When a third party is involved in providing goods or services to a customer, an entity that is a principal obtains control of any one of the following before that good or service is transferred to a customer: A common example would be a general contractor using a subcontractor to perform a certain aspect of the construction project. Additionally, the revenue recognition rules note that an entity does not necessarily control a specified good if the entity obtains legal title to the good only momentarily before legal title is transferred to a customer.Ī principal may satisfy its performance obligation to provide the specified good or service itself or it may engage another party to satisfy some or all of the performance obligation on its behalf. The conclusion of control should not be based on the presence of one or more of these indicators. The indicators noted above are to support an assessment of control. Discretion in establishing the price for the specified good or service.Primary responsibility for fulfilling the promise to provide the specific good or service.Control is described further in the regulations, but some general indicators include: Said another way, a principal will have control of the goods or services before they are transferred to the customer, while an agent will not. Generally, a principal provides goods or services directly to the end customer, while an agent arranges for another party to provide its goods or services to the end customer. Determining if You Are an Agent or a Principal In the Groupon case noted above, its original filing of $1.52 billion in revenue was reduced to $688 million. An agent should report revenue based on the net amount retained, for example, the amount billed to a customer less the amount paid to the supplier, subcontractor, etc.A principal should report revenue based on the gross amount billed to a customer, while.This determination can have a significant impact to financial statement reporting:
This evaluation is necessary to properly assess the performance obligations within the contract. If a third party is involved in providing goods or services to your customer, your company should evaluate whether it is acting as a principal or an agent. How Agent vs Principal Can Impact the Recognition of Your Company’s Revenue The new revenue recognition rules have clarified and enhanced guidance surrounding the application.
COMPANY PRINCIPAL DEFINITION HOW TO
Historically, there has been diversity in practice surrounding how to apply the principal versus agent concept. In 2011, Groupon made headlines as the company restated its financial results to correct for an error in the way it recorded revenue due to principal versus agent considerations. The concept of principal versus agent is not new to accounting. A specific area that has been scrutinized under the new regulations is principal versus agent considerations. The new revenue recognition standard codified in FASB Accounting Standards Codification (ASC) 606 has brought a number of challenges to accountants and other stakeholders.
Agent Considerations – Januby Nevin Nussbaum Revenue Recognition Standards Clarify Principal vs.
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