Principal vs agent
Principal versus agent analysis decides whether an entity reports revenue gross, as principal controlling the specified good or service before transfer, or net, as agent arranging for another party to provide it. Indicators of control include primary responsibility for fulfilment, inventory risk and discretion in setting the price.
Standard references
- ASC 606606-10-55-36 to 55-40
- IFRS 15paragraphs B34–B38
- Ind AS 115paragraphs B34–B38
Worked example
Illustrative: a marketplace sells a third-party app licence to a customer for $1,000 and pays the developer $700.
- Identify the specified good: the app licence.
- If the marketplace controls the licence before transfer (it is responsible for fulfilment and sets the price), it is principal: revenue $1,000, cost of sales $700.
- If the developer fulfils and the marketplace only arranges the sale, it is agent: revenue $300, the net commission.
Result: Same cash, very different top line: $1,000 gross or $300 net.
Illustrative figures for explanation only, not taken from a real contract.
Common mistakes
- Using credit risk as an indicator; it was removed from ASC 606 by ASU 2016-08.
- Concluding at the contract level instead of for each specified good or service.
- Treating the indicators as a scorecard instead of evidence about control.