The Financial Accounting Standards Board and the International Accounting Standards Board have reached some tentative decisions about how they will address questions in the new revenue recognition standard around when to report revenue on a gross versus net basis.
FASB and IASB met recently to hammer out how they will respond to questions and agreed on an approach that is expected to result in similar changes to both U.S. GAAP and International Financial Reporting Standards. The boards are moving forward in different ways in terms of how they will amend their respective guidance, but FASB says the amendments to each set of rules will be similar.
FASB and IASB are looking for a way to address uncertainty that emerged from its Transition Resource Group over how to implement the new revenue recognition standard with respect to determining whether an entity is acting as a “principal” providing a good or service to a customer, or as an “agent” of another party to the transaction, and therefore should recognize revenue on a gross or net basis. The boards reaffirmed the principle outlined in the guidance that an entity is the principal when it controls the goods or services that are transferred to the customer, but as the agent when it does not have control over the goods or services.
The board decided they will amend the guidance to clarify that a specific good or service is distinct. “Depending on the circumstances, a specified good or service may be a right to an underlying good or service to be provided by another party,” FASB says. The boards determined they will amend the guidance on principal versus agent considerations to clarify the application of the control principle in the context of services. They also will provide language to clarify the indicators of control.
FASB also addressed how it will answer questions around when an entity is a principal but is unaware of the price paid for its goods or services by the end customer to a middle man. The board asked its staff to perform some additional analysis on the issue. FASB plans to discuss that issue at a future board meeting, then issue a proposed amendment to the standard for public comment.
FASB has already issued two earlier exposure drafts of amendments to the standard, one to delay the effective date of the entire standard to 2018 and a second to clarify requirements around identifying performance obligations and accounting for revenue arising from licensing agreements. FASB has said it plans to wrap up any amendments to the standard in 2015 so companies can proceed with their implementation plans.