The principal versus agent guidance in ASC 606
applies to revenue arrangements that involve three or more parties and is applied from the perspective of an intermediary (for example, a reseller) in a multi-party arrangement. Management of a reporting entity that is an intermediary will need to determine whether the reporting entity has promised to provide goods or services to customers itself (as a principal) or to arrange for those goods or services to be provided by another party (as an agent). Significant judgment is often required in this assessment. Conclusions about whether a reporting entity is a principal or an agent has implications for other aspects of the five-step revenue model, including identifying which party or parties are the reporting entity’s customer(s), identifying the reporting entity’s performance obligation(s) in the contract, determining the transaction price, and timing of revenue recognition. Therefore, it is often helpful to assess the principal versus agent guidance prior to completing the other steps in the model.
Any arrangement where more than one party is involved in transferring goods or services to an end consumer will generally require application of the principal versus agent guidance. Examples of arrangements that frequently require this assessment include internet advertising, online retail, sales of mobile applications/games and virtual goods, consignment sales, sales by or through a travel or ticket agency, transactions in which subcontractors fulfill some or all of the contractual obligations, and sales of services provided by a third-party service provider (for example, a transportation or delivery platform).
Reporting entities that issue “points” under customer loyalty programs that are redeemable for goods or services provided by other parties also need to assess whether they are the principal or an agent for redemption of the points. Refer to RR 7.2.5
for further discussion of the accounting for customer loyalty points.
Figure RR 10-1 illustrates the parties in a typical three-party arrangement.
Figure RR 10-1
Parties in a typical three-party arrangement
This chapter discusses principal versus agent considerations and the related accounting implications for both the intermediary/reseller (refer to 10.2.2
) and vendor/supplier (refer to 10.3
). The chapter also addresses related practical application issues, including accounting for shipping and handling fees, out-of-pocket reimbursements, and amounts collected from a customer to be remitted to a third party (for example, certain sales taxes).