In freight brokerage the revenue line and the cost line are nearly the same size, so the principal or agent conclusion changes reported revenue several times over while gross profit stays the same. Lenders, surety providers, insurers and buyers read that revenue figure. The conclusion has to be made by service line, documented, and tested against how the business actually operates. This guide gives the freight-specific application. For the general framework, see gross vs net revenue under ASC 606.
What a broker is, and why it matters
Federal regulations define a broker as a person who, for compensation, arranges or offers to arrange transportation by an authorized motor carrier. Carriers and their bona fide agents handling loads they are authorized to haul are not brokers. The regulation requires a broker to keep a record of each transaction showing the consignor and originating carrier, the bill of lading or freight bill number, the compensation received for brokerage service and the payer, any non-brokerage service and its compensation, and any freight charges collected and the date paid to the carrier. Brokers keep these records for three years.
That record is the audit's best evidence. It ties each shipment to a customer billing, a carrier payment and a margin. A broker whose transaction records cannot be produced has a regulatory problem and an audit-evidence problem at the same time.
The accounting question: who controls the carrier's service?
The principal versus agent assessment is made for each specified good or service. Under ASC 606-10-55-37, an entity is a principal if it controls the specified service before it transfers to the customer. ASC 606-10-55-37A says that when another party is involved, an entity can control a right to a service to be performed by the other party, which gives it the ability to direct that party to serve the customer on its behalf, or a service from the other party that it combines with other services. ASC 606-10-55-39 lists indicators: primary responsibility for fulfilling the promise, inventory risk, and discretion in establishing price. ASC 606-10-55-38 describes an agent as an entity whose obligation is to arrange for another party to provide the service. The indicators support the control assessment and are not a checklist.
For a freight broker the key facts are these:
- Primary responsibility. Does the customer look to the broker for delivery, damage and delay claims, and does the broker's contract make it liable as the carrier of record? A contract that holds the broker responsible for the freight and cargo claims points toward principal.
- Discretion over price. A broker that quotes the customer a rate, buys capacity at a rate negotiated separately and keeps the spread has pricing discretion. A broker whose commission is fixed by the carrier or shipper does not.
- Selection and direction. A broker that selects the carrier, sets pickup and delivery instructions and can replace the carrier has the ability to direct the service. A shipper that picks the carrier and uses the broker only for billing and payment does not give the broker that ability.
- Inventory risk. Freight rarely has inventory risk, but capacity commitments, such as guaranteed lanes or dedicated trailers paid whether or not the broker has freight, can count.
Revenue streams within one company can land differently. A truckload brokerage line, a managed transportation program where the customer selects carriers, a freight forwarding line with the broker as the shipper of record, and a warehousing line each need their own conclusion. A company can be a principal for the forwarding service and an agent for a managed program. The audit file needs one memo covering each stream, with evidence from the contract and from operations.
Revenue timing and cutoff
Freight service is performed over transit time. CSX's filing, for example, recognizes freight revenue over transit time, allocating revenue for shipments in progress at period end by relative transit time, with incidental charges recorded when the service is complete. A broker applies its own policy, and the year-end test is the same as for a carrier: loads picked up before year end and delivered after need a decision, and the effect is measured against the cutoff testing population.
Carrier payables and the accrual risk
The largest completeness risk is carrier cost. A broker bills the customer when the load delivers, while the carrier's invoice may arrive weeks later, and some carriers bill through factoring companies. Revenue without the matching cost overstates gross profit. Test:
- Delivered loads with no carrier invoice, a listing from the transportation management system
- Carrier invoices received after year end for service before year end, see search for unrecorded liabilities
- Duplicate payments to carriers and payments redirected to a factor, which are a fraud pattern
- Accessorial charges (detention, layover, lumper) that the customer has not accepted but the carrier has billed
Credit risk has an extra edge: the broker owes the carrier even if the shipper never pays. Test receivables aging, credit insurance and subsequent collections, and send external requests for larger accounts.
Worked example
An illustrative example: a broker moves 2,000 loads in a quarter. The customer is billed an average of $2,450 per load and the carrier is paid an average of $2,070. Gross billings are $4,900,000 and carrier cost is $4,140,000, a gross profit of $760,000 and a margin of 15.5 percent.
If the broker is a principal, revenue is $4,900,000. If it is an agent, revenue is $760,000. The profit is the same. The first presentation shows a 15.5 percent margin and the second shows 100 percent, so revenue-based covenants, bonding capacity and comparisons to peers all move.
Cutoff adds a second test. At December 31, 85 delivered loads have no carrier invoice, and the carrier rate sheet shows an average of $2,070. The accrual is 85 × $2,070 = $175,950. Without it, the first quarter of the following year absorbs that cost and December gross profit is overstated by the same amount.
PBC list
- Principal or agent memo by service line, with executed customer and carrier contracts
- Transaction records by load: customer, carrier, bill of lading, billed amount, paid amount, date paid
- Open delivered-not-invoiced and carrier invoice listings at year end
- Carrier payment register, factoring notices and vendor master change log
- Receivables aging, credit insurance reports and subsequent receipts
- Cargo claim log, contingent auto liability and insurance certificates
Red flags
- Gross reporting with a contract that disclaims liability for the freight
- A margin by customer that is far above the book average
- Carrier payment changes to a new bank account or factor without a callback
- Delivered loads with no carrier cost accrued
- Cargo claims paid by the broker that are not in the reserve
Sources
- FASB ASC 606-10-55-36 through 55-40, as amended by ASU 2016-08, text reproduced by PwC Viewpoint: https://viewpoint.pwc.com/dt/us/en/fasb_financial_accou/asus_fulltext/2016/asu_201608revenue_fr/asu_201608revenue_fr_US/asu_201608revenue_fr_US.html
- 49 CFR 371.2, Definitions (broker, bona fide agents), Legal Information Institute: https://www.law.cornell.edu/cfr/text/49/371.2
- 49 CFR 371.3, Records of brokered transactions, Legal Information Institute: https://www.law.cornell.edu/cfr/text/49/371.3
- CSX Corporation Form 10-K, revenue recognition note, SEC EDGAR: https://www.sec.gov/Archives/edgar/data/277948/000027794826000006/R20.htm
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