Expenses are often incurred by service providers while performing work for their customers. These can include costs for travel, meals, accommodations, and miscellaneous supplies. It is common in service arrangements for the parties to agree that the customer will reimburse the service provider for some or all of the out-of-pocket expenses. Alternatively, such expenses may be incorporated into the price of the service instead of being charged separately.
Out-of-pocket expenses often relate to activities that do not transfer a good or service to the customer. For example, a service provider that is entitled to reimbursement for employee travel costs would generally account for the travel costs as costs to fulfill the contract with the customer. Reimbursements would be included in the transaction price for the contract.
Management should consider the principal versus agent guidance if a customer reimburses the vendor for a good or service transferred to the customer as part of a contract (for example, reimbursement of subcontractor services). Management should first identify the specified good or service to be provided to the customer. This includes assessing whether the goods or services are inputs into a combined output that the reporting entity transfers to the customer.
For example, a service provider may subcontract a portion of the service it provides to customers and agree with the customer to be reimbursed for the subcontracted services (sometimes referred to as a "pass-through" cost). The service provider would be an agent with regard to the subcontracted services if it does not control the subcontracted services before they are transferred to the customer. In this case, the service provider would recognize revenue from the reimbursement net of the amount it pays to the subcontractor. The service provider would be the principal if it controls the subcontracted services by directing the subcontractor to perform on its behalf or combining the subcontracted services with its own services to create a combined output. If the service provider is the principal for the subcontracted services, the reimbursement would be included in the transaction price and allocated to the separate performance obligations in the contract.
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