How does the principal vs agent test work under ASC 606?
Start by identifying the specified good or service the customer receives. On a rideshare app, is it the ride, or the right to be matched with a driver? On a travel site, is it the hotel stay, or the booking service? The answer frames everything else. Then ask whether the company controls that good or service before it reaches the customer.
What are the indicators of control?
| Indicator | Points to principal when the company | Points to agent when |
|---|---|---|
| Primary responsibility | Is responsible for fulfilling the promise and for the acceptability of the good or service | The supplier handles delivery, quality and complaints |
| Inventory risk | Holds goods before the sale or takes them back on return | It never owns the goods |
| Pricing discretion | Sets the price the customer pays | The supplier sets the price; the company earns a set fee |
The indicators support the control assessment rather than replace it, and no single indicator decides the answer.
Gross vs net revenue: three US examples
| Business | Specified service | Usually | Revenue on a $40 transaction |
|---|---|---|---|
| Rideshare app taking a 25% service fee | Connecting rider and driver | Agent | $10 (its fee) |
| Online marketplace for third-party sellers | Facilitating the sale | Agent | The commission only |
| Online retailer selling its own inventory | The product | Principal | $40, with cost of sales |
A company can be principal for some items and agent for others: a marketplace that also sells from its own warehouse reports both gross and net revenue. The conclusion can also differ between the rider and the driver, because each is a separate customer relationship to assess.
A worked example: a hotel booking
A traveler pays $200 for a hotel night through an online travel company. Under an agency model, the hotel sets the price, provides the room and handles complaints, and the travel company earns a $30 commission: it reports $30 of revenue. Under a merchant model where the travel company has bought a block of rooms in advance, bears the risk of unsold rooms and sets the selling price, it may control the room before the traveler does: it reports $200 of revenue and $170 of cost. Same booking, very different revenue.
Why does gross vs net revenue matter?
Profit is the same, but reported revenue, gross margin and growth rates differ greatly. Investors and lenders often value companies on revenue multiples, so the SEC staff regularly comments on principal vs agent conclusions. Document the analysis for each revenue stream, and revisit it when the business model changes.
What about sales taxes, shipping and gift cards?
- Sales taxes: ASC 606 lets companies elect to exclude from revenue all sales and similar taxes collected from customers, rather than assessing each tax.
- Shipping and handling: if performed after control of the goods passes, a company may elect to treat it as a fulfillment cost rather than a separate service.
- Gift cards for other brands: a retailer selling another company's gift cards is usually an agent and reports only its margin.
Is it the same under IFRS 15?
Yes. Both standards use the same control principle and indicators. See principal or agent under IFRS 15, and for the full model, the ASC 606 five-step model.
Need help applying the standards?
Our Chartered Accountants help finance teams and students apply US GAAP and IFRS to real transactions.
Questions people ask
What is the difference between principal and agent under ASC 606?
A principal controls the good or service before transfer and reports gross revenue; an agent arranges for another party to provide it and reports net revenue.
How do you decide gross vs net revenue?
Identify the specified good or service, then assess whether the company controls it before transfer, using primary responsibility, inventory risk and pricing discretion as indicators.
Is a marketplace a principal or an agent?
Usually an agent for third-party sales, reporting only its commission, but a principal for goods it sells from its own inventory.
Does principal vs agent affect profit?
No. It changes revenue and gross margin, not net income.
Sources
Every fee, date and rule on this page was taken from these official and primary sources.
- FASB Accounting Standards Codification: Topic 606, Revenue from Contracts with Customers
- Financial Accounting Standards Board: Revenue recognition
Rules and fees change. If you are reading this long after October 4, 2026, confirm the figures with the source before you rely on them.
Related guides
More in ASC 606
This guide is general information. It is not tax or legal advice for your situation.