EITF ABSTRACTS
Issue No. 00-10
Title: Accounting for Shipping and Handling Fees and Costs
Dates Discussed: May 17–18, 2000; July 19–20, 2000; September 20–21, 2000
References:
FASB Concepts Statement No. 5, Recognition and Measurement in
Financial Statements of Business Enterprises
FASB Concepts Statement No. 6, Elements of Financial Statements
AICPA Accounting Research Bulletin No. 43, Restatement and Revision
of Accounting Research Bulletins
APB Opinion No. 22, Disclosure of Accounting Policies
SEC Staff Accounting Bulletin No. 101, Revenue Recognition in
Financial Statements
SEC Staff Accounting Bulletin No. 101B, Second Amendment: Revenue
Recognition in Financial Statements
ISSUE
1.
Shipping and handling costs are incurred by most companies that sell goods;
however, diversity in practice exists regarding the income statement classification of
amounts charged to customers for shipping and handling, as well as for costs incurred
related to shipping and handling.
Many sellers charge customers for shipping and
handling in amounts that exceed the related costs incurred. Some display the charges to
customers as revenues and the costs as expenses, while others net the costs and revenues.
This Issue addresses the income statement classification for shipping and handling fees
and costs by companies that record revenue based on the gross amount billed to
customers under Issue No. 99-19, "Reporting Revenue Gross as a Principal versus Net as
an Agent." This Issue excludes from its scope shipping and handling fees billed and
costs incurred by shipping companies or businesses that provide those services on an
outsourcing basis.
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2.
The components of shipping and handling costs, and the determination of the
amounts billed to customers for shipping and handling, may differ from company to
company. Some companies define shipping and handling costs as only those costs
incurred for a third-party shipper to transport products to the customer. Other companies
include as shipping and handling costs a portion of internal costs, for example, salaries
and overhead related to the activities to prepare goods for shipment. In addition, some
companies charge customers only for amounts that are a direct reimbursement for
shipping and, if discernible, direct incremental handling costs; however, many other
companies charge customers for shipping and handling in amounts that are not a direct
pass-through of costs.
3.
For the purpose of this Issue, "shipping" is understood to be those costs that are
incurred to physically move the product from the seller's place of business to the buyer's
designated location. Shipping costs generally comprise payments to third-party shippers
but may also be costs incurred directly by the seller. "Handling" is understood to be
those costs incurred to store, move, and prepare the products for shipment. Generally,
handling costs are incurred from the point the product is removed from finished goods
inventory to the point the product is provided to the shipper and often include an
allocation of internal overhead.
4.
The issues are:
Issue 1—How a seller of goods should classify in the income statement amounts billed to
a customer for shipping and handling
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Issue 2—How a seller of goods should classify in the income statement costs incurred for
shipping and handling.
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EITF DISCUSSION
5.
The Task Force reached a consensus on Issue 1 that all amounts billed to a
customer in a sale transaction related to shipping and handling, if any, represent revenues
earned for the goods provided and should be classified as revenue.
6.
The Task Force reached a consensus that on Issue 2 the classification of shipping
and handling costs is an accounting policy decision that should be disclosed pursuant to
Opinion 22. A company may adopt a policy of including shipping and handling costs in
cost of sales. If shipping costs or handling costs are significant and are not included in
cost of sales (that is, if those costs are accounted for together or separately on other
income statement line items), a company should disclose both the amount(s) of such
costs and the line item(s) on the income statement that include them.
7.
The Task Force observed that there would be some diversity in the types of costs
companies include in "shipping and handling," but decided not to provide additional
guidance. The Task Force also reached a consensus that deducting shipping and handling
costs from revenues (that is, netting any such costs against shipping and handling
revenues) is inconsistent with the Task Force's consensus on Issue 1.
8.
The SEC Observer stated that the SEC staff expects SEC registrants to evaluate
the significance of shipping and handling costs for the purpose of applying the guidance
of this Issue based on the significance of those costs to each line item on the income
statement that includes them and on their significance in total to gross margin.
9.
The Task Force reached a consensus that the consensuses on Issues 1 and 2 should
be applied by SEC registrants no later than the required implementation date for SAB
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101.
According to SAB 101B, that implementation date is the fourth quarter of a
registrant's fiscal year beginning after December 15, 1999. Accordingly, all registrants,
including those that may already have adopted SAB 101, are required to apply the
consensus guidance in this Issue in their financial statements for the fourth quarter of
their fiscal year beginning after December 15, 1999. Nonregistrants should apply the
consensus no later than in annual financial statements for the fiscal year beginning after
December 15, 1999.
Upon application of the consensus, comparative financial
statements for prior periods should be reclassified to comply with the classification
guidelines of this Issue.
If it is impracticable to reclassify prior-period financial
statements, disclosure should be made of both the reasons why reclassification was not
made and the effect of the reclassification on the current period.
10.
The SEC Observer noted that in Topic No. D-85, "Application of Certain Transition
Provisions in SEC Staff Accounting Bulletin No. 101," the SEC staff has indicated that
registrants should retroactively apply the guidance in SAB 101 regarding income
statement classification to all periods presented in their next financial statements
(whether interim or annual) filed with the Commission after January 20, 2000, if that
information is available. The SEC Observer indicated that the same guidance applies to
reclassification of shipping and handling revenues in this Issue.
STATUS
11.
No further EITF discussion is planned.
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