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Rev Rec Impact on Transportation Industry

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There are few large interstate trucking companies. Regional trucking outfits are more numerous, but their numbers are still no comparison to the thousands of independent truckers that form the backbone of the industry. Many shippers are owner-operators — truckers who own their own vehicle and lease it out to a driver. Form more information see, for example, www.truck.net.

The major input cost is diesel fuel. However, advances — such equipping most over-the-road trucks with global positioning system (GPS) devices that make it relatively easy to track the driver and his or her load — have resulted in industry-wide productivity increases that aid in offsetting high fuel costs.

Shippers deal either with brokers or directly with smaller or medium-sized businesses that need their products hauled to a region. Because the larger manufacturers use brokers, most independent shippers will work with brokers.

Another concern for shippers in the trucking industry is the back haul — the load for the return trip. Shippers will seek out load boards or brokers to obtain return loads to home base. Running empty is shipper’s the fastest route to bankruptcy.

Shipper contracts via a broker to carry a load from Orlando, Florida to Houston, Texas. Shipper would check a load board to determine what’s available from Houston, Texas to Orlando, Florida (Shipper’s home base). Some legitimate load boards can be found at www.loads.truck.net; www.internet.truckstop.com.

Without the intangible operating rights, the trucker and the shipper have a large piece of idle machinery. Accordingly, the focus in the accounting area has been on the treatment of such intangible assets as set forth in FASB Statement No. 145, Recission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections, which rescinded FASB Statement No. 44, Accounting for Intangible Assets of Motor Carriers.

Today, the rule for allocating costs to interstate or intrastate operating rights is as follows:

Allocate costs of acquired intangible assets to interstate (or intrastate) operating rights, other recognized intangibles, and goodwill; and

Expense the costs assigned to interstate (or intrastate) operating rights.

If the motor carrier cannot separately identify interstate or intrastate operating rights, other intangibles, or goodwill, then it should allocate the cost of acquiring all intangibles to interstate or intrastate operating rights.

On October 1, 2005, the Federal Motor Carrier Safety Administration (FMCSA) enacted new hours-of service regulations at 49 CFR part 395. These new rules provide an increased opportunity for drivers to obtain necessary rest and restorative sleep, while recognizing the business realities facing drivers and motor carriers.

These new regulations, found at the FMCSA website www.fmcsa.dot.gov, apply only to property carriers and commercial motor vehicle drivers. Passenger carriers and their drivers (for example, bus drivers) continue to operate under the pre-2005 rules).

The gist of these new rules for 2005 and beyond is as follows:

Drivers may drive up to 11 hours in the 14-hour on-duty window after they come on duty following 10 or more consecutive hours off duty.

The 14-hour on-duty window may not be extended with off-duty time for meal and fuel stops, etc.

The prohibition on driving after being on duty 60 hours in 7 consecutive days, or 70 hours in 8 consecutive days, remains the same, but drivers can “restart” the 7/8-day period any time a driver has 34 consecutive hours off duty.

Commercial motor vehicle (CMV) drivers using the sleeper berth provision must take at least 8 consecutive hours in the sleeper berth, plus 2 consecutive hours either in the sleeper berth or off duty, or any combination of the two.

As the revenue recognition section discusses, establishing the proper revenue recognition policy is crucial given the substantial fixed costs of the owner-operator or carrier. Revenues should be analyzed in light of the new hours-of-service rules, in an effort to maintain profit margins on interstate loads.

Revenue Recognition
Upon delivery of a load, the shipper’s driver has the shipping documents that will be needed to support revenue recognition. The documents specify, for example, FOB factory, CIF, C&F, or FAS (these terms are discussed in Part 4, Legal Rules). Also, the driver has the recipient of the goods sign the freight bill; that is, the proof of delivery (POD). The shipper tenders the POD to the customer, usually a broker, and once this is done, can wait for usually 30 to 45 days for cash payment. In the alternative, the shipper can immediately discount this receivable with a freight bill factoring company. The factoring company buys the receivable (with or without recourse) from the shipper, advancing about 90% of the cash proceeds to the shipper. When the recipient pays the receivable, the factor collects the full amount, thereby retaining about 10% as the factoring fee. Used in many industries, this financing device effectively shifts the risk of loss to the shoulders of the factor in the nonrecourse case.

Revenue is recognized in this arrangement as it is in any accounting system that uses the accrual or cash method. Under the accrual method and FASB Concepts Statement (CON) No. 5, Recognition and Measurement in Financial Statements of Business Enterprises, the shipper has earned realizable revenue at the point the goods are actually delivered, as evidenced by the signed and dated POD. At this point, the shipper can recognize the revenue — notwithstanding the fact that cash is not received for as long as possibly 45 days (unless factoring occurs).

As a result, many shippers are on the cash basis, whereby revenue is recognized upon actual receipt — 45 days later, or earlier in the case of factoring the POD. The cash basis records can be restated on the accrual basis if the need arises; for example, for the sale of the business or applying for a bank loan.

The general industry perspective for shippers applies equally to owner-operators who must either operate their own truck or lease it to another. These owner-operators form the backbone of the trucking industry and often enter into an independent contractor agreement with a driver or another shipping company (that owns the ICC/DOT operating right). Owner-operators must have their rig cover enough miles to compensate themselves for the economic fixed costs of their rig and the variable cost of operation (fuel and maintenance costs) and, hopefully, make a return on their investment in the form of profit.

Today, operators (non-owner drivers), as independent contractors, seek to be paid an average of $0.32 per mile (the industry range is generally $0.27 to $0.42 per mile). This is a flat rate. So, when the truck isn’t moving with a load, the contractor (driver) is losing money.

In the case of the owner-operator who drives his or her own trucks, the revenue as shipper (received from the broker), less operating and other expenses, results in the owner-operator’s profit. Since the DOT-operating-right-shipper is the owner-operator in this case, the owner-operator, as the driver, would receive revenue of $1.10 per mile from the broker, against which expenses are taken. The resulting difference is the owner-operator’s profit or loss.

Revenue Recognition
If the owner-operator is the shipper and driver of his or her own rig, then the revenue recognition rules under the discussion of shippers (above) apply.

In the case of the operator who is the independent contractor driver, the revenue received is in the form of a flat fee (such as $0.32 per mile), which is recognized under the cash method upon receipt. On the accrual basis — and very few independent contractor drivers use this accounting method — the same CON 5 tests as discussed above would apply, requiring revenue recognition at the point of having earned the revenue, as evidenced by the date on the signed POD.

Excerpted by permission. Copyright 2007, Specialty Technical Publishers.