FASB Revenue Rule Guidance Clarifies Principal Versus Agent

By Steve Burkholder

March 17 — Companies preparing for the advent of far-reaching revenue recognition standards have new guidance intended to settle questions about gross versus net presentation with respect to whether an enterprise is a principal or an agent in a revenue-making transaction.

The Financial Accounting Standards Board March 17 issued a narrowly drawn accounting standards update on the principal-versus-agent scenario—ASU 2016-08. The 40-page FASB guidance lines up with similar clarifying amendments published by the International Accounting Standards Board.

The ultimate answers to gross-vs-net questions could have significant impact on companies' booking of revenue. Revenue is widely deemed one of the most important lines—if not the most important—in financial statements.

FASB and IASB devised the new guidance with help last year from the boards' joint Transition Resource Group for Revenue Recognition . The discussions by the group and the boards are intended to help smooth the transition over the next few years to the 2014 standards—ASC 606 and IFRS 15).

`Clarify the Thought Process.'

According to FASB, the main revenue rules are built on a core principle: “that an entity should 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,” the U.S. board stated in the new ASU.

When another part is involved in providing goods or service to a customer, FASB wrote, “an entity is required 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 the good or service to be provided by the other party (that is, the entity is an agent).”

The answer to that question drives whether a company reports gross or net amounts of revenue.

FASB described the boards' decision, reflected in the new ASU, “to clarify the thought process to be applied when assessing whether an entity is a principal or an agent by specifically requiring an entity to identify the specified good or service before applying the control principle,” a key element of the revenue reporting rules.

Sample Scenarios

FASB and IASB sought to clarify issues arising in scenarios such as one in which one customer contract includes more than one specified good or service, and “an entity could be a principal for some specified goods or services and an agent for others.”

The added rules also are aimed at making clearer how enterprises determine the nature of the good or service. FASB cited the examples of a contract pertaining to a good or service, or to a right to a good or service.

To contact the reporter on this story: Steve Burkholder in Norwalk, Conn., at sburkholder@bna.com

To contact the editor responsible for this story: Steven Marcy at smarcy@bna.com

For More Information

The new revenue reporting guidance on principal vs. agent and gross vs. net presentation is available at http://www.fasb.org/cs/ContentServer?c=Document_C&pagename=FASB%2FDocument_C%2FDocumentPage&cid=1176167987739.