FASB Updates Guidance for Principal versus Agent Revenue Accounting
Improving the implementation guidance regarding principal versus agent revenue considerations, the Financial Accounting Standards Board (“FASB”) has issued Accounting Standards Update (ASU) No. 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net). The amendments in ASU No. 2016-08 clarify the following:
- A company must determine the nature of each specified good or service promised to a customer (e.g., a good/service itself or right to a good/service). Then a company decides whether it is acting in the capacity as a principal or agent for each individual good or service promised to a customer.
- When more than one company is involved in providing goods and services to a customer, the principal company obtains control of the good or asset; or obtains a right to a service which it can then direct to its customers; or combines the goods and services with other goods or services and provides the combined goods or services to its customers.
- Obtaining control is the key differentiator. The indicators in paragraph 606-10-55-39 provide support for assessing which party has obtained control. The amendments in paragraph 606-10-55-39A clarify that the facts and circumstances will dictate which indicators are relevant and which indicators should be weighted more heavily.
ASU No. 2016-08 also includes amendments to existing illustrative examples and features additional examples to help companies with implementation of the guidance.
Public companies must apply the amendments for annual periods, including interim periods within, starting after December 15, 2017. The effective date for private companies is for annual periods starting after December 15, 2018.