Appendix C — Summary of Issues Addressed in the FASB Staff’s Revenue Recognition Implementation Q&As and/or by the TRG

C.9 Principal-Versus-Agent Considerations (Chapter 10 of the Roadmap)

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C.9 Principal-Versus-Agent Considerations (Chapter 10 of the Roadmap)

C.9.1 Assessing Whether an Entity Is a Principal or an Agent — TRG Agenda Papers 1 and 5

Arrangements involving “virtual” goods and services — intangible goods and services that continue to be offered on the Internet through social networking Web sites and mobile application stores — may complicate the assessment of whether an entity is a principal or an agent. Because of the nature of such arrangements (and others, such as arrangements involving rights conveyed through gift cards), the TRG discussed the following implementation issues:

How control would be assessed with respect to the originator and intermediary, including the impact on the principal-agent assessment when an originator has no knowledge of the amount an intermediary charged a customer for virtual goods or services.
The order of steps for determining whether an entity is a principal or an agent. For example, it is unclear whether (1) the agency indicators in the revenue standard are intended to help an entity initially assess who controls the goods or services or (2) the entity would apply the agency indicators only after it cannot readily determine who controls the goods or services.
How to apply the agency indicators to the originator and intermediary (e.g., if certain indicators apply to both the originator and the intermediary).
Whether certain indicators either are more important or should be discounted (e.g., whether inventory risk would be applicable in arrangements involving virtual goods or services).

In addition, the revenue standard requires an entity to allocate the total consideration in a contract with a customer to each of the entity’s performance obligations under the contract, including discounts. Stakeholders have questioned whether discounts should be allocated to all performance obligations and whether consideration should be allocated on a gross or net basis if the entity is a principal for certain performance obligations but an agent for others.

TRG members did not reach general agreement on the issues discussed and believed that clarifications to principal-versus-agent guidance in the revenue standard would be helpful.

In March 2016, the FASB issued ASU 2016-08 to address issues raised regarding how an entity should assess whether it is the principal or the agent in contracts that include three or more parties. Specifically, the guidance in ASU 2016-08 requires an entity to determine:

The nature of its promise to the customer. If the entity’s obligation is to provide the customer with a specified good or service, it is the principal. Otherwise, if the entity’s obligation is to arrange for the specified good or service to be provided to the customer by a third party, the entity is an agent.
Who controls the specified good or service before it is transferred to the customer. ASC 606-10-55-37, as amended by ASU 2016-08, states, in part, that an “entity is a principal if it controls the specified good or service before that good or service is transferred to a customer.”

Further, ASU 2016-08 clarifies that the unit of account is a specified good or service (which is a distinct good or service or a bundle of distinct goods or services) and that an entity may be the principal with respect to certain specified goods or services in a contract but may be an agent with respect to others.

The ASU also adds clarifying guidance on the types of goods or services that a principal may control29 and reframes the principal-versus-agent indicators in the revenue standard to (1) illustrate when an entity may be acting as a principal instead of when an entity acts as an agent and (2) explain how each indicator is related to the control principle.

ASU 2016-08 does not amend the guidance in ASC 606 as originally issued to directly address the accounting for situations in which the originator has no knowledge of the amount an intermediary charges a customer for goods or services. However, paragraph BC38 of the ASU clarifies that the guidance in ASC 606 on variable consideration is helpful in the determination of what amounts should be included in the transaction price. Specifically, paragraph BC38(c) states, in part:

A key tenet of variable consideration is that at some point the uncertainty in the transaction price ultimately will be resolved. When the uncertainty is not expected to ultimately be resolved, the guidance indicates that the difference between the amount to which the entity is entitled from the intermediary and the amount charged by the intermediary to the end customer is not variable consideration and, therefore, is not part of the entity’s transaction price.

For additional information, see Chapter 10.

C.9.2 Allocation of the Transaction Price When an Entity Is a Principal for Some Goods or Services and an Agent for Others — Implementation Q&A 44 (Compiled From TRG Agenda Papers 1 and 5)

Stakeholders have questioned how the transaction price should be allocated in a contract when an entity is a principal for some promised goods or services and an agent that is arranging for the transfer of other goods or services.

First, an entity should consider whether its arrangement involves a single customer or multiple customers. If the entity identifies two or more customers, it may not be appropriate to allocate a discount to all goods or services in the contract because the contract combination guidance does not apply to contracts with more than one customer. In this scenario, the discount would be allocated entirely to one contract (e.g., in which the entity is acting as a principal).

If there is a single customer in the arrangement (i.e., the entity is acting as both a principal and an agent in a contract with a customer), the entity will need to consider whether it can allocate the discount to one or more, but not all, performance obligations in the contract. If it does not meet the criteria to allocate the discount to one or more, but not all, performance obligations, the entity may conclude that it is appropriate to allocate the discount to all performance obligations in the contract.

Footnotes

See ASC 606-10-55-37A (added by the ASU).

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