Revenue from contracts with customers: A trucking industry perspective

May 10, 2017|Chris Roble

Updated guidance on revenue recognition standards will affect nearly all U.S. companies, and you’ll need to begin planning for the implementation of changes sooner than later to comply with these provisions.

In May 2014, the Financial Accounting Standards Board (FASB) issued new comprehensive principles-based rules on revenue recognition, scheduled to broadly impact U.S. companies issuing financial statements. The FASB and the International Accounting Standards Board (IASB) converged to jointly issue guidance on revenue from contracts with customers. The purpose of their project is to provide one core model for companies to recognize revenue, which will replace the various divergent methods existing in current GAAP literature that are primarily based on an entity’s industry focus.

The new standard on revenue recognition, with its amendments issued for clarification, will supersede virtually all of the previously used revenue recognition and related industry-specific guidance used in financial reporting.

Who is affected?

The FASB’s updated guidance generally applies to all entities industry-wide, including private companies, public companies and not-for-profit organizations. The new model does not impact revenue recognition related to insurance contracts, leases, financial instruments or certain non-monetary exchanges.

In preparing the new revenue standard, the FASB and IASB formed a joint Transition Resource Group (TRG) to undertake issues arising in planning for the new guidance implementation. As a result of the TRG’s evaluation, the FASB published a number of amendments that modified the original revenue recognition guidance:

  • ASU 2015-14, Deferral of the Effective Date
  • ASU 2016-08, Principal versus Agent Considerations
  • ASU 2016-10, Identifying Performance Obligations and Licensing
  • ASU 2016-12, Narrow-Scope Improvements and Practical Expedients
  • ASU 2016-20, Technical Corrections and Improvements to Topic 606

Delayed implementation

In August 2015, the FASB delayed the effective implementation date, allowing companies additional time to grapple with the expected magnitude of changes involved in complying with the new requirements, including making enhancements to information systems, accounting processes, and internal controls. The FASB granted a one-year deferral of the new standards, and the American Institute of Certified Public Accountants (AICPA) advised companies to take advantage of the additional time to prepare for its implementation.

U.S. nonpublic entities issuing calendar year-end financial statements must implement the new revenue standard in 2019. Required adoption by U.S. public companies is one year earlier in 2018.

Basic core principles

Under the new revenue recognition accounting model, companies will recognize revenue using a single standard that depicts the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. During the evolution of U.S. GAAP, both transaction- and industry-specific guidance evolved that created inconsistencies across entities, resulting in different accounting for similar transactions and different disclosure requirements for an issuer’s financial statements.

The premise of the core principles in recording the timing of revenue recognition is provided under a five-step process:

Step 1: Identify the contract with a customer (enforceable rights and obligations)
Step 2: Identify performance obligations in the contract (promise to transfer a good or service to a customer)
Step 3: Determine the transaction price (amount of consideration, for example, payment)
Step 4: Allocate the transaction price to the performance obligations in the contract (allocate based on stand-alone selling price)
Step 5: Recognize revenue when (or as) the entity satisfies a performance obligation (when customer obtains control)

Principal versus agent considerations

In March 2016, the FASB issued guidance to address an issue raised by the TRG related to principal and agent considerations. In this amendment, to clarify situations when a supplier or another party is involved in selling goods or services to a customer, the FASB provided the following clarifications to define a principal and an agent to a transaction.

  • An entity is a “principal” if it promises to provide the specified good or service
  • An entity is considered an “agent” if it receives a fee to arrange for goods or services to be provided to another party

Using these definitions, the consideration of principal versus agent may apply to a trucking operation where owner-operators are used in the carrier’s operating model. Based on the responsibilities of the parties, the carrier may represent either the principal or agent based on its relationship in providing service to its customer. This determination will impact both the timing and presentation of operating revenue for a trucking company.

Identifying performance obligations and licensing

In April 2016, the FASB clarified the approach companies are to take for:

1. Identifying performance obligations, and
2. Licensing of certain access to an entity’s intellectual property

In regard to performance obligations, when companies provide goods or services in contracts, certain performance obligations are immaterial to the underlying contract. If performance obligations are immaterial to the contract, you are not required to assess those performance obligations further.

Performance obligations were also reviewed to determine whether goods and services provided together to customers meet a definition of being distinct, and should be separately identified for recording revenue recognition.

Licensing and access to intellectual property was discussed by the FASB relative to whether a transaction represents a point in time transfer or if the licensor is required to undertake additional activities impacting the pattern of recording revenue. In the scope of this discussion, FASB also clarified that an entity has an option for an accounting policy specific to shipping and handling. These activities can be evaluated as an activity related to the original transfer, rather than an additional promised service.

Example of trucking industry revenue recognition

In accordance with current U.S. GAAP, the trucking industry recognizes revenue for basic freight services of truckload and less than truckload shipping at the point in time when the freight is delivered to a destination location.

In applying the new revenue recognition standard, as a carrier, you will be required to first evaluate existing contracts under step 1 of the model and determine the terms of a customary model agreement with a shipper.

As the contracts are reviewed, step 2 is to evaluate the individual performance obligations within the contracts. You provide basic freight charges to customers, and may also perform additional services to be evaluated in your customer contracts. Several of these additional services may include loading and unloading of freight and detention of the trailers and tractors during loading and unloading after a certain period of time, for example. You may find there are specific terms for individual customers, or contract provisions that may impact revenue recognition, such as network planning or warehouse storage services performed for customers that need to be evaluated as separate performance obligations.

In steps 3-5, determine the amount of consideration to be allocated to each performance obligation, allocate the transaction consideration and recognize revenue as each performance obligation is satisfied.

Under the new revenue standard, the FASB provided observations on service contracts, that customers receive the benefit of an entity’s performance over time, as is the case of freight services. Specifically, the FASB discussed whether the benefits of an entity transporting goods from the point of origin to destination were provided throughout the time of the trip or not until the goods were delivered to the destination. Although many respondents through the TRG provided that no benefit was transferred until the goods were delivered to the destination, the FASB provided that even if goods were delivered part of the way, there was a benefit transferred as another trucking entity would only need to complete the remaining part of the shipment.

Under the new revenue standard, freight revenue is theoretically recognized over the period of time the shipments are provided for customers. Shippers receive the benefits of goods being moved from origin to the destination, versus at the point in time at delivery. The FASB acknowledged that practical limitations may exist in whether another carrier would be able to take over the remainder of the trip for an incomplete shipment, but disregard this fact under the guidance for the revenue recognition model. Therefore, under the new revenue standard, your revenue recognized will consist of freight delivered during the period, as well as a proportion of revenue for service deliveries that are in process as of the end of the reporting period.

AICPA new revenue recognition accounting standard—learning and implementation plan

As published by the AICPA, the following is a model plan for companies to both learn from and work through the major implementation of the new revenue standard.

Step Task Description By When
1. Assign an individual accounting staff or form a task force to lead the implementation. The new revenue standard will eliminate the transaction and industry-specific revenue recognition guidance under current GAAP. It will be replaced with a principle-based approach for determining revenue recognition. Now – 2018
2. Evaluate the changes from current GAAP to the new revenue recognition standard. Obtain a full understanding of the new revenue recognition standard as prescribed in step 1, including the amendments to ASU 2014-09. Now – 2018
3. Determine how you will retrospectively adopt the new revenue recognition standard, and how to track the accounting differences for periods that require restatement. The new revenue recognition standard should be applied using one of the following two methods (1) retrospectively to each prior period using a practical expedient (2) retrospectively with the cumulative effect recognized at the date of initial application. Now
4. Determine whether you need to make any changes to IT systems or software applications to capture new information needed for the new revenue recognition standard. The new revenue recognition standard may require modifications to IT systems. Now
5. Determine what interim disclosures you need to make before the revenue recognition standard is effective. Public companies should consider the guidance in SEC Staff Accounting Bulletin (SAB) 74. Now – 2018
6. Develop an evolving project plan for implementation of the revenue recognition standard considering all of the steps above and facilitate training. Now – 2018
7. Educate key stakeholders on the revenue recognition standard and what changes to expect in your financial statements. The new revenue recognition standard may result in changes in timing of revenue recognized, as well as disclosures that will need to be explained to stakeholders. Now – 2018

With the forthcoming and the extent of the changes in the new revenue standard, it will be vital for you to plan for and then execute the implementation process. Contact your Schenck assurance advisor for assistance in planning for the implementation of this new standard and determining its impact on your business.

Chris Roble, CPA, is a shareholder who has nearly 15 years of audit and financial reporting experience. He specializes in the planning, supervision and review of external audit engagements primarily serving the trucking, logistics and manufacturing industries.