Accounting

FASB to Clarify ‘Principal vs. Agent' in Rev. Rules

By Steve Burkholder The Financial Accounting Standards Board is drafting proposed changes to its far-reaching revenue reporting rules to clarify how companies and auditors should view issues that affect gross versus net reporting of revenue.FASB, together with the International Accounting Standards Board, plans to improve guidance on principal versus agent questions that stem from the year-old revenue recognition standards of the boards. The answers to those questions drive whether a company reports gross or net amounts of revenue.FASB expects to issue the draft amendments on principal versus agent considerations in the third quarter of this year.FASB and IASB jointly issued the aligned standards on revenue recognition in May 2014. The rules—FASB's Accounting Standards Codification Topic 606 and the London-based board's IFRS 15—go into effect in 2018.FASB Drops Estimating Gross Revenue Issue At its July 29 meeting, FASB dropped further consideration of offering guidance on estimating gross revenue as a principal. The staff of the U.S. board recommended that course.Questions about estimating gross revenue percolated in early 2014 in the time before the first meeting of the FASB-IASB Joint Transition Resource Group for Revenue Recognition, according to FASB's staff. That group helps identify and refine potential implementation guidance to smooth the first use of the revenue rules and to forge amendments to the standards, as warranted.However, FASB's staff determined that the specific issues that gave rise to questions about estimating gross revenue are not pervasive.The issues stem from circumstances that involve an intermediary and in which the principal isn't aware of the price of a product charged to an end customer by the intermediary, according to a staff-written handout.If FASB rendered official readings on estimating gross revenue in such scenarios, it runs the risk of diverging from the IASB's version of the revenue standards, the staff of the U.S. cautioned.Guidance to Ease Transition The U.S. board also has other formal documents in the works that are aimed at easing the shift to the new rules on revenue. Revenue is deemed by many in finance to be one of the most important lines in the financial statements, if not the single most important item.The other revenue-related subtopics being pursued by FASB for planned guidance are:licenses and identifying performance obligations; andmaking narrow-scope...

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