Reporting entities that sell goods often deliver them via third-party shipping service providers. Reporting entities sometimes charge customers a separate fee for shipping and handling costs, or shipping and handling might be included in the price of the good. Separate fees may be a direct reimbursement of costs paid to the third-party, or they could include a profit element.
If control of a good does not transfer to the customer before shipment (that is, control transfers upon delivery), shipping is not a promised service to the customer, and any fees charged for shipping would be included in the transaction price for the good. In contrast, if control of a good transfers at shipping point, shipping services may be a separate performance obligation. In that case, management needs to assess whether the reporting entity is the principal for the shipping service or is an agent arranging for the shipping service to be provided by another party. Management could conclude that the reporting entity is the principal for both the sale of the goods and the shipping service, or that it is the principal for the sale of the goods, but an agent for the service of shipping those goods.
The revenue standard includes an accounting policy election that permits reporting entities to account for shipping and handling activities that occur after the customer has obtained control of a good as a fulfillment cost rather than as an additional promised service. Refer to RR 3.6.4
for further discussion of shipping services and the policy election.
Question RR 10-2
Does a reporting entity need to assess whether it is the principal or agent for shipping and handling if it elects to account for shipping and handling activities as a fulfillment cost?
No. We believe a reporting entity that elects to account for shipping and handling activities as a fulfillment cost does not need to separately assess whether it is the principal or agent for those activities. Reporting entities applying the election will include any fee received for shipping and handling as part of the transaction price and recognize revenue when control of the good transfers. Refer to RR 3.6.4
for further discussion of this policy election.
Question RR 10-3
What is the appropriate classification of shipping and handling costs within the income statement?
The revenue standard does not include specific guidance regarding the classification of shipping and handling costs within the income statement. If a reporting entity has determined that shipping and handling activities represent an additional promised service to the customer (refer to RR 3.6.4
), we believe the related costs should be presented within costs of revenue. Similarly, if the reporting entity has elected to account for the costs of shipping and handling as costs to fulfill the performance obligation, presentation in costs of revenue would also be appropriate.
Under previous revenue guidance, some reporting entities may have elected to present shipping and handling costs in a line item other than costs of revenue and have continued that practice under ASC 606
. In those circumstances, reporting entities should consider whether additional disclosure of shipping and handling costs is warranted, including disclosure of the amount(s) and line item(s) where the costs have been presented.
A change in the presentation of shipping and handling costs in the income statement from (or to) costs of revenue would likely be considered a change in accounting policy under ASC 250
, which would require an assessment of whether such a change is preferable. We believe it may be challenging to conclude that presentation of those costs outside of cost of sales is preferable.