Final answer:
The FASB believes the correct method for recognizing revenue in a principal-agent relationship is the net method, which allows agents to record only the commission they earn, while principals record the gross transaction amount.
Step-by-step explanation:
The FASB (Financial Accounting Standards Board) believes the correct method for recognizing revenue in a principal-agent relationship is the net method.
In a principal-agent relationship, one party (the agent) arranges for the sale of goods or services on behalf of another party (the principal). When it comes to revenue recognition, the principal recognizes revenue for the gross amount of the transaction, while the agent recognizes revenue only for the fee or commission earned from the transaction. The FASB's guidance, laid out in ASC 606, provides a framework for determining whether a company is acting as a principal or an agent in a transaction, which in turn affects how revenue is recognized.
The FASB's approach emphasizes the importance of reflecting the substance of the transaction over its form. It requires an assessment of control: if the entity controls the good or service before it is transferred to a customer, it is a principal; if not, it is an agent and will record the net amount of revenue earned from the transaction.