Article
Tips for implementing the new revenue recognition accounting standard
Dec. 8, 2019 · Authored by Jesse Proctor
Private transportation companies with a calendar year-end of Dec. 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.
Important questions
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.
The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely. The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.