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Revenue Standard’s Implementation Guidance for Principal-Versus-Agent Considerations Is Clarified

The FASB amended U.S. GAAP to clarify the implementation guidance for what the board calls principal-versus-agent considerations in its revenue recognition standard. The amendments apply to sales that involve two or more suppliers to a customer, where one supplier controls the good or service being sold and the other supplier or suppliers are agents and collect fees or commissions for arranging the sales.

The FASB on March 17, 2016, published Accounting Standards Update (ASU) No. 2016-08, Revenue From Contracts With Customers (Topic 606): Principal Versus Agent Considerations – Reporting Revenue Gross Versus Net.

The amendment to U.S. GAAP clarifies the implementation guidance for what the FASB calls principal-versus-agent considerations in the board’s revenue recognition standard. A principal-versus-agent consideration applies to sales that involve two or more suppliers to a customer. The FASB is instructing each participant in the sale to determine whether they control the good or service and are entitled to the gross amount of the transaction or are acting as an agent and should collect only a fee or commission for arranging the sale. The FASB said the guidance is applicable in markets such as online commerce, where a business or organization maintains a website from which consumers may purchase goods from multiple suppliers. The board also provides an example where a supplier offers to customize a specific product for a client and then hires a contract manufacturer to make the product.

The FASB said the amendments in ASU No. 2016-08 will go into effect when the revenue standard issued in ASU No. 2014-09, Revenue From Contracts With Customers (Topic 606), becomes effective. Last August the FASB delayed the effective date for Topic 606 to the first quarter of 2018 for public companies and 2019 for private companies, not-for-profit organizations, and other nonpublic entities.

The amendments to the implementation guidance in Topic 606 are intended to clarify how a business or organization determines if it is a principal or agent. The FASB is asking sellers to identify the good or service being sold and their role in the sale. The FASB said sellers should focus on the good or service being sold and not the promise to transfer the good or service, or what the board calls a performance obligation, in part because stressing the promise related to the sale would be confusing for an agent.

The identification of the performance obligation remains one of the five basic steps within the revenue standard for recognizing a customer sale, and the FASB said its amendments in ASU No. 2016-08 are not intended to alter the steps for recognizing sales.

The FASB and IASB began discussing the principal-versus-agent issue with their special revenue standard advisory panel, the Transition Resource Group (TRG), not long after they published ASU No. 2014-09 and IFRS 15, Revenue From Contracts With Customers. The TRG members were particularly concerned with sales where a principal supplier cannot immediately recognize a sale because it is dependent upon its agent for setting the price when the sale is made or contract signed.

The FASB published its draft version of the amendments for public comment in August, and the IASB published its proposed changes in July 2015 in Exposure Draft (ED) No. 2015-6, Clarifications to IFRS 15, as part of a broader set of minor revisions to the IFRS standard. The boards agreed to finalize the changes in December.

For in-depth analysis of the FASB’s revenue recognition standard, please see Catalyst: GAAP Critical Issues — Revenue Recognition, also on Checkpoint.

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