Case 17-5 Stanley & Sons Stanley & Sons Inc. (the \"Company\") assists clients b

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Case 17-5 Stanley & Sons Stanley & Sons Inc. (the "Company") assists clients by designing and implementing solutions that reduce the overall costs of its customers' supply chains. The Company provides Just-In-Time (JIT) inventory management of spare parts used in its customers' manufacturing processes to reduce cycle times and lower inventory-related costs The Company entered into a supply management contract (the "Agreement") with Tadduni Partners (the "Customer"), an unrelated third party, to provide spare parts management services, including sourcing, procurement, repair, transport and delivery, and warehouse management The key terms of the agreement are as follows Purchase Process A Customer provides the Company with a plan at the beginning of the year with a forecast of spare parts that it needs as part of its manufacturing process. On the basis of this plan, the Company purchases spare parts from third-party vendors and ships the spare parts directly to the Customer's location. The Agreement states that the Customer determines the product and service specifications and that no changes or modifications can occur without the Customer's consent. The Company purchases spare parts directly from vendors. Note that although the Company purchased the spare parts according to the plan, the Customer is not obligated or committed to purchase these spare parts · The Company directly purchases from third-party vendors; the Customer is not involved in the purchasing process. Vendors name the Company in their invoices; the Customer is not named in the invoice. The Company is responsible for all payments to its vendors in purchasing the spare parts . When space parts are purchased by the Company, the vendor ships the spare parts directly to the Customer's warehouse; however, the Customer does not purchase and obtain title to the spare parts in its warehouse until it issues a purchase order P..) to the Company. At this point, the title of the inventory for which a P.O has been authorized transfers from the Company to the Customer .The Company is responsible for the quality of the product sold to the Customer, who has the right to return any defective product to the Company Purchase of spare parts by the Company is generally made in advance of receiving a P.. from the Customer, and the Company is obligated to pay the vendors within the agreed-upon payment terms irrespective of whether the spare parts are sold to the Customer or payment is collected from the Customer .The Company has latitude in vendor selection and negotiates pricing with its vendors. The Company sets the price it charges the Customer on the basis of the

Explanation / Answer

An entity is a principal if, when involved in providing goods or services to a customer, that entity obtains control of any of following (ASC 606-10-55-37A):

ASC 606 offers three indicators to help an entity determine if it controls the specified good or service before it is transferred to the customer (ASC 606-10-55-39):

Let us analyse the given case under the guidance of ASC 606 for principal v agent-

In the given case, Stanley & Sons (the “Company”) is responsible to procure the required products from the vendor. Though the product and service specifications are determined by the Customer, but the Company is solely responsible to purchase spare parts directly from the vendors. Also, Company is responsible for the quality of the products supplied to the Customer.

As mentioned, though the inventory is stored in the Customer’s warehouse, but the risk of loss or damage remains with the Company. Also, the Company has the risk of loss during shipping of the inventory.

Also, though the Company obtains the inventory on the basis of forecast of the required spare parts provided by the Customer, but the Customer does not have any obligation to purchase these spare parts. Therefore, the inventory risk remains with the Company.

The Company has the right to determine the prices to be charges from the Customer. The Company sets the price it charges from the Customer on the basis of Company’s cost plus a mark-up.

The Company directly purchases from the vendors and the Customer is not involved in vendor selection and price determination. Also, the invoice is also raised in the name of the Company. The Company is liable to pay to the Vendors for the purchased spare parts within the agreed payment terms irrespective of the fact that the spare parts are sold to the Customer or payment is collected from the Customer.

Therefore, the credit risk remains with the Company.

Based on the indicators, as discussed above, it is analysed that the Company is acting as a principal in the given case study and should recognize revenue on gross basis.

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