Definition
When another party is involved in providing goods or services to a customer, ASC 606 requires the entity to determine whether it is a principal or an agent. A principal controls the specified good or service before it is transferred and reports revenue at the gross amount. An agent arranges for another party to provide the good or service and reports revenue net, as the fee or commission it earns. The assessment is made for each specified good or service.
Why it matters in an audit or review
Gross-versus-net changes reported revenue and margin but not net income, so it affects metrics, covenants, and valuation. Auditors examine contracts and indicators: primary responsibility for fulfillment, inventory risk, and discretion in setting price.
Example
(Illustrative) A travel platform sells a hotel night for $200 and pays the hotel $170. If it is an agent, revenue is $30. If it is a principal, revenue is $200 and cost of revenue is $170. Gross profit is $30 either way.
Common mistakes
- Concluding gross based on collecting cash alone.
- Applying one answer across all products without contract review.
Sources
- FASB ASC 606-10-55-36 through 55-40 (principal versus agent considerations)
- FASB ASU 2016-08, Principal versus Agent Considerations (Reporting Revenue Gross versus Net)
Definitions paraphrase AICPA and FASB guidance; read the standard itself before relying on a requirement. Example figures are illustrative. This page is guidance, not professional advice. Report an error