10.4 Contracts in Which the Entity Is a Principal and an Agent
As discussed in Section
10.1.1, an entity must determine whether it is a principal or an
agent at what can effectively be described as the performance obligation level
(i.e., the specified good or service that is distinct), not the contract level.
Therefore, in some contracts, an entity could have both performance obligations to
arrange for goods or services to be provided by another entity (i.e., the entity is
acting as an agent) and performance obligations to transfer goods or services to the
customer itself (i.e., the entity is acting as a principal).
10.4.1 Illustrative Examples of Contracts in Which an Entity Is Both a Principal and an Agent
The following implementation guidance from the revenue standard
illustrates a situation in which an entity is a principal and an agent in the
same contract:
ASC 606-10
Example 48A — Entity Is a Principal and
an Agent in the Same Contract
55-334A An entity sells
services to assist its customers in more effectively
targeting potential recruits for open job positions. The
entity performs several services itself, such as
interviewing candidates and performing background
checks. As part of the contract with a customer, the
customer agrees to obtain a license to access a third
party’s database of information on potential recruits.
The entity arranges for this license with the third
party, but the customer contracts directly with the
database provider for the license. The entity collects
payment on behalf of the third-party database provider
as part of its overall invoicing to the customer. The
database provider sets the price charged to the customer
for the license and is responsible for providing
technical support and credits to which the customer may
be entitled for service down-time or other technical
issues.
55-334B To determine whether
the entity is a principal or an agent, the entity
identifies the specified goods or services to be
provided to the customer and assesses whether it
controls those goods or services before they are
transferred to the customer.
55-334C For the purpose of
this Example, it is assumed that the entity concludes
that its recruitment services and the database access
license are each distinct on the basis of its assessment
of the guidance in paragraphs 606-10-25-19 through
25-22. Accordingly, there are two specified goods or
services to be provided to the customer — access to the
third-party’s database and recruitment services.
55-334D The entity concludes
that it does not control the access to the database
before it is provided to the customer. The entity does
not at any time have the ability to direct the use of
the license because the customer contracts for the
license directly with the database provider. The entity
does not control access to the provider’s database — it
cannot, for example, grant access to the database to a
party other than the customer or prevent the database
provider from providing access to the customer.
55-334E As part of reaching
that conclusion, the entity also considers the
indicators in paragraph 606-10- 55-39. The entity
concludes that these indicators provide further evidence
that it does not control access to the database before
that access is provided to the customer.
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The entity is not responsible for fulfilling the promise to provide the database access service. The customer contracts for the license directly with the third-party database provider, and the database provider is responsible for the acceptability of the database access (for example, by providing technical support or service credits).
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The entity does not have inventory risk because it does not purchase or commit to purchase the database access before the customer contracts for database access directly with the database provider.
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The entity does not have discretion in setting the price for the database access with the customer because the database provider sets that price.
55-334F Thus, the entity
concludes that it is an agent in relation to the
third-party’s database service. In contrast, the entity
concludes that it is the principal in relation to the
recruitment services because the entity performs those
services itself and no other party is involved in
providing those services to the customer.
In the example above, an important part of the fact pattern is
that the entity has no further obligations to the customer after arranging for
the database access to be provided to the customer. If this is not the case
(e.g., because the entity would be responsible for the acceptability of the
database access), the analysis could be different.
Example 10-9
Company X, a food delivery service,
offers delivery of meals from restaurants to consumers
within a certain radius from a specific location in a
city. Via its Web site and app, the food delivery
service connects a consumer with a restaurant, processes
food orders, and provides a service of delivering food
to the consumer. Each restaurant has full discretion to
establish the price for its food ordered through X. The
food delivery service earns a 5 percent commission on
sales from each restaurant order and charges a flat
delivery fee of $10 per order. The restaurant is
responsible for fulfilling the ordered food and
addressing all consumer complaints regarding the quality
of the food or an incorrect order. If the food is
compromised while in transit, X is liable.
Company X is responsible for delivering the food and can
change the delivery fee at its discretion. Company X
takes custody of the food ordered from a restaurant, but
it can deliver the food only to the consumer’s location.
Company X uses independent contractors (ICs) to perform
the delivery service, and such ICs commit to being
available to provide the delivery service at set
schedules. When an IC is presented with a delivery
request, that IC can decide whether to accept or reject
the request. If an IC accepts a request, X will direct
the IC to pick up the food at a specific restaurant and
deliver the good to a specific consumer. If, instead, an
IC rejects a request, X is still obligated to provide
the delivery service and will attempt to find another IC
to perform the delivery. In some cases, X will take a
loss on the delivery service by paying an IC a rate
higher than the delivery fee to fulfill the
delivery.
Assume that the food and the delivery service are each
capable of being distinct and distinct within the
context of the contract (see Chapter 5).
In this example, X does not obtain
control of the food (one of the specified goods or
services) before it is transferred to the consumer.
Although X takes custody of the food, it cannot redirect
the food to another consumer or consume the good (the
food) as a resource. Further, X is not responsible for
fulfilling the food order or addressing consumer
complaints, does not purchase the food before the food
is transferred to the consumer, and does not have
discretion to establish the price of the food. Company X
is acting as an agent and arranging for the restaurant
to fulfill the promise to transfer food to the
consumer.
However, X is primarily responsible for
providing the service of delivering the food to the
consumer. If the food is compromised while in transit, X
is liable to the customer. Although ICs are used to
perform the delivery service and an individual IC can
reject a particular delivery, X is still obligated to
provide the delivery service and is required to identify
another IC to complete the delivery service even if
doing so results in a loss to X. Further, X has full
discretion to establish the price of the delivery
service. Consequently, X is the principal for the
delivery service.
10.4.2 Allocating the Transaction Price When an Entity Is a Principal for Some Performance Obligations and an Agent for Other Performance Obligations
In a single contract, an entity may promise to (1) arrange for
goods or services to be provided by another entity (i.e., the entity is acting
as an agent) and (2) transfer goods or services to the customer itself (i.e.,
the entity is acting as a principal). As a result, the entity may identify one
or more performance obligations for which it is acting as an agent and one or
more performance obligations for which it is acting as a principal in the same
contract. In such a situation, an entity must consider how to allocate the
contract transaction price to those separate performance obligations.
ASC 606-10-32-28 states the objective of allocating the
transaction price:
The objective when allocating the
transaction price is for an entity to allocate the transaction price to each
performance obligation (or distinct good or service) in an amount that
depicts the amount of consideration to which the entity expects to be
entitled in exchange for transferring the promised goods or services to the
customer.
ASC 606-10-32-29 explains how to meet this objective:
To meet the allocation objective, an entity shall allocate
the transaction price to each performance obligation identified in the
contract on a relative standalone selling price basis in accordance with
paragraphs 606-10-32-31 through 32-35, except as specified in paragraphs
606-10-32-36 through 32-38 (for allocating discounts) and paragraphs
606-10-32-39 through 32-41 (for allocating consideration that includes
variable amounts).
Further, ASC 606-10-32-36 states:
A
customer receives a discount for purchasing a bundle of goods or services if
the sum of the standalone selling prices of those promised goods or services
in the contract exceeds the promised consideration in a contract. Except
when an entity has observable evidence in accordance with paragraph
606-10-32-37 that the entire discount relates to only one or more, but not
all, performance obligations in a contract, the entity shall allocate a
discount proportionately to all performance obligations in the contract. The
proportionate allocation of the discount in those circumstances is a
consequence of the entity allocating the transaction price to each
performance obligation on the basis of the relative standalone selling
prices of the underlying distinct goods or services.
In light of the guidance above, we believe that an entity should
generally allocate the transaction price to all of the performance obligations
(i.e., those for which the entity is acting as a principal as well as those for
which the entity is acting as an agent) on a relative stand-alone selling price
basis. When allocating the transaction price, the entity should also consider
the guidance on allocating discounts and variable consideration to individual
performance obligations. In addition, given the guidance above, we believe that
there are two acceptable models (“Alternative A” and “Alternative B”) for
allocating a contract transaction price when the entity is a principal for some
performance obligations and an agent for other performance obligations. Those
models are illustrated in the example below.
Example 10-10
Entity X sells two distinct products,
Item 1 and Item 2, and provides a distinct service to
Customer Z for a total contract price of $180,000. The
products and the service are all transferred to the
customer at different times. The stand-alone selling
prices are as follows:
Entity X determines that it is the
principal for the sale of Item 1 and Item 2 but that it
is an agent for the service. Entity X agrees to sell the
service for $60,000 on behalf of a third-party service
provider for a 25 percent commission and bundles the
service with its products. Thus, $45,000 is remitted to
the third-party service provider, and X retains a
$15,000 commission. Assume that the criteria for
allocating a discount to one or more, but not all,
performance obligations in accordance with ASC
606-10-32-37 are not met.
Alternative
A
Entity X determines that the stand-alone
selling price of the service provided as an agent is
$15,000 (and that therefore, the total stand-alone price
of the performance obligations is $165,000). Because X
must remit $45,000 back to the third-party service
provider and retains only a $15,000 commission, X
determines that the total consideration it is entitled
to receive is $135,000 rather than the contract price of
$180,000. Therefore, X allocates the $135,000
transaction price to Item 1, Item 2, and the service on
a relative stand-alone selling price basis, as shown in
the table below.
Alternative B
The facts and circumstances in this
example may suggest that X’s performance obligations are
provided to two separate customers (i.e., the facts and
circumstances may support a determination that those
performance obligations for which X acts as a principal
(Item 1 and Item 2) are transferred to the end customer,
and the performance obligation for which X acts as an
agent (arranging for the service to be provided by the
third party) is performed on behalf of the third party).
If so, we believe that it is acceptable for X to (1)
allocate $120,000 ($180,000 contract price – $60,000
stand-alone selling price of the service) to Item 1 and
Item 2 on a relative stand-alone selling price basis and
(2) allocate the $15,000 commission received from the
third-party service provider directly to the service.
The allocations are shown in the table below.
While both alternatives described in the example above are
acceptable, we believe that for an entity to fairly depict the substance of the
transaction, one alternative may be preferable to the other depending on the
facts and circumstances of the particular arrangement. To determine which
alternative is preferable, an entity should understand and evaluate the
relationship of all of the parties involved in the particular arrangement.
Specifically, Alternative A would most likely be preferable if (1) the facts and
circumstances indicate that the entity has only one customer in the arrangement
or (2) the economic substance of the arrangement is such that there is a single
bundled discount provided to the end customer. In contrast, Alternative B would
most likely be preferable if the facts and circumstances indicate that (1) the
entity’s performance obligations in the contract (or contracts) are provided to
two separate customers (i.e., those performance obligations for which the entity
acts as a principal are transferred to the end customer, and those performance
obligations for which the entity acts as an agent are performed on behalf of a
third party) and (2) the pricing of the performance obligations provided to the
separate customers is not interdependent. Judgment is often needed in these
types of arrangements to assess whether an entity has one customer or two
customers.