Note

Significant Accounting Policies

Basis of Presentation

The

condensed consolidated financial statements include the accounts of Covenant Transportation Group, Inc., a Nevada holding company, and its wholly owned subsidiaries. References in this report to "we," "us," "our," the "Company," and similar expressions refer to Covenant Transportation Group, Inc. and its wholly owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.

The accompanying unaudited

condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form

-Q and Article

of Regulation S-

promulgated under the Securities Act of

1933.

In preparing financial statements, it is necessary for management to make assumptions and estimates affecting the amounts reported in the condensed consolidated financial statements and related notes. These estimates and assumptions are developed based upon all information available. Actual results could differ from estimated amounts. In the opinion of management, the accompanying financial statements include all adjustments that are necessary for a fair presentation of the results for the interim periods presented, such adjustments being of a normal recurring nature.

Certain information and footnote disclosures have been condensed or omitted pursuant to such rules and regulations. The

December 31, 2016,

condensed consolidated balance sheet was derived from our audited balance sheet as of that date. The Company’s operating results are subject to seasonal trends when measured on a quarterly basis; therefore operating results for the

three

and

nine

months ended

September 30, 2017

are

not

necessarily indicative of the results that

may

be expected for the year ending

December 31, 2017.

These condensed consolidated financial statements and notes thereto should be read in conjunction with the consolidated financial statements and notes thereto included in our Form

-K for the year ended

December 31, 2016.

Results of operations in interim periods are

not

necessarily indicative of results to be expected for a full year.

Recent Accounting Pronouncements

Accounting Standards

not

yet

adopted

April 2015,

the Financial Accounting Standards Board ("FASB") issued ASU

2015

14,

which defers the effective date of ASU

2014

09.

The new standard introduces a

five

-step model to determine when and how revenue is recognized. The premise of the new model is that an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The new standard will be effective for us for our annual reporting period beginning

January 1, 2018,

including interim periods within that reporting period. Early application is permitted for the annual periods beginning

January 1, 2017.

Entities are allowed to transition to the new standard by either recasting prior periods or recognizing the cumulative effect.

anticipate that the new standard will require us to recognize revenue from loads proportionally as the transportation service is performed as opposed to recognizing revenue upon the completion of the load, which is our current practice. We expect our recognition of revenue under the new standard will approximate our recognition of revenue under the current standards, as there will generally be a consistent amount of freight in process at the beginning and end of the period; however, seasonality and the day on which the period ends

may

cause minor differences. We plan to transition to the new standard by recognizing the cumulative effect of adoption as an adjustment in the

first

quarter of

2018.

We believe the cumulative effect of the adoption will result in a positive adjustment to retained earnings of approximately

$1.0

million, net of tax, from initially recording in process revenue and associated direct expenses. We plan to complete our evaluation during the remainder of

2017,

including an assessment of the new expanded disclosure requirements and a final determination of the impact to adoption and related changes required to internal controls.

February 2016,

FASB issued ASU

2016

02,

which requires lessees to recognize a right-to-use asset and a lease obligation

liability for all leases. Lessees are permitted to make an accounting policy election to

not

recognize an asset and liability for leases with a term of

twelve

months or less. Lessor accounting under the new standard is substantially unchanged. Additional qualitative and quantitative disclosures, including significant judgments made by management, will be required. This new standard will become effective for us in our annual reporting period beginning

January 1, 2019,

including interim periods within that reporting period and requires a modified retrospective transition approach. We are currently evaluating the impacts the adoption of this standard will have on the consolidated financial statements.

Property and Equipment

Property and equipment is stated at cost less accumulated depreciation. Depreciation for book purposes is determined using the straight-line method over the estimated useful lives of the assets, while depreciation for tax purposes is generally recorded using an accelerated method. Depreciation of revenue equipment is our largest item of depreciation. We have historically depreciated new tractors (excluding day cabs) over

five

years to salvage values of approximately

15%

of their cost. We generally depreciate new trailers over

seven

years for refrigerated trailers and

ten

years for dry van trailers to salvage values of approximately

25%

of their cost. We annually review the reasonableness of our estimates regarding useful lives and salvage values of our revenue equipment and other long-lived assets based upon, among other things, our experience with similar assets, conditions in the used revenue equipment market, and prevailing industry practice. Over the past several years, the price of new tractors has risen dramatically and there has been significant volatility in the used equipment market. As a result of the progressive decline in the market value of used tractors in

2016

and our expectations that used tractor prices would

not

rebound in the near term, effective

July 1, 2016

we reduced the salvage values on our tractors and, thus, prospectively increased depreciation expense. Changes in the useful life or salvage value estimates, or fluctuations in market values that are

not

reflected in our estimates, could have a material effect on our results of operations. Gains and losses on the disposal of revenue equipment are included in depreciation expense in the consolidated statements of operations.