Remarks before the 2020 AICPA Conference on Current SEC and PCAOB Developments
Professional Accounting Fellow, Office of the Chief Accountant
Dec. 7, 2020
The Securities and Exchange Commission disclaims responsibility for any private publication or statement of any SEC employee or Commissioner. This speech expresses the author's views and does not necessarily reflect those of the Commission, the Commissioners, or other members of the staff.
Good afternoon. I am excited to be able to speak with you today. I would like to share some observations regarding principal versus agent determinations under the revenue standard and accounting for right of use assets under the leases standard.
Principal versus agent guidance
This year’s conference may have changed to an all-virtual format, but one thing that will remain the same is a member of the OCA staff providing a speech on principal versus agent considerations. This continues to be a frequent area of consultation for the OCA staff, and my colleague Jillian Pearce and I will both discuss it at this year’s conference.
Significant judgment is often required when determining whether an entity is a principal or an agent in a revenue transaction. As discussed in previous staff speeches, assessing whether an entity is a principal or agent under the applicable revenue guidance can be particularly challenging in certain industries, such as the digital advertising industry or other industries in the technology space, where arrangements often involve multiple parties providing the good or service. I would like to share a fact pattern that illustrates such an arrangement.
In this fact pattern, the registrant operated a platform that facilitated an advertiser’s purchase of advertising space from a publisher. The registrant identified a specific advertiser’s digital advertisement (“ad”) before bidding on potential advertising space in an auction process. Upon winning an auction, the registrant obtained an exclusive right to the potential advertising space and immediately pre-loaded the identified advertiser’s ad to the publisher’s site. If a valid user reaches the stage in the publisher’s app where the potential advertising space is to be displayed, the pre-loaded ad is displayed in the advertising space on the publisher’s site and a revenue transaction occurs.
The registrant concluded it was an agent in the transaction, despite the fact that it obtained momentary title to the advertising space, stating that it did not obtain control of the advertising space prior to transferring it to the customer. That is, the registrant concluded that it did not have the ability to direct the use of, and obtain substantially all the remaining benefits from, the publisher’s advertising space. Due to certain constraints, the registrant concluded it was unable to direct the use of the potential advertising space to an ad other than the predetermined ad in the seconds between winning the auction and the time the ad was displayed on the publisher’s site.
As part of its assessment, the registrant considered the indicators of control set forth in the revenue recognition guidance, determining that it was not primarily responsible for fulfillment and did not have inventory risk; however, the registrant determined that it did have pricing discretion as the publisher had no ability to set or influence the price charged to advertisers. In reaching its conclusion, the registrant stated that it was not primarily responsible for fulfillment based on the terms and conditions of its contract with the advertiser. The registrant believed that the terms and conditions of its contract only obligated it to provide an advertiser with access to the platform that facilitated the customer’s purchase of advertising space from publishers. Finally, the registrant stated that it did not promise its customer, explicitly or implicitly, the delivery of advertising space, nor did the customer have recourse against the registrant if its ad was not properly displayed in the advertising space or a valid user did not view the ad.
Based on the facts and circumstances presented to OCA staff, the staff did not object to the registrant’s conclusion that it was an agent in the transaction and should recognize revenue on a net basis.
Right-of-use asset guidance
The second topic I would like to discuss today relates to the accounting for abandonment of right-of-use assets under the leases standard.
Consider a fact pattern where the registrant identified leases for abandonment, but expected there to be an extended period of time between the identification of abandonment and the actual abandonment date. The registrant noted that the leases standard requires a lessee to recognize any impairment loss for a right-of-use asset in accordance with existing guidance on impairment or disposal of long-lived assets; however, upon performing an impairment assessment of the asset group, the registrant concluded there was no impairment. In this fact pattern, the registrant’s identification of specific leases for abandonment did not result in a change to the asset group (i.e., the lowest level of identifiable cash flows) for which it assessed impairment.
The registrant noted that the leases standard did not provide explicit guidance to address its unique circumstances. The registrant identified a number of alternatives that it believed could be acceptable but ultimately concluded that it would be appropriate to adjust the amortization period of the right of use assets associated with the leases identified for abandonment. Given its plans to abandon these leases, and in the absence of any impairment, the registrant re-evaluated the economic life of the associated right-of-use assets and determined that the remaining right-of-use assets should be amortized ratably over the period between identification of abandonment and the actual abandonment date.
The staff did not object to the registrant’s conclusion.
Thank you for your time and I hope you enjoy the remainder of the conference.
 Financial Accounting Standards Board Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers.
 ASC Topic 842, Leases.
 See Jillian Pearce, Professional Accounting Fellow, Office of the Chief Accountant, U.S. Securities and Exchange Commission, Remarks before the 2020 AICPA Conference on Current SEC and PCAOB Developments (Dec. 7, 2020), available at https://www.sec.gov/news/speech/pearce-remarks-aicpa-2020.
 See, e.g., Barry Kanczuker, Associate Chief Accountant, Office of the Chief Accountant, U.S. Securities and Exchange Commission, Remarks before the 2017 AICPA Conference on Current SEC and PCAOB Developments (Dec. 4, 2017), available at https://www.sec.gov/news/speech/kanczuker-aicpa-2017-conference-sec-pcaob-developments; and also Lauren K. Alexander, Professional Accounting Fellow, Office of the Chief Accountant, U.S. Securities and Exchange Commission, Remarks before the 2019 AICPA Conference on Current SEC and PCAOB Developments (Dec. 9, 2019), available at https://www.sec.gov/news/speech/alexander-speech-2019-aicpa-conference.
 See ASC 606-10-55-36 to 55-40.
 See ASC 606-10-55-37.
 See ASC 606-10-25-25.
 See ASC 606-10-55-39.
 See ASC 842-20-35-9.