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, 2017,

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

six

months ended

June 30, 2018

are

not

necessarily indicative of the results that

may

be expected for the year ending

December 31, 2018.

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, 2017.

Results of operations in interim periods are not necessarily indicative of results to be expected for a full year.

Recent Accounting Pronouncements

Accounting Standards adopted

May 2014

the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update ("ASU")

2014

09,

which supersedes virtually all existing revenue guidance. 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 guidance also requires enhanced disclosures regarding the nature, timing and uncertainty of revenue and cash flows arising from an entity’s contracts with customers. The new standard became effective for us for our annual and interim reporting periods beginning

January 1, 2018.

The guidance permits the use of either a full retrospective or modified retrospective adoption approach with a cumulative effect adjustment recorded in either scenario as necessary upon transition.

As permitted by the guidance, we elected the modified retrospective approach and thus recognized the cumulative effect of adoption of

$0.6

million, net of tax, as a positive adjustment to retained earnings in the

first

quarter of

2018

as a result of the initial recording of in process revenue and associated direct expenses.

Based on our review of our customer shipping arrangements and the related guidance, we have concluded that we will recognize revenue from loads proportionally as the transportation service is performed based on the percentage of miles completed as of the period end, as opposed to recognizing revenue upon the completion of the load, which was our historic practice. Revenue will be recognized on a gross basis at amounts charged to our customers because we control and are primarily responsible for the fulfillment of the promised service. Our recognition of revenue under the new standard approximates our recognition of revenue under the prior standard, 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.

The following tables summarize the impacts of adopting ASU

606

on the Company’s consolidated condensed financial statements for the

three

and

six

months ended

June 30, 2018.

	Three Months Ended June 30, 2018
Financial Statement Line Item (in thousands)	As reported			Adjustments			Balances without adoption of Topic 606
Consolidated Balance S heet
Accounts receivable, net of allowances	$	103,053		$	(1,325	)	$	101,728
Total assets		729,826			(1,325	)		728,501
Accrued expenses		29,420			(140	)		29,280
Deferred income taxes		70,552			(326	)		70,226
Total liabilities		416,275			(466	)		415,809
Retained earnings		172,450			(859	)		171,591
Total stockholders’ equity		313,551			(859	)		312,692
Total liabilities and stockholders’ equity		729,826			(1,325	)		728,501
Consolidated Statement of Operations
Freight revenue		170,635			(34	)		170,601
Total revenue		196,318			(34	)		196,284
Salaries, wages and related expenses		64,633			(1	)		64,632
Revenue equipment rentals and purchased transportation		37,388			60			37,448
Total operating expenses		182,253			59			182,312
Income tax expense		3,928			(25	)		3,903
Net income		9,971			(68	)		9,903
Consolidated Statement of Comprehensive Income
Net income		9,971			(68	)		9,903
Comprehensive income		10,551			(68	)		10,483
Consolidated Statement of Cash Flows
Operating Cash Flows
Net income		9,971			(68	)		9,903
Deferred income tax expense		4,805			(25	)		4,780
Change in: Receivables and advances		(1,174	)		34			(1,140	)
Change in: Accounts payable and accrued expenses		5,881			59			5,940
Net cash flows provided by operating activities		25,936			-			25,936

	Six Months Ended June 30, 2018
Financial Statement Line Item (in thousands)	As reported		Adjustments			Balances without adoption of Topic 606
Consolidated Balance S heet
Accounts receivable, net of allowances	$	103,053	$	(1,325	)	$	101,728
Total assets		729,826		(1,325	)		728,501
Accrued expenses		29,420		(140	)		29,280
Deferred income taxes		70,552		(326	)		70,226
Total liabilities		416,275		(466	)		415,809
Retained earnings		172,450		(859	)		171,591
Total stockholders’ equity		313,551		(859	)		312,692
Total liabilities and stockholders’ equity		729,826		(1,325	)		728,501
Consolidated Statement of Operations
Freight revenue		321,097		(315	)		320,782
Total revenue		369,884		(315	)		369,569
Salaries, wages and related expenses		125,253		14			125,267
Revenue equipment rentals and purchased transportation		68,079		41			68,120
Total operating expenses		349,394		55			349,449
Income tax expense		5,467		(101	)		5,366
Net income		14,388		(269	)		14,119
Consolidated Statement of Comprehensive Income
Net income		14,388		(269	)		14,119
Comprehensive income		15,639		(269	)		15,370
Consolidated Statement of Cash Flows
Operating Cash Flows
Net income		14,388		(269	)		14,119
Deferred income tax expense		6,495		(101	)		6,394
Change in: Receivables and advances		11,821		315			12,136
Change in: Accounts payable and accrued expenses		1,635		55			1,690
Net cash flows provided by operating activities		62,632		-			62,632

We have

two

reportable segments, Truckload, which is comprised of our truckload services, and Managed Freight, which provides freight brokerage and logistics services.

The Truckload segment consists of

three

operating fleets that are aggregated because they have similar economic characteristics and meet the aggregation criteria. The

three

operating fleets that comprise our Truckload segment are as follows: (i) Covenant Transport, our historical flagship operation, which provides expedited long haul, dedicated, temperature-controlled, and regional solo-driver service; (ii) SRT, which provides primarily long-haul, regional, and dedicated service; and (iii) Star Transportation, Inc., which provides regional solo-driver and dedicated services, primarily in the southeastern United States.

Managed Freight is comprised primarily of freight brokerage and logistics services. Also included in Managed Freight is our accounts receivable factoring business, which does

not

meet the aggregation criteria, but only accounts for

$2.0

million of our

2018

revenue.

The following table summarizes our revenue by reportable segment by operating fleet, as used by our chief operating decision maker of the Company in making decisions regarding allocation of resources, etc., for the

three

and

six

months ended

June 30, 2018:

(in thousands)	Three Months ended June 30,				Six Months ended June 30,
	2018		2017		2018		2017
Total Revenues:
Truckload: Covenant Transport	$	105,648	$	89,444	$	201,361	$	177,287
Truckload: SRT		45,594		41,823		86,297		82,523
Truckload: Star Transportation		19,469		16,364		37,601		33,446
Managed Freight		25,607		16,695		44,625		29,814

Total	$	196,318	$	164,326	$	369,884	$	323,070

Accounting Standards

not

yet adopted

February 2016,

FASB issued ASU

2016

02,

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