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Identifying the customer can be more challenging when there are multiple parties involved in a transaction. The analysis should include understanding the substance of the relationship of all parties involved in the transaction.
Arrangements with three or more parties, particularly if there are separate contracts with each of the parties, require judgment to evaluate the substance of those relationships. Management will need to assess which parties are customers and whether the contracts meet the criteria to be combined, as discussed in RR 2.8, when applying the guidance in the revenue standard.
A reporting entity needs to assess whether it is the principal or an agent in an arrangement that involves multiple parties. This is because a reporting entity will recognize revenue for the gross amount of consideration it expects to be entitled to when it is the principal, but only the net amount of consideration that it expects to retain after paying the other party for the goods or services provided by that party when it is the agent. Refer to RR 10 for further considerations that a reporting entity should evaluate to determine whether it is the principal or an agent.
A reporting entity also needs to identify which party is its customer in a transaction with multiple parties in order to determine whether payments made to any of the parties meet the definition of “consideration payable to a customer” under the revenue standard. Refer to RR 4.6 for further discussion on consideration payable to a customer.
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