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Proposal to Clarify Guidance for Control in Some Sales Agreements

The IASB agreed to consider some changes to its revenue standard regarding how a business determines whether it is the principal in a multi-part transaction or merely an agent that collects a commission or fee. The board plans to release a proposed version of the changes for public comment in July.

The IASB on May 19, 2015, agreed to propose some limited amendments to its sweeping revenue recognition standard to answer questions about determining when a business is a primary supplier of a good or service and not an agent who essentially just brokers a sale.

The distinction is usually straightforward in simple contracts involving the sale of physical goods. But questions crop up in newer industries such as online gaming, when it is not always clear whether an app developer, phone manufacturer, or cellular service provider is the primary supplier and entitled to the largest share of the transaction price or acting as an agent that gets a modest fee for aiding the sale.

A majority of the IASB agreed to emphasize the concept of control in IFRS 15, Revenue from Contracts with Customers , to help businesses determine when they are simply acting as agents.

Under the proposed clarification, an entity that is a principal controls a good it obtains from another party and then transfers it to a customer. The proposal will also clarify other actions principals may take, such as control of the right to a service provided to the customer and the ability to direct other parties acting as agents, or the control of a good or service that is packaged with other goods and services sold to the customer.

The standard says an entity determines whether it is a principal or agent by determining the “nature of its promise” to provide the specified goods or services. A majority of the IASB declined to add an extra paragraph of guidance in the standard that would have helped businesses determine the nature of their promises.

“We’re in danger here of turning our standard into a textbook and losing sight of what we’re trying to do,” IASB member Stephen Cooper said. “I feel what we have in the standard is understandable, it’s clear.”

The IASB issued IFRS 15, and the FASB published Accounting Standards Update ASU No. 2014-09, Revenue From Contracts With Customers , to establish a uniform, principles-based method for companies worldwide to calculate the top line in their income statements. The boards have sought to avoid amending the standard with specific requirements and prefer that companies and auditors apply judgment when possible.

IASB member Gary Kabureck said accountants with years of experience in revenue accounting on the FASB and IASB’s Transition Resource Group (TRG) still had questions about distinguishing between a principal versus an agent and needed more guidance. Cooper responded, “Maybe there’s these world experts that struggled, but we set up the TRG for them to have a forum for that discussion.”

A majority of the IASB did, however, agree to add examples in the standard to illustrate the application of the principal-versus-agent guidance.

The IASB declined to change the indicators in the standard to help a business assess if it was an agent.

“I’m all for changing the standard as little as possible; I’m not always convinced there’s no knock-on effects,” IASB Vice Chairman Ian Mackintosh said. “Some of this is a fairly substantial kind of change. So if we’re going to do anything, let’s make the examples more clear.”

The IASB expects to issue a draft version of all changes it plans for the revenue standard for public comment in July and finalize them by the end of the year. Previously, the international board said it would issue the proposal in June, but its research staff said the schedule is unrealistic now that the FASB and IASB plan to meet in June.

The IASB and the FASB published their revenue standards in May 2014, and designated 2017 as the effective date. But both boards are considering whether to delay the effective date to 2018, in part because of questions that have arisen after publication.

The FASB is researching possible changes regarding the principal-versus-agent guidance in its version of the standard.

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