FASB, IASB to Clarify Principal, Agent For Gross vs. Net Revenue Presentation

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By Steve Burkholder

June 22 — Proposed changes to far-reaching accounting rules on revenue reporting are expected to be issued in coming months by the Financial Accounting Standards Board and the International Accounting Standards Board.

With the planned amendments to their one-year-old standards on revenue recognition, FASB and IASB aim to clarify and improve guidance on principal-versus-agent questions, the boards decided June 22.

The answers to those question drive whether a company reports gross or net amounts of revenue.

Stating Principles 

General accounting principles, set out in the May 2014 rules—FASB Accounting Standards Codification 606 and IFRS 15—state that an entity must determine whether it is the principal in the revenue-generating transaction or the agent.

The principal in the transaction, which provides the good or service to the customer, would recognize “as revenue the gross amount of consideration to which it expects to be entitled in exchange for those goods or services transferred,” according to the standards.

By contrast, the agent “arranges for the other party to provide the good or service,” FASB and IASB state. An agent would record as revenue the fee or commission to which it expects to be entitle in exchange for arranging for the other party to provide its goods or services to the customer.

Control is Linchpin

A key notion behind the boards' approaches on appropriate designations of principal-versus-agent is assessing which party has control over the promised good or service before it is provided or otherwise transferred.

The determination of control can be nuanced. “The nature of the entity's promise may not always be readily apparent,” FASB and IASB state in the standards.

Transition to the New Standards

The overall standards on revenue are not expected to be effective until 2018, pending formal votes this summer on whether to delay the current Jan. 1, 2017 effective date for the rules.

FASB and IASB would like to make companies' shift to the revenue standards as smooth as possible. The panels have been working on various clarifications and amendments. Those were spawned in discussions at meetings of the boards' Transition Resource Group for Revenue Recognition.

IASB plans to issue its exposure draft containing the amendments on principal-vs.-agent by July 31, a senior staff accountant said. FASB's timing for its own publication of the amendments is uncertain. A timetable for issuance wasn't discussed, but the U.S. board expects to publish the draft amendments to the revenue standard in coming months, if not weeks.

The boards hope to roughly align their schedules for redeliberations on the topic. Those redeliberations are expected to start in the fall.

Differentiating Principals From Agents

To help determine whether an entity is a principal or an agent, the boards laid out a list of “indicators.” As tentatively decided June 22 at the boards' joint meeting, FASB and IASB plan to sharpen and clarify the language on indicators to better lend themselves to aiding in the principal-vs.-agent determination under different scenarios.

In an agenda paper prepared for the boards' meeting, the staffs of FASB and IASB stated in an agenda paper, for example, that “clarifying that a principal can direct another party to perform a service for the customer on its behalf explains how an entity can control a service, even when another party actually performs the service.”

Specifics of the Amendments 

Before voting to tentatively support four proposed amendments to the revenue rules, FASB formally added a standard-setting project to amend the principal-vs.-agent guidance in ASC 606.

The four amendments that the US board would like to float for public comment later this summer include two that IASB already voted in May to expose for public comment. Those two common amendments to the principal-vs.-agent guidance are:

• one that would help explain the scenarios in which an entity that is a principal can control a service to be performed by another party for the entity's customer; and

• one that would reflect the desire of FASB and IASB to change some illustrative examples already in the standards, in order to clarify the guidance, and to include added examples.


The two other amendments tentatively endorsed for the proposal by FASB and IASB are, according to the agenda paper:

• one to set the unit of account for the principal-vs.-agent analysis and link more clearly “the identification of that specified good or service” to the guidance in ASC 606 and IFRS 15 on identifying performance obligations, a key step in the revenue reporting model; and

• one that lays out the essential notion of control of a specified good or service through use of a non-exhaustive—that is, “not an all-inclusive”—list of indicators that assist in the gauging of control.


On assessing control through a list of indicators, the boards' staff would stress looking at evidence “of when an entity controls a specified good or service” rather than emphasizing when the entity is an agent. In addition, FASB and IASB staff accountants would clarify that one or more of the indicators could be “more or less persuasive to the control evaluation in different contracts.”

FASB's Own Deliberations

Meeting June 22 by itself, FASB discussed extensively estimations of gross revenue and the topic of principal-vs.-agent.

The board didn't yet resolve the issues it debated. However, it tentatively narrowed differences and elected to carry out more research and thinking on several views.

Many of the gross revenue-reporting scenarios discussed by FASB involved companies that produce virtual games, but which see their product sold by resellers or others. In addition, the game-maker may have varying degrees of knowledge of the price for which the game ultimately is sold.

The identification of the customer—“what the customer is,” according to one FASB member—also figured in the debate.

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

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

A detailed IFRS paper (Agenda Paper 7A) on “principal versus agent considerations” is available at http://www.ifrs.org/Meetings/Pages/IASB-Meeting-June-2015.aspx.

For a discussion of fundamental principles of revenue recognition, see 5100-2nd, Revenue Recognition: Fundamental Principles, at 5100.

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