Private transportation companies with a calendar year-end of December 31, 2019, will soon need to issue their first generally accepted accounting principles (GAAP) financial statements under the new revenue recognition accounting standard codification (ASC) Topic 606 five-step model.
While all companies need to ensure they fully address each area of the new standard before implementation, transportation companies should pay specific attention to the timing of the recognition of revenue. After the implementation of ASC Topic 606, transportation service revenue will generally be recognized over time as it’s typically concluded that the customer simultaneously receives and consumes the benefits provided from transportation services. As such, it’s important to determine how to track the distance traveled or duration of time in transit.
Public companies have already implemented the new standard and their initial experiences provide insight for private companies to consider during their own implementation process.
Below, we outline common questions your company may face as you implement the new standard, as well as tips and steps to take during the process.
How should my company transition?
In general, public transportation companies elected to adopt ASC Topic 606 utilizing the modified retrospective transition approach.
How will the modified retrospective method impact companies?
For public companies, disclosures were significantly increased—in some cases, expanding from a single paragraph to multiple paragraphs.
After the implementation of ASC Topic 606, transportation companies generally recognize revenue over time for in-transit items based on either transit time or distance shipped. Under the modified retrospective approach, this resulted in a cumulative effect adjustment to the opening balance of retained earnings.
A contract asset was also commonly recognized for in-transit items at year-end representing unbilled revenue. Upon the completion of shipments, the amounts are reclassified to accounts receivable.
How should sales and revenue-producing taxes be treated?
In general, companies elected the accounting policy to exclude taxes assessed by a governmental authority and collected from the customer when measuring the transaction price. As a result, sales taxes and other revenue-producing transaction taxes collected from a customer on behalf of third parties were generally reported on a net basis—excluded from the income statement.
In comparison, if this accounting policy isn’t elected, sales taxes and other revenue-producing transaction taxes would need to be considered under the principal versus agent guidance and may need to be reported on a gross basis—included within sales revenue and transportation costs.
How should costs to obtain a contract be treated?
Under ASC Topic 606, transportation companies are required to capitalize costs of obtaining a contract with a customer if those costs are only incurred as a result of obtaining a contract and if the company expects to recover those costs.
Sales commissions paid to employees are typically considered to be recoverable and incremental costs of obtaining a contract with a customer. As such, they should generally be deferred and amortized over the term of the contract. This may be a significant change from the current accounting treatment for sales commissions and if material, this change may result in a beginning equity adjustment under the modified retrospective approach.
If the amortization period would have been one year or less, companies may elect a practical expedient that allows for incremental costs incurred to obtain a contract to be recognized as an expense when incurred.
Should brokerage revenue be recorded on a gross or net basis?
ASC Topic 606 continues to require brokerage-related revenue to be evaluated under the principal versus agent guidance to determine whether it should be reported on a gross or net basis. Additionally, ASC Topic 606 continues to require disclosures regarding the factors considered in determining the basis.
How should warehousing revenue be treated?
Warehouse, inventory management, and order fulfillment services were generally considered to represent a series of distinct services as they are substantially the same and are provided to the customer over time. A series of distinct services may be accounted for as a single performance obligation.
The fixed consideration included in the transaction price for warehousing arrangements represents the fixed-pricing charges for facility and equipment costs. Variable consideration represents variable amounts that are based on the units or hours of services.
The performance obligation was generally considered to be satisfied overtime. The fixed consideration was generally recognized on a straight-line basis over the term of the contract—using the time elapsed output method—and the variable consideration was generally recognized based on the level of activity provided–using the units produced or units delivered output method.
This is generally consistent with legacy revenue recognition guidance.
How should incidental charges to customers be treated?
If incidental or accessorial charges—such as loading and unloading, customs clearing, in-transit stops, and toll payments—are immaterial in the context of the contract, it’s not required to assess whether or not these charges are performance obligations and the corresponding revenue can be recognized with the transportation service revenue.
However, if these charges are material, they should be evaluated to determine if they represent a distinct performance obligation or if they’re inputs to provide the combined item to the customer—the transportation service performance obligation.
As you implement ASC Topic 606, it’s important to have a transition plan in place and determine if you’ll proceed with a modified or full retrospective transition approach.
Create an appropriate timeline so you can devote sufficient time to the development of the expansive disclosures required.
Review the New Model
The expanded revenue recognition disclosures provide more information to users of financial statements to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers.
As a reminder, the five-step model includes the following steps:
- Identify the contract with a customer
- Identify the performance obligations in the contract
- Determine the transaction price
- Allocate the transaction price to the performance obligations in the contract
- Recognize revenue when or as the entity satisfies a performance obligation
Evaluate Specific Factors
To complete these steps, it’s important to consider the following:
- Evaluate if revenue will be recognized over time. If so, evaluate your current system reporting capabilities to provide the relevant driver with miles, or other distance measurement, and days, or other transit time durations.
- Evaluate sale commission structures for potential cost deferral.
- Understand basis for reporting amounts as either a principal—gross basis—or as an agent—net basis—especially for asset-light logistics revenue.
- Evaluate if taxes collected and remitted for specific revenue-generating transactions will be included or excluded from the transaction price.
- Evaluate your system’s ability to identify contract assets such as unbilled revenue to be presented.
- Evaluate the promised services, such as paying tolls, in-transit stops, and loading and unloading in the context of the contract for appropriate determination of performance obligations and transaction price allocation.
We’re Here to Help
To learn more about implementing ASC 606, explore our implementation guide, or contact your Moss Adams professional to start your implementation process.