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FASB and IASB discuss principal versus agent analysis

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FASB and IASB discuss principal versus agent analysis
SEC
     Small entity compliance guide on Amendments to Regulation A issued
     CorpFin updates Compliance and Disclosure Interpretations
Comment letters issued



FASB and IASB discuss principal versus agent analysis

All decisions reached at Board meetings are tentative and may be changed at future meetings. Decisions are included in an Exposure Draft only after a formal written ballot. Decisions reflected in Exposure Drafts are often changed in redeliberations by the Board based on information received in comment letters, at public roundtable discussions, and from other sources. Board decisions become final after a formal written ballot to issue a final Accounting Standards Update.

The FASB and the IASB held a joint videoconference meeting on June 22 to discuss implementation questions on the principal versus agent guidance in ASC 606 and IFRS 15, both titled Revenue from Contracts with Customers, which arose during a meeting of the Joint Transition Resource Group for Revenue Recognition.

Similar to existing guidance under both U.S. GAAP and IFRS, the new revenue standard requires an entity to determine if it is acting as a principal (whereby it recognizes revenue gross) or as an agent (whereby it recognizes revenue net) when two or more entities are parties to a revenue transaction. The Boards tentatively agreed to propose amendments to ASC 606 and IFRS 15 to clarify the principal versus agent guidance, as summarized below.

The Boards reaffirmed that the principal versus agent guidance in ASC 606 and IFRS 15 is based on the principle of control. A principal controls the specified good or service before it transfers that good or service to the customer, while an agent does not control the specified good or service before it transfers that good or service to the customer. Said differently, a principal promises to provide a specified good or service to a customer, while an agent promises to arrange for another party to provide that good or service to a customer.  

The Boards tentatively decided to amend the guidance to clarify how to apply the control principle to services performed by another entity. The Boards proposed clarifying that an entity acting as a principal controls a right to a service to be performed by another party, which gives the entity the ability to direct the other party in providing that service to the customer on the entity’s behalf in satisfying its performance obligation.

The Boards also tentatively agreed to clarify the unit of account for the principal versus agent evaluation by explaining that a “specified good or service” is a distinct good or service (or a distinct bundle of goods or services). In some circumstances, a “specified good or service” may be a right to an underlying good or service that will be provided by another party.

The Boards tentatively agreed on the following revisions to the guidance in ASC 606-10-55-39 on indicators that an entity is acting as an agent (for example, the entity’s consideration is in the form of a commission):

  • To clarify that the indicators are meant to assist in the evaluation of control, not override or replace the control evaluation
  • To add explanatory language describing how each indicator relates to the control principle
  • To clarify that one or more indicators may be more or less relevant to the control evaluation in different contracts
  • To reframe the indicators to indicate when an entity is a principal rather than an agent

Finally, the Boards tentatively decided to amend the examples in ASC 606 and IFRS 15 that describe how to apply the principal versus agent guidance and to include additional examples.

The FASB considered whether an entity acting as a principal should estimate the price paid by an end customer to an intermediary acting as an agent in determining the transaction price when the entity is unaware of the price ultimately paid for its goods or service by the end customer. The Board directed its staff to perform additional analysis and will discuss this topic again at a future meeting.



SEC

Small entity compliance guide on Amendments to Regulation A issued

Small Entity Compliance Guides summarize and explain rules adopted by the SEC, but they are not a substitute for SEC rules. Only an SEC rule provides complete and definitive information regarding its requirements.

The SEC staff recently issued a Small Entity Compliance Guide, Amendments to Regulation A, to summarize the key provisions and related forms of the Commission’s Final Rule, Amendments to Regulation A. That rule expands Regulation A by creating two tiers of offerings and allows exemption from registration under the Securities Act of 1933 for offerings of up to $50 million in any 12-month period.

The Final Rule became effective June 19, 2015.

CorpFin updates Compliance and Disclosure Interpretations

The Compliance and Disclosure Interpretations (C&DIs) described below reflect the views of the SEC staff. They are not rules, regulations, or statements of the Commission and have not been approved by the Commission. The interpretations are intended as general guidance and should not be relied on as definitive.

The SEC Division of Corporation Finance (CorpFin) recently added Section 182 to its Securities Act Rules Compliance and Disclosure Interpretations to address the adoption of the Final Rule, Amendments to Regulation A.

The C&DIs discuss certain eligibility requirements and non-public and public filing requirements related to exhibits. Additionally, among other matters, the C&DIs provide interpretations regarding the availability of Regulation A for business combination transactions (that is, mergers and acquisitions), and age and content requirements for the financial statements of a newly created entity.



Comment letters issued

The firm recently submitted two comment letters to the FASB in response to two proposed ASUs:




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