Changes to principal vs. agent guidance are on track for final approval as FASB and the International Accounting Standards Board (IASB) amend the converged revenue recognition standard that they established in 2014.
The amendments were introduced in August 2015 through a FASB Proposed Accounting Standards Update, Revenue From Contracts With Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net), and an IASB Exposure Draft, Clarifications to IFRS 15.
The boards affirmed the principle for determining whether an entity is a principal or an agent. An entity is a principal if it controls a specified good or service before the good or service is transferred to the consumer. When that isn't the case, the entity is an agent. The boards also approved clarifications to the unit of account for the principal vs. agent evaluation; proposals to clarify the application of the control principle in the context of services; and proposals to clarify the role of the indicators of control in Paragraph 606-10-55-39 of Topic 606 and Paragraph B37 of IFRS 15.
The boards also moved to eliminate exposure to credit risk as an indicator of whether an entity controls a specified good or service before it is transferred to the customer.
The staffs of the boards were to draft final standards, including these clarifications, for approval and issuance. The boards also will consider additional changes and clarifications regarding revenue recognition.