Principal vs Agent? GAAP Revenue Recognition Criteria (ASC 606)

Principal vs Agent? GAAP Revenue Recognition Criteria (ASC 606)

Should you report revenue gross as a principal or net as an agent? GAAP revenue recognition criteria related to principal vs agent determination is changing under ASC 606 because of the issuance of ASU 2016-08, Principle versus Agent Considerations (Reporting Revenue Gross versus Net). I needed this guidance because I was very confused by a recent purchase I made on Walmart’s website.

I purchased pair of Beats by Dr. Dre Powerbeats 2 wireless in-ear headphones as a prize for our company’s Super Bowl squares game (other prizes included a Yeti cooler, $150 gift certificate for a date night, and an Apple Watch…did I mention we’re hiring!). After my purchase, I received the following email from Walmart:

The email clearly states the item “ships from Incredible Cellular LLC.” I was confused. Who the heck did I buy these headphones from? I picked Walmart figuring if I ran into any problems they always refund your purchase “no questions asked.” However, the fine print clearly said:

“If you bought your item from a Marketplace Retailer on our site, please contact them for return instructions. Items purchased from a Marketplace Retailer cannot be returned to a Walmart store or to; they must be returned to the Marketplace Retailer in accordance with their return policy.”

As any good accountant would do, it got me thinking:

“How should Walmart recognize and present revenue from this transaction?”

Exciting life I lead, huh!

Why does it matter?

Before we get into the new guidance within ASC 606 (which was amended by ASU 2016-08), let’s talk about why it matters. Let’s assume:

  • I paid $110.00 to Walmart for the headphones, shipping was free, and there was no sales tax collected on the transaction (Shhhh…don’t tell tax authorities).
  • Incredible Cellular set the sales price and Walmart agreed to pay Incredible Cellular 85% of the sales price collected. In our case, Walmart owes Incredible Cellular $93.50 ($110.00 x 85%).
  • Incredible Cellular is responsible for fulfilling the order and delivery.
  • The headphones are shipped from Incredible Cellular’s warehouse.

This transaction contributes $16.50 ($110.00 less $93.50) to Walmart’s bottom line. However, should Walmart present the transaction gross or net?

This transaction results in operating income of $16.50, regardless of how it is presented in the income statement. However, which presentation looks better? Obviously, revenues are higher using gross presentation.

New Guidance within ASU 2016-08

ASU 2016-08, Principal versus Agent Considerations (Reporting Revenue Gross versus Net) amends revenue recognition guidance within ASC 606 for these types of transactions. To determine the nature of its promise to the customer, the entity should:

  1. Identify the specified goods or services to be provided to the customer; and
  2. Assess whether it controls each specified good or service before that good or service is transferred to the customer.

An entity is a principal if it controls the specified good or service before that good or service is transferred to a customer. If an entity does not control the good or service before it is transferred to the customer, the entity is an agent in the transaction.

Control is defined within step 5 of ASC 606. Control of an asset refers to the ability to direct the issue of, and obtain substantially all the remaining benefits from, the asset. Control includes the ability to prevent other entities from directing the use of, and obtaining the benefits from, an asset. The benefits of an asset are the potential cash flows (inflows or savings from outflows) that can be obtained directly or indirectly from using, selling, pledging, or holding the asset.

It is not always clear whether the entity obtains control of the specified good or service. Luckily, ASU 2016-08 provided the following three indicators of control that can be useful in making this determination:

  1. The entity is primarily responsible for fulfilling the promise to provide the specified good or service.
  2. The entity has inventory risk before the specified good or service has been transferred to a customer, or after transfer of control to the customer (for example, if the customer has a right or return).
  3. The entity has discretion in establishing the prices for the specified goods or service.


So, what do you think? Should Walmart present this sale gross or net?

Walmart should present this transaction net as they appear to be the agent in the transaction. Walmart does not control the headphones before they are shipped. Furthermore:

  • Incredible Cellular, not Walmart, is responsible for fulfillment.
  • Incredible Cellular, not Walmart, has the inventory risk both before and after shipment, as the goods are shipped from their warehouse and they are responsible for returns.
  • Incredible Cellular sets the sales price.

Clearly, Walmart is the agent and, as such, earns a 15% commission on the sale. Therefore, net presentation within the income statement is appropriate. Interestingly, this Walmart transaction is almost identical to the example used within ASU 2016-06 (Example 45) found in paragraphs 606-10-55-317 through 55-319.

I hope this “real-life” example helps you understand the new principle vs agent guidance within ASC 606. By the way, I gave the headphones a 5-start review and bought another pair for myself!


This post is published to spread the love of GAAP and provided for informational purposes only. Although we are CPAs and have made every effort to ensure the factual accuracy of the post as of the date it was published, we are not responsible for your ultimate compliance with accounting or auditing standards and you agree not to hold us responsible for such. In addition, we take no responsibility for updating old posts, but may do so from time to time.


New Revenue Standard
New Revenue Standard

Comments (20)

  1. Jean Mersch:
    Oct 09, 2017 at 12:03 PM

    How should Incredible Cellular account for the transaction? Is their revenue the net $93.50 they receive from Walmart, or is their revenue $110.00 with $16.50 of selling expense?

  2. Nhlanhla:
    Oct 16, 2017 at 10:06 AM

    Thank you for the illustration. Please indicate how Incredible Cellular would account for the sale (at the gross amount - $110 or net $93.50). If at the gross amount, where would it disclose the commission costs paid to Walmart?

  3. Mike Walworth, CPA:
    Oct 16, 2017 at 12:26 PM

    Great question! In the blog, we determined that Wal-Mart was the agent. This makes Incredible Cellular (IC) the principal. As such, IC would record revenue of $110 (credit), a receivable from Wal-Mart of $93.50 (debit), and commission/selling expense of $16.50 (debit). Please note that IC would also have to debt cost of goods sold with a corresponding credit to inventory to determine the gross margin on the transaction. Hope it helps!

  4. Andreas Matthes:
    Feb 02, 2018 at 01:12 PM

    Interesting - I wonder how invoicing would look like in this scenario? Would the invoice to the end-client be from Wal-Mart for 110 or from IC for 110? And who would the end client pay?

  5. Michael Walworth:
    Feb 02, 2018 at 02:16 PM

    I actually know the answer to this because I actually was the "end-client" in the transaction! I paid $110 to Wal-Mart via their website. Therefore, since Wal-Mart was the agent (as outlined in the blog post), their entry would have been as follows:

    DR. Cash $110,00
    CR. Payable to IC $93.50
    CR. Commission revenue $16,50

    Hope this helps!

  6. Andreas Matthes:
    Feb 05, 2018 at 02:33 PM

    Hi Mike,
    Thanks for your input! Sorry for digging deeper but our business is in a similar situation and we report gross at the moment. Regardless of the payment flow, did you receive the invoice from Walmart with their billing address on it or was IC the merchant on record. More specifically, would you set up Walmart or IC as a vendor in your system. I am asking since we have a lot of transactions where we are being charged tax from our suppliers that we probably couldn't recover when acting as an agent.

  7. Mike Walworth, CPA:
    Feb 05, 2018 at 03:14 PM

    I went back to the receipt included in my timesheet last January. The online receipt was from Wal-Mart, but it clearly stated that the item ships from IC and that I am to contact IC in case of a problem. However, in looking back at my corporate Visa statement, it shows the vendor as Regarding how I would set up the vendor, I'd probably set it up as Wal-Mart (because that's where I bought the product and I don't know or have a relationship with IC). However, I don't think that matters in the determination on whether Wal-Mart is principal or agent.
    Don't know if this helps or not, but check out this EY Technical Line. There's a 1-2 pages in there on principal vs. agent.$file/technicalline_03068-171us_revrec_rcp_9may2017.pdf?OpenElement
    Also, check out Chapter 10 of Deloitte's "A Roadmap to Applying the New Revenue Recognition Standard" which has an entire chapter devoted to this topic.
    Hope it helps!

  8. Lesley K:
    Apr 17, 2018 at 11:23 AM

    I think I understand the example given as it pertains to our situation. We contract independent agents to sell insurance for carriers the company is contracted with. On the Income Statement, we record revenue as a gross amount, then subtract the commissions payable to the agents as COS. We are not he principle, just an agent, more like a middleman that is paid by the carrier, and we in turn pay the agents their commission, while retaining a percentage of the revenue. My beef is that this is misleading. For example, let's say an agent sold a policy that produced commission of $20,000 paid to the company, and the agent's contract states we will pay them 85% of that commission obtained, so the company is actually getting $3,000 of revenue. But it's being recorded as $20,000 of revenue, and $17,000 COS. Am I wrong that this is misleading? Another beef I have is that the agents can earn bonuses from the carriers for different sales blitzes. This bonus is paid to the company, and then we in turn pay it to the agent 100%. But we are still recording it as revenue. Why? If anyone can explain this to me, I would greatly appreciate it. Been arguing this with the Senior Acct for a while now, and it doesn't matter who is right, I'm just trying to understand it better. Thanks!

  9. Mike Walworth, CPA:
    Apr 19, 2018 at 09:32 AM

    Lesley, thank you for your question. Without all of the details, I think it is because your company is subject to specialized industry guidance covered by ASC Topic 944 (insurance). Revenue recognition related to insurance contracts within the scope of ASC Topic 944 are scoped out of the new revenue recognition guidance within ASC Topic 606. Therefore, you must follow ASC Topic 944 for your contracts.

    I feel your pain as reporting the revenue "gross" with all those commission as cost of sales (COS) doesn't seem right, but it appears to be in line with that outline in ASC Topic 944. I'm not sure of the origin of this industry-specific guidance, but I believe it is probably because written premiums is such a big KPI for the industry.

    In summary, the guidance in our blog post DID NOT relate to your situation as insurance contracts are scoped out of the guidance within ASC Topic 606. Therefore, you must follow the guidance within ASC Topic 944. Hope it helps!

  10. Wey L:
    Apr 17, 2019 at 05:04 PM

    Hi Mike,

    Wanted to ask about something similar. More in tune to Example 48, we are a SAAS company reselling another SAAS product. We only purchase from them when we receive an order which we mark up. Since we are not serving their product, I assume we are the agent.

    For my example if we purchased $1,200 SAAS product for one year agreement (they must serve the end customer for the whole year), and we resold it for $1,500.00 to end customer. Would we also show Revenue as net like above? Also, would we need to pro-rate the revenue over 12 months or would we be able to recognize the $300 at transaction point. Thanks!

  11. Mike Walworth, CPA:
    Apr 17, 2019 at 09:11 PM

    Thank you for your question Wey L. Unfortunately, though, I am not going to be able to answer it with sufficient specificity in this blog nor would I even try without knowing all the facts. Sorry. All I can say is that revenue recognition for software / SaaS is a VERY COMPLICATED topic. So, complicated in fact that KPMG has put at a guide of over 700 pages. Here's the link:

    You're bound to find your answer somewhere in there! You can start with their example A120.1 on page 62. Question D10 on page 269 also talks about it. It can be daunting, but Just download the document and "Command F" searching for the word "agent" and you're bound to find something.

    Hope it helps!

  12. Titia S:
    May 08, 2019 at 08:03 AM

    Hi Mike,
    Thank you for this detailed illustration and the revenue presentation for both parties. I completely agree with your conclusions. I was wondering, however, what if Incredible Cellular (IC) was not referenced at all in the transaction? If Walmart assumes the risk and burden of fulfilling the order and you are directed to contact instead in case of returns, I would think that changes the presentation of this for both Walmart and IC. What are your thoughts on that?

  13. Mike Walworth, CPA:
    May 16, 2019 at 02:07 PM

    Probably, but it's still a judgment call. At the end of the day, just make sure you document your conclusions, referencing the 3 indicators of control within ASC 606. Good luck!


  14. Monica:
    Oct 21, 2019 at 10:55 PM

    Hi Mike,

    So would like to confirm, if Walmart provides promotions (like buy2, get 1) and reimburses % of the promotions from IC, how will that be accounted for (In both parties respective books). Also in this case, Walmart is acting as an agent, does it also mean, they wont be recognizing any of the revenue reserves since they only get commissions right? Will there be any other cost of "alliance revenues" that Walmart can record after they record the commissions as their revenue?

  15. Jennifer:
    Oct 23, 2019 at 09:05 PM

    Hi Mike,

    What would the accounting look like for IC if they used a third party fulfillment company to deliver to the customer? If IC contracted with a 3rd party who was responsible for packaging and shipping the headphones out, after the headphones were shipped to their warehouse by IC, is it safe to assume IC would record the corresponding fee as an expense versus a contra revenue item?

  16. Teresa:
    Nov 20, 2019 at 11:29 AM

    Hi Mike,

    How would you write the journal entries if a company was an agent and they gained a notes receivable from the customer?

  17. Teresa:
    Nov 20, 2019 at 11:29 AM

    Hi Mike,

    How would you write the journal entries if a company was an agent and they gained a notes receivable from the customer?

  18. Teresa:
    Nov 20, 2019 at 11:29 AM

    Hi Mike,

    How would you write the journal entries if a company was an agent and they gained a notes receivable from the customer?

  19. Jake:
    Mar 11, 2020 at 07:43 PM

    Hi Mike - You mentioned above that IC would need to report the revenue at gross $110 and a selling expense at $16.50. What if IC didn't know the price Walmart sold the headphones at? Does that change the dynamic if the cost to the end user is not known? Also is selling of services accounted for in the same manner?

  20. Polina Gancheva:
    Apr 06, 2021 at 02:36 PM

    Hi. Thanks, fantastic illustration
    I am interested though what is the legal documents that go between the principal and the agent. Given Walmart at no point in time own the goods , but sells them in agent capacity, can LC invoice Walmart for 110 , or rather Lc has to invoice end user because they actually sell to end user directly.
    However if they invoice end user and Walmart also , we have two legal documents for the same transaction..

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