The FASB has issued an Exposure Draft titled Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net)
This proposal resulted from the efforts of the FASB and the IASB Joint Transition Resource Group for Revenue Recognition (TRG) which works to identify any potential implementation issues. One issue identified by the TRG was when an entity with another party is involved in a providing a good or service to a customer.
The entity is required under ASC 606 to identify if they are a principal (promises to provide a good or service) or an agent (arranges for the good or service to be provided). This amendment is being proposed to reduce the risk of diversity in practice, as well as the cost and complexity of applying ASC 606 at transition and on an ongoing basis.
An entity should perform the following steps to determine if revenue is to be recognized under ASC 606:
- Identify the contract(s) with a customer
- Identify the performance obligations in the contract
- Determine the transaction price
- Allocate the transaction price to performance obligations
- Recognize revenue when (or as) a performance obligation is satisfied
There is no change to this method under the proposed amendment. The proposed amendment would clarify the following:
- An entity needs to determine whether they are principal or agent for each specified good or service. There is a potential to be a principal for some goods, and agent for others with the same customer.
- An entity determines the nature of each good or service
- An entity that is a principal obtains control of
- A good from the other party and transfers to the customer
- 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
- A good or service from the other party that is bundled with other goods or services to provide to the customer
- This proposal would also clarify that indicators should be reviewed based on the facts and circumstances
Comments related to this Exposure Draft are due on October 15, 2015. The full text of the Exposure Draft is available by clicking here.
Readers should not act upon information presented without individual professional consultation.