A retailer purchases inventory outright from a manufacturer, takes title to the goods, and stores them in its own warehouse before any customer places an order. Once a customer buys a unit, the retailer bears the risk of loss or damage to that unit until it is delivered, and the retailer would bear the cost of any unsold or damaged inventory regardless of whether a particular customer ever purchases it. Under ASC 606-10-55-39(b), how does this fact pattern support the retailer being a principal rather than an agent in sales to its customers?
- The retailer has inventory risk before the specified good is transferred to a customer (and, in some cases, after transfer), which is one of the indicators that the retailer controls the good before transferring it and is therefore a principal
- The retailer is automatically a principal because it purchased the goods from a manufacturer rather than from another retailer
- The retailer is automatically a principal because the goods are stored in a warehouse it owns rather than a leased facility
- Inventory risk is not relevant to the principal-versus-agent assessment under ASC 606; only who collects payment from the customer matters
Why A? And why not the others?
Correct answer: A. The retailer has inventory risk before the specified good is transferred to a customer (and, in some cases, after transfer), which is one of the indicators that the retailer controls the good before transferring it and is therefore a principal
ASC 606-10-55-39(b) lists inventory risk before the specified good is transferred to the customer, or in some cases after transfer (such as when the customer has a right of return), as one of the indicators supporting a conclusion that the entity controls the good before it transfers to the customer and is therefore acting as a principal; the retailer here bears exactly that risk, having taken title and bearing loss on unsold or damaged inventory regardless of any particular sale, which supports, though does not alone conclusively determine, principal status. Simply having purchased from a manufacturer rather than another retailer says nothing about control of the good before transfer to the end customer, so it cannot by itself establish principal status; a reseller could still be an agent depending on the actual control indicators present. Warehouse ownership versus leasing is an unrelated real-estate fact that has no bearing on which party controls the specified good before it is transferred to a customer. The claim that only payment collection matters misstates the standard entirely; ASC 606-10-55-36 through 55-40 centers the analysis on control of the good or service, with fulfillment responsibility, inventory risk, and pricing discretion serving as supporting indicators, not on who happens to process the customer's payment.
Source: FASB Accounting Standards Codification: ASC 606-10-55-39(b), Revenue from Contracts with Customers — Principal versus Agent Considerations