Gross versus net revenue presentation when the organiser resells stand build and housing

Two people describe the same show to two different audiences in the same week. The commercial director tells a prospective advertiser the show is a 12.4 million business. The group financial controller tells the auditor it is 8.4 million. Both have the same ledger open.

The 4 million between them is the housing programme, where the organiser blocks hotel rooms, exhibitors and attendees book through the show's portal, and the hotels pay a commission. Gross versus net revenue presentation decides whether that 4 million belongs on the top line, and the answer changes nothing about profit and almost everything about how the business reads.

Two versions of the same show, 4 million apart

Under net presentation the show does 8.4 million of revenue and makes 2.8 million after all costs and overhead, a margin of 33.3 per cent. The housing programme contributes 600,000 of that revenue, being 15 per cent commission on 4 million of room nights.

Under gross presentation the show does 12.4 million of revenue, carries an extra 3.4 million of cost for the rooms themselves, and still makes 2.8 million. The margin is 22.6 per cent.

Same show, same cash, same profit. Revenue up 47.6 per cent and margin down 10.7 percentage points, from one presentation decision. If the housing programme grows 20 per cent next year while the exhibition itself is flat, the gross version reports 800,000 of revenue growth, which is 6.5 per cent on 12.4 million, against zero change in profit. Anyone reading a growth rate off that top line is reading hotel demand.

Who controls the service before it transfers?

IFRS 15, issued by the IFRS Foundation in 2014, sets the test in its application guidance and it is worth reading in the original because the wording is unusually blunt.

Paragraph B34 says an entity determines whether it is a principal or an agent by assessing the nature of its promise to the customer, and that the assessment "does not depend on the legal form of the entity or the contractual labels used". Paragraph B35 says an entity is a principal if it controls the specified good or service before that good or service is transferred to the customer. Paragraph B36 says an entity is an agent if it arranges for another party to provide the specified good or service.

The consequences are in B37 and B38. A principal recognises revenue in the gross amount of consideration. An agent recognises revenue in the amount of any fee or commission to which it expects to be entitled.

So the question is never who sends the invoice, who collects the money, or what the housing agreement calls the organiser. The question is control.

The three indicators, applied to a housing block

Paragraph B35A lists circumstances in which an entity obtains control before transfer. It takes on inventory risk after a customer orders and before the customer receives the good. It has the ability to direct the use of, and obtain substantially all the remaining benefits from, the good or service before transfer. It has agreed to provide the good or service and is responsible for fulfilling that promise.

Take a typical show housing programme and run all three.

Inventory risk. Most housing agreements let the organiser release unsold rooms back to the hotel without penalty up to a cut-off date, and after the cut-off any attrition clause is usually capped or waived. If the organiser carries no real exposure for unsold rooms, that indicator points to agent. An organiser that has signed a firm commitment for 3,000 room nights at a fixed rate and is on the hook whether they sell or not is in a different position entirely.

Direction and benefit. The hotel sets the room, the standard, the check-in and the cancellation terms. The organiser negotiated the rate and nothing else. That points to agent.

Responsibility for fulfilment. When a delegate arrives and the hotel has no room, who is the responsible party? If the answer in the contract and in practice is the hotel, that points to agent.

Three indicators pointing the same way, so the housing programme is a 600,000 commission and the top line is 8.4 million. That will be the answer for most organiser housing blocks, and it will not be the answer for all of them, which is why the analysis has to be done on the actual agreement rather than assumed from the industry norm.

Turnkey stand build, where the answer often flips

Now the same test on a turnkey stand programme, where the organiser sells a fitted booth to exhibitors and buys the build from a contractor.

Suppose 180 exhibitors take the turnkey package at 2,400 each, which is 432,000. The organiser pays the contractor 1,950 each, or 351,000, and keeps 81,000, a margin of 18.75 per cent.

The indicators now read differently. The organiser sets the price, and it set it independently of what the contractor charges. It specifies the build, chooses the contractor and can change contractor between editions. If a stand is not ready on the morning of day one, the exhibitor complains to the organiser and the organiser fixes it, because the promise to the exhibitor was a working stand. The organiser is usually committed to a minimum volume with the contractor before it knows how many exhibitors will buy.

That looks like a principal. Revenue of 432,000 and cost of 351,000, both on the face of the statement, and 81,000 of margin exactly as before.

The two programmes sit in the same show and get opposite answers, which is the point. A single policy line saying the organiser presents resold services net is a policy that has skipped the analysis on one of them.

What gross presentation does to every ratio you report

Grossing up moves the denominator of everything.

On the housing example, direct show cost of 3.1 million is 36.9 per cent of an 8.4 million top line. Gross it up and the cost becomes 6.5 million against 12.4 million, which is 52.4 per cent. Marketing spend of 1.6 million is 19.0 per cent of revenue at 8.4 million and 12.9 per cent at 12.4 million, so a marketing efficiency ratio improves by six points with no change in spend or output. Revenue per attendee, revenue per net square foot, revenue per head of staff: all of them move, none of them for a reason connected to the business.

This is the practical reason to publish adjusted measures with a reconciliation, and to say in the note whether resold services are in or out. An event group that changes its housing arrangement mid-portfolio and does not flag the presentation change has just published a growth rate that means something different from last year's, which is what the discipline around alternative performance measures reporting exists to prevent.

Why can't the cost just be netted off?

Because offsetting is prohibited by default, and the prohibition is there precisely to stop presentation choices from hiding scale.

IAS 1, as revised in 2007, says at paragraph 32 that "an entity shall not offset assets and liabilities or income and expenses, unless required or permitted by an IFRS". Paragraph 33 explains why: offsetting in the statements, except where it reflects the substance of the transaction, detracts from users' ability to understand the transactions that have occurred and to assess future cash flows.

Presenting 81,000 for the turnkey programme when the organiser is a principal is offsetting. Presenting 600,000 for the housing programme when the organiser is an agent is not, because the agent's revenue genuinely is the commission and there is no gross amount to net down. The distinction sounds like semantics and it is the whole of the rule.

Once the amount is settled, where it sits is a separate question, and resold services usually belong alongside the rest of the service line rather than inside space revenue versus service revenue. Bundled deals that mix a resold service into a sponsorship tier need the allocation treated first, as in sponsorship revenue accounting, and the principal analysis applied to the element afterwards.

Where this stops

The test rests on facts in contracts, and the contracts change without anyone telling finance.

A housing agreement renegotiated to include a firm room commitment has moved inventory risk onto the organiser and may have flipped the conclusion, and the first anyone hears of it is often the audit. A standing quarterly review of the three or four reselling arrangements a show runs, with the current agreement in front of you, is cheap insurance and takes an hour.

The harder limit is that the indicators can genuinely point in different directions on the same arrangement. An organiser that sets the price and picks the contractor but bears no volume risk and no fulfilment liability is a real case and the conclusion is a judgement. Where that happens, write the judgement down at the time with the facts that supported it. A reasoned note from the year the arrangement started is worth a great deal more than a reconstruction two audits later.

This week, list every arrangement where your show sells something a third party delivers. Housing, stand build, freight, audio-visual, temporary staff, insurance. Against each one write who bears the risk if the customer does not pay and who the customer complains to when it goes wrong, and you will have the first draft of the analysis the rest of your event finance presentation depends on.