The new revenue standard generally shifts revenue guidance to a control-based principle. This change extends to guidance on principal-agent determinations. While entities continue to recognize revenue gross as a principal and net as an agent, the framework for the determination has been modified to also reflect a control-based principle.
In this report, we will focus on tangible goods where a distributor has the tangible goods shipped directly from its supplier (usually a manufacturer) to the distributor’s customer, otherwise known as a “drop shipment.” In typical drop shipment transactions, the distributor does not take physical possession of the tangible goods. Private companies are quite common in the distribution industry and the impact of a change in revenue recognition could be very significant for some of these entities.
A March 2018 BNA article noted significant issues with current adopters on principal (gross) vs. agent (net) determinations in drop shipments of drugs, medical devices, computer hardware and software, telecom gear, and retail items such as household appliances.
Note that while this resource focuses on distributor drop shipments, the topic applies to any tangible goods sold through a third party to an end customer where the third party does not take physical possession of the tangible goods.