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Principal versus agent: Assessing how to recognize revenue · PwC's accounting podcast

• 0:00
  SPEAKER_00: Thought Leadership from PWC.
• 0:06
  SPEAKER_01: Welcome to PWC's Accounting Podcast.
• 0:10
  SPEAKER_01: I'm Heather Horn.
• 0:12
  SPEAKER_01: Thanks so much for joining me as we continue our Tuesday series in which one of our all-star podcast guests takes over the podcast, picking the topics for the month, and joining me on all the episodes.
• 0:24
  SPEAKER_01: For the month of June, our takeover guest is Angela Ferguson, a partner in PWC's national office who specializes in revenue and compensation.
• 0:35
  SPEAKER_02: This would be a good time to revisit Principal versus Agent because it continues to be one of the most challenging and judgmental topics in revenue.
• 0:45
  SPEAKER_03: Business models are always changing, so anytime there's a business model change or a contract form type of change, it makes sense to go through the analysis again.
• 0:57
  SPEAKER_01: That was Angela with Mike Coleman, another national office partner with a wealth of experience on revenue recognition.
• 1:04
  SPEAKER_01: Angela and Mike are here to walk us through the principal versus agent assessment.
• 1:10
  SPEAKER_01: In other words, what revenues should you be recognizing?
• 1:14
  SPEAKER_01: They start with the broad assessment from the perspective of both intermediaries and vendors and end with recommendations for companies to avoid common pitfalls we see in SEC Commons on this very judgmental topic.
• 1:28
  SPEAKER_01: Listen in for Angela and Mike's advice.
• 1:36
  SPEAKER_01: Angela, welcome back this week.
• 1:38
  SPEAKER_01: And Mike, so nice to have you back on the podcast.
• 1:41
  SPEAKER_01: And for today's episode, we're going to be talking about a perennial favorite, which is principal versus agent.
• 1:48
  SPEAKER_01: And Angela, just to kick things off, I thought it'd be nice to start with why you chose this topic.
• 1:53
  SPEAKER_01: I could probably guess, but I will let you go ahead.
• 1:56
  SPEAKER_02: Sure.
• 1:56
  SPEAKER_02: So principal versus agent is a topic that we've talked about many times in the past, but it has been a few years since we actually went into a deep dive and made it the topic of a podcast.
• 2:08
  SPEAKER_02: So I thought that this would be a good time to revisit principal versus agent because it continues to be one of the most challenging and judgmental topics in revenue.
• 2:20
  SPEAKER_02: And Mike and I spend a lot of our time on principal versus agent.
• 2:24
  SPEAKER_02: So as a reminder, this issue arises when there's more than one party, more than one unrelated party that's involved in transferring goods or services to an end consumer.
• 2:36
  SPEAKER_02: And then principal versus agent refers to the assessment of whether a company should present revenue on a gross basis, which is typically the amount paid by the end consumer in the transaction, or whether revenue should be presented net of amounts paid to another party that's involved in transferring the goods or services to the end consumer.
• 2:59
  SPEAKER_02: So another way we describe this often is gross versus net.
• 3:03
  SPEAKER_02: But I would want to emphasize that it's not just a presentation issue because it really gets to the heart of how you describe your business and how you present your financial statements.
• 3:14
  SPEAKER_02: And principal versus agent evaluations, like I said, typically involve three parties.
• 3:20
  SPEAKER_02: So that would be a vendor, an intermediary, and an end consumer.
• 3:25
  SPEAKER_02: So you can almost picture this in your head that you have the vendor on one side and the end consumer on the other side, and then sort of in the middle within a relationship with both parties is this intermediary.
• 3:39
  SPEAKER_02: And we get questions from companies that might be in either the role of the intermediary or the vendor.
• 3:46
  SPEAKER_02: And so I thought we would spend this podcast talking about the analysis from both perspectives.
• 3:52
  SPEAKER_01: All right, very helpful.
• 3:53
  SPEAKER_01: And I think uh as you were describing it, I can picture the chain that you're talking about, but I always think it's helpful to go through some examples.
• 4:01
  SPEAKER_01: So maybe, Mike, can you give us some examples of when we often see this type of arrangement and um when it's necessary to do this type of analysis?
• 4:12
  SPEAKER_03: Uh sure.
• 4:13
  SPEAKER_03: It's more often than you think uh it comes into play.
• 4:17
  SPEAKER_03: Because these days it's not that common for a company to fulfill an arrangement it to a customer entirely with its own resources.
• 4:27
  SPEAKER_03: Um once a third party is involved, the principal versus agent assessment is required.
• 4:32
  SPEAKER_03: Sometimes it's relatively straightforward.
• 4:35
  SPEAKER_03: So for example, let's take a company may use a subcontractor for a portion of a contract, but it's clear that the company is the principal to the end user and it's using that cut con that subcontracted work for the arrangement with its customer.
• 4:48
  SPEAKER_03: Those are pretty straightforward.
• 4:50
  SPEAKER_03: In other situations, much more gray.
• 4:54
  SPEAKER_03: So for example, if the end consumer is getting an intangible like software or a service, um, or in cases where we've got complex ecosystems with many parties involved, like internet advertising, payment processing services, or healthcare services.
• 5:11
  SPEAKER_01: So can you give a specific example or two of just like a common arrangement you may see?
• 5:18
  SPEAKER_03: Sure.
• 5:18
  SPEAKER_03: Um give a common arrangement.
• 5:19
  SPEAKER_03: So I'm a home builder, right?
• 5:21
  SPEAKER_03: And I'm working with my customer uh to build their home, and then I hire a plumbing contractor.
• 5:27
  SPEAKER_03: So I'm not going to do the plumbing work, I hire that plumbing contractor, they're working at direction of mine, so that third parties involved because they're working on the house.
• 5:40
  SPEAKER_03: Um, so that's a circumstance that's pretty easy to deal with because the contractor is still the person selling the house, you're still dealing with the customer on what they want.
• 5:51
  SPEAKER_03: You've just hired somebody else instead of your own labor, you've hired that plumber.
• 5:56
  SPEAKER_03: Um contrast that with let's say a payment processing ecosystem.
• 6:02
  SPEAKER_03: So you're a merchant, we've all gone to the store.
• 6:05
  SPEAKER_03: Yes.
• 6:06
  SPEAKER_03: We've seen the little cube that says toast or square, and we put our card and we get our pizza.
• 6:12
  SPEAKER_03: Okay, that merchant is taking an alternative payment to cash.
• 6:17
  SPEAKER_03: Okay, who's providing that payment processing service to the merchant?
• 6:21
  SPEAKER_03: Is it the company that gave the little square?
• 6:24
  SPEAKER_03: Is it the merchant's bank?
• 6:26
  SPEAKER_03: Is it the card issuing bank?
• 6:29
  SPEAKER_03: Is it the payment networks like a MasterCard or Visa?
• 6:33
  SPEAKER_03: Who is that?
• 6:34
  SPEAKER_03: Who is principal to that merchant in allowing the customer to use that credit card?
• 6:40
  SPEAKER_01: All right, we might have to come back later so you can answer that that question.
• 6:44
  SPEAKER_01: I don't think we're gonna be able to answer it.
• 6:46
  SPEAKER_00: Yeah, there's not really an answer.
• 6:48
  SPEAKER_01: Too many, too many.
• 6:49
  SPEAKER_01: Okay, so facts and circumstances specific.
• 6:52
  SPEAKER_01: So I think it's very helpful just to show how quick the complexity goes.
• 6:56
  SPEAKER_01: Because when you started with the pizza example, I'm like, okay, well, obviously the restaurant is, you know, the the principle in this arrangement.
• 7:03
  SPEAKER_01: For the pizza pizza.
• 7:04
  SPEAKER_01: For the pizza.
• 7:05
  SPEAKER_01: But you were going way beyond that, right?
• 7:07
  SPEAKER_00: So all right.
• 7:09
  SPEAKER_01: So then, Angela, with all of that said, now that we've kind of warmed up our audience, um, why don't we start with some assessments from the perspective of the intermediary?
• 7:20
  SPEAKER_02: Sure.
• 7:20
  SPEAKER_02: So typically this is what we think of when we think of a principal versus agent analysis.
• 7:25
  SPEAKER_02: And the key question to answer is whether the intermediary, so that's the company whose accounting we're doing, is the principal for providing goods or services to the end consumer, or are they an agent because they're just arranging for another party to provide goods or services.
• 7:44
  SPEAKER_02: So examples of intermediaries could be a reseller, a distributor, a marketplace, or often anything that we call a platform.
• 7:53
  SPEAKER_02: So that could be an online platform where consumers go to purchase goods and services.
• 7:58
  SPEAKER_02: But there's many other kinds of companies that could be considered intermediaries.
• 8:02
  SPEAKER_02: And an example I'm going to use sort of throughout the podcast is an arrangement where you have a software vendor that uses a network of resellers to sell their software product to end consumers.
• 8:16
  SPEAKER_02: So in this case, the intermediary would be the reseller in that arrangement.
• 8:22
  SPEAKER_02: So this analysis is going to include two steps.
• 8:26
  SPEAKER_02: The first step is that you need to identify the specified good or service that's being transferred to the end consumer.
• 8:34
  SPEAKER_02: And then the second step is that you have to determine whether the intermediary, so our reseller in this case, controls the specified good or service before it's transferred to the end consumer.
• 8:47
  SPEAKER_01: Okay.
• 8:48
  SPEAKER_01: And then just before we get into how we determine that, what would be the outcome if you say that the reseller does control uh the specified good or service?
• 8:58
  SPEAKER_02: Yeah.
• 8:58
  SPEAKER_02: So if they control the good or service before it's transferred to the end consumer, then the reseller is the principal and they're presenting revenue on a gross basis.
• 9:09
  SPEAKER_02: If the reseller does not control the good or service before it's transferred to the end consumer, then they're an agent and they're going to present revenue on a net basis.
• 9:20
  SPEAKER_02: So it's basically the net commission that they would recognize as revenue in their financials.
• 9:25
  SPEAKER_01: All right.
• 9:26
  SPEAKER_01: So then let's actually rewind though and go back to your two steps.
• 9:30
  SPEAKER_01: And first with the um good or service.
• 9:33
  SPEAKER_01: And as in my question to Mike when I was thinking pizza and he was thinking something totally different, it it I can see how it could get complex, often straightforward, but could get complex.
• 9:44
  SPEAKER_01: So yeah, you're spot on, right?
• 9:45
  SPEAKER_02: Sometimes it can get complicated because you've got different things happening in the same transaction.
• 9:50
  SPEAKER_02: So you do really need to focus in on what is the good or service that we're assessing in the principal versus agent analysis.
• 9:59
  SPEAKER_02: And just to give like another example for our software vendor reseller example, this in this case, the software vendor might be selling both the software license as well as PCS or ongoing updates to the to that software.
• 10:16
  SPEAKER_02: And so the reseller would have to assess if both of those elements are distinct.
• 10:22
  SPEAKER_02: And that goes back to how we think about distinct in the revenue standard.
• 10:26
  SPEAKER_02: If they're distinct, the reseller has to do the principal versus agent assessment for both elements, both the software license and the PCS.
• 10:36
  SPEAKER_02: And you could actually get different answers.
• 10:38
  SPEAKER_02: So they could conclude, they might conclude that they're principal for the software license, but agent for the PCS.
• 10:46
  SPEAKER_01: And PCS stands for?
• 10:48
  SPEAKER_01: Post-contract services.
• 10:52
  SPEAKER_03: Post-contract customer services.
• 10:54
  SPEAKER_01: All right.
• 10:56
  SPEAKER_02: All right, good.
• 10:57
  SPEAKER_02: That's we just say PCS all the time.
• 10:59
  SPEAKER_01: I hate acronyms, so I always like to ask that question.
• 11:03
  SPEAKER_01: So all right.
• 11:04
  SPEAKER_01: So in your example, you could have two different things.
• 11:07
  SPEAKER_01: So then, Mike going to you, how do you figure out if the intermediary does have control?
• 11:13
  SPEAKER_03: Um, so you the the first thing you want to do is under just remind yourself of the control concept in the revenue standard.
• 11:21
  SPEAKER_03: So that's defined as having the ability to direct the use of or obtain substantially all of the remaining benefits from an asset.
• 11:31
  SPEAKER_03: Um an intermediary can have control in three ways.
• 11:37
  SPEAKER_03: Uh you can take control of an asset and then transfer that asset to an end customer.
• 11:42
  SPEAKER_03: That's usually the more straightforward scenario.
• 11:46
  SPEAKER_03: Um the second way is you direct another party to perform on the entity's behalf.
• 11:52
  SPEAKER_03: So that would be like the circumstance of building the house.
• 11:56
  SPEAKER_03: I'm directing the plumber to work on my behalf.
• 11:59
  SPEAKER_03: And then the last one is taking control of another party's goods or services by integrating it with their own goods or services for a single output.
• 12:10
  SPEAKER_03: Okay.
• 12:11
  SPEAKER_03: And again, the house building is another example of that one too, where I take the bathroom and put it part of the house.
• 12:17
  SPEAKER_03: I'm not selling you a bathroom and a house.
• 12:19
  SPEAKER_03: I'm integrating it into the house I'm selling it.
• 12:22
  SPEAKER_01: All right.
• 12:22
  SPEAKER_01: And I know that there's some indicators in the principal versus agent that help with that analysis.
• 12:27
  SPEAKER_03: Yeah.
• 12:28
  SPEAKER_03: So in in a lot of cases, that's not as straightforward.
• 12:32
  SPEAKER_03: So you want the the guidance gives you three basic indicators.
• 12:37
  SPEAKER_03: Who's primarily responsible to deliver that good or service, uh, whether the intermediary takes inventory risk.
• 12:45
  SPEAKER_03: And then the last one is who has pricing discretion with the customer.
• 12:49
  SPEAKER_03: Um it's not a checklist, right?
• 12:52
  SPEAKER_03: So depending upon the type of arrangement and the circumstance, you have to look to see which of the indicators are more relevant than others and which of them are going to have more impact.
• 13:02
  SPEAKER_03: So for example, in a service, there isn't oftentimes inventory risk because there's no physical asset to take.
• 13:10
  SPEAKER_03: So in those circumstances, there'll be more judgment placed on who's primarily responsible for providing the service and who's setting the pricing for the service.
• 13:21
  SPEAKER_01: All right.
• 13:21
  SPEAKER_01: So, Mike, I think that's helpful.
• 13:23
  SPEAKER_01: And there's definitely you can see how those considerations could have different weights depending on the analysis.
• 13:29
  SPEAKER_01: I guess, Angela, specifically then thinking about our example of the software and the reseller and the end customer, what are some of the key considerations that you would think about?
• 13:40
  SPEAKER_02: Well, the first observation I would make is that you really need to start with the contracts.
• 13:44
  SPEAKER_02: So, in our example, the reseller is going to have a contract with the software vendor in order to be the reseller of that product, right?
• 13:52
  SPEAKER_02: And they're also going to have usually some sort of contract with the end consumer.
• 13:57
  SPEAKER_02: And if it's not a formal written contract, it might just be something like terms and conditions.
• 14:03
  SPEAKER_02: And often you see that when you have a consumer that's purchasing things through a website.
• 14:08
  SPEAKER_02: But the the contract terms are going to be really key to understanding the responsibilities of the different parties and applying those indicators that Mike went through, including who's primarily responsible.
• 14:22
  SPEAKER_02: A lot of that you can really get from the details of the terms of the contract.
• 14:27
  SPEAKER_02: And it helps you understand what role each party is playing in the arrangement.
• 14:33
  SPEAKER_02: For example, when it comes to who's primarily responsible, the contracts will likely lay out who's on the hook if something goes wrong.
• 14:42
  SPEAKER_02: Right.
• 14:42
  SPEAKER_02: And that would be one key thing to look at as far as who's primarily responsible.
• 14:47
  SPEAKER_02: But on the other hand, you can't just simply read the contracts and only look at that in isolation.
• 14:55
  SPEAKER_02: You also need to understand all the surrounding facts and circumstances and the actual business practices of all of the parties.
• 15:03
  SPEAKER_02: And sometimes you just need broader context as well.
• 15:06
  SPEAKER_02: I mean, Mike was talking about the payment processing ecosystem.
• 15:11
  SPEAKER_02: I mean, if you're talking about a situation where there's a larger ecosystem involved, you really need to have a holistic understanding of how all the parties in that ecosystem function to understand how the parties that we're evaluating fit into the bigger picture.
• 15:28
  SPEAKER_01: So, Angela, if we're thinking about the software then, does it would a factor be how it's being delivered to the customer?
• 15:37
  SPEAKER_01: Because I'm just trying to think the role of the reseller here.
• 15:41
  SPEAKER_01: What role are they actually playing typically when you're dealing with software?
• 15:45
  SPEAKER_02: Right.
• 15:45
  SPEAKER_02: And some some of it will come down to who's contracting directly with the end consumer.
• 15:50
  SPEAKER_02: Is it just the reseller or does the software vendor also have some sort of contractual arrangement with the end consumer?
• 15:58
  SPEAKER_03: Yeah, I was gonna uh jump in with just just take an app on your iPhone.
• 16:02
  SPEAKER_03: Well, who sold it to you?
• 16:04
  SPEAKER_03: Apple or the app developer?
• 16:06
  SPEAKER_03: And so the question is well, it's coming from your cell phone, and so it sounds like it's coming from Apple, but do you have to click in the terms and conditions from the app developer?
• 16:17
  SPEAKER_02: I'm sure you read those very carefully, yes.
• 16:22
  SPEAKER_03: But those apps are software.
• 16:25
  SPEAKER_03: Um oftentimes the app developer is going to require you to click those terms and conditions.
• 16:31
  SPEAKER_03: That doesn't necessarily mean they're the principal just because you click those, but the intermediary at Apple would have to do the evaluation of who's fulfilling it.
• 16:42
  SPEAKER_03: The app development may not allow Apple to sell it to everybody.
• 16:47
  SPEAKER_03: Um it gets into who's setting the price for that.
• 16:50
  SPEAKER_03: So and and all those terms and conditions between the the Apple in that case or the app, and then the terms and conditions between Apple and the app provider.
• 17:01
  SPEAKER_03: Have to look at that whole arrangement to figure out who's really selling you that app.
• 17:07
  SPEAKER_01: Well, and I think that's a great example because in that case, the consumer with paying their$2.99 or whatever is not thinking whatsoever.
• 17:16
  SPEAKER_01: Is this coming from Apple?
• 17:18
  SPEAKER_01: Is this coming from the software developer?
• 17:19
  SPEAKER_01: They're just thinking, here's an app I want.
• 17:22
  SPEAKER_01: So then if we take your same arrangement, Angela, and try to look at it from the perspective of the vendor, how is that different than what we just talked about?
• 17:34
  SPEAKER_02: So the model that we're applying is the same.
• 17:37
  SPEAKER_02: However, while the intermediary, so the reseller, is assessing whether it's they are the principal or the agent, the question that we're answering is a little different when we're talking about the accounting being done by the vendor.
• 17:52
  SPEAKER_02: So in our example of the software vendor and the reseller, the vendor would need to determine whether they are transferring control of the software license to the reseller.
• 18:04
  SPEAKER_02: So therefore the reseller is their customer, or whether they're transferring control of the software license directly to the end consumer and therefore the end consumer is their customer.
• 18:16
  SPEAKER_02: And then in that case, the reseller would really just be a sales agent.
• 18:20
  SPEAKER_01: So then, Angela, how does that impact the accounting outcome?
• 18:25
  SPEAKER_02: So if the reseller is the vendor's customer, then the vendor is gonna recognize revenue equal to the amount that they receive from the reseller.
• 18:35
  SPEAKER_02: So after the reseller's already retained their share.
• 18:39
  SPEAKER_02: However, if the end consumer is the vendor's customer, then the vendor is gonna recognize revenue equal to the amount paid by the end consumer.
• 18:49
  SPEAKER_02: And then they're gonna have an expense for the commission that they're paying to the reseller.
• 18:56
  SPEAKER_01: All right.
• 18:57
  SPEAKER_01: So then if I'm the vendor and trying to think through some of my accounting mic, what are some of the things that I would be thinking about?
• 19:05
  SPEAKER_03: Okay.
• 19:06
  SPEAKER_03: So what you're thinking about again is you're really trying to determine who your customer is.
• 19:13
  SPEAKER_03: One one of the things we try to make sure to remember is the vendor is never the agent.
• 19:19
  SPEAKER_03: A lot of times people are doing, ooh, principal versus agent.
• 19:22
  SPEAKER_03: Someone's a principal and somebody's the agent.
• 19:25
  SPEAKER_03: That's a perspective from the intermediary.
• 19:27
  SPEAKER_03: It can either be the principal or the agent.
• 19:29
  SPEAKER_03: The vendor's never the agent, they're always selling the thing.
• 19:33
  SPEAKER_03: It's just a matter of who are they selling it to.
• 19:37
  SPEAKER_03: So I'm software, I'm either selling it to the intermediary or I'm selling it to the end user.
• 19:41
  SPEAKER_03: If I sell donuts through a coffee shop, I'm either selling the donuts to the coffee shop or I'm selling the donuts to the end user.
• 19:48
  SPEAKER_03: But I'm selling donuts.
• 19:50
  SPEAKER_03: So they're never the agent, they're always the seller.
• 19:54
  SPEAKER_03: So with that, what you really want to get into is okay, who are they selling to?
• 20:00
  SPEAKER_03: Right?
• 20:01
  SPEAKER_03: And you always want to keep top of mind this control notion.
• 20:05
  SPEAKER_03: Okay.
• 20:06
  SPEAKER_03: So who am I transferring control to?
• 20:09
  SPEAKER_03: Am I transferring control to the intermediary or am I transferring control to the end user?
• 20:14
  SPEAKER_03: Oftentimes contracts, again, will help us make that assessment.
• 20:18
  SPEAKER_03: So for example, you want to look at the contract terms to see if the vendor has like we purchase rights with the intermediary.
• 20:26
  SPEAKER_03: That would be an indicator that I'm not transferring control to the intermediary.
• 20:30
  SPEAKER_03: I'm maintaining control while it's there, and maybe then my customer is the end customer.
• 20:36
  SPEAKER_03: Other things that you would think about is what whose whose promise am I fulfilling?
• 20:43
  SPEAKER_03: Did I make a promise to the intermediary?
• 20:45
  SPEAKER_03: And am I delivering to fulfill the promise to the intermediary?
• 20:49
  SPEAKER_03: Or did I make a promise to the end customer?
• 20:51
  SPEAKER_03: And am I fulfilling that promise to the end customer?
• 20:54
  SPEAKER_03: So things like that you would want.
• 20:56
  SPEAKER_03: Those are the types of considerations we would look at.
• 20:59
  SPEAKER_03: And then sometimes the vendor can control the product that goes directly to the end customer.
• 21:07
  SPEAKER_03: Um, and they may do that without having a contract or a relationship, a contractual relationship with the end customer.
• 21:14
  SPEAKER_03: And when that happens, we get into some interesting accounting.
• 21:17
  SPEAKER_02: And where this can impact the accounting is in particular a situation where you may not have visibility into the price that the reseller is charging to the end consumer.
• 21:29
  SPEAKER_02: And one common situation where this comes up is where a vendor might sell through a reseller.
• 21:36
  SPEAKER_02: So, say our software vendor example, they're selling through a reseller, but the reseller is bundling that together with other products, so other distinct products, even so hardware, other software products.
• 21:50
  SPEAKER_02: And for the end consumer, they're just paying one single price for that entire bundle.
• 21:56
  SPEAKER_02: So the software vendor doesn't really have.
• 22:00
  SPEAKER_02: Transparency into a price being paid just for their product.
• 22:06
  SPEAKER_02: So in this situation, you do not try to estimate some sort of gross price being charged to the end consumer for your good or service.
• 22:17
  SPEAKER_02: You would just recognize revenue equal to the amount that the reseller is paying you for that software license.
• 22:23
  SPEAKER_02: So you kind of end up in a net answer, even though you've concluded that your customer is the end consumer.
• 22:30
  SPEAKER_02: So it's kind of a unique set of facts and circumstances that comes up from time to time.
• 22:35
  SPEAKER_01: Wow.
• 22:35
  SPEAKER_01: So definitely a lot of different scenarios.
• 22:37
  SPEAKER_01: And I guess kind of full circle back to making sure you really understand the arrangement.
• 22:43
  SPEAKER_01: But as you guys have, you know, help clients and engagement teams work through these types of issues, what advice would you give them?
• 22:50
  SPEAKER_01: Obviously, we ran through an example, but more holistically, if you're dealing with these types of situations, what would you say?
• 22:57
  SPEAKER_01: And Mike, I'll go to you first.
• 22:59
  SPEAKER_03: Okay.
• 22:59
  SPEAKER_03: I'd I'd offer two things.
• 23:01
  SPEAKER_03: First, this isn't a set it, evaluate it once, and forget it type of analysis.
• 23:07
  SPEAKER_03: Business models are always changing.
• 23:10
  SPEAKER_03: So anytime there's a business model change or a contract form type of change, it makes sense to go through the analysis again.
• 23:19
  SPEAKER_03: The second piece of advice is it's contract by contract, arrangement by arrangement.
• 23:25
  SPEAKER_03: Most companies would love to have the same answer for their entire business line.
• 23:30
  SPEAKER_03: It just makes life operating easy.
• 23:33
  SPEAKER_03: However, contracts vary between customers and contracts vary types of products and contracts vary within businesses.
• 23:42
  SPEAKER_03: So it's really an arrangement by arrangement, contract-by-contract analysis.
• 23:47
  SPEAKER_03: And you can have certain contracts with customers where you're the principal and certain contracts with customers where you're the agent.
• 23:54
  SPEAKER_03: And so it really needs to be done arrangement by arrangement.
• 23:57
  SPEAKER_01: And very good disclosure, I would say would be the case if and it's particularly in that scenario, but with any of these arrangements.
• 24:04
  SPEAKER_01: How about from your perspective, Angela?
• 24:07
  SPEAKER_02: Well, I'm gonna double down on your importance of good disclosure.
• 24:11
  SPEAKER_02: Um, because this is an area where there you know often are significant judgments involved, and sometimes it is very gray.
• 24:19
  SPEAKER_02: So it's important to be transparent in your disclosure about first, what were the conclusions that you reached?
• 24:26
  SPEAKER_02: Did you just determine you were the principal or the agent, or if you're having to evaluate who your customer it is, what was the conclusion?
• 24:32
  SPEAKER_02: And then what were the key factors that impacted that conclusion?
• 24:36
  SPEAKER_02: And I would also point out that when you're describing your the company's business, for example, throughout an SEC filing, I mean, the description of the business should be consistent with how you've concluded in your principal versus agent analysis.
• 24:52
  SPEAKER_02: For example, if you're the reseller and you've concluded you're an agent, you know, it would you would need to describe your business that way, not as somebody who's selling a good or service, but who is an agent for other parties who sell that good or service.
• 25:06
  SPEAKER_01: All right, so definitely a lot to think about here.
• 25:08
  SPEAKER_01: If someone wants to do know more, Angela, where should they go?
• 25:12
  SPEAKER_02: They can check out chapter 10 of our revenue guide where we go through the the entire principle versus agent model.
• 25:18
  SPEAKER_01: All right, I'm sure many examples there too to work through.
• 25:21
  SPEAKER_01: Yes.
• 25:22
  SPEAKER_01: All right, very good.
• 25:23
  SPEAKER_01: Well, definitely a complicated topic, but some very helpful reminders today.
• 25:27
  SPEAKER_01: So thanks so much for joining me.
• 25:29
  SPEAKER_03: No problem.
• 25:29
  SPEAKER_03: Yeah, no problem.
• 25:31
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• 25:53
  SPEAKER_01: From Thought Leadership at PwC, I'm Heather Horn.
• 25:58
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