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Freight charges to customer - Revenue? or net of expense?

Allan Kaplan's Profile

Looking for opinions - do you include the freight charges passed through to customers as top line revenue, or as a reduction of your cost of goods sold? Thanks.

Answers

Topic Expert
Wayne Spivak
Title: President & CFO
Company: SBAConsulting.com
LinkedIn Profile
(President & CFO, SBAConsulting.com) |

Selling expense - net

John Cook
Title: Independent Consultant
Company: Consultant
(Independent Consultant, Consultant) |

Under US GAAP, it depends upon whether your business is as a freight or shipping business. If it is, then ASC 605-20-25-13 provides the relevant guidance. There are four acceptable methods for freight companies to recognize this revenue and as such it is a policy election that must be disclosed.

If your business is not a freight or shipping business (which I suspect it isn't) then what you are really talking about is shipping and handling costs. The relevant guidance is in ASC 605-45-45-20. Under US GAAP, if these charges are separately stated on the contract, then they must be reported as revenue (assuming payment is reasonably assured). Additionally, the associated cost needs to be recognized as shipping expense (no netting against revenue is allowed). This is the case even if the cost is a pass through cost from the shipper and the vendor isn't trying to recoup any internal overhead costs.

The reason for this rule is that basically companies have the ability to offer "free shipping" and bake this cost into their top line anyway or charge for it separately. It's just a consistency play from a GAAP standard-setter perspective.

Hope that helps.

Topic Expert
Wayne Spivak
Title: President & CFO
Company: SBAConsulting.com
LinkedIn Profile
(President & CFO, SBAConsulting.com) |

Not withstanding the "free shipping" concept and the combined sales price (which can be argued, but makes the debate too complicated), separately stated shipping when reported as revenue artificially inflates revenues.

If income from shipping is not material, regardless of the GAAP maker's intent, it can be shown in selling expenses, and such revenue would ultimately flow to the bottom line.

The same logic can be used in billing for reimbursable expenses. They are not revenues.

In some localities, that could even mean more income/corporate-type taxes on items that are clearly not revenue, since they tax based on the top line.

GAAP are principles, they are not absolutes. Disclosure in the financials of the accounting method used lets everyone know what you are doing. Sometimes its quite obvious, other times you really should have the footnote inserted.

On a tangential issue, adding shipping to the selling price to offer free shipping produces a higher GPM, which is also misleading to reader of said financials.

Sarah Jackson
Title: Associate Editor
Company: Proformative
(Associate Editor, Proformative) |

Proformative offers 400+ online business courses with free CPE, many on Accounting.

Anonymous
(Associate) |

John, if I am understanding you, our accountant has been approving something that's not right. We have a revenue account that is used for both the charge to the customer, and the payment to the freight vendor. Ideally this account would net to zero as we charge the customer what we are charged by the freight vendor to ship our products. Should we create an expense account for the freight vendor's charge to us and only use the revenue account for charges we bill the customer? (we do list the item separately on invoices)

John Cook
Title: Independent Consultant
Company: Consultant
(Independent Consultant, Consultant) |

In my opinion, yes. The authoritative guidance is pretty clear, but perhaps there is some rationale that he/she is using (materiality, primary obligor, etc?). This issue was first addressed and ruled on by the EITF in 2000, so it's not something new from a codification perspective. But be sure you don't look at source material or material from Big-4 guides that is pre-codification in case something has changed in the last few years. Always go to FASB.org to look at the latest and greatest rules. They change more than most people think.

Anonymous
(Transportation Broker) |

okay, I had to read it a few times but I think I understand.

Anonymous
(Associate) |

Thank you John. Would you recommend an immediate switch of accounting practices, or to switch accounting practices at some mark during the year, ie quarter or year-end?

John Cook
Title: Independent Consultant
Company: Consultant
(Independent Consultant, Consultant) |

Quarter-end. You should evaluate the error in the prior financial statements as well.

EMERSON GALFO
Title: CFO
Company: C-Suite Services
LinkedIn Profile
(CFO, C-Suite Services) |

I would first get the input of your external auditor (if you have one) before doing anything. Remember, they signed off on your last year's financials and presented an opinion.

Anonymous
(Controller) |

As far as accounting mistakes go, this one is not so bad. There's no impact on the bottom line, it's just a presentation issue with overstating revenue and COGS, so I doubt your auditors will get too fussed unless you have bank covenants or other important measures tied to your sales figures.

As mentioned above, you should advise your auditor at your next meeting and prepare the comparative changes as well for last years revenue figure as well. Not sure how you do these changes in US GAAP, but I've seen it locally where we just add a quick paragraph in the notes to the FS about how certain comparative information has been changed in order to provide better financial information. It's not considered a real restatement, just a reclass.

Anonymous
(Independent Consultant) |

From my reading of US GAAP, shipping and handling would always be reported as revenue. The only distinction is whether the revenue is reported as net revenue or gross revenue. It should never be just reported as a net expense. A negative expense doesn't really exist in the aggregate - only on a specific transaction level where a transaction is reversed but having expenses "disappear" because they are netted against payments from customers doesn't lead to the appropriate view of the business (it's analogous to the treatment of barter arrangements that need to be monitized for purposes of financial reporting).

My sources: ASC 605-45-45-20 &21 states, "For those entities that determine under the indicators listed in paragraphs 605-45-45-4 through 45-18 : that shipping and handling fees shall be reported gross, all amounts billed to a customer in a sale transaction related to shipping and handling represent revenues earned for the goods provided and shall be classified as revenue. Also, shipping and handling costs shall not be deducted from revenues (that is, netted against shipping and handling revenues).

While there are many areas of accounting that require judgment and estimates, this isn't one of them. The term "shall" means this is a rule that must be followed and the only disclosure is whether the company believes it meets the criteria to report as net revenue.

So when one reads through the paragraphs to determine whether revenue can be reported net (acting as just an agent) the key indicator that I have always seen is that the company has the credit risk for the transportation charge and so even if this cost is a pass-through and other indicators of net reporting might exist, I see many companies record it as gross revenue.

Just my experience. What has everyone else seen?, and does anyone believe that there is some other piece of US GAAP that allows for different treatment? This was EITF 00-10 and most companies dealt with this over 15 years ago, so I'm somewhat confused as to the confusion and divergence of opinions.

Anonymous
(Transportation Broker) |

should a transportation broker charge a revenue charge to the customer as extra charges? or why would a broker charge a revenue charge to a customer for arranging transportation for their freight?

Phyllis Evers
Title: Transportation Broker
Company: PMETransport LLC
(Transportation Broker, PMETransport LLC) |
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