No. US2017-15August 10, 2017What’s inside:Overview .1Step 1: Identify thecontract . 2Step 2: Identifyperformanceobligations . 4Step 3: Determinetransaction price . 5Step 4: Allocatetransaction price . 8Step 5: Recognize revenueand contract costs . 11Principal versus agent.14New revenue guidanceImplementation in the transportation andlogistics sectorAt a glancePublic companies must adopt the new revenue standards in 2018. Almost allcompanies will be affected to some extent by the new guidance, though the effect willvary depending on industry and current accounting practices. Although originallyissued as a converged standard under US GAAP and IFRS, the FASB and IASB havemade slightly different amendments, so the ultimate application of the guidance coulddiffer under US GAAP and IFRS.The Revenue Recognition Transition Resource Group (TRG) has discussed variousimplementation issues impacting companies across many industries. These discussionsmay provide helpful insights, and the SEC expects registrants to consider them inapplying the new guidance.This publication reflects the implementation developments over the past few years andhighlights certain challenges specific to the transportation and logistics industry. Thecontent in this publication should be considered with our global Revenue guide,available at transportation and logistics industry includes companies associated with shipping,railways, airlines, trucking and logistics, and cruise lines. Customers generally pay a feefor the movement of cargo or passengers between two or more specified points.Customer incentives are limited, and primarily arise from volume discounts, or airlines’customer loyalty programs, in which awards are earned based on mileage flown and canbe redeemed for a variety of products or services.This publication discusses the areas in which the final revenue standards (ASC 606 andIFRS 15, Revenue from Contracts with Customers) are expected to have the greatestimpact for companies in the transportation and logistics industry, broken down by stepof the model.National Professional Services Group www.cfodirect.comIn depth1

ScopeThe new US GAAP and IFRS standards apply to all contracts with customers except for: Lease contractsInsurance contractsCertain contractual rights or obligations within the scope of other standards, including financial instrumentcontractsCertain guarantees (other than product warranties) within the scope of other standardsNonmonetary exchanges (between companies in the same line of business) to facilitate a sale to another partySome contracts within the transportation and logistics industry may include components that are in the scope of therevenue standards and components that are in the scope of other standards (for example, a lease contract that alsoincludes maintenance or other services). The new standards state that if a contract is partially within the scope ofanother standard, a company should apply any separation and/or measurement guidance in the other standard first.Otherwise, the principles in the revenue standards should be applied to separate and/or initially measure thecomponent(s) of the contract.The determination of whether an arrangement contains a lease might have significant accounting implications. Carefulconsideration of the relevant standard is required before applying the revenue standard to a contract. Contracts thatinvolve providing or using fixed assets (for example, vessel time charters) might contain a lease. The boards issued newleasing standards that amend the guidance about what constitutes a lease. Management will need to carefully assesswhich arrangements or components of arrangements fall outside the scope of lease accounting and should be treated asrevenue contracts.The following discussion relates only to contracts and/or components of contracts that are within the scope of therevenue standard.(1) Identifythe contract(2) Identifyperformanceobligations(3) Determinetransactionprice(4) nsiderations1. Identify the contractA contract can be written, oral, or implied by a company’s customary business practices. Generally, any agreement witha customer that creates legally-enforceable rights and obligations meets the definition of a contract. Legal enforceabilitydepends on the interpretation of the law and could vary across legal jurisdictions where the rights of the parties are notenforced in the same way.Transportation and logistics companies should consider any history of entering into amendments or side agreements toa contract that either change the terms of, or add to, the rights and obligations of a contract. These can be verbal orwritten, and could include cancellation, termination or other provisions. They could also provide customers withoptions or discounts, or change the substance of the arrangement. All of these have implications for revenuerecognition. Therefore, understanding the entire contract, including any amendments, is important to the accountingconclusion.As part of identifying the contract, companies are required to assess whether collection of the consideration is probable,which is generally interpreted as a 75-80% likelihood in US GAAP and a greater than 50% likelihood in IFRS. Thisassessment is made after considering any price concessions expected to be provided to the customer. In other words,price concessions are variable consideration (which affects the transaction price), rather than a factor to consider inassessing collectibility. Further, the FASB clarified in an amendment of ASC 606 that companies should consider, aspart of the collectibility assessment, their ability to mitigate their exposure to credit risk, for example by ceasing toprovide goods or services in the event of nonpayment. The IASB did not amend IFRS 15 on this point, but did includeadditional discussion regarding credit risk in the Basis for Conclusions of their amendments to IFRS 15.National Professional Services Group www.cfodirect.comIn depth2

New guidanceCurrent US GAAPA company accounts for a contract witha customer when: A company is generally prohibitedfrom recognizing revenue from anarrangement until persuasiveContract has been approved and the evidence of it exists, even if the otherparties are committedrevenue recognition criteria haveEach party’s rights are identifiedbeen met.Payment terms are definedContract has commercial substance Revenue is recognized whencollectibility is reasonably assured.Collection is probableIn evaluating whether an amount iscollectible, management shouldconsider whether a customer has theability and intention to pay thepromised consideration when it is due.The amount of consideration to whichthe company will be entitled may be lessthan the price stated in the contract ifthe consideration is variable. Forexample, the company may offer thecustomer a price concession.When collectibility of the transactionprice is not probable at inception,management should continue to assessthe contract each reporting period todetermine if collectibility is probable. Ifcollectibility of the transaction price isnot probable and the company receivesconsideration from the customer, itshould recognize the considerationreceived as revenue only when one of thefollowing events has occurred: There are no remaining obligationsto transfer goods or services to thecustomer, and substantially all ofthe consideration has been receivedand is nonrefundable.The contract has been terminated,and the consideration received isnonrefundable.The company has transferredcontrol of the goods or services towhich the consideration receivedrelates, the company has stoppedtransferring goods or services to thecustomer (if applicable) and has noobligation to transfer additionalgoods or services, and theconsideration received isnonrefundable [US GAAP].Current IFRSA company is required to considerthe underlying substance andeconomics of an arrangement, notmerely its legal form.Management must establish that itis probable that economic benefitswill flow before revenue can berecognized.Expected impactToday, companies that customarily obtain a written contract from theircustomers are precluded from recognizing revenue under US GAAP untilthere is a written and final contract signed by both the company andcustomer. The assessment of whether a contract with a customer existsunder the new revenue guidance is less driven by the form of thearrangement, but whether an agreement between two parties (eitherwritten, oral, or implied) creates legally enforceable rights and obligationsbetween them.The purpose of the collectibility assessment under the new guidance is todetermine whether there is a substantive contract between the companyand the customer. This differs from current guidance in which collectibilityis a constraint on revenue recognition.The FASB’s amendment to the collectibility guidance, intended to narrowthe population of contracts that fail the collectibility assessment, results indifferences between US GAAP and IFRS. However, differences alreadyexisted in the original versions of the standards in this area because of thedifferent definitions of “probable” in US GAAP and IFRS as discussedabove. Based on the IASB’s clarifications in the Basis for Conclusions oftheir amendments and the fact that we expect the collectibility threshold totypically be met under both definitions, we do not expect a significantdifference in financial reporting outcomes between US GAAP and IFRS inmost cases.The new guidance also eliminates the cash-basis method of revenuerecognition that is often applied today if collectibility is not reasonablyassured (US GAAP) or probable (IFRS). Any cash received is recognized asa contract liability until either collectibility of the transaction price isprobable or one of the criteria for recognition is met. This could result inrevenue being recorded later than under current guidance in somesituations.The third criterion included in ASC 606is intended to clarify when revenueshould be recognized when it is unclearNational Professional Services Group www.cfodirect.comIn depth3

New guidanceCurrent US GAAPCurrent IFRSwhether the contract has beenterminated.IFRS 15 does not include the thirdcriterion; however, the Basis forConclusions indicates that a companycould conclude a contract has beenterminated when it stops providinggoods or services to the customer, andtherefore it is unlikely that the treatmentunder ASC 606 and IFRS 15 will bedifferent.(1) Identifythe contract(2) Identifyperformanceobligations(3) Determinetransactionprice(4) nsiderations2. Identify performance obligationsMany transportation and logistics companies provide multiple products or services to their customers as part of a singlearrangement. Management must identify the separate performance obligations in an arrangement based on the termsof the contract and the company’s customary business practices. A bundle of goods and services might be accounted foras a single performance obligation in certain fact patterns.New guidanceCurrent US GAAPCurrent IFRSA performance obligation is a promise in The following criteria are applied to The revenue recognition criteria area contract to transfer to a customertransactions to determine ifusually applied separately to eacheither:elements included in a multipletransaction. In certainelement arrangement should becircumstances, it might be necessary A good or service (or a bundle ofaccounted for separately:to separate a transaction intogoods or services) that is distinct; oridentifiable components to reflect A series of distinct goods or services The delivered item has value tothe substance of the transaction.the customer on a standalonethat are substantially the same andTwo or more transactions mightbasis.have the same pattern of transfer toneed to be grouped together whenthe customer. If a general return right existsthey are linked in such a way thatfor the delivered item, deliveryA good or service is distinct if both of thethe commercial effect cannot beor performance of thefollowing criteria are met:understood without reference to theundelivered item(s) isseries of transactions as a whole.considered probable and The customer can benefit from thesubstantially in the control ofgood or service either on its own orthe vendor.together with other resources thatare readily available to the customer(i.e., it is capable of being distinct).Expected impact The good or service is separatelyAssessing whether goods and services are capable of being distinct isidentifiable from other goods orsimilar to determining if deliverables have standalone value under existingservices in the contract (i.e., it isUS GAAP or are separate components under existing IFRS, although thedistinct in the context of thedefinitions are not identical. Under the new guidance, management willcontract).assess if the customer can benefit from the good or service with “resourcesFactors that indicate that two or morethat are readily available to the customer,” which could be a good or servicepromises to transfer goods or services toa customer are not separatelyNational Professional Services Group www.cfodirect.comIn depth4

New guidanceCurrent US GAAPCurrent IFRSidentifiable include (but are not limitedto):sold separately by the company or another company, or a good or servicethe customer has already obtained. Companies will need to determine whether the nature of the promise,within the context of the contract, is to transfer each of those goods orservices individually or, instead, to transfer a combined item to which thepromised goods or services are inputs. This will be a new assessment forcompanies as compared to today. The company provides a significantservice of integrating the goods orservices with other goods or servicespromised in the contract.One or more of the goods or servicessignificantly modifies or customizesthe other goods or services.The goods or services are highlyinterdependent or highlyinterrelated.ASC 606 states that a company is notrequired to separately account forpromised goods or services that areimmaterial in the context of the contract.IFRS 15 does not include the samespecific guidance; however, IFRSreporters should consider theapplication of materiality concepts whenidentifying performance obligations.Change feesChange fees are common in the airline industry. The predominant industry practice under existing US GAAP is toaccount for change fees as a separate transaction independent of the original ticket sale and recognize revenue when thechange occurs. In this case, change fees are viewed as a separate transaction because (1) the fees are charged subsequentto the initial sale, (2) passengers are not required to pay the fee at the time of the original sale, and (3) passengers whopay the fee receive an additional benefit.An alternative view is that the change is not a separate transaction, but the result of the customer paying the lowest costto obtain the new travel reservation (that is, paying the change fee instead of the price of a new ticket). Using thisapproach, the change fee is deferred and recognized when the travel occurs.Under IFRS, practice today is mixed with some companies following the approach under US GAAP that the change feeis a separate transaction while others apply the alternative view.Under the new standards, distinct goods or services are not transferred to the customer when a change fee is paid, sothey do not represent a separate performance obligation. The only performance obligation in the contract (setting asideany loyalty points) is the flight, so change fees will be deferred and recognized when the flight occurs.(1) Identifythe contract(2) Identifyperformanceobligations(3) Determinetransactionprice(4) nsiderations3. Determine transaction priceThe transaction price is the consideration to which the company expects to be entitled in exchange for goods or services.Determining the transaction price may be simple when the contract price is fixed and paid at the time services areprovided. However, it may require more judgment if the consideration contains an element of variable or contingentconsideration. Common forms of variable consideration in the transportation and logistics industry include discounts,volume rebates and performance bonuses.National Professional Services Group www.cfodirect.comIn depth5

New guidanceCurrent US GAAPThe transaction price is theconsideration that the entity expects tobe entitled to in exchange fortransferring promised goods or servicesto the customer. It includes fixedamounts and an estimate of variableconsideration based on either theexpected value or most likely amountapproach (whichever is most predictive).The seller's price must be fixed ordeterminable for revenue to berecognized. Rebates, otherdiscounts, and incentives must beanalyzed to conclude whether all ofthe revenue from the currenttransaction is fixed or determinable.Revenue related to variableconsideration is recognized when itis probable that the economicbenefits will flow to the entity andthe amount is reliably measurable,assuming all other revenuerecognition criteria are met.Volume rebates are recognized as areduction to revenue on a systematicVariable consideration (e.g., discountsand rational basis as progress by theand rebates) included in the transaction customer toward earning the rebateprice is subject to a constraint. Theoccurs. The reduction is limited toestimated amount of variablethe estimated amounts potentiallyconsideration is included in thedue to the customer. If the rebatetransaction price up to an amount that is cannot be reliably estimated,probable (US GAAP) or highly probable revenue is reduced by the maximum(IFRS) of not resulting in a significantpotential rebate.reversal of cumulative revenue in thefuture.Volume rebate payments aretypically systematically accruedbased on rebates expected to betaken. The rebate is recognized as areduction of revenue based on thebest estimate of the amountspotentially due to the customer. Ifthe rebate cannot be reliablyestimated, revenue is recognized atan amount no greater than theminimum consideration that theseller will retain.Management will need to determine ifthere is a portion of the variableconsideration (that is, a minimumamount) that would not result in asignificant revenue reversal and includethat amount in the transaction price.Determining the amount of variableconsideration to record, including anyminimum amounts, requires judgment.Current IFRSExpected impactThe evaluation of variable consideration will require judgment in manycases. Some companies will need to recognize revenue before allcontingencies are resolved, which might be earlier than under currentpractice. Management might need to put into place new processes tomonitor estimates on an ongoing basis as more experience is obtained.The revenue standards provide factors toconsider when assessing whethervariable consideration should beconstrained.Management should reassess theestimate of variable consideration eachreporting period. Customers may notexercise all of their contractual rightsrelated to a contract, such as rebates andother incentive offers. These unexercisedrights are often referred to as breakage.Management should adjust for changesin expectations when updating theestimated amount of consideration towhich an entity expects to be entitled.National Professional Services Group www.cfodirect.comIn depth6

New guidanceCurrent US GAAPCurrent IFRSTime value of moneyA company needs to adjust the amountof promised consideration to reflect thetime value of money if the contractincludes a significant financingcomponent. Factors to consider whende