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Subparagraph superseded by Accounting Standards Update No. 2016-08.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Subparagraph superseded by Accounting Standards Update No. 2016-08.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Subparagraph superseded by Accounting Standards Update No. 2016-08.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Subparagraph superseded by Accounting Standards Update No. 2016-08.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Subparagraph superseded by Accounting Standards Update No. 2016-08.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Subparagraph superseded by Accounting Standards Update No. 2016-08.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Subparagraph superseded by Accounting Standards Update No. 2016-08.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