A principal? Or an agent? FASB proposal aims to clarify

By Ken Tysiac

FASB on Monday proposed changes to the new revenue recognition standard that are meant to clarify how to determine whether an entity is a principal or an agent in a contract.

Under the new revenue recognition standard, an entity is required to determine whether it has promised:

  • To provide a good or service to a customer, which makes the entity a principal.
  • To arrange for the good or service to be provided to the customer by another party.

The determination is based upon whether the entity controls the good or service before it is transferred to the customer, and the new standard includes indicators to assist in this evaluation.

Constituents have voiced concerns about the guidance through the joint transition resource group that is helping FASB and the International Accounting Standards Board (IASB) evaluate implementation concerns regarding the new, converged standard.

The proposed amendments are a response to those concerns. The proposal would not change the core principle of the guidance, but is designed to clarify implementation guidance. The amendments in the proposal would clarify that:

  • 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 included 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 (for example, 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:

    1. A good or another asset from the other party that it then transfers to the customer; or
    2. 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
    3. 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 proposed 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.

In addition, under the proposal, some existing illustrative examples would be amended, and other illustrative examples would be added to assist in application of the guidance.

The proposal is aligned with clarifications proposed July 30 by the IASB in an exposure draft, Clarifications to IFRS 15.

FASB is accepting comments on its proposal until Oct. 15.

Ken Tysiac (ktysiac@aicpa.org) is a JofA editorial director.


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