To further clarify the requirements of the new revenue recognition standard, the Financial Accounting Standards Board has proposed an amendment to the standard meant to answer questions around when entities recognize revenue on a gross or net basis.
In its proposed update to accounting standards, FASB provides guidance to clarify the analysis of when an entity is acting as the principal in its interaction with a customer, or when its role is that of an agent for some other entity. That’s the analysis that helps a company determine if it should recognize revenue on a gross or net basis.
In discussions with FASB’s and the International Accounting Standards Board’s Joint Transition Resource Group, FASB learned companies were struggling with how to identify the unit of account at which an entity should assess whether it is a principal or agent, and how to identify whether a particular good or service is actually a right to a good or service. FASB says its intention with the proposed update is not to change any of the underlying principles of the guidance in the new revenue recognition standard, but to clarify some key points to make the new standard more operational and easier to understand.
The proposed update says an entity determines whether it is a principal or an agent for each specified good or service that is promised to a customer. It indicates it’s possible for an entity to be the principal for some goods or services promised in a contract while acting as an agent for other goods or services in the same contract. The proposal also provides guidance meant to help sort out when an entity should be classified as the principal based on its control over goods or services.
In its efforts to facilitate implementation with the new revenue recognition standard, FASB has deferred the effective date to 2018 for public companies and promised guidance meant to answer some of the most burning questions that have surfaced as companies have prepared for adoption. The board also is developing guidance around how to account for licensing arrangements and how to identify performance obligations. FASB has said its goal is to complete implementation guidance by the end of the year to allow implementation efforts to continue.
The IASB also has deferred the effective date of its standard for International Financial Reporting Standards and is preparing its own guidance around many of the same implementation questions.