A principal? Or an agent? FASB proposal aims to clarify.
 

A principal? Or an agent? FASB proposal aims to clarify.

FASB on Monday proposed changes to the new revenue recognition standard that are meant to clarify how to determine whether an entity is a principal or an agent in a contract.

Under the new revenue recognition standard, an entity is required to determine whether it has promised:

  • To provide a good or service to a customer, which makes the entity a principal.
  • To arrange for the good or service to be provided to the customer by another party.

The determination is based upon whether the entity controls the good or service before it is transferred to the customer, and the new standard includes indicators to assist in this evaluation.

Constituents have voiced concerns about the guidance through the joint transition resource group that is helping FASB and the International Accounting Standards Board (IASB) evaluate implementation concerns regarding the new, converged standard.

The proposed amendments are a response to those concerns. The proposal would not change the core principle of the guidance, but is designed to clarify implementation guidance. The amendments in the proposal would clarify that:

  • An entity determines whether it is a principal or an agent for each specified good or service promised to the customer. A specified good or service is a distinct good or service—or a distinct bundle of goods or services—to be provided to the customer. If a contract with a customer included more than one specified good or service, an entity could be a principal for some specified goods or services and an agent for others.
  • An entity determines the nature of each specified good or service (for example, whether it is a good, a service, or a right to a good or service).

Read more on the Journal of Accountancy.