The US Financial Accounting Standards Board (FASB) on Thursday issued an accounting standards update that clarifies how to apply revenue recognition guidance related to whether an entity is a principal or an agent.
The goal of Accounting Standards Update (ASU) No. 2016-8, Revenue From Contracts With Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net), is to improve the “operability and understandability of the implementation guidance” on principal versus agent considerations, according to the update.
The update comes three months after FASB and the International Accounting Standards Board (IASB) reaffirmed amendments designed to address inconsistent application of principal versus agent guidance. The changes included defining that an entity is a principal when it controls the specified good or service before that good or service is transferred to the customer, and that an entity is an agent when it does not control the specified good or service before it is transferred to the customer.
The update seeks to clarify the guidance in four ways:
- 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.
- An entity determines the nature of each specified good or service (e.g., whether it is a good, a service, or a right to a good or service).
- When another party is involved in providing goods or services to a customer, an entity that is a principal obtains control of (a) a good or another asset from the other party that it then transfers to the customer; (b) 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 (c) 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.
- 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 in this update affect the guidance in ASU No. 2014-09, Revenue From Contracts With Customers (Topic 606), which is not yet effective. The effective date and transition requirements for the amendments in this ASU are the same as the effective date and transition requirements of 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.
—Jeff Drew (jdrew@aicpa.org) is a CGMA Magazine senior editor.
