The standard requires an entity to first identify the specified good or service

The standard requires an entity to first identify the

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The standard requires an entity to first identify the specified good or service (or unit of accounting for the principal versus agent evaluation) to be provided to the customer in the contract in order to determine the nature of its promise. A specified good or service is defined in ASC 606-10-55-36 as each “distinct good or service (or distinct bundle of goods or services) to be provided to the customer.” The second step in determining the nature of the entity’s promise (i.e., whether it is to provide the specified goods or services or to arrange for those goods or services to be provided by another party) is for the entity to determine whether the entity controls the specified good or service before it is transferred to the customer. An entity cannot provide the specified good or service to a customer (and therefore be a principal) unless it controls that good or service prior to its transfer. That is, as the Board noted in the Basis for Conclusions of ASU 2016-08, 13 control is the determining factor when assessing whether an entity is a principal or an agent. Because it may not be clear whether an entity controls the specified good or service, the standard provides three indicators of when an entity controls the specified good or service and is therefore a principal. These indicators are meant to support an entity’s assessment of control, not to replace it, and each indicator explains how it supports the assessment of control. If an entity reaches different conclusions about whether it controls the specified good or service by applying the standard’s definition of control versus the principal indicators, the entity should reconsider its assessment considering the facts and circumstances of its contract. This is because the entity’s assessment of control and the principal indicators should align. Retailers commonly enter into contracts with third parties (referred to as “vendors”) to provide goods or services to be sold through their sales channels to their customers. In these arrangements, the retailer may take legal title to the good only momentarily before the good is transferred to the customer, such as in a scan-based trading contract (e.g., vendor is responsible for stocking, rotating and otherwise managing the product until the final point of sale), or never takes physical possession or legal title to the good (e.g., when goods are shipped directly from a vendor to the customer). In these situations, the entity needs to carefully evaluate whether it obtains control of the specified good and therefore is the principal in the transaction with the end consumer. We believe some questions a retailer may consider when making this judgment could include: Does the entity take title to the goods at any point in the order-to-delivery process?
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  • Fall '17
  • meenakshi

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