Revenue Recognition in the Transportation Industry
Author: Tim Chitwood
As you’re probably already aware, the model for revenue recognition is changing with the Financial Accounting Standards Board’s (FASB) 2014 release of Accounting Standards Update (ASU) 2014-09, Revenue from Contracts with Customers (Topic 606).
Under current standards, the transportation industry can recognize revenues and costs from transporting freight using one of the following methods, provided the revenue also is realized or realizable:
- When freight is received from the shipper or leaves the carrier’s terminal with accrual of the estimated direct costs to complete delivery
- When the shipment is completed, i.e., the destination is reached
- When the shipment is completed with expenses recognized as incurred
- Via a proportional performance method with expenses recognized as incurred—under a proportional performance method, revenue is recognized by allocating revenue between reporting periods based on relative transit time in each reporting period
The ASU eliminates most of the existing industry-specific guidance and significantly expands revenue recognition disclosures. More than 600 pieces of revenue recognition guidance are replaced with an overriding principle and a five-step model. The standard requires entities to make more estimates and use more judgment than under current guidance.
On July 9, 2015, FASB approved amendments deferring the effective date of the new revenue recognition standard by one year. Public and nonpublic entities will be allowed to early adopt the new revenue standard—but not before the original public entity effective date, i.e., annual periods beginning after December 15, 2016. Entities should use this additional time to develop a comprehensive transition plan, including an evaluation of implementation issues, potential system solutions and any needed internal control updates.
As a result of the deferral, public entities would be required to apply the new revenue standard to annual reporting periods beginning after December 15, 2017, including interim reporting periods therein. Nonpublic entities would be required to apply the new revenue standard to annual reporting periods beginning after December 15, 2018, and interim reporting periods within annual reporting periods beginning after December 15, 2019. The table below illustrates the new effective dates for entities with December 31 year-ends.