The Financial Accounting Standards Board (FASB) has issued an update to clarify how to apply revenue recognition to entities that enter into contracts with customers to transfer goods or services.

The update – no. 2016-8, Revenue From Contracts With Customers (Topic 606): Principal versus Agent Considerations – aims to improve “operability and understandability of the implementation guidance” with regards to whether an entity is considered an agent or a principal.

One of the key differences between agent and principal, as defined in the update, is that a principal controls the specified goods or service before they are transferred to the customer, while an agent does not control the said goods or services before they are transferred to the customer.

This update refers to a converged standard on recognition of revenue from contracts with customers, issued on 28 May 2014 by the FASB and the International Accounting Standards Board (IASB) – the boards then formed the Joint Transition Resource Group for Revenue Recognition (TRG).

The main provision of Topic 606 is that “an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services”.