FASB Proposes Clarifications to Principal vs. Agent Guidance in Revenue Standard

On August 31, 2015, the Financial Accounting Standards Board (FASB) issued proposed guidance which would amend ASC 606, Revenue from Contracts with Customers. The amendment would clarify the provisions of ASC 606 regarding when an entity is acting as a principal or an agent regarding providing a specified good or service to a customer.

The proposed revision does not alter the core principal outlined in ASC 606 as to whether an entity is acting as a principal or agent, which is that an entity is a principal if it controls the specified good or service before the good or service is transferred to the customer.  The proposed amendments are intended to clarify existing guidance in response to implementation questions raised by stakeholders to the FASB-IASB Joint Transition Resource Group regarding:

1. The unit of account for assessing whether the entity is acting as a principal or as an agent
2. Identifying the nature of a good or service (e.g., whether it is a good or service, or a right to a good or service)
3. How to apply the control principle to certain types of transactions
4. Interaction of the control principle with provided indicators as to whether an entity is the principal or acting as an agent

The proposed amendments provide implementation guidance to clarify that:

1. The unit of account for determining whether an entity is a principal or agent is each specified good or service that is distinct good or service or a bundle of distinct goods or services. Based on this guidance, the assessment may result in different conclusions for each specified good or service.
2. An entity must determine the nature of each specified good or service, i.e., whether it is a good or service or the right to a good or service.
3. An entity that provides a good or service is the principal if it obtains control of (a) good or an asset from another party that it transfers to the customer; (b) the right to a service to be provided by another party which gives the entity the right to direct that the party to provide the service on behalf of the entity; or (c) a good or service provided by the other party that is combined with a good or service provided by the entity to provide a combined good or service to a customer.
4. Proposed indicators of whether an entity obtains control may be more or less relevant or persuasive to the determination, depending on the facts and circumstances. Rather than the existing standard’s focus on indicators of whether an entity is acting as an agent, the proposed amendments provide indicators as to whether an entity is acting as a principal.

Existing illustrative examples in ASC 606 would be amended to clarify the above guidance and one additional example will be added.

Comments on the proposed amendments are due by October 15, 2015.

If you would like further information or need assistance in applying ASC 606, please visit puncelconsulting.com, or contact Luis Puncel at lpuncel@puncelconsulting.com.