The quality of the goods and services provided to third partiesxiii. The quality of the goods and services to be received from third parties

b) It does not have the ability to use all, or substantially all, of the resources that result from the transactions for its own benefit

Indicators (list not exhaustive) :

i. Receipts related to specific goods and services provided, or taxes, levies and other charges, for example, proceeds paid to the relevant Revenue Fund are collected for the benefit of the Revenue Fund

ii. The fee retained from revenue collected by the entity is nominal in relation to the total revenue collected.

c) It is not exposed to variability in the results of the transaction.Indicators(list not exhaustive):

i. The rights and obligations established by the binding arrangement are the responsibility of another party, for example as specified by legislation and recipients of goods and services expect such party to deliver the goods and services.

ii. Has limited inventory risk, i.e. the risk of theft, obsolescence, other losses or change in value

iii. Receives a fixed fee or a fixed margin for carrying out the transactions

iv. Is not exposed to significant default risk, i.e. the risk of fees, taxes, levies or other charges not being paid by third parties

Annexure B: Note on Principal-agent arrangement

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Current Agent-Principal arrangement Note

42 Agent-principal arrangements2014/15 2013/14

42.1 Department acting as the principal R'000 R'000

- - - - - - - - - -

Total - -

42.2 Department acting as the agent

42.2.1 Revenue received for agency activities 2014/15 2013/14R'000 R'000

- - - - - - - - - -

Total - -

42.2.2 Reconciliation of agency funds and disbursements - 2014/15

Name of principal entityTotal agency funds received

Expenditure incurred against funds

Amount remitted to the principal

Variance betw amounts received and amounts remitted

R'000 R'000 R'000 R'000

Total - - - -

Provide a narrative description and explanation of assets belonging to other entities that are held in the custody of the department

Explanation of the variance

For each of the individual agent relationships of the department, provide a description of the nature, circumstances and terms relating to the arrangements with the principal

For each of the individual agents of the department, provide a description of the nature, circumstances and terms relating to the arrangements with the agents

Aligning the Principal-agent arrangement note to GRAP

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42 Agent-principal arrangements2014/15 2013/14

42.1 Department acting as the principal R'000 R'000

- - - - - - - - - -

Total - -

42.1.1 Reconciliation of movement of funds between principal and agent

Name of agency

Total principal-agency arrangements funds transferred


Balance due by / to agent

Resources (incl assets and liabilities) under custodianship of agent

R'000 R'000 R'000 R'000 R'000

Total - - - -

Fee paid to agent

For each of the individual principal-agent arrangement of the department, provide a description of the nature, circumstances, significant judgment applied, significant terms and conditions, any significant risks and benefits, and termination implications relating to the arrangements with the agents


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42.2 Department acting as the agent

42.2.1 Revenue received for agency activities 2014/15 2013/14R'000 R'000

- - - - - - - -

Total - -

42.2.2 Reconciliation of movement of funds between principal and agent

Name of principal entity

Total principal-agency arrangements funds received


Balance due by / to agent

Resources (incl assets and liabilities) under custodianship of agent

R'000 R'000 R'000 R'000

Total - - - -

42.2.2 Reconciliation of movement of funds between agent and third parties on behalf of principal

Name of principal entity

Revenue received or to be received

Expenditure or accrued expenditure

Receivables (revenue, less write-offs, settlements or waivers, add cash received)

Payables (Expenditure less cash paid)

R'000 R'000 R'000 R'000 R'000

Total - - - -


Other


Compensation for transactions carried out on

behalf of principal

For each of the individual principal-agent arrangement of the department, provide a description of the nature, circumstances, significant judgment applied, significant terms and conditions, any significant risks and benefits relating to the arrangements with the agents.

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Annexure C: Practical examples

Disclaimer

The following are added for illustrative purposes only. Where the analysis indicates that the arrangement is a principal agent arrangement, for illustrative purposes, it can be assumed that all other criteria and indicators were met. Departments should consider their own circumstances when assessing whether an arrangement is a principal-agent arrangement.

Example 1

Department Y, as part of their mandate, identifies unemployed graduates in the province and assist them to set up businesses. The department then through SCM procurement processes appoints Swox Ltd to perform the following activities on their behalf:

assist individuals to set the business in the province; provide training to the beneficiaries, and ensure that the beneficiaries are capacitated to run the business

Swox Ltd opened a dedicated account for this project and the department transfers the money required for the project including the fee payable to Swox Ltd in that dedicated account. The department sets conditions on how the money should be used. At the end of the project unspent money is transferred back to the department.

Analysis: In this arrangement, principal agent relationship exists. Department Y has the performance obligation to equip the beneficiaries with funding and skills and the department has beneficial control over this activity. Swox LTD does not have control over the activity as the activity is directed by the department and the entity is the department’s authorised representative in effecting the departments legal relationships with third parties.

Example 2

Department A has a mandate, through its Trading Entity, to manage state-owned properties and leases of private property by government departments, in terms of the Government Immovable Asset Management Act. One of the key functions of the Department A is to provide office accommodation to Client Departments. The Department A, through its Trading Entity, enters into lease agreement with private parties (landlord) to lease the office buildings which will be utilised by client departments. The lease agreement entered into is between the landlord and Department A. The department further sign the client departments to govern all aspects of the relationship between Department A and the client departments.

As stipulated in the SLA, client departments are required to make rental payments on a monthly basis to Department A which would in turn pay the amounts to the landlord.

Analysis: In this scenario, Department A enters into agreement with the landlord in its capacity and Department A does not conduct itself as a representative of client departments in its dealings with the landlord as it is fulfilling its mandated responsibility. The relationship between Department A and client department should not be seen as Principal-Agent relationship.

Example 3

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The department enters into a 10 year PPP agreement with a private party in terms of which the private party is required to construct a building from which a service will be delivered. A monthly unitary payment is made by the entity of R800 000, which includes a service element and an asset element.

Analysis: There is no principal agent relationship as the private party assumes substantial financial, technical and operational risk in the design, financing, building and operation of a project. The private party do not act on behalf of the department. The transaction should be disclosed only in the PPP note.

Example 4

On the 15 April 20X1, the Department K transferred an amount of R98 000 to Department N for conducting surveys for Department K.

Analysis: This arrangement is not a principal-agent arrangement as there is no third party involved. The Department N is delivering goods/services to Department K.

Example 5

In terms of legislation, Department X is mandated to issue licenses to companies who wish to undertake Activity Y. It establishes Public Entity A and grants it the necessary powers and responsibilities to regulate Activity Y and to issue the relevant licenses. In terms of legislation, Public Entity Y is required to develop Regulations governing the issuing of the licenses, including determining the licensing conditions, which companies are required to acquire licenses and, on an annual basis, determining the license fees payable.

Legislation requires that any fees collected to undertake Activity Y are direct receipts of the relevant Revenue Fund. Public Entity A is required to pay over any cash collected to the Revenue Fund. Public Entity A receives a transfer payment from Department Y to fund the activities that it undertakes on its behalf.

Analysis: Public Entity A has been established for the function of issuing the licenses to companies and in performing their duties does not do it in the name of and on behalf of Department Y, having been given and assumed some degree of authority to do so.

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