The Financial Accounting Standards Board has issued a proposed accounting standards update to clarify the implementation guidance on principal versus agent considerations contained in the new revenue recognition standard.
The clarification comes out of the work done by FASB and the International Accounting Standards Board’s joint Transition Resource Group, which has been working on implementation issues raised by the standard released last year by FASB and the IASB.
One issue discussed by the TRG relates to when another party, along with the entity, is involved in providing a good or a service to a customer. Under those circumstances, the new standard requires the entity to determine whether the nature of its promise is to provide that good or service to the customer (that is, the entity is a principal) or to arrange for the good or service to be provided to the customer by the other party (that is, the entity is an agent). The determination is based upon whether the entity controls the good or the service before it is transferred to the customer. The revenue recognition standard includes indicators to assist in the principal versus agent evaluation.
During meetings of the Transition Resource Group, the boards heard about implementation issues related to the implementation guidance on principal versus agent guidance considerations, including identifying the unit of account at which an entity should assess whether it is a principal or an agent; identifying the nature of the good or the service provided to the customer (for example, whether it is a good, a service, or a right to a good or service); applying the control principle to certain types of transactions, such as service arrangements; and the interaction of the control principle with the indicators provided to assist in the principal versus agent evaluation. FASB decided to add a project to its technical agenda to improve the standard to address those issues.
Under the proposed guidance, an entity would 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. To achieve that core principle, an entity would have to apply the following steps:
1. Identify the contract(s) with a customer.
2. Identify the performance obligations in the contract.
3. Determine the transaction price.
4. Allocate the transaction price to the performance obligations in the contract.
5. Recognize revenue when (or as) the entity satisfies a performance obligation.
The proposed update would clarify the implementation guidance on principal versus agent considerations, but not the underlying revenue recognition standard. When another party is involved in providing goods or services to a customer, an entity would need to determine whether the nature of its promise is to provide the specified good or service itself (that is, the entity is a principal) or to arrange for that good or service to be provided by the other party (that is, the entity is an agent).
When a principal satisfies a performance obligation, the entity would recognize revenue in the gross amount of consideration to which it expects to be entitled in exchange for the specified good or service transferred to the customer. When an agent satisfies a performance obligation, the entity would recognize revenue in the amount of any fee or commission to which it expects to be entitled in exchange for arranging for the specified good or service to be provided by the other party. An entity is a principal if it controls the specified good or service before that good or service is transferred to a customer.
The guidance includes indicators to assist an entity in determining whether it controls a specified good or service before it is transferred to the customer.
On July 30, 2015, the IASB issued an exposure draft with similar clarifications to keep the revenue recognition standard converged (see IASB Proposes Changes in Revenue Recognition Standard). FASB is encouraging stakeholders to review and comment on the proposal by Oct. 15, 2015.
FASB's proposed ASU is available for review at www.fasb.org.
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