The guidance on transaction price in paragraph 606-10-32-2 states that the transaction price should exclude “amounts collected on behalf of third parties.”

Conversely, if an entity is not collecting an amount on behalf of a third party (for example, on behalf of a government or another service provider), that amount should be included in the transaction price. Sometimes it may not be entirely clear whether the amounts are collected on behalf of third parties. In those cases, some stakeholders have expressed the view that an entity should apply the principal-agent framework in Topic 606 to determine whether it is merely a conduit for the amounts collected or whether it is the principal with respect to the obligation. An entity could use the principal-agent framework to help it to determine whether the customer is compensating the entity for a cost it incurred to provide a good or service (that is, as a principal) or, instead, whether the entity is arranging for the customer to pay its (the customer’s) obligation to another party (that is, acting as an agent).

The principal versus agent implementation guidance assists an entity in determining whether the nature of its promise is a performance obligation to provide the specified goods or services itself or to arrange for another party to provide services. For items such as shipping and handling fees and other out-of-pocket expenses, this guidance is applicable because those costs are incurred by the entity as part of satisfying a performance obligation. Because taxes and other assessments are generally an obligation to a governmental authority, rather than to a customer, the principal versus agent guidance is applied by analogy.

Below are some considerations about how stakeholders note that the principal versus agent guidance could be applied in determining how to present some common amounts billed to customers.

Other stakeholders have raised questions with respect to the guidance in paragraph 606-10-32-2 that states that the transaction price should include only “the amount of consideration to which an entity expects to be entitled in exchange for transferring promised goods or services to a customer.” Those stakeholders question whether there is, as a result of the definition of transaction price, a possible distinction between items such as reimbursements of out-of-pocket expenses or shipping and handling fees charged as part of fulfilling a promised good or service and collections for taxes or other assessments by governmental authorities.

Some assert that out-of-pocket expenses, including shipping and handling fees, are generally incurred by the entity in fulfilling its performance obligation(s) to the customer, and, therefore, the amounts billed to the customer represent consideration to which an entity expects to be entitled in exchange for transferring goods or services to a customer. They assert that the fees are no different than the transaction price of a good representing “reimbursement” for the costs to produce that product (for example, the cost of each item of raw material, labor, depreciation on manufacturing equipment).

With respect to collections of taxes or other assessments, some stakeholders note that it is not clear whether those amounts represent consideration to which the entity expects to be entitled in exchange for transferring promised goods or services to a customer. In addition, they note that it can vary depending on the nature of the sales tax or other assessment from a governmental entity. Those billings may not relate to the entity’s fulfillment of a promised good or service. This may be evident in circumstances when the price of the good or service varies among jurisdictions by the statutorily mandated tax or assessment amount. For example, when a good is sold over the internet, a sales tax amount is added (or not added) at time of checkout based on where the customer resides. In addition, in some jurisdictions, certain types of entities might not be required to pay sales tax for certain products, while other types of entities are required to pay sales tax for the same products. In those examples, because the price variation is entirely attributable to the tax (and not attributable to any incremental performance), some assert that the tax amount should not be considered to be part of the consideration to which the entity is entitled in exchange for transferring the promised good or service to the customer. Those amounts would, therefore, be excluded from revenue.

Other stakeholders assert that a principal-agent analysis of the nature described above is appropriate to determine whether those amounts should be considered part of the transaction price because an obligation of the entity to a governmental authority that is required in order for the entity to conduct business is no different than other costs of the entity that are paid with the proceeds from the entity’s sales. For example, assume an entity sells a product to a customer for CU100 and, as a direct result of that sale, owes a third party a sales commission of CU10 and owes a governmental authority a tax on the transaction of CU8. There appears to be no substantive difference between the third-party commission and the tax. The two costs were incurred as a direct result of the specific sale transaction, and neither the commission nor the tax provide any additional good or service to the customer beyond the product purchased.

The staff agrees with the view of most TRG members that Topic 606 provides sufficient guidance to determine the gross or net presentation of amounts billed to customers, including shipping and handling fees and reimbursements of other out-of-pocket expenses, and various taxes collected from customers and remitted to governmental authorities. See paragraph 606-10-32-2A for an accounting policy election about exclusion of taxes from the transaction price.