FASB Issues Accounting Standards Update 2016-08—Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net)
In March 2016 the FASB issued Accounting Standard Update 2016-08 to address issues related to guidance on principal versus agent arising from the discussion of Transition Resource Group meetings. While the amendments in this Update do not change the core principle of the guidance (i.e. the 5 step revenue recognition model), the amendments clarify the implementation guidance on principal versus agent considerations.
When another party is involved in providing goods or services to a customer, an entity should evaluate whether the nature of its promise is to provide the specified good or service itself (that is, the entity is a principal) or to arrange for that good or service to be provided by the other party (that is, the entity is an agent). When an entity is a principal, the entity recognizes revenue in the gross amount of consideration to which it is entitled in exchange for the specified good or service.Conversely as an agent, the entity recognizes revenue in the amount of any fee or commission to which it expects to be entitled in exchange for arranging for the specified good or service to be provided by the other party.
The amendments in this Update are intended to improve the operability and understandability of the implementation guidance on principal versus agent considerations by clarifying the following: