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A reporting entity that is a vendor or supplier that provides goods or services using its own resources (for example, its own inventory or its own employees) is the principal for providing those goods or services. However, when another party (an intermediary) is also involved in the transaction, the reporting entity needs to assess whether the other party or the end consumer is its customer.
The principal versus agent framework is also relevant in assessing which party is the reporting entity’s customer. The intermediary is the reporting entity’s customer if the intermediary takes control of the good or service before it is transferred to the end consumer. In that situation, the reporting entity will recognize as revenue the amount it receives from the intermediary. If the intermediary does not take control of the good or service, the end consumer is the reporting entity’s customer; accordingly, the reporting entity will recognize as revenue the amount it receives from the end consumer and recognize as an expense the amount retained by the intermediary.
In some situations in which a reporting entity concludes its customer is the end consumer, it may not have visibility into the price paid by the end consumer. For example, the reporting entity may not have visibility into the pricing of its good or service if a reseller “bundles” the reporting entity’s good or service with other distinct goods or services and charges the end consumer a single price for the bundle. ASC 606 does not include specific guidance to address this situation. However, the FASB noted in its basis for conclusions (BC37-BC38 of ASU 2016-08) that if the price charged by an intermediary to the customer is unknown, and not expected to be resolved, the unknown amount does not meet the definition of variable consideration and should not be included in the transaction price. Thus, the reporting entity should not estimate the price charged to the customer by the intermediary and should instead recognize revenue for only the amount paid by the intermediary for the good or service.

Example RR 10-4 and Example RR 10-5 illustrate the analysis of whether an intermediary or end consumer is the reporting entity’s customer.
EXAMPLE RR 10-4
Principal versus agent – customer is the end consumer
SoftwareCo sells its software product offering through multiple channels, including an online marketplace owned and operated by PlatformCo, an unrelated party. In arrangements with PlatformCo, end consumers initiate a purchase of SoftwareCo’s product through the online marketplace and are prompted to sign an agreement directly with SoftwareCo. SoftwareCo determines the selling price paid by the end consumer, which is collected by PlatformCo and remitted to SoftwareCo less a 20% fee for use of the marketplace. SoftwareCo provides all customer service related to the use of its software product, while PlatformCo provides customer service for use of the online marketplace.
Which party is SoftwareCo’s customer for sales of its software product through the online marketplace?
Analysis
SoftwareCo’s customer for sales through the online marketplace is the end consumer because PlatformCo does not obtain control of the software product and is therefore an agent providing services to SoftwareCo. SoftwareCo should recognize revenue equal to the price paid by end consumers and an expense for the amount retained by PlatformCo.
The specified good or service provided to the end consumer is the software product. PlatformCo does not obtain control of the software product before it is transferred to the end consumer; therefore, PlatformCo is an agent arranging for SoftwareCo’s sales to end consumers. This conclusion is supported by the indicators of control:
  • PlatformCo is only responsible for its online marketplace and is not primarily responsible for providing the software product.
  • PlatformCo does not have inventory risk related to the software product.
  • PlatformCo does not have discretion in establishing the selling price of the software product.

EXAMPLE RR 10-5
Principal versus agent – customer is the intermediary
ProductCo contracts with Reseller, who sells ProductCo’s products to end consumers. Reseller identifies and contracts with end consumers, establishes the selling price for ProductCo’s products, and often bundles ProductCo’s products with other distinct products and services depending on the end consumer’s needs. Reseller does not purchase ProductCo’s products in advance but has agreed to pay ProductCo a specified price for its products when an end consumer places an order. ProductCo does not have a contract directly with the end consumer and does not provide customer support to the end consumer. ProductCo typically ships its products directly to the end consumer based on instructions it receives from Reseller. ProductCo has responsibility to Reseller to replace defective products; however, Reseller has responsibility to end consumers for satisfaction with orders placed with Reseller. ProductCo is not contractually obligated to accept products that have been returned by unsatisfied end consumers, but may agree to take returns from Reseller at its discretion.
Which party is ProductCo’s customer for sales of its products?
Analysis
ProductCo’s customer for sales of its products is Reseller because Reseller obtains control of ProductCo’s products before they are transferred to the end consumer. ProductCo should recognize as revenue the amount it receives from Reseller for purchase of its products.
The specified good or service provided to the end consumer is ProductCo’s products. Reseller obtains control of the products by directing ProductCo to provide the products to end consumers on its behalf. This conclusion is supported by the indicators of control:
  • Reseller is primarily responsible for fulfilling the promise to deliver ProductCo’s products to the end consumer.
  • Although Reseller does not take inventory risk prior to transfer of the products to the end consumer, Reseller has inventory risk related to returns of ProductCo’s products from end consumers.
  • Reseller has discretion in establishing the selling price of ProductCo’s products to the end consumer.
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