Crimson Tide Shipping (“Crimson”) provides domestic and international transportation and
logistics services to customers. The company contracts shipping vessels, trucks, and aircraft to
provide regional, long-haul, and international shipments of customer goods. Crimson has entered
into the following contracts:
In March 2019, Crimson entered into a revenue contract with a customer, Matador
Manufacturing (“Matador”), in which Crimson would be the exclusive shipper of Matador’s
products between Shanghai and Los Angeles. Crimson’s contract with Matador is effective on
July 1, 2019. Before signing the contract with Matador, Crimson did not operate the ShanghaiLos Angeles
route, and to satisfy the contract with Matador, in April 2019, Crimson leases a
cargo ship from Buckeyes Vessel Manufacturing (“Buckeyes”), which commences on July 1,
Because the shipping route is new, on July 1, 2019, (1) Crimson has no other customers tdeliver goods on the Shanghai-Los Angeles route and (2) because of operational costs, Crimson
does not have alternative uses for the leased cargo ship.
Crimson adopted ASC 842, Leases, on January 1, 2019.
The following are relevant facts about Crimson’s revenue contract with Matador, and Crimson’s
lease with Buckeyes.
Crimson’s Revenue Contract with Matador
The revenue contract’s stated term with Matador is for one year.
Matador can renew the contract annually for up to four additional years. Therefore, the
revenue contract can extend to five full years.
Matador pays a significant up-front nonrefundable fee for the initial one-year term; the
same amount is due at the beginning of every renewal period.
Matador can cancel at any time without incurring a penalty outside of forfeiting any upfront nonrefundable
fees already paid or owed at the beginning of the initial contract term
and any and each renewed period.
Although the contract is new, Crimson and Matador have entered into similar
arrangements with similar terms and historically, Matador has renewed for one or more
Crimson appropriately concludes that (1) the revenue contract meets the scope of, and
criteria in, ASC 606, Revenue From Contracts With Customers, and (2) the contract term
for its revenue contract with Matador is one year.
Crimson’s Lease with Buckeyes
The contract between Crimson and Buckeyes contains a lease under ASC 842.
Rental payments are at market and fixed each year.
To mitigate risks, Crimson negotiated the lease period and renewal options to mirror
those of Crimson’s revenue contract with Matador. As a result, the fixed, noncancelable
term of the lease is one year, and Crimson can renew annually for four additional years
(i.e., up to five full years).Crimson believes that since Matador can terminate the revenue contract after one
though Matador may need to ship products for longer than a year and has historically renewed
under other similarly structured contracts), it is uncertain whether Matador will renew the
revenue contract. Because of this uncertainty, Crimson believes that the renewal options related
to the lease are not reasonably certain at the commencement date of the lease.
As a result, Crimson concludes that the lease term for its lease contract with Buckeyes is also one
1. Do you agree with Crimson’s conclusion that the lease term for the cargo vessel is one
year because the revenue contract is for one year?
2. What factors should Crimson consider in supporting its conclusion related to the lease
On December 1, 2019, Crimson entered into a shipping contract with Redhawks Manufacturing
Company (“Redhawks”) to ship Redhawks’ products between Shanghai and Los Angeles. The
contract with Redhawks commences on January 1, 2020, and on the basis of Crimson’s
evaluation of its enforceable rights and obligations in the contract with Redhawks, Crimson
concludes that term of the revenue contract with Redhawks is for a period of two years. Further,
Crimson concludes that (1) because of its contract with Matador and Redhawks, it would not be
operationally feasible to deploy the leased cargo vessel on other routes; (2) the cargo vessel will
have sufficient capacity to service both Matador and Redhawks; and (3) the leased asset is
needed for Crimson to perform under its revenue contract with Redhawks (because oreasons that would not allow Crimson to use another vessel).
3. Should Crimson reassess the lease term of the cargo vessel? If so, why?