ASC 2 Essay Example | Topics and Well Written Essays - 500 words

ASC 2 - Essay Example ipal supplier earns the entire revenue from the sale transaction and should therefore report the gross earnings, while the agent earns a commission on the transaction and should report the net earnings. The guidelines specify eight tests to ascertain whether a particular entity is acting in the capacity of a principal. Satisfaction of many of these conditions would normally indicate that the entity is acting in the capacity of principal and should record thee gross revenue. The eight tests specified by ASC are: 2. Risk for Inventory: The party that has unmitigated general inventory risk would be acting in the capacity of a principal. Such party would maintain an inventory of products before sale with accompanying inventory risk and will take ownership if the product is returned by the customer. 5. Supplier selection: A party that has the discretion to select a particular supplier, from several suppliers who can provide the product, for fulfilling a particular order to a customer would be acting in the capacity of principal. 7. Physical loss inventory risk: If the entity assumes risk of the product until transfer to the customer or gets the title back if the product is returned, it is most probably acting in the capacity of a principal. Amazon.Com has included three of the eight conditions specified under the ASC. Conditions such as carrying out product changes, determination of product specifications, and assumption of credit risk have not been included by Amazon. Some of these are specified as providing weaker evidence. However, when a number of factors are being considered and judgment is made on the basis of several of these factors, it would have been more appropriate to include all of them, which Amazon has not done. Thus while Amazon’s stated practice is in conformance with the ASC guidelines, it does not include all the conditions. Overstock.Com specifically states that it follows the ASC guidelines on Principal Agent Considerations while determining