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Remarks before the 2018 AICPA Conference on Current SEC and PCAOB Developments

Sheri L. York
Professional Accounting Fellow

Washington D.C.

Dec. 10, 2018

The Securities and Exchange Commission disclaims responsibility for any private publication or statement by any SEC employee or Commissioner. The views expressed herein are those of the author and do not necessarily reflect the views of the Commission, the Commissioners, or other members of the staff.


Good morning. I would like to share some observations from two consultations OCA has received related to the new revenue standard ("Topic 606")[1] regarding the application of the principal versus agent guidance[2] and the guidance on the identification of performance obligations.[3]  These areas represent two of the most frequently consulted topics with OCA under Topic 606.

Principal versus Agent Considerations

You may be thinking, "Didn't we hear about principal versus agent considerations at last year's conference…and the conference before that?"  Yes, my good friends, Ruth Uejio[4] and Barry Kanczuker[5] both previously spoke about principal versus agent considerations.  I chose to speak about this topic today because I have observed that determining whether an entity is a principal or an agent in a revenue transaction often requires a significant amount of judgment and different conclusions can impact the amount and timing of revenue recognition. 

Application of the principal versus agent guidance can be especially challenging when an entity never obtains physical possession of a good (for example, when goods are shipped directly from a manufacturer to the third party).  Over the past year OCA has received questions regarding the principal versus agent determination in these types of fact patterns, including fact patterns where the company concluded it was acting as a principal and others where the company concluded it was acting as an agent.  I would like to share one of the consultations that OCA received on this topic. 

In this consultation, the registrant distributed a wide variety of healthcare-related goods to retailers.  The registrant maintained inventory for the majority of the goods sold; however, for certain specialized goods, the manufacturer shipped the goods directly to the retailer.  The registrant managed the return process with the retailer; however, due to regulatory reasons, certain returned goods were returned directly to the manufacturer. 

The registrant concluded that it was acting as a principal in the arrangement because it controlled the specified good before it was transferred to the customer.[6]  That is, the registrant had the ability to direct the use of, and obtain substantially all of the remaining benefits from, the goods.[7]  As part of its assessment of control, the registrant considered the indicators of control and concluded that it was primarily responsible for fulfillment and had discretion in establishing the price at which the goods were sold to the retailer.[8]  The registrant believed that it was primarily responsible for fulfillment based on the terms of the agreement and marketing materials communicated to the customer.  In this fact pattern, the registrant was the primary point of contract with the retailer, and was contractually responsible for ensuring that products were acceptable to the retailer, including responsibility for issues related to delivery, quantity, and spoilage.   

In this fact pattern, the staff did not object to the registrant's conclusion that it was the principal in the transaction.  Based on my experience, I think it is important to remember that the conclusion as to whether or not an entity is a principal or an agent requires a consideration of the definition of control, often including consideration of the indicators of control, of which inventory risk is only one of the possible indicators.[9]  In some circumstances, physical possession will not coincide with control of a specified good.[10]

As a reminder, the staff continues to view the principal versus agent guidance as an area of the standard that requires significant judgment.  To reiterate a point from a previous speech, [11] significant judgment does not mean optionality.  Registrants should apply a rigorous analysis of the facts in order to faithfully apply the principal versus agent model to their specific facts and circumstances.  

Identification of Performance Obligations

I would now like to discuss my views regarding the identification of performance obligations; specifically, whether or not a promise to transfer a good or service to the customer is distinct within the context of the contract.[12]  The objective of this assessment is to determine whether the nature of the promise, within the context of the contract, is to transfer each of the goods or services individually or, instead, to transfer a combined item for which the promised goods or services are inputs.[13]

In a recent consultation with OCA, a registrant provided its customer with a commercial security monitoring service by integrating a variety of cameras and sensors (which I will refer to as "equipment") with the registrant's technology platform.  The equipment was integrated via a control panel that was installed at the customer's location and enabled communication between the equipment and the registrant's technology platform.  The registrant's technology platform also incorporated an element of artificial intelligence that used data from the cameras and sensors to learn the patterns of the customer's behavior.  It then used that information to create a "smart" security monitoring service.  For example, motion detectors may identify an attempt to open a window while other sensors may simultaneously indicate, based on a lack of body temperature readings, that personnel are not currently located within the building.  In this case, the control panel would route this information obtained from the equipment to the registrant's technology platform, which may alert the customer and/or the authorities about a potential issue. 

The registrant concluded that each piece of equipment (including the control panel), the installation, and the monitoring services were capable of being distinct, but believed that these promises comprised a single performance obligation as they were not distinct in the context of the contract.  The registrant believed it was providing a significant service of integrating the goods and services in the contract into a bundle that represented the combined output for which the customer had contracted.[14]  More specifically, the delivery of a "smart" security monitoring service would not be possible if the equipment were not integrated with the technology platform. 

The staff did not object to the registrant's conclusion and considered it reasonable to conclude that the nature of the promise is to transfer a combined item—the commercial security solution—to which each piece of equipment (including the control panel), the technology platform, and installation are inputs.  In this fact pattern, the entity demonstrated reasonable judgment that they were providing a significant integration service that transformed the equipment and services into a combined output that provided the customer with an overall service offering that was greater than the customer could receive from each individual part.[15] 


Thank you very much for your attention and I hope you enjoy the remainder of the conference.


[1] Accounting Standards Codification ("ASC") Topic 606, Revenue from Contracts with Customers.

[2] ASC 606-10-55-36 to 55-40.

[3] ASC 606-10-25-19 to 25-22.

[4] Ruth Uejio, Professional Accounting Fellow, Office of the Chief Accountant, U.S. Securities and Exchange Commission, Remarks before the 2016 AICPA National Conference on Current SEC and PCAOB Developments (December 5, 2016), available at

[5] Barry Kanczuker, Associate Chief Accountant, Office of the Chief Accountant, U.S. Securities and Exchange Commission, Remarks before the 2017 AICPA National Conference on Current SEC and PCAOB Developments (December 4, 2017), available at

[6] ASC 606-10-55-37.

[7] ASC 606-10-25-25.

[8] ASC 606-10-55-39.

[9] ASC 606-10-55-39A.

[10] ASC 606-10-25-30(c).

[11] See footnote 5 above.

[12] ASC 606-10-25-19(b).

[13] ASC 606-10-25-21.

[14] ASC 606-10-25-21(a).

[15] BC29 of Accounting Standards Update ("ASU") No. 2016-10, Revenue from Contracts with Customers (Topic 606) – Identifying Performance Obligations and Licensing.

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