Chapter 10 — Principal-Versus-Agent Considerations

10.1 General Considerations

For an entity, deciding whether the nature of its promise is to transfer goods or services to the customer itself (as a principal) or to arrange for goods or services to be provided by another party (as an agent) is an important determination because the conclusion the entity reaches can significantly affect the amount of revenue recognized. Whereas a principal of a performance obligation will recognize revenue at the gross amount it is entitled to from its customer, an agent will present revenue at the net amount retained. An entity must use judgment when assessing whether it is acting as a principal or as an agent.

The revenue standard focuses on recognizing revenue as an entity transfers control of a good or service. Therefore, an entity is a principal in a transaction if it controls the specified goods or services before they are transferred to the customer. The revenue standard provides some indicators to help an entity (1) determine whether it is a principal and (2) assess whether it controls the underlying goods or services before they are transferred to the customer. See Section 10.1.2 for further details.

10.1.1 Identifying the Specified Goods or Services

ASC 606-10

55-36 When another party is involved in providing goods or services to a customer, the entity should determine whether the nature of its promise is a performance obligation to provide the specified goods or services itself (that is, the entity is a principal) or to arrange for those goods or services to be provided by the other party (that is, the entity is an agent). An entity determines whether it is a principal or an agent for each specified good or service promised to the customer. A specified good or service is a distinct good or service (or a distinct bundle of goods or services) to be provided to the customer (see paragraphs 606-10-25-19 through 25-22). If a contract with a customer includes more than one specified good or service, an entity could be a principal for some specified goods or services and an agent for others.

55-36A To determine the nature of its promise (as described in paragraph 606-10-55-36), the entity should:

Identify the specified goods or services to be provided to the customer (which, for example, could be a right to a good or service to be provided by another party [see paragraph 606-10-25-18])
Assess whether it controls (as described in paragraph 606-10-25-25) each specified good or service before that good or service is transferred to the customer.

The first step in the evaluation of whether an entity is acting as a principal or as an agent “[w]hen another party is involved in providing goods or services to a customer is to identify the goods or services that will be transferred to the customer” (i.e., the “specified goods or services” referred to in ASC 606-10-55-36A). In the amendments in ASU 2016-08, the FASB confirmed that the unit of account for evaluating whether an entity is acting as a principal or as an agent is not at the contract level. Rather, the principal-versus-agent analysis is performed for each specified distinct good or service (or distinct bundle of goods or services) that will be transferred to the customer. Accordingly, an entity could be a principal for certain aspects of a contract with a customer and an agent for others.

The unit of account to be used in the first step of the principal-versus-agent analysis could be described as being at the performance obligation level. Consequently, this part of the analysis could be performed as part of step 2 of ASC 606’s revenue model. However, the revenue standard does not refer to the analysis as being conducted at the performance obligation level because the performance obligation of an agent is to arrange for another entity to transfer the specified goods or services to the customer. For an entity to determine whether it controls promised goods or services before they are transferred to a customer, it must first identify the specified goods or services that will be transferred to the customer. However, the notion of aggregating goods or services that are not distinct into performance obligations (i.e., a distinct bundle of goods or services) will apply to identifying the unit of account used in the evaluation of whether an entity is acting as a principal or as an agent. That is, the same guidance that an entity applies to identify performance obligations (ASC 606-10-25-19 through 25-22) will be used to determine the specified goods or services.

10.1.2 Determining Whether the Entity Controls the Goods or Services Before They Are Transferred to the Customer

An entity is a principal in providing a specified good or service if the entity controls that specified good or service before it is transferred to the customer. The control principle used in the determination of whether an entity is acting as a principal or as an agent is the same control principle used in the evaluation of the timing of when a good or service (i.e., an asset) is transferred to a customer (see Section 8.2). ASC 606-10-25-25 states, in part, “Control of an asset refers to the ability to direct the use of, and obtain substantially all of the remaining benefits from, the asset. Control includes the ability to prevent other entities from directing the use of, and obtaining the benefits from, an asset.” Paragraph BC120 of ASU 2014-09 describes the components of control as follows:

Ability — A customer must have the present right to direct the use of, and obtain substantially all of the remaining benefits from, an asset for an entity to recognize revenue. For example, in a contract that requires a manufacturer to produce an asset for a particular customer, it might be clear that the customer will ultimately have the right to direct the use of, and obtain substantially all of the remaining benefits from, the asset. However, the entity should not recognize revenue until the customer has actually obtained that right (which, depending on the contract, might occur during production or afterwards).
Direct the use of — A customer’s ability to direct the use of an asset refers to the customer’s right to deploy that asset in its activities, to allow another entity to deploy that asset in its activities, or to restrict another entity from deploying that asset.
Obtain the benefits from — The customer must have the ability to obtain substantially all of the remaining benefits from an asset for the customer to obtain control of it. Conceptually, the benefits from a good or service are potential cash flows (either an increase in cash inflows or a decrease in cash outflows). A customer can obtain the benefits directly or indirectly in many ways, such as by using, consuming, disposing of, selling, exchanging, pledging, or holding an asset.

In addition, ASC 606-10-55-39 provides indicators to support an entity’s evaluation of control.

Connecting the Dots

In the determination of whether an entity controls a specified good or service before the good or service is transferred to a customer, the control principle should be considered before the indicators of control are analyzed. As noted in paragraph BC16 of ASU 2016-08, “the indicators in paragraph 606-10-55-39 were included to support an entity’s assessment of whether it controls a specified good or service before it is transferred to the customer. The indicators (a) do not override the assessment of control, (b) should not be viewed in isolation, (c) do not constitute a separate or additional evaluation, and (d) should not be considered a checklist of criteria to be met in all scenarios.” Further, paragraph BC18(e) of ASU 2016-08 states, in part, that “the indicators are not an exhaustive list and merely support the assessment of control. They do not replace or override that assessment.”

At the 2021 AICPA & CIMA Conference on Current SEC and PCAOB Developments, Jonathan Wiggins, senior associate chief accountant in the SEC’s Office of the Chief Accountant (OCA), cautioned that the indicators of control in the principal-versus-agent analysis as outlined in ASC 606-10-55-39 are neither a checklist nor a substitute for an entity’s assessment of control; rather, an entity should consider whether these indicators support its control assessment.

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This publication provides comprehensive guidance; however, it does not address all possible fact patterns, and the guidance is subject to change. Consult a Deloitte & Touche LLP professional regarding your specific issues and questions.