With ASC 606 – Revenue from Contracts with Customers becoming effective for private companies with annual reporting periods beginning after December 15, 2018, now is the time to ensure that revenue recognition policies are consistent with the new standard.
One key area where there could potentially be a change from current reporting practices will be with how drop shipments are accounted for. Historically, most distributors have accounted for drop shipments on a gross basis. With the change in how the determination of the type of relationship, principal vs. agent, this could result in these transactions being reported differently.
One of the most indicative factors in determining whether a distributor is a principal or an agent comes down to the control of the goods. That being said, companies will need to review the contracts that they have with vendors to determine whether or not a principal or agent transaction is in place. The Center for Plain English Accounting has identified several factors that should be considered in determining whether the distributor is a principal or agent:
- Does the distributor take legal title of the goods or services?
- Does the distributor have the ability to redirect the goods to another customer?
- Is the distributor adding any additional value?
- Does the distributor handle returns and complaints?
- Does the distributor accept returns that are outside of what the vendor would accept?
- Does the distributor bear the risk of loss while in transit?
- Did the distributor select the vendor of the goods?
- Does the distributor maintain an inventory of the goods?
- Does the distributor have pricing discretion?
Additionally, distributors will need to review their current invoicing procedures to ensure that the recognition of revenue from drop shipments is accounted for accurately.
If you have any questions or concerns on revenue recognition implementation, please do not hesitate to contact us here or call 513-241-8313.