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U.S. comment letter on principal-versus-agent considerations

Published on: Oct 16, 2015

Deloitte & Touche LLP comments on the FASB's proposed Accounting Standards Update, Principal Versus Agent Considerations (Reporting Revenue Gross Versus Net), issued on August 31, 2015.

An excerpt from the comment letter is shown below:

We support the Board’s efforts to clarify and improve ASC 606 to help reduce potential diversity in practice and the initial and ongoing costs of applying the new revenue standard. We believe the amendments in the proposed ASU are necessary to ensure that ASC 606 is understood and practical to implement. Further, we encourage the FASB to continue its convergence dialogue with the IASB as these and other amendments to ASC 606 move forward.

We support the Board’s proposed amendments to the guidance on determining whether an entity’s obligation is to provide a good or service to a customer (i.e., the entity is a principal) or to arrange for a third party to provide that good or service (i.e., the entity is an agent). In particular, we support the proposed amendments that clarify:

•  The need to identify the specified goods or services in the contract, including rights to goods or services provided by another entity.
•  That a principal is the party who controls the specified goods or services before those goods or services are transferred to the customer.
•  How the use of the control model in the principal-versus-agent assessment is correlated with the application of the control model under other guidance in ASC 606.

While we believe that these proposed amendments would be beneficial to the practical application of ASC 606, we recommend that the Board reframe the guidance in ASC 606-10-55-39 to make certain indicators determinative of control. Much of the difficulty in current practice is that current guidance for determining whether to present revenue gross or net contains numerous indicators without a clear framework for making judgments when several indicators point towards contrary directions.

In addition, the proposed amendments address and catalogue the delivery of goods and services separate from rights to goods and services provided by a third party. We recommend that the Board include guidance differentiating how an entity assesses control when the specified goods or services are actual goods and services as compared to rights to goods or services.  

Specifically, we believe that when the specified good or service is the actual good or service the customer receives (i.e., not just a right to acquire the good or service from a third party), the characteristics in ASC 606- 10-55-39(a) and aspects of 55-39(b) — which discuss whether an entity is primarily responsible for fulfillment of the specified goods and services and the part about whether the entity has inventory risk before the good or service is transferred to the customer, respectively — are determinative of whether the entity controls the specified good or service before it is transferred to the customer. Therefore, if an entity possesses either of these characteristics, it is the principal in the transfer of the goods or services to the customer. However, because inventory risk is not always applicable for either party and an entity must often use judgment in evaluating whether it is primarily responsible for fulfilling the promise to provide a good or service, as discussed in our response to question 3 herein, we believe that the Board should include additional guidance in the final ASU that helps an entity exercise the judgment necessary to determine who is primarily responsible.

Conversely, when the specified good or service is a right to a good or service to be provided by another entity, the assessment of whether the entity is primarily responsible for fulfillment is not applicable (i.e., as the entity is providing a right to a third party’s good or service and not the good or service itself, the entity is never primarily responsible for providing the underlying good or service). Therefore, we believe that the characteristic in ASC 606-10-55-39(b) should be determinative and needs to be present for an entity to conclude that it controls the right to the good or service before it is transferred to the customer. 

As currently proposed, the ASU provides indicators without a framework for how the indicators interact and without sufficient clarity on how judgements should be made.  Although ASC 606-10-55-39A notes that the indicators may be more or less relevant to the principal-versus-agent assessment depending on the nature of the arrangement, we believe that an entity applying the proposed guidance, as currently drafted, may give each indicator equal relevance or over-emphasize weaker indicators. Therefore, if certain indicators are not designated as determinative, an entity may draw an inconsistent conclusion by placing too much reliance on other indicators, such as credit risk and pricing discretion. This could perpetuate the diversity that currently exists.

With respect to determining the transaction price as a principal, it is unclear how an entity would account for situations in which there is a difference between the amount to which the entity is entitled from the intermediary and the amount charged by the intermediary to an end customer. We note that paragraphs BC36–BC38 of the proposed ASU’s Basis for Conclusions indicate that a principal does not include in the transaction price “the difference between the amount to which an entity is entitled from the intermediary and the amount charged by the intermediary to an end customer when the entity is (and expects to remain) unaware of the amount that the intermediary charged to the end customer.” We recommend that the Board move the guidance in these paragraphs into the final standard rather than the basis for conclusion. Further, we believe that the Board should clarify the guidance to address such differences for situations in which the entity is aware of the amount charged by the intermediary to the end customer.

We also understand that the Board is aware that questions about whether an entity is a principal or an agent under the existing revenue guidance in ASC 605-45 are presently among the most common reasons for consultations between entities and regulators and between entities and their auditors. To alleviate current practice issues related to applying the principal-versus-agent guidance, we encourage the Board to consider whether improvements similar to those in the proposed ASU, and recommended herein, should be made to existing U.S. GAAP (i.e., effective sooner than effective date for ASC 606).

We believe that transition resources such as the FASB-IASB joint revenue recognition transition resource group and AICPA industry task forces have been an integral part of the implementation process and will remain so. We strongly support the FASB’s efforts to monitor entities’ implementation progress, publicly address implementation questions, assist entities and auditors during transition, and continue the dialogue with the IASB.

We will continue to work closely with our clients throughout their implementation process. However, a successful audit of the application of the new standard is directly linked to the readiness of our clients.  Accordingly, we encourage the FASB to continue its outreach with financial statement preparers to understand their implementation status and progression toward successful transition. 


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