FASB, IASB to propose clarifications to principal vs. agent considerations

The US Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) voted Monday to seek public comment on proposed changes to the converged revenue recognition standard that would give financial statement preparers additional guidance on the principal versus agent analysis.

Questions posed on implementation by financial statement preparers have led the boards to work to amend and clarify the standard, which the boards issued jointly in May 2014. The boards also have proposed delaying the effective date to accommodate a smoother transition in light of the amendments and clarifications that still are being made.

The potential amendments the boards discussed Monday were part of a larger list of changes to the standard that are in various stages of development by the boards as a result of issues brought to the attention of their joint transition resource group.

The boards voted Monday to propose amendments that would:

  • Clarify the thought process to be applied when assessing whether an entity is a principal or an agent by specifying the unit of account and more clearly linking the identification of that specified good or service to the guidance in the revenue recognition standard on identifying performance obligations (Step 2 of the revenue model).
  • Emphasise the importance of appropriately identifying the nature of the good or service (or in some cases, the right to a good or service) that will be transferred to the customer. This is a key to assessing whether the entity controls the good or service before it is transferred.
  • Clarify that the “specified good or service,” which is the unit of account for the principal versus agent evaluation, is each distinct good or service (or each distinct bundle of goods or services). This would clarify that in a contract that includes multiple goods or services, an entity may be a principal for one or more specified goods or services and an agent for others.
  • Clarify that a principal can direct another party to perform a service for the customer on its behalf, which explains how the principal can control a service even when another party actually performs the service.
  • Help to explain how inventory risk can apply to some services.
  • Amend, not delete, the indicators in FASB Accounting Standards Codification Paragraph 606-10-55-39 of the standard to make it clear that the indicators support or assist in the evaluation of control, rather than overriding or replacing the evaluation of control, and to help entities understand how those indicators assist in that evaluation.
  • Amend examples in the guidance and provide additional examples that would:
    • Clearly link the principal versus agent conclusion to the notion of control;
    • Identify the specified good or service in each example; and
    • Demonstrate that the indicators merely support the control principle, which, depending on the example, might result in none, or only some, of the indicators being relevant to the principal versus agent assessment.

The boards voted to have the FASB and IASB staffs draft exposure drafts to seek public comment on these proposed clarifications.

Some of the clarifications and amendments already had been approved for exposure by the IASB, which affirmed that approval Monday and voted to include the amendments in an exposure draft that is expected to be issued in July.

Ken Tysiac ( is a CGMA Magazine editorial director.