Principal vs Agent: Recognizing Revenue Gross or Net

What Is the Principal vs Agent Assessment?

Principal vs agent revenue recognition decides whether a third party’s revenue belongs on your income statement in full or only as your fee. The governing guidance is ASC 606-10-55-36 through 55-40. A principal controls the specified good or service before it transfers to the customer and recognizes revenue gross, at the full consideration it expects to be entitled to. An agent arranges for another party to provide that good or service and recognizes revenue net, at the fee or commission it retains. Indinero’s CPA team runs this assessment in the month the contract is signed, because reconstructing it a year later is how a presentation restatement starts.

Two facts do most of the work. The assessment is performed per distinct specified good or service, not once per contract. And it settles on control, not on who invoices, who collects, or who carries the receivable.

What the ASC 606 principal vs agent guidance actually requires:

• A unit of account. ASC 606-10-55-36A requires you to identify the specified goods or services promised to the customer, then assess control over each one.
• A control conclusion. ASC 606-10-55-37 makes control before transfer the test. ASC 606-10-25-25 defines it as the ability to direct the use of, and obtain substantially all of the remaining benefits from, the asset, including the ability to prevent other entities from doing the same.
• A measurement. ASC 606-10-55-37B sets the principal’s amount at the gross consideration. ASC 606-10-55-38 sets the agent’s at the fee or commission, which might be the net amount retained after paying the other party.
• Indicators used as support. The three items in ASC 606-10-55-39 corroborate a control conclusion. They do not produce one.

It replaced something, too. Legacy ASC 605-45, codified from EITF Issue No. 99-19, ran on a weighted list of eight gross indicators and three net indicators, and inventory risk and credit risk drove most conclusions in practice. That framework is retired.

This is not the question the five-step model asks. Our walkthrough of ASC 606 and what it means for your customer contracts covers the five steps. This call sits beside them and decides whether a third party’s dollars belong on your revenue line at all.

The Control Test Under ASC 606

The revenue recognition control test asks one question. Do you control the specified good or service before it transfers to the customer.

ASU 2016-08, Principal versus Agent Considerations reframed that question and removed two indicators carried over from legacy guidance: exposure to credit risk, and whether the consideration is in the form of a commission. The FASB removed credit risk because it is not an indicator of control, and removed the commission form because it describes how an entity is paid rather than what it controls. The three remaining indicators were rewritten to point at control instead of at risks and rewards.

So say the consequence plainly. A memo that leads with “we bear the credit risk” or “we invoice the customer directly” is arguing from a superseded framework. PwC’s guidance is explicit that the cash flow basis, whether you take gross cash and remit or take only your net share, is generally not an indicator of control.

ASC 606-10-55-37A describes the three ways an entity obtains control before transfer:

• a. A good or another asset from the other party that the entity then transfers to the customer.
• b. A right to a service to be performed by the other party, which gives the entity the ability to direct that party to provide the service to the customer on the entity’s behalf.
• c. A good or service from the other party that the entity then combines with other goods or services in providing the specified good or service to the customer.

Subparagraph (b) decides most SaaS and services fact patterns.

ASC 606-10-55-40 closes the range, and almost no competing article covers it. If another entity assumes your performance obligations and contractual rights so that you are no longer obligated to transfer the specified good or service, you recognize no revenue for that performance obligation. You evaluate instead whether you are an agent satisfying a performance obligation to obtain a contract for the other party. Novations, assignments, and channel restructures live there.

One currency note. The FASB closed its Post-Implementation Review of Topic 606 in November 2024 with no fundamental revision, and no 2026 ASU touches 55-36 through 55-40. The standard is settled. The judgment is not, which is why it belongs inside the same monthly discipline as the rest of your GAAP accounting.

Identifying the Specified Good or Service

ASC 606-10-55-36 frames the question and ASC 606-10-55-36A sets the sequence. Identify the specified goods or services to be provided to the customer, then assess control over each one. ASU 2016-08 introduced the term as the unit of account, meaning a distinct good or service or a distinct bundle of them.

Three disciplines get skipped here.

• Work per distinct good or service, never per contract. The determination happens at what is effectively the performance obligation level. One contract can produce a principal answer on one line and an agent answer on the next.
• Frame it from the end customer’s perspective. A marketplace operator may describe its own promise as “marketplace access,” but the specified good or service is the product the customer actually buys.
• Separate a third-party input from a third-party specified good or service. ASC 606-10-55-37 contemplates a principal engaging a subcontractor to satisfy some or all of the obligation on its behalf. A SaaS company running its application on AWS or Azure is consuming a fulfillment input. The customer never contracted for compute. No principal versus agent question, no gross-up.

ASC 606-10-55-37 also supplies the classic negative case. You do not control a specified good or service if you obtain legal title only momentarily before title passes to the customer.

The Three Control Indicators

ASC 606-10-55-39 lists the indicators that an entity controls the specified good or service before transfer:

• a. Primary responsibility for fulfilling the promise. This typically includes responsibility for the acceptability of the specified good or service, for example that it meets customer specifications.
• b. Inventory risk before transfer, or after transfer of control. For example, where the customer holds a right of return.
• c. Discretion in establishing the price. Setting the price the customer pays may indicate the ability to direct the use of that good or service and obtain substantially all of the remaining benefits. An agent can have pricing discretion in some cases.

ASC 606-10-55-39A then says these indicators may be more or less relevant depending on the nature of the specified good or service and the terms of the contract, and that different indicators provide more persuasive evidence in different contracts. The Basis for Conclusions in ASU 2016-08 is blunter. The indicators were included to support the control assessment. They do not override it, should not be viewed in isolation, do not constitute a separate or additional evaluation, and are not a checklist of criteria to be met in all scenarios. No single indicator is determinative, and none is weighted above the others.

Two of three is not a conclusion. It’s a tally.

Conclude on control first, then show the indicators corroborating it. And remember that inventory risk is simply inapplicable to pure SaaS. Writing “we fail indicator (b)” when indicator (b) cannot apply is a self-inflicted wound.

When One Contract Has Both Roles

A single contract routinely produces a principal conclusion on one distinct good or service and an agent conclusion on another. The codified illustration is Example 48A, at ASC 606-10-55-334A through 55-334F. A recruitment services entity promises both recruitment services it performs itself and access to a third party’s candidate database. Two specified goods or services, two answers. The entity is the principal for the recruitment services. It is the agent for the database access, because the customer licenses directly from the provider and the entity can neither direct the use of that license nor prevent the provider from serving the customer directly. Under ASC 606-10-55-334E, the indicators corroborate that agent conclusion: no responsibility for fulfillment, no inventory risk, no pricing discretion.

An allocation problem follows. Deloitte’s Roadmap describes two acceptable approaches. One allocates all consideration on a relative standalone selling price basis, then adjusts the agent component down to the commission retained. The other performs separate allocations depending on whether the performance obligation serves the end customer or the third party.

For a SaaS controller this is the ordinary case. Subscription plus implementation plus a third-party connector is three specified goods or services and potentially two presentation answers inside one invoice.

SaaS-Specific Application

Marketplace revenue recognition is where this judgment actually bites, and it’s where generic content stops at taxi rides and concert tickets. These are the fact patterns a growth-stage SaaS accounting team sees every quarter.

• Cloud marketplace listings. When an ISV sells its own subscription through AWS, Azure, or Google Cloud Marketplace, the specified good or service delivered to the end customer is the ISV’s software. The ISV typically holds the EULA, controls provisioning, sets list price, owns the SLA, and is primarily responsible for acceptability. That usually supports principal, with the listing fee in cost of revenue. The marketplace’s own “seller of record” language is a fact to weigh, not a conclusion.
• The numbers behind that call. AWS Marketplace listing fees, effective January 5, 2024, run 3% of pre-tax total contract value for SaaS public offers and 20% for server products. Private offers step from 3% under $1M TCV to 2% from $1M to under $10M and 1.5% at $10M and above. On a $1,000,000 public offer, gross vs net revenue reporting is the difference between $1,000,000 of revenue carrying $30,000 of cost of revenue and $970,000 of revenue carrying nothing. Net income never moves.
• What the board still prices. Gross presentation inflates the top line and compresses gross margin. Benchmarkit’s 2025 SaaS Performance Metrics report puts median total revenue gross margin at 77% and median subscription gross margin at 81%. Land at 62% and you’ll be asked which part of that revenue is really software. ARR and the rest of the SaaS metrics investors price move with presentation even though the economics don’t.
• App stores and platform commissions. Many registrants have concluded they are the principal on app store sales and report gross with the platform fee in cost of revenue, on the basis that they control the app functionality and the end user relationship. IAC has disclosed exactly that position for Apple’s App Store and Google’s Play Store. Commercial context, not an accounting change: US App Store commissions are in active litigation as of September 2026, with the Ninth Circuit contempt finding upheld, Supreme Court review granted in June 2026, and no final US link-out rate set. The control analysis under 55-36 through 55-40 is unchanged by the rate. What can change is which entity contracts with the end user in a link-out flow, and that’s a fact input to the test.
• Embedded payments. Toast’s Form 10-K recognizes transaction fees gross because it concluded it controls the payment processing services before the customer receives them, performs authorization and fraud checks before submitting to the network, has sole discretion over which third-party acquiring processors it uses, and is ultimately responsible to customers if those processors fail. That last clause is the tell, and it maps onto 55-37A(b) and 55-39(a). A platform that merely refers merchants to a processor and can’t switch processors has none of it.
• Resellers and referral partners. A referral partner generates leads for a commission, never takes the customer contract, and is an agent. A value-added reseller that commits to the underlying subscription before a customer is identified, bundles implementation and first-line support, is visible to the customer as the responsible provider, and sets the end price has a far stronger principal case. Hybrids get the Example 48A treatment.
• Collected taxes are a different question. Under ASC 606-10-32-2A you may elect, as an accounting policy, to exclude from the transaction price all taxes assessed by a governmental authority that are both imposed on and concurrent with a specific revenue-producing transaction and collected from the customer. The election requires disclosure, and income tax withholdings don’t qualify.

Common Pitfalls

Most of these surface in the same place: a memo written months after the contract, by someone reconstructing intent from an invoice.

1. Indicator-counting. Scoring two of three and declaring principal. ASC 606-10-55-39A and the Basis for Conclusions both reject the checklist reading.
2. Reasoning from retired ASC 605-45 factors. Credit risk and the form of consideration were removed by ASU 2016-08. A memo resting on either is citing superseded logic.
3. Assessing at the contract level. Fails the unit-of-account requirement in ASC 606-10-55-36A and misses the dual-role outcome in Example 48A entirely.
4. Treating gross cash collection as control. Who invoices, who collects, and who holds the receivable are not the test.
5. Accepting the counterparty’s label. “Seller of record,” “merchant of record,” and “authorized reseller” are commercial terms. Inputs, not conclusions.
6. Opening a memo on ordinary fulfillment inputs. Hosting, bandwidth, and subcontracted engineering consumed to deliver your own promise are cost of revenue.
7. Grossing up an estimate you can’t observe. A principal without visibility into what an intermediary charges the end customer should recognize only amounts known to be receivable.
8. Never revisiting the conclusion. Contract templates change, channel structures change, and ASC 606-10-55-40 exists precisely because obligations get assumed by other parties.
9. Missing the significant-judgment disclosure. A judgmental gross conclusion with no corresponding disclosure is a standard comment-letter trigger.
10. Restating late. Correcting gross versus net after the fact touches every historical revenue and gross margin figure in the data room. It surfaces most often in financial due diligence, where it reads to a buyer as a controls problem.

You’re not just choosing a revenue line. You’re choosing the number every derived metric is built on.

The Audit-Ready Standard

Revenue is still the most frequently cited area of audit deficiency. The PCAOB’s Spotlight on 2024 inspection activities reports that deficiencies in 2024, 2023, and 2022 primarily related to substantive testing of, and testing controls over, revenue and related accounts, with aggregate deficiency rates at triennially inspected non-affiliate firms of 61% in 2024, down from 67% in 2023. A gross presentation conclusion sits inside the highest-scrutiny account on the audit.

What the evidence file needs, per revenue stream:

• The memo, per specified good or service. Not one memo for the whole revenue line. It concludes on control under ASC 606-10-55-37 and ASC 606-10-25-25 first, presents the 55-39 indicators as corroboration, and explicitly addresses 55-39A on why a given indicator is more or less relevant here.
• The contracts, extracted and abstracted. The customer-facing MSA or EULA, the upstream supplier agreement, and the marketplace or platform terms. AICPA documentation expectations extend to contract abstracts when revenue contracts are material.
• Evidence of primary responsibility. Who signs the SLA, who owes service credits, who indemnifies, who takes the support ticket, who the customer sues.
• Evidence of pricing discretion. Realized price variance against the third party’s list or floor. A fixed take rate with no ability to vary the end price is weak evidence for principal.
• Evidence of substitution rights. Whether you can switch the underlying provider without customer consent.
• Consistency across the company. Sales collateral, support scripts, and the order form should all agree with the accounting conclusion.
• Disclosure and change control. The significant-judgments note, plus a trigger list covering template changes, upstream provider switches, new channels, and novation events.

This paragraph range is live with the SEC staff, not dormant. In correspondence dated January 12, 2026, the staff asked SemiLEDs Corporation to expand its disclosure of a new buy-sell equipment business and its ASC 606 assessment of gross versus net, citing 55-36 through 40 directly. The registrant responded that it obtains control and bears inventory risk before transfer, has pricing discretion, and controls title and risk of loss until delivery, and therefore presents gross. Build the file that way, well before audit preparation season.

How Indinero Approaches Gross Versus Net Decisions

Indinero’s accounting team is CPA-led, and every monthly close gets a GAAP-discipline review before it ships. For principal versus agent, the assessment happens in the month a new contract type or channel arrangement is signed, not the week before a diligence call. The control reasoning and the corroborating indicators get written down while the deal facts are fresh and the people who negotiated them are still reachable.

What that looks like in practice:

• A memo per specified good or service, structured the way an auditor reads it: control conclusion first, ASC 606-10-55-39 indicators second, ASC 606-10-55-39A relevance discussion third.
• A trigger list inside the close checklist, so a renegotiated partner agreement or a new marketplace listing reopens the question instead of aging quietly.
• Presentation and disclosure handled together, because a judgmental gross conclusion without the significant-judgments note is the comment letter, not the accounting.

This works because the technical accounting isn’t a carve-out. Revenue recognition sits inside the same engagement as your bookkeeping, business tax, and fractional CFO advisory, so the team documenting the gross versus net call is the team closing your books and modeling the ARR that call feeds. Continuous operations since 2009, 500+ regular customers, 100+ years combined team experience, SOC 2 compliant (2026), and a 5-star Clutch rating. Pricing starts at $750/mo, with month-to-month engagements available.

Presentation follows control. Valuation follows disclosure. If the gross economics are good, say so in the MD&A or the board deck, not by manufacturing a principal conclusion the facts won’t carry. If you’re reselling, embedding, or listing on a marketplace and the memo doesn’t exist yet, our accounting services team can build it. Reach out for a free consultation. We’d love to learn about your revenue streams and find where we can help.

Frequently asked questions

The gross versus net call raises the same handful of questions on almost every engagement, usually from a controller preparing a memo an auditor has already questioned. These are the ones we answer most often, with the ASC reference behind each answer. If your fact pattern isn’t covered below, it’s worth a conversation rather than a guess.

Does reporting gross instead of net change our net income?

No, gross versus net presentation moves reported revenue and gross margin, but net income lands in exactly the same place. On a $1,000,000 public offer through a cloud marketplace, principal presentation shows $1,000,000 of revenue carrying $30,000 in cost of revenue. Agent presentation shows $970,000 and no cost of revenue. The bottom line never moves. Every metric built on the top line does.

Are cloud marketplace fees a reduction of revenue or a cost of revenue?

Cloud marketplace fees are a cost of revenue when you control the software before it transfers to the customer. There’s no blanket rule for AWS, Azure, or Google Cloud Marketplace listings. If you hold the EULA, control provisioning, set list price, and own the SLA, that supports principal and the fee goes in cost of revenue. If you don’t control the service, you’re the agent and revenue is your net fee. Seller of record language is an input, not the conclusion.

How does a gross or net call affect our ARR and our valuation multiple?

Gross presentation raises reported revenue and ARR while compressing gross margin, so it moves revenue-multiple valuation even though the underlying economics never change. Benchmarkit’s 2025 SaaS Performance Metrics report puts median total revenue gross margin at 77% and median subscription gross margin at 81%. Report 62% and a board or a buyer will ask which part of that revenue is really software. Choose the presentation the facts carry, then explain the gross economics in the MD&A or the board deck.

What evidence does an auditor want before accepting gross presentation?

An auditor wants the contract terms, a control analysis per distinct good or service, and a contemporaneous memo, not a tally of indicators. The three indicators at ASC 606-10-55-39 corroborate a control conclusion, they don’t produce one, and ASC 606-10-55-39A rejects indicator counting outright. Indinero’s CPA team writes that memo in the month the contract is signed and files it with the customer MSA, the upstream supplier agreement, and the significant-judgments disclosure.

Can we be the principal for software and the agent for implementation?

Yes, because the principal versus agent assessment runs per distinct good or service, so one contract can produce both roles. Example 48A at ASC 606-10-55-334A through 55-334F codifies exactly that, with an entity acting as principal for services it performs and agent for a third party’s database access. Subscription, implementation, and a third-party connector on one invoice are three specified goods or services and potentially two presentation answers, which then drives the allocation. Write one memo per specified good or service, not one for the contract.