Codification Case

Johansson Shipping (2022) Johansson Shipping ("Johansson), a public company, provides transportation and logistics services to clients. The company contracts shipping vessels, trucks, and aircraft to provide regional, long-haul, and international shipments of customer goods. Johansson has entered into the following contracts In January 2022, Johansson entered into a shipping contract with a customer, Stark Enterprises ("Stark"), in which Johansson is the exclusive shipper of Stark's products between Tokyo and Los Angeles. Johansson's contract with Stark is effective on May 1, 2022. Before signing the contract with Stark, Johansson did not operate the Tokyo-Los Angeles route. To satisfy the contract with Stark, in February 2022, Johansson leases a cargo plane from Parker Manufacturing ("Parker"), which commences on May 1, 2022. Johansson had no other customers on May 1, 2022 to deliver goods on the Tokyo-Los Angeles route. The following are relevant facts about Johansson's shipping contract with Stark and Johansson's lease with Parker. Johansson's Shipping Contract with Stark The shipping contract's stated term with Stark is for one year. Stark can renew the contract annually for up to four additional years. Therefore, therevenue contract can extend to include a total of five years. Stark pays a significant up-front nonrefundable fee for the initial one-year term; the sameamount is due at the beginning of every renewal period. Stark can cancel at any time without incurring a penalty other than forfeiting any up-front nonrefundable fees already paid or owed at the beginning of the initial contract term and any nonrefundable fees paid or owed at the beginning of each renewed period. Although the contract is new, Johansson and Stark have entered into similar arrangements with similar terms and routes, and, historically, Stark has renewed for one or more years. Johansson appropriately concludes that (1) the shipping contract with Stark meets the scope of and criteria in ASC 606, Revenue From Contracts With Customers, and (2) the contract term for its shipping contract with Stark is one year. Johansson's Lease With Parker The contract between Johansson and Parker contains a lease under ASC 842. Rental payments are fixed and based on expected market prices for each year. To mitigate risks, Johansson negotiated the lease period and renewal options to mirrorthose of Johansson's revenue contract with Stark. As a result, the fixed, noncancelable term of the lease is one year, and Johansson can renew annually for four additional years (i.e., up to five full years). Johansson believes that since Stark can terminate the revenue contract after one year (even though Stark may need to ship products for longer than a year and has historically renewed under other similarly structured contracts), it is uncertain whether Stark will renew the revenue contract. Required: The Johansson controller, Pepper Paltrow, has asked for your firm's advice on determining the lease term that the company should use to account for the cargo plane lease. Johansson Shipping (2022) Johansson Shipping ("Johansson), a public company, provides transportation and logistics services to clients. The company contracts shipping vessels, trucks, and aircraft to provide regional, long-haul, and international shipments of customer goods. Johansson has entered into the following contracts In January 2022, Johansson entered into a shipping contract with a customer, Stark Enterprises ("Stark"), in which Johansson is the exclusive shipper of Stark's products between Tokyo and Los Angeles. Johansson's contract with Stark is effective on May 1, 2022. Before signing the contract with Stark, Johansson did not operate the Tokyo-Los Angeles route. To satisfy the contract with Stark, in February 2022, Johansson leases a cargo plane from Parker Manufacturing ("Parker"), which commences on May 1, 2022. Johansson had no other customers on May 1, 2022 to deliver goods on the Tokyo-Los Angeles route. The following are relevant facts about Johansson's shipping contract with Stark and Johansson's lease with Parker. Johansson's Shipping Contract with Stark The shipping contract's stated term with Stark is for one year. Stark can renew the contract annually for up to four additional years. Therefore, therevenue contract can extend to include a total of five years. Stark pays a significant up-front nonrefundable fee for the initial one-year term; the sameamount is due at the beginning of every renewal period. Stark can cancel at any time without incurring a penalty other than forfeiting any up-front nonrefundable fees already paid or owed at the beginning of the initial contract term and any nonrefundable fees paid or owed at the beginning of each renewed period. Although the contract is new, Johansson and Stark have entered into similar arrangements with similar terms and routes, and, historically, Stark has renewed for one or more years. Johansson appropriately concludes that (1) the shipping contract with Stark meets the scope of and criteria in ASC 606, Revenue From Contracts With Customers, and (2) the contract term for its shipping contract with Stark is one year. Johansson's Lease With Parker The contract between Johansson and Parker contains a lease under ASC 842. Rental payments are fixed and based on expected market prices for each year. To mitigate risks, Johansson negotiated the lease period and renewal options to mirrorthose of Johansson's revenue contract with Stark. As a result, the fixed, noncancelable term of the lease is one year, and Johansson can renew annually for four additional years (i.e., up to five full years). Johansson believes that since Stark can terminate the revenue contract after one year (even though Stark may need to ship products for longer than a year and has historically renewed under other similarly structured contracts), it is uncertain whether Stark will renew the revenue contract. Required: The Johansson controller, Pepper Paltrow, has asked for your firm's advice on determining the lease term that the company should use to account for the cargo plane lease