An online marketplace lists a third-party seller's products. The seller is solely responsible for order fulfillment, sets its own prices, and bears all inventory risk before a customer purchases; the marketplace never takes control of the goods and merely collects payment and forwards it to the seller, less a service fee. Under ASC 606-10-55-36, why is the marketplace an agent rather than a principal in this arrangement?
- Because the marketplace does not control the specified good before it is transferred to the customer, and indicators such as the seller's fulfillment responsibility, inventory risk, and pricing discretion support that conclusion
- Because the marketplace collects payment from the customer, and any entity that collects payment on behalf of another party is automatically an agent
- Because the marketplace's fee is smaller in dollar terms than the price the customer pays for the goods
- Because the goods are shipped directly from the seller to the customer without passing through a marketplace-owned warehouse, which by itself is dispositive of agent status
Correct answer: A. Because the marketplace does not control the specified good before it is transferred to the customer, and indicators such as the seller's fulfillment responsibility, inventory risk, and pricing discretion support that conclusion
ASC 606-10-55-36 makes control of the specified good or service before it transfers to the customer the determining factor for principal-versus-agent status, and 606-10-55-39 identifies fulfillment responsibility, inventory risk, and pricing discretion as indicators that support (rather than independently decide) that control assessment; here the seller holds all three indicators and the marketplace never controls the goods, so the marketplace is an agent recognizing only its net fee. Merely collecting and forwarding payment does not by itself make an entity an agent under the standard, since a principal can also use a payment collection mechanism while still controlling the underlying good — the standard looks to control of the good or service, not to who physically processes payment. The relative size of the fee compared to the total price is not a criterion in the standard at all, and a low fee percentage does not by itself indicate agent status. Where shipping originates from is only relevant to the extent it informs which control indicators are met; it is not on its own a dispositive test, since the standard directs entities to assess control using the underlying indicators rather than physical shipping logistics alone.
Source: FASB Accounting Standards Codification: ASC 606-10-55-36 through 606-10-55-40, Revenue from Contracts with Customers — Principal versus Agent Considerations