A recent Accounting Standards Update (ASU) issued by the Financial Accounting Standards Board (FASB) provides four amendments to the application of revenue recognition guidance depending on whether an entity is the principal or the agent.
The update is the result of input from the Joint Transition Resource Group for Revenue Recognition, created by the FASB and the International Accounting Standards Board in 2014. The group’s duties include letting the boards know when implementation of the new revenue recognition standard raises questions.
ASU No. 2016-8, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net), aims to make the implementation guidance on principal vs. agent issues more understandable.
The amendments don’t affect the core principle of the guidance in Topic 606, which is “an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services,” the update states.
The amendments, quoted verbatim, state the following:
1. 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. 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.
2. An entity determines the nature of each specified good or service (for example, whether it is a good, a service, or a right to a good or service).
3. When another party is involved in providing goods or services to a customer, an entity that is a principal obtains control of:
- A good or another asset from the other party that it then transfers to the customer;
- A right to a service that will be performed by another party, which gives the entity the ability to direct that party to provide the service to the customer on the entity’s behalf; or
- A good or service from the other party that it combines with other goods or services to provide the specified good or service to the customer.
4. The purpose of the indicators in paragraph 606-10-55-39 is to support or assist in the assessment of control. The amendments in paragraph 606-10-55-39A clarify that the indicators may be more or less relevant to the control assessment and that one or more indicators may be more or less persuasive to the control assessment, depending on the facts and circumstances.
The amendments affect the guidance in ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), which hasn’t yet taken effect. The effective date and transition requirements for the amendments are the same as those in ASU No. 2014-09. ASU No. 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, defers the effective date of ASU No. 2014-09 by one year.
Terry Sheridan is an award-winning journalist who has covered real estate, mortgage finance, health care, insurance, personal finance, and accounting and taxation issues for newspapers, magazines, and websites. A Chicago native and former South Florida resident, she now lives in New England.