Boards address principal-versus-agent considerations in new revenue standard

Published on: 26 Jun 2015

This week, the FASB and IASB tentatively decided to amend the new revenue standard1 to address issues that have been raised related to how an entity should assess whether it is the principal or agent in contracts that include three or more parties (i.e., principal-versus-agent considerations).

The new revenue standard requires an entity to evaluate whether it is a principal or an agent on the basis of whether it controls a promised good or service before it transfers the good or service to the customer.2 However, stakeholders have questioned (1) how to determine the unit of account (i.e., whether it should be at the contract level or performance obligation level), (2) whether the related indicators in the new revenue standard are intended to assist in a single evaluation of control or represent an additional evaluation, and (3) how certain indicators are related to the new revenue standard’s general control principle.

In response, the boards tentatively agreed to amend the standard as follows:

  • Amendment 1 — Clarify that an entity should apply principal-versus-agent guidance to each distinct good or service (or distinct bundle of goods or services).
  • Amendment 2 — Describe situations in which an entity that is a principal can control a service that is to be performed by a third party for the entity’s customer. This amendment is intended to explain how “inventory risk” can apply to services.
  • Amendment 3— Update the indicators in ASC 606-10-55-39 (paragraph B37 of IFRS 15) by:
    • Adding explanatory language to illustrate how each indicator supports the control principle.
    • Reframing them to indicate when an entity is a principal rather than when an entity is an agent.
    • Clarifying that (1) the purpose of the indicators is to help an entity assess whether it controls the specified good or service (i.e., whether it acts as the principal) and (2) certain indicators may be more or less persuasive for different contracts.
  • Amendment 4 — Revise the existing examples in ASC 606 and IFRS 15 (and add examples) to better illustrate the application of the principal-versus-agent guidance.

In addition, the FASB met separately to discuss stakeholder concerns about whether an entity that concludes that it is the principal in a transaction but does not know how much the intermediary will charge the end customer for the good or service being provided is required to estimate such unknown amount and include it in the transaction price. However, no tentative decisions were reached, and the Board instructed its staff to perform additional research on this issue.

Next Steps

The FASB has decided not to proceed with drafting a proposed Accounting Standards Update until it reaches a consensus on the issue it discussed separately related to whether a principal should estimate gross revenue. The IASB decided that it will include the joint tentative decisions with other earlier proposed clarifications to IFRS 15 in a single exposure draft, which is expected to be published before the end of July 2015.


1 FASB Accounting Standards Update No. 2014-09, Revenue From Contracts With Customers; IFRS 15, Revenue From Contracts With Customers.

2 Refer to ASC 606-10-55-36 through 55-40 (paragraphs B34 through B38 of IFRS 15).

Boards address principal-versus-agent considerations in new revenue standard Image

Correction list for hyphenation

These words serve as exceptions. Once entered, they are only hyphenated at the specified hyphenation points. Each word should be on a separate line.