In the past year, the Financial Accounting Standards Board (FASB) has issued a number of exposure drafts aimed at converging U.S. Generally Accepted Accounting Principles (GAAP) with the International Accounting Standards Board (IASB). Below are a few of the exposure drafts that could impact trucking company financial statements.
As discussed in the last issue of Truck Times, the FASB issued an exposure draft on lease accounting in August 2010. The objective of the project is to not only create common lease accounting requirements to ensure leases are recognized on the balance sheet, but also provide users of financial statements with useful and complete information about leasing transactions.
In summary, some of the key items in the exposure draft that would likely affect many trucking companies include:
· Substantially all long-term (greater than 12 months) equipment leases would be recorded as capital leases.
· Accounting for independent contractor agreements could be impacted (depending on the terms of the agreements). If the trucking company is deemed to have exclusive rights to the use of the independent contractor’s equipment and the right to control that equipment, then the agreement may contain a lease.
· Existing operating leases at the date of implementation would not be excluded (i.e., no grandfather clause).
The FASB is expected to issue the final accounting standards update by the end of 2011, with implementation likely expected in 2013.
In June 2010, the FASB issued an exposure draft on revenue recognition. The exposure draft would replace the FASB’s current revenue recognition rules (Topic 605 of the Accounting Standards Codification), which were derived from a number of sources, and include specific guidance developed over time to address the peculiarities of different industries and transactions. The FASB intends to have a single revenue recognition model that can be applied to all contracts with customers over all industries.
The definition of contract in the exposure draft is broad but includes purchase orders, verbal agreements and signed agreements. Companies would be required to identify, and account for separately, all “performance obligations” in each contract. Revenues would be recognized upon satisfaction of each performance obligation, as evidenced by the customer obtaining control, or having the ability to use or receive benefit from the related goods or services in each performance obligation.
The exposure draft will likely not have a significant impact on most trucking companies. Currently, revenue from the transportation of freight is generally recognized upon the delivery of that freight to the customer. The exposure draft likely would require no change to the current revenue recognition policies for freight delivery services.
The greatest impact for trucking companies will likely be when the trucking company also provides warehousing, cross-docking and other value-added services. As currently proposed, the exposure draft would require the company to identify, and account for separately, all performance obligations associated with the value-added service.
Due to the amount of feedback received, the FASB is expected to re-expose the exposure draft in the third quarter of 2011 for a comment period of 120 days.
In April 2011, the FASB issued an exposure draft on testing goodwill for impairment. The objective of this proposed update is to simplify how an entity is required to test goodwill for impairment. Currently (Topic 350 of the Accounting Standards Codification), an entity is required to test goodwill for impairment on at least an annual basis, using a two-step approach, by comparing the fair value of a reporting unit with its carrying amount, including goodwill (step one). If the fair value of a reporting unit is less than its carrying amount, then the test must be performed to measure the amount of the impairment loss (step two), if any.
The proposed amendments would permit an entity to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test. An entity would not be required to calculate the fair value of a reporting unit unless the entity determines that it is more likely than not that its fair value is less than its carrying amount.
The exposure draft comment period ended on June 6, 2011. If approved, the proposed amendments would be effective for annual and interim goodwill impairment tests performed for fiscal years beginning after Dec. 15, 2011. Early adoption would be permitted.
This article was excerpted from Truck Times.
Jason Miller is a director in KSM’s Transportation Services Group. For more information, contact Jason at 317.580.2045 or firstname.lastname@example.org.