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The principal versus agent assessment is a two-step process that consists of (1) identifying the specified good or service to be provided to the end consumer and (2) assessing whether the reporting entity (intermediary) controls the specified good or service before it is transferred to the end consumer.
The reporting entity will apply the “distinct” guidance in ASC 606-10-25-19 through ASC 606-10-25-22 to identify the specified goods or services. In other words, specified goods or services are the distinct goods or services (or a distinct bundle of goods or services) that are transferred to the end consumer. Refer to RR 3.4 for additional discussion of the guidance for assessing whether a good or service is distinct.
The specified goods or services are determined from the perspective of the end consumer and are not necessarily the same as the reporting entity’s performance obligations. For example, a reporting entity operating an online marketplace for selling and buying products may ultimately conclude its performance obligation is providing access to the marketplace; however, the specified good or service for purposes of the principal versus agent assessment is the product the end consumer purchases on the marketplace. If there is more than one specified good or service, the reporting entity should perform a separate principal versus agent assessment for each. In contracts with multiple specified goods or services, the reporting entity could be the principal for some goods or services and an agent for others.
The second step in the assessment requires a reporting entity that is an intermediary to use the definition of control in ASC 606-10-25-25 and the explanation of how a company obtains control outlined in ASC 606-10-55-37A to assess whether it obtains control of the specified good or service before it is transferred to the end consumer. If additional evidence is needed to reach a conclusion, the reporting entity should evaluate the indicators in ASC 606-10-55-39 along with all relevant facts and circumstances to inform the assessment of control.
Figure RR 10-2 illustrates the framework of the principal versus agent assessment.
Figure RR 10-2
Principal versus agent framework*
View image
*Note: this decision tree assumes that the reporting entity performing the assessment is in the role of the intermediary.
Question RR 10-1 addresses whether a reporting entity can elect to present revenue on a net basis.
Question RR 10-1
Is the principal versus agent assessment a policy election (for example, can a reporting entity elect to report on a net basis as an agent)?
PwC response
No. The principal versus agent assessment is not an accounting policy election. It is a judgment that must be supported based on the facts and circumstances of each arrangement.

10.2.1 Determining whether the reporting entity controls the specified good or service

A reporting entity is the principal in a transaction with an end consumer if it obtains control of the specified good or service before it is transferred to the end consumer. A reporting entity is an agent if it does not control the specified good or service before it is transferred to the end consumer.
“Control” is defined in ASC 606-10-25-25 as the ability to direct the use of, and obtain substantially all of the remaining benefits from, an asset (refer to RR 6.2). The revenue standard describes examples of how a reporting entity that is a principal could control a good or service before it is transferred to the end consumer.

ASC 606-10-55-37A

When another 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:

  1. A good or another asset from the other party that it then transfers to the customer.
  2. A right to a service to be performed by the other party, which gives the entity the ability to direct that party to provide the service to the customer on the entity’s behalf.
  3. A good or service from the other party that it then combines with other goods or services in providing the specific good or service to the customer. For example, if an entity provides a significant service of integrating the goods or services… provided by another party into the specified good or service for which the customer has contracted, the entity controls the specified good or service before that good or service is transferred to the customer. This is because the entity first obtains control of the inputs to the specified good or service (which include goods or services from other parties) and directs their use to create the combined output that is the specified good or service.

This guidance is intended to clarify how a reporting entity could obtain control in different arrangements, including arrangements to provide services. It also explains that if the reporting entity combines goods or services into a combined output that forms a single performance obligation to the end consumer, the reporting entity is the principal for all of the goods and services in that combined output. In that situation, the “specified good or service” for performing the principal versus agent assessment is the combined output received by the end consumer. Management should assess whether goods or services are inputs into a combined output based on the guidance for determining whether goods or services are distinct from other promises in a contract (refer to RR 3.4.2).
It is not always clear solely from the definition of control whether the reporting entity obtains control of the specified good or service before it is transferred to the end consumer. The revenue standard provides indicators to help management make this assessment.

ASC 606-10-55-39

Indicators that an entity controls the specified good or service before it is transferred to the customer (and is therefore a principal…) include, but are not limited to, the following:

  1. The entity is primarily responsible for fulfilling the promise to provide the specified good or service. This typically includes responsibility for acceptability of the specified good or service (for example, primary responsibility for the good or service meeting customer specifications). If the entity is primarily responsible for fulfilling the promise to provide the specified good or service, this may indicate that the other party involved in providing the specified good or service is acting on the entity’s behalf.
  2. The entity has inventory risk before the specified good or service has been transferred to a customer, or after transfer of control to the customer (for example, if the customer has a right of return). For example, if the entity obtains, or commits to obtain, the specified good or service before obtaining a contract with a customer, that may indicate that the entity has the ability to direct the use of, and obtain substantially all of the remaining benefits from, the good or service before it is transferred to the customer.
  3. The entity has discretion in establishing the prices for the specified goods or service. Establishing the price that the customer pays for the specified good or service may indicate that the entity has the ability to direct the use of that good or service and obtain substantially all of the remaining benefits. However, an agent can have discretion in establishing prices in some cases. For example, an agent may have some flexibility in setting prices in order to generate additional revenue from its service of arranging for goods or services to be provided by other parties to customers.

The indicators of control in ASC 606-10-55-39 are not intended to override the assessment that a reporting entity makes based on the definition of control in ASC 606-10-25-25; instead, they provide further guidance to inform management’s assessment of whether the reporting entity controls the specified good or service.
Management needs to apply judgment when assessing the indicators and evaluate all relevant facts and circumstances. No single indicator is individually determinative. The guidance also does not weigh any indicator more heavily than the others, although some indicators may provide stronger evidence than others, depending on the circumstances. Judgment will often be required to evaluate the totality of the evidence, including assessing which indicators provide stronger evidence in the specific facts and circumstances. Management should consider both the contractual terms between the parties (including contractual rights and obligations) and the reporting entity’s customary business practices when assessing the indicators.
It is helpful to understand the cash flows between the parties as part of gaining an understanding of the relationships between the parties. However, whether the reporting entity receives cash on a net or gross basis is generally not an indicator of whether the reporting entity is the principal or an agent in an arrangement.

10.2.1.1 Primary responsibility for fulfillment

If the reporting entity is primarily responsible for fulfilling the promise to the end consumer, this is an indicator that the reporting entity is directing the other party to perform on its behalf and therefore controls the specified good or service. The terms of the agreement and other communications (for example, marketing materials, website terms and conditions) often provide evidence about which party is primarily responsible for fulfilling the promise to the end consumer. Management should also consider who the end consumer views as primarily responsible, including which entity is responsible for customer service during and subsequent to fulfillment.
Examples of evidence that the reporting entity is primarily responsible for fulfillment could include:
  • The reporting entity determines which suppliers or vendors to contract with to fulfill end consumer orders (that is, the reporting entity has supplier discretion) or whether to fulfill the obligation with its own resources.
  • The reporting entity (a) has the ability to redirect goods or redirect a service provider to fulfill a different end consumer contract and/or (b) can prevent the other party from continuing to provide goods or services to a specific end consumer.
  • Contractual terms and other communications (for example, marketing materials, FAQs on the reporting entity’s website) indicate that the reporting entity is responsible for providing the goods or service.
  • The end consumer does not have a contractual relationship with the other party and/or the end consumer has little to no interaction with the other party.
  • If the other party is unable to provide the good or service, the reporting entity is responsible for finding a replacement.
  • The reporting entity is the primary contact for customer service issues, including resolving complaints.
  • The reporting entity is significantly involved with the end consumer in identifying the goods or services that meet the end consumer’s needs.
  • The reporting entity provides training or instruction to the other party or otherwise significantly influences how the other party fulfills the contract.

The above list is not comprehensive and should not be used as a checklist as certain evidence may be more or less persuasive, depending on the circumstances.

10.2.1.2 Inventory risk

Inventory risk is an indicator that a reporting entity obtains control of a good or service from the other party before it is transferred to the end consumer. Inventory risk exists when the reporting entity bears the risk of loss due to factors such as physical damage, decline in value, or obsolescence either before the specified good or service has been transferred to the end consumer or upon return. A reporting entity’s risk is reduced if it has the ability to return unsold products or products returned by end consumers to the supplier for a credit or refund.
Noncancellable purchase commitments and certain types of guarantees may expose a reporting entity to inventory risk if the reporting entity bears the risk of ownership of the committed or guaranteed amounts (that is, the risk that it ultimately cannot sell or otherwise monetize the inventory). However, judgment may be required to determine whether a guarantee or commitment to a minimum quantity by the reporting entity is (a) a commitment to obtain a good or service in advance of obtaining a contract with a customer and therefore akin to inventory risk for the reporting entity or (b) a variable commission structure (that is, the reporting entity’s “net fee” or commission from the provider of the good or service varies based on the volume of transactions).
Taking legal title to a product only momentarily before it is transferred to the customer (that is, “flash title”) does not, on its own, result in a reporting entity being the principal. The reporting entity needs to have control of the good before it is transferred to the customer to be the principal.
On the other hand, it is not a requirement for a reporting entity to have inventory risk to conclude it takes control of a good. For example, a reporting entity that sells a good to an end consumer may instruct a supplier to ship the product directly to the end consumer (“dropship” the product) and as a result, the reporting entity does not take physical possession and may never have substantive inventory risk related to the good. This fact, on its own, would not preclude the reporting entity from concluding it controls the good before it is transferred to the end consumer. However, the reporting entity would have to support its conclusion based on other evidence of control.
Inventory risk might exist even if no physical product is sold. For example, a reporting entity might have inventory risk in a service arrangement if it is committed to pay the service provider even if the reporting entity is unable to identify a customer to purchase the service. However, inventory risk is commonly not applicable for services; therefore, the absence of inventory risk in a service arrangement is generally not evidence that the reporting entity lacks control of the services.

10.2.1.3 Pricing discretion

Discretion in establishing the price that the end consumer pays for the specified good or service is an indicator that the reporting entity obtains substantially all of the remaining benefits from an asset and therefore, controls the good or service. Conversely, earning a fixed fee or fixed percentage of the consideration for each sale might indicate that a reporting entity is an agent, as a fixed commission limits the benefit a reporting entity can receive from the transaction.
Unlimited pricing discretion provides more persuasive evidence of control, while pricing discretion limited by the other party to a range or a specified floor or ceiling may be less persuasive. Further, the narrower the range within which the reporting entity has pricing discretion, the less persuasive the evidence that the reporting entity has pricing discretion that indicates control.
In some cases, a reporting entity could have flexibility in setting prices and still be considered an agent. For example, agents often have the ability to provide discounts to end consumers (and effectively forgo a portion of their fee or commission) in order to incentivize purchases of the principal’s good or service.
A variable commission structure, including the potential to incur a loss on a transaction, typically does not provide conclusive evidence that the reporting entity controls the specified good or service. However, a variable commission structure may coincide with other indicators of control. For example, actions the reporting entity takes to manage or mitigate this type of economic risk in an arrangement may provide support that the reporting entity is primarily responsible for fulfillment or has inventory risk.

10.2.2 Accounting implications for an intermediary in a three-party arrangement

As illustrated in Figure RR 10-3, the differences in the amount of revenue recognized can be significant depending on the conclusion of whether a reporting entity is the principal or an agent for providing a good or service to an end consumer.
Figure RR 10-3
Revenue recognition for a principal versus agent
Assessment of control
Principal or agent
Amount presented as revenue
Which party is the customer
Reporting entity obtains control of the specified good or service
Principal
Price paid by the end consumer for the good or service (“gross” revenue); amounts remitted to the other party are presented as an expense
End consumer
Reporting entity does not obtain control of the specified good or service
Agent
Net amount retained after remitting amounts to the other party for providing the good or service (“net” revenue)
It depends*
*Depending on the circumstances, if the reporting entity is an agent, its customer could be:
  • the vendor/supplier/service provider. This is more likely if the reporting entity’s role is that of a sales agent;
  • the end consumer. This is more likely if the reporting entity’s role is that of a purchasing agent; or
  • both the vendor/supplier/service provider and the end consumer. This is more likely if the reporting entity provides services (explicitly or implicitly) to both parties.

The timing of revenue recognition can also differ depending on whether the reporting entity is the principal or an agent. Once a reporting entity identifies its promises in a contract and determines whether it is the principal or an agent for those promises, it recognizes revenue when (or as) the performance obligations are satisfied. It is therefore critical to identify the promise in the contract to determine when that promise is satisfied.
An agent might satisfy its performance obligation (arranging for the transfer of specified goods or services) before the end consumer receives the specified good or service from the principal in some situations. For example, an agent that promises to arrange for a sale between a vendor and the vendor’s customer in exchange for a commission will generally recognize its commission as revenue at the time a contract between the vendor and vendor’s customer is executed (that is, when the agency services are completed). In contrast, the vendor will not recognize revenue until it transfers control of the underlying goods or services to the end consumer.

10.2.3 Examples of the principal versus agent assessment

Example RR 10-1, Example RR 10-2, and Example RR 10-3 illustrate the analysis of whether a reporting entity is the principal or an agent in various arrangements. These concepts are also illustrated in Examples 45-48A of the revenue standard (ASC 606-10-55-317 through ASC 606-10-55-334F).
EXAMPLE RR 10-1
Principal versus agent – reporting entity is an agent
WebCo operates a website that sells books. WebCo enters into a contract with Bookstore to sell Bookstore’s books online. WebCo’s website clearly identifies Bookstore as the seller of the books and facilitates payments between Bookstore and the end consumer. The sales price is established by Bookstore, and WebCo earns a fee equal to 5% of the sales price. Bookstore ships the books directly to the end consumer, and WebCo cannot redirect ordered books to other customers. The end consumer returns the books to WebCo if they are dissatisfied; however, WebCo has the right to return books to Bookstore for a full refund if they are returned by the end consumer.
Is WebCo the principal or an agent for the sale of books to the end consumer?
Analysis
WebCo is acting as a sales agent for Bookstore and should recognize revenue equal to the fee it charges Bookstore for facilitating sales to end consumers; that is, it should recognize revenue on a net basis.
The specified good or service is a book purchased by the end consumer. WebCo does not control the book before it is transferred to the end consumer because it does obtain control of the book from Bookstore, does not direct Bookstore to perform on its behalf, and does not combine the book with other goods or services into a combined output. This conclusion is supported by the indicators of control:
  • WebCo is not primarily responsible for fulfilling the promise to deliver a book.
  • WebCo does not have inventory risk because it has the right to return books to Bookstore that are returned by end consumers.
  • WebCo does not have discretion in establishing the selling price of the book.

WebCo should recognize revenue equal to its 5% fee when it satisfies its promise to facilitate the sale of a book (that is, when a confirmed order is placed on its website).
EXAMPLE RR 10-2
Principal versus agent – reporting entity is the principal
TravelCo negotiates with major airlines to obtain access to airline tickets at reduced rates and sells the tickets to end consumers through its website. TravelCo contracts with airlines to buy a specific number of tickets at agreed-upon rates and must pay for those tickets regardless of whether it is able to resell them. End consumers visiting TravelCo’s website search TravelCo’s available tickets. TravelCo has discretion in establishing the prices for the tickets it sells to the end consumers.
TravelCo is responsible for delivering the ticket to the end consumer. TravelCo will also assist the end consumer in resolving complaints with the service provided by the airlines. The airline is responsible for fulfilling all other obligations associated with the ticket, including the air travel and related services (that is, the flight), and remedies for service dissatisfaction.
Is TravelCo the principal or an agent for the sale of an airline ticket to an end consumer?
Analysis
TravelCo is the principal for the sale of the ticket to the end consumer and should recognize revenue for the price paid by the end consumer; that is, it should recognize revenue on a gross basis.
The specified good or service is a right to fly on the selected flight (represented by a ticket) along with the other rights provided by the airline for the holder of that ticket. TravelCo obtains control of the right to the airline’s services (which it could resell or use itself) and transfers that right (represented by the ticket) to the end consumer. This conclusion is supported by the indicators of control:
  • Although the airline is responsible for providing the air travel services, TravelCo is primarily responsible for fulfilling the promise to transfer a right to future services (the ticket) to the end consumer.
  • TravelCo has inventory risk as a result of purchasing the ticket from the airline in advance and will be subject to the risks and rewards of ownership, including loss if it is unable to sell the ticket.
  • TravelCo has discretion in establishing the selling price of the ticket.

TravelCo should recognize revenue equal to the price paid by the end consumer for the ticket when it transfers control of the ticket to the end consumer. It will recognize the cost of the ticket (the purchase price from the airline) as cost of sales.
EXAMPLE RR 10-3
Principal versus agent – multiple specified goods or services
PayrollCo provides payroll processing services to end consumers under a service arrangement. PayrollCo also offers consulting services to an end consumer related to the end consumer’s payroll and compensation processes. PayrollCo has concluded that the payroll processing services and consulting services are distinct in the arrangement with the end consumer.
The consulting services are performed by a third party, ConsultCo. ConsultCo determines the pricing of the consulting services and coordinates directly with the end consumer to determine the timing and scope of work. PayrollCo occasionally assists the end consumer in resolving complaints about the consulting services; however, ConsultCo is responsible for meeting the end consumer’s specifications, including providing any refunds or reperforming work, as needed.
PayrollCo bills and collects the fee for the consulting services, of which 90% is remitted to ConsultCo. Any losses resulting from cost overruns in the consulting services are fully absorbed by ConsultCo. On a monthly basis, PayrollCo bills and collects a service fee from the end consumer for the payroll processing services. No discounts are provided to the end consumer for purchasing the services as a bundle.
Is PayrollCo the principal or an agent for the payroll processing services and consulting services?
Analysis
There are two distinct specified services in the arrangement: payroll processing services and consulting services. PayrollCo is the principal for the payroll processing services provided to the end consumer because no other parties are involved in providing these services. Therefore, PayrollCo will recognize revenue for the payroll processing services on a gross basis. PayrollCo is an agent arranging for ConsultCo to provide the consulting services to the end consumer; therefore, it will recognize revenue net of the amount remitted to ConsultCo.
PayrollCo does not control the consulting services because it does not obtain a right to the consulting services, does not direct ConsultCo to perform on its behalf, and does not combine the consulting services with other goods or services into a combined output. This conclusion is supported by the indicators of control:
  • PayrollCo is not primarily responsible for fulfilling the promise to provide consulting services.
  • PayrollCo does not have inventory risk as it does not pay for the consulting services in advance.
  • PayrollCo does not have discretion in establishing the selling price of the consulting services.

PayrollCo should recognize revenue equal to the price it charges end consumers for payroll processing services as it provides the services. PayrollCo should recognize the commission it receives from ConsultCo when it satisfies its promise to arrange for the consulting services.

PwC. All rights reserved. PwC refers to the US member firm or one of its subsidiaries or affiliates, and may sometimes refer to the PwC network. Each member firm is a separate legal entity. Please see www.pwc.com/structure for further details. This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors.

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