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Question 44: How should the transaction price allocation guidance be applied to a transaction in which an entity is a principal for some of the deliverables and an agent for others?
Publication date: 31 Jan 2020
us FASB Staff Q&A Revenue 44
Reference(s): Section 606-10-32
To illustrate this potential issue, consider the following example:
A web-based entity (the “originator”) collects data related to its users. In exchange for a fee, the originator provides third parties with access to that data. A third-party service provider may bundle the service from the originator with its own services and sell the package to another entity (the “customer”). The customer remits a combined fee for access to the originator’s service and the third party’s services to the third party. The third-party service provider remits the originator’s fee, net of the agreed upon commission, to the originator. The customer is aware of the component of the combined fee that is related to the originator’s service.
In this example, the third-party service provider is delivering a bundle of services to the end customer for a combined fee. A portion of that fee is designated for the originator’s service based on the originator’s price list. The originator grants access to the data directly to the end customer. The third-party service provider (the intermediary with respect to the data access services) may determine it is an agent for the data access services, while being the principal for all of the other elements in the transaction (that is, the other services provided to the end customer).
The staff is aware of the following two views about the interaction of the transaction price allocation guidance with the principal versus agent guidance in determining how the intermediary in the above example should allocate any overall discount in its contract with the end customer:
(a) View A—Any discount in the overall arrangement is allocated to each element, regardless of whether the element is a “gross” or a “net” element (unless the entity meets the criteria to allocate the discount entirely to one or more, but not all performance obligations in the contract).
(b) View B—The entity should recognize its fee (or commission) for any net elements and any discount should be allocated only to the “gross” elements.
The appropriate interpretation may not be directly related to application of the allocation guidance. If an entity (for instance the service provider in the example above) determines that it is the principal to some of those promised goods or services and an agent to the others, then it should question whether it has one customer (that is, the end customer receiving all of the goods or services) or multiple customers (that is, the end customer for those elements for which the entity is the principal and the originator for those elements for which it is an agent).
If the entity has a single customer, some think that View A would appear to be consistent with the allocation guidance. However, if the entity has more than one customer, the contract combination guidance does not allow for combining arrangements with two or more unrelated third parties. The contract combination guidance addresses combining contracts with the same customer (or related parties of the customer). Therefore, allocating a bundled discount across these contracts may not be appropriate if the entity has two customers in the arrangement.
It may further be appropriate for the entity to consider whether it is principal to only some of the promised goods or services in the contract if those goods or services are not separable from each other (for example, where the goods or services are each inputs to a combined item for which the customer contracted).
Copyright #year# by Financial Accounting Foundation, Norwalk, Connecticut.
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