Chapter 10 — Principal-Versus-Agent Considerations

10.3 Determining Whether an Entity Is Acting as an Agent

If an entity concludes that it does not obtain control of a good or service before that good or service is transferred to a customer, the entity is acting as an agent. That is, the entity’s performance obligation is to arrange for another party to transfer the good or service to the customer. As an agent, the entity will recognize as revenue the commission or fee it earns (i.e., the net amount of consideration retained) when or as it satisfies its performance obligation of arranging for the specified goods or services to be provided by another party. This guidance is articulated in ASC 606-10-55-38 as follows:

ASC 606-10

55-38 An entity is an agent if the entity’s performance obligation is to arrange for the provision of the specified good or service by another party. An entity that is an agent does not control the specified good or service provided by another party before that good or service is transferred to the customer. When (or as) an entity that is an agent satisfies a performance obligation, the entity recognizes revenue in the amount of any fee or commission to which it expects to be entitled in exchange for arranging for the specified goods or services to be provided by the other party. An entity’s fee or commission might be the net amount of consideration that the entity retains after paying the other party the consideration received in exchange for the goods or services to be provided by that party.

10.3.1 Codification Examples of Promised Goods or Services for Which an Entity Is an Agent (ASC 606-10-55-317 Through 55-319 and ASC 606-10-55-330 Through 55-334)

The following implementation guidance from the revenue standard will help an entity determine whether it is acting as an agent in a contract:

ASC 606-10

Example 45 — Arranging for the Provision of Goods or Services (Entity Is an Agent)

55-317 An entity operates a website that enables customers to purchase goods from a range of suppliers who deliver the goods directly to the customers. Under the terms of the entity’s contracts with suppliers, when a good is purchased via the website, the entity is entitled to a commission that is equal to 10 percent of the sales price. The entity’s website facilitates payment between the supplier and the customer at prices that are set by the supplier. The entity requires payment from customers before orders are processed, and all orders are nonrefundable. The entity has no further obligations to the customer after arranging for the products to be provided to the customer.

55-318 To determine whether the entity’s performance obligation is to provide the specified goods itself (that is, the entity is a principal) or to arrange for those goods to be provided by the supplier (that is, the entity is an agent), the entity identifies the specified good or service to be provided to the customer and assesses whether it controls that good or service before the good or service is transferred to the customer.

Subparagraph superseded by Accounting Standards Update No. 2016-08.
Subparagraph superseded by Accounting Standards Update No. 2016-08.
Subparagraph superseded by Accounting Standards Update No. 2016-08.
Subparagraph superseded by Accounting Standards Update No. 2016-08.
Subparagraph superseded by Accounting Standards Update No. 2016-08.

55-318A The website operated by the entity is a marketplace in which suppliers offer their goods and customers purchase the goods that are offered by the suppliers. Accordingly, the entity observes that the specified goods to be provided to customers that use the website are the goods provided by the suppliers, and no other goods or services are promised to customers by the entity.

55-318B The entity concludes that it does not control the specified goods before they are transferred to customers that order goods using the website. The entity does not at any time have the ability to direct the use of the goods transferred to customers. For example, it cannot direct the goods to parties other than the customer or prevent the supplier from transferring those goods to the customer. The entity does not control the suppliers’ inventory of goods used to fulfill the orders placed by customers using the website.

55-318C As part of reaching that conclusion, the entity considers the following indicators in paragraph 606-10- 55-39. The entity concludes that these indicators provide further evidence that it does not control the specified goods before they are transferred to the customers.

The supplier is primarily responsible for fulfilling the promise to provide the goods to the customer. The entity is neither obliged to provide the goods if the supplier fails to transfer the goods to the customer nor responsible for the acceptability of the goods.
The entity does not take inventory risk at any time before or after the goods are transferred to the customer. The entity does not commit to obtain the goods from the supplier before the goods are purchased by the customer and does not accept responsibility for any damaged or returned goods.
The entity does not have discretion in establishing prices for the supplier’s goods. The sales price is set by the supplier.

55-319 Consequently, the entity concludes that it is an agent and its performance obligation is to arrange for the provision of goods by the supplier. When the entity satisfies its promise to arrange for the goods to be provided by the supplier to the customer (which, in this example, is when goods are purchased by the customer), the entity recognizes revenue in the amount of the commission to which it is entitled.

Example 48 — Arranging for the Provision of Goods or Services (Entity Is an Agent)

55-330 An entity sells vouchers that entitle customers to future meals at specified restaurants, and the sales price of the voucher provides the customer with a significant discount when compared with the normal selling prices of the meals (for example, a customer pays $100 for a voucher that entitles the customer to a meal at a restaurant that would otherwise cost $200). The entity does not purchase or commit itself to purchase vouchers in advance of the sale of a voucher to a customer; instead, it purchases vouchers only as they are requested by the customers. The entity sells the vouchers through its website, and the vouchers are nonrefundable.

55-331 The entity and the restaurants jointly determine the prices at which the vouchers will be sold to customers. Under the terms of its contracts with the restaurants, the entity is entitled to 30 percent of the voucher price when it sells the voucher.

55-332 The entity also assists the customers in resolving complaints about the meals and has a buyer satisfaction program. However, the restaurant is responsible for fulfilling obligations associated with the voucher, including remedies to a customer for dissatisfaction with the service.

55-333 To determine whether the entity is a principal or an agent, the entity identifies the specified good or service to be provided to the customer and assesses whether it controls the specified good or service before that good or service is transferred to the customer.

Subparagraph superseded by Accounting Standards Update No. 2016-08.
Subparagraph superseded by Accounting Standards Update No. 2016-08.
Subparagraph superseded by Accounting Standards Update No. 2016-08.
Subparagraph superseded by Accounting Standards Update No. 2016-08.

55-333A A customer obtains a voucher for the restaurant that it selects. The entity does not engage the restaurants to provide meals to customers on the entity’s behalf as described in the indicator in paragraph 606-10-55-39(a). Therefore, the entity observes that the specified good or service to be provided to the customer is the right to a meal (in the form of a voucher) at a specified restaurant or restaurants, which the customer purchases and then can use itself or transfer to another person. The entity also observes that no other goods or services (other than the vouchers) are promised to the customers.

55-333B The entity concludes that it does not control the voucher (right to a meal) at any time. In reaching this conclusion, the entity principally considers the following:

The vouchers are created only at the time that they are transferred to the customers and, thus, do not exist before that transfer. Therefore, the entity does not at any time have the ability to direct the use of the vouchers or obtain substantially all of the remaining benefits from the vouchers before they are transferred to customers.
The entity neither purchases nor commits itself to purchase vouchers before they are sold to customers. The entity also has no responsibility to accept any returned vouchers. Therefore, the entity does not have inventory risk with respect to the vouchers as described in the indicator in paragraph 606-10- 55-39(b).

55-334 Thus, the entity concludes that it is an agent in the arrangement with respect to the vouchers. The entity recognizes revenue in the net amount of consideration to which the entity will be entitled in exchange for arranging for the restaurants to provide vouchers to customers for the restaurants’ meals, which is the 30 percent commission it is entitled to upon the sale of each voucher.

10.3.2 Timing of Revenue Recognition When the Entity Is an Agent

The timing of when an agent satisfies its performance obligation may not be the same as the timing of when the principal in the arrangement transfers control of the specified good or service to the end customer. As noted in Section 8.2, ASC 606-10-25-23 states that (1) an entity should “recognize revenue when (or as) the entity satisfies a performance obligation by transferring a promised good or service . . . to a customer” and (2) an “asset is transferred when (or as) the customer obtains control of that asset.” Accordingly, when an entity determines that it is acting as an agent with respect to the specified good or service, the entity must use judgment and consider all of the relevant facts and circumstances to determine when it has satisfied its performance obligation to arrange for the provision of a specified good or service by another party.

When the nature of an entity’s promise is to arrange for goods or services to be provided by another party, it is often important to determine whether the entity is an agent for the buyer, the seller, or both to assess (1) to whom the entity is obligated to satisfy its performance obligation of arranging for the provision of goods or services and (2) when the entity satisfies such performance obligation. Further, if there is a difference in timing between when the agent arranges for goods or services to be provided by a seller and when the specified goods or services are transferred from the seller to the buyer, it is important to determine whether the entity’s promise of arranging for goods or services to be transferred by the seller is satisfied when the arrangement is made or when the specified goods or services are transferred by the seller to the buyer.

Example 10-7

Entity A operates a travel booking Web site that arranges for airlines to provide transportation services to end customers. Entity A partners with various airlines and offers their flights on its platform. End customers will purchase specific flights on A’s platform and pay A the nonrefundable airfare price at the time of purchase. Flights can be sold up to 12 months before the scheduled departure date. Within seven days of an end customer’s purchase, A remits to the airline the airfare price less A’s commission. After the initial booking on A’s platform, any changes requested by the end customer are handled directly by the airline. Therefore, A has no further involvement with the end customer or the airline related to the flight purchased after the initial booking.

Entity A concludes that the nature of its promise is to arrange for airlines to provide transportation services to end customers. Entity A’s customer is the end customer, and A’s performance obligation is satisfied at the time of the initial booking. This is because A has no further obligations after the initial booking. Specifically, A has no further involvement with the end customer or the airline after the initial booking, any changes requested by the end customer must be handled directly by the airline, and the amount A collects is nonrefundable. Accordingly, A may conclude that it should recognize revenue at the point in time when the initial booking is successfully made.

Example 10-8

Entity B operates a travel booking Web site that arranges for various travel services (e.g., hotels, rental cars, experiences) to be provided by third parties. Entity B partners with these third parties and offers their services on its platform. End customers will reserve the travel services on B’s platform, but B does not collect payment from end customers until the travel services are provided. This is because B allows end customers to change or cancel their travel arrangements at any time before when the underlying travel services are scheduled to be transferred to the end customers. Entity B also promises to provide assistance to end customers in modifying or canceling the arranged travel services and to coordinate with the travel service providers until the underlying services are provided. Within seven days of payment by the end customer, B remits to the travel service provider the price of the travel service less B’s commission.

Entity B concludes that the nature of its promise is to identify paying end customers for its travel service provider partners. Entity B’s customer is the travel service provider, and B’s performance obligation is not satisfied until the travel service provider begins to provide travel services to the end customer. This is because B remains obligated to identify paying end customers after booking and before the travel service provider begins providing travel services. Specifically, end customers can cancel or modify their travel arrangements at any time before when the underlying travel services are scheduled to be provided, B continues to be involved with the end customers and the travel service providers by helping end customers modify or cancel their arrangements until such services are provided, and end customers are not required to pay until the travel services are provided. That is, a paying end customer is not identified for the travel service provider until the travel services are provided. Accordingly, B may conclude that it should recognize revenue at the point in time when the travel services provided to the end customer commence.

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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.