1.	ACCOUNTING POLICIES

Description of Business and Principles of Consolidation

–P.A.M. Transportation Services, Inc. (the “Company”), through its subsidiaries, operates as a truckload transportation and logistics company.

The consolidated financial statements include the accounts of the Company and its wholly owned operating subsidiaries: P.A.M. Transport, Inc., P.A.M. Cartage Carriers, LLC, Overdrive Leasing, LLC, Choctaw Express, LLC, Decker Transport Co., LLC, T.T.X., LLC, Transcend Logistics, Inc., and East Coast Transport and Logistics, LLC. The following subsidiaries were inactive during all periods presented: P.A.M. International, Inc., P.A.M. Logistics Services, Inc., Choctaw Brokerage, Inc., and S & L Logistics, Inc.

Use of Estimates

–The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of any contingent assets and liabilities at the financial statement date and reported amounts of revenue and expenses during the reporting period. The Company periodically reviews these estimates and assumptions. The Company's estimates were based on its historical experience and various other assumptions that management believes to be reasonable under the circumstances. Actual results could differ from those estimates.

Cash and Cash Equivalents

–The Company considers all highly liquid investments with a maturity of

three

months or less when purchased to be cash equivalents. At times cash held at banks

may

exceed FDIC insured limits.

Accounts Receivable and Allowance for Doubtful Accounts

–Accounts receivable are presented in the Company’s consolidated financial statements net of an allowance for estimated uncollectible amounts. Management estimates this allowance based upon an evaluation of the aging of our customer receivables and historical write-offs, as well as other trends and factors surrounding the credit risk of specific customers. The Company continually updates the history it uses to make these estimates so as to reflect the most recent trends, factors and other information available. In order to gather information regarding these trends and factors, the Company also performs ongoing credit evaluations of its customers. Customer receivables are considered to be past due when payment has not been received by the invoice due date. Write-offs occur when management determines an account to be uncollectible and could differ from the allowance estimate as a result of a number of factors, including unanticipated changes in the overall economic environment or factors and risks surrounding a particular customer. Management believes its methodology for estimating the allowance for doubtful accounts to be reliable however, additional allowances

may

be required if the financial condition of our customers were to deteriorate, and could have a material effect on the Company’s consolidated financial statements

in future periods.

Bank Overdrafts

–The Company classifies bank overdrafts in current liabilities as an accounts payable and does not offset other positive bank account balances located at the same or other financial institutions. Bank overdrafts generally represent checks written that have not yet cleared the Company’s bank accounts. The majority of the Company’s bank accounts are

zero

balance accounts that are funded at the time items clear against the account by drawings against a line of credit, therefore the outstanding checks represent bank overdrafts. Because the recipients of these checks have generally not yet received payment, the Company continues to classify bank overdrafts as accounts payable. Bank overdrafts are classified as changes in accounts payable in the cash flows from operating activities section of the Company’s Consolidated Statement of Cash Flows. Bank overdrafts as of

December

31,

2016

and

2015

were approximately

$3,509,000

and

$467,000,

respectively.

Accounts Receivable Other

–The components of accounts receivable other consist primarily of amounts representing company driver advances, independent contractor advances, equipment manufacturer warranties, and restricted cash. Advances receivable from company drivers as of

December

31,

2016

and

2015,

were approximately

$628,000

and

$580,000,

respectively. Restricted cash consists of cash proceeds from the sale of trucks and trailers under our like-kind exchange (“LKE”) tax program. See Note

11,

“Federal and State Income Taxes,” for a discussion of the Company’s LKE tax program. We classify restricted cash as a current asset within “Accounts receivable-other” as the exchange process must be completed within

180

days in order to qualify for income tax deferral treatment. The changes in restricted cash balances are reflected as an investing activity in our Consolidated Statements of Cash Flows as they relate to the sales and purchases of revenue equipment.

Marketable Equity Securities

– Marketable equity securities are classified by the Company as either available for sale or trading. Securities classified as available for sale are carried at market value with unrealized gains and losses recognized in accumulated other comprehensive income in the statements of stockholders’ equity. Securities classified as trading are carried at market value with unrealized gains and losses recognized in the statements of operations. Realized gains and losses are computed utilizing the specific identification method.

Impairment of Long-Lived Assets

–The Company reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of a long-lived asset

may

not be recoverable. An impairment loss would be recognized if the carrying amount of the long-lived asset is not recoverable, and it exceeds its fair value. For long-lived assets classified as held and used, if the carrying value of the long-lived asset exceeds the sum of the future net undiscounted cash flows, it is not recoverable.

Property and Equipment

–Property and equipment is recorded at historical cost, less accumulated depreciation. For financial reporting purposes, the cost of such property is depreciated principally by the straight-line method. For tax reporting purposes, accelerated depreciation or applicable cost recovery methods are used. Depreciation is recognized over the estimated asset life, considering the estimated salvage value of the asset. Such salvage values are based on estimates using expected market values for used equipment and the estimated time of disposal which, in many cases include guaranteed residual values by the manufacturers. Gains and losses are reflected in the year of disposal. The following is a table reflecting estimated ranges of asset useful lives by major class of depreciable assets:

Asset Class	Estimated Asset Life (in years)

Service vehicles	3	-	5
Office furniture and equipment	3	-	7
Revenue equipment	3	-	12
Structures and improvements	5	-	40

The Company’s management periodically evaluates whether changes to estimated useful lives and/or salvage values are necessary to ensure its estimates accurately reflect the economic use of the assets. During

2016,

management adjusted the estimated useful lives and salvage values of certain trucks based on such an evaluation. These changes resulted in an increase in depreciation expense of approximately

$1.3

million during

2016.

This increase in depreciation expense reduced the Company’s

2016

reported net income by approximately

$0.8

million

($0.13

per diluted share). During

2015,

management determined that an adjustment to the estimated useful lives or salvage values of trucks or trailers was not necessary based on such an evaluation.

Inventory

–Inventories consist primarily of revenue equipment parts, tires, supplies, and fuel. Inventories are carried at the lower of cost or market with cost determined using the

first

in,

first

out method.

Prepaid Tires

–Tires purchased with revenue equipment are capitalized as a cost of the related equipment. Replacement tires are included in prepaid expenses and deposits and are amortized over a

-month period. Amounts paid for the recapping of tires are expensed when incurred.

Advertising Expense

–Advertising costs are expensed as incurred and totaled approximately

$1,019,000,

$988,000

and

$683,000

for the years ended

December

31,

2016,

2015

and

2014,

respectively.

Repairs and Maintenance

–Repairs and maintenance costs are expensed as incurred.

Self-Insurance Liability

–A liability is recognized for known health, workers’ compensation, cargo damage, property damage, and auto liability damage claims. An estimate of the incurred but not reported claims for each type of liability is made based on historical claims made, estimated frequency of occurrence, and considering changing factors that contribute to the overall cost of insurance.

Income Taxes

–The Company applies the asset and liability method of accounting for income taxes, under which deferred taxes are determined based on the temporary differences between the financial statement and tax basis of assets and liabilities using tax rates expected to be in effect during the years in which the basis differences reverse. A valuation allowance is recorded when it is more likely than not that some or all of the deferred tax assets will not be realized.

The application of income tax law to multi-jurisdictional operations such as those performed by the Company, are inherently complex. Laws and regulations in this area are voluminous and often ambiguous. As such, we

may

be required to make subjective assumptions and judgments regarding our income tax exposures. Interpretations of and guidance surrounding income tax laws and regulations

may

change over time which could cause changes in our assumptions and judgments that could materially affect amounts recognized in the consolidated financial statements.

We recognize the impact of tax positions in our financial statements. These tax positions must meet a more-likely-than-not recognition threshold to be recognized and tax positions that previously failed to meet the more-likely-than-not threshold are recognized in the

first

subsequent financial reporting period in which that threshold is met. Previously recognized tax positions that no longer meet the more-likely-than-not threshold are derecognized in the

first

subsequent financial reporting period in which that threshold is no longer met. We recognize potential accrued interest and penalties related to unrecognized tax benefits within the consolidated statements of income as income tax expense.

In determining whether a tax asset valuation allowance is necessary, management, in accordance with the provisions of ASC

740

30,

weighs all available evidence, both positive and negative to determine whether, based on the weight of that evidence, a valuation allowance is necessary. If negative conditions exist which indicate a valuation allowance might be necessary, consideration is then given to what effect the future reversals of existing taxable temporary differences and the availability of tax strategies might have on future taxable income to determine the amount, if any, of the required valuation allowance. As of

December

31,

2016,

management determined that the future reversals of existing taxable temporary differences and available tax strategies would generate sufficient future taxable income to realize its tax assets and therefore a valuation allowance was not necessary.

Revenue Recognition

–Revenue is recognized in full upon completion of delivery to the receiver’s location. For freight in transit at the end of a reporting period, the Company recognizes revenue pro rata based on relative transit time completed as a portion of the estimated total transit time. Expenses are recognized as incurred.

Share-Based Compensation

–The Company estimates the fair value of stock option awards on the option grant date using the Black-Scholes pricing model and recognizes compensation for stock option awards expected to vest on a straight-line basis over the requisite service period for the entire award. Forfeitures are estimated at grant date based on historical experience. For additional information with respect to share-based compensation, see Note

to our consolidated financial statements.

Earnings Per Share

–The Company computes basic earnings per share (“EPS”) by dividing net income (loss) available to common stockholders by the weighted average number of common shares outstanding during the period. Diluted EPS includes the potential dilution that could occur from stock-based awards and other stock-based commitments using the treasury stock or the as if converted methods, as applicable.

The difference between the Company's weighted-average shares outstanding and diluted shares outstanding is due to the dilutive effect of stock options for all periods presented. See Note

for computation of diluted EPS.

Fair Value Measurements

–Certain financial assets and liabilities are measured at fair value within the financial statements on a recurring basis. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The fair value hierarchy requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.

For additional information with respect to fair value measurements, see Note

to our consolidated financial statements.

Reporting Segments

–The Company's operations are all in the motor carrier segment and are aggregated into a single reporting segment in accordance with the aggregation criteria under Generally Accepted Accounting Principles (“GAAP”). The Company provides truckload transportation services as well as brokerage and logistics services to customers throughout the United States and portions of Canada and Mexico. Truckload transportation services revenues, excluding fuel surcharges, represented

88.4%,

87.6%

and

92.5%

of total revenues, excluding fuel surcharges, for the

twelve

months ended

December

31,

2016,

2015

and

2014,

respectively. Remaining revenues, excluding fuel surcharges, for each respective year were generated by brokerage and logistics services.

Concentrations of Credit Risk

–The Company performs ongoing credit evaluations and generally does not require collateral from its customers. The Company maintains reserves for potential credit losses. In view of the concentration of the Company’s revenues and accounts receivable among a limited number of customers within the automobile industry, the financial health of this industry is a factor in the Company’s overall evaluation of accounts receivable.

Subsequent Events

– We have evaluated subsequent events for recognition and disclosure through the date these financial statements were filed with the United States Securities and Exchange Commission and concluded that no subsequent events or transactions have occurred that require recognition or disclosure in our financial statements.

Foreign Currency Transactions

–The functional currency of the Company’s foreign branch office in Mexico is the U.S. dollar. The Company remeasures the monetary assets and liabilities of this branch office, which are maintained in the local currency ledgers, at the rates of exchange in effect at the end of the reporting period. Revenues and expenses recorded in the local currency during the period are remeasured using average exchange rates for each period. Non-monetary assets and liabilities are remeasured using historical rates. Any resulting exchange gain or loss from the remeasurement process are included in non-operating income (loss) in the Company’s consolidated statements of operations.

Recent Accounting Pronouncements–

May

2014,

the FASB issued ASU No.

2014

09,

(“ASU

2014

09”),

Revenue from Contracts with Customers

. The objective of ASU

2014

and subsequent amendments is to establish a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and will supersede most of the existing revenue recognition guidance, including industry-specific guidance. The core principle of ASU

2014

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. In applying the new guidance, an entity will

(1)

identify the contract(s) with a customer;

(2)

identify the performance obligations in the contract;

(3)

determine the transaction price;

(4)

allocate the transaction price to the contract’s performance obligations; and

(5)

recognize revenue when (or as) the entity satisfies a performance obligation. ASU

2014

applies to all contracts with customers except those that are within the scope of other topics in the FASB Accounting Standards Codification. The new guidance, as amended, is effective for annual reporting periods (including interim periods within those periods) beginning after

December

15,

2017

for public companies. Early adoption is not permitted prior to annual periods beginning after

December

31,

2016.

Entities have the option of using either a full retrospective or modified approach to adopt ASU

2014

09.

The Company has performed an analysis of the effects of adopting this guidance. The analysis included the following items:

●

identifying what constitutes a contract within the Company’s business practices,

●

identifying performance obligations within our contracts,

●

determining transaction prices,

●

allocating the transaction price to performance obligations,

●

determination of when performance obligations are satisfied and revenue is earned,

●

disaggregation of revenue by source within segments, and

●

principal verses agent considerations.

Based upon this evaluation, the effects of adopting this guidance is not expected to have a significant impact on the Company’s financial condition, results of operations, or cash flows.

November

2015,

the FASB issued ASU No.

2015

17,

(“ASU

2015

17”),

Income Taxes (Topic

740):

Balance Sheet Classification of Deferred Taxes

, which simplifies the presentation of deferred income taxes. Under the new accounting standard, deferred tax assets and liabilities are required to be classified as noncurrent, eliminating the prior requirement to separate deferred tax assets and liabilities into current and noncurrent. ASU

2015

is effective for annual and interim periods beginning after

December

15,

2016,

with early adoption permitted. The Company has early adopted ASU

2015

effective

January

2016

on a retrospective basis. Adoption of this ASU resulted in a reclassification of the Company’s deferred tax liability in its consolidated balance sheet as of

December

31,

2015.

The reclassification resulted in a

$1.8

million decrease in the current deferred income tax liability and a corresponding increase in the net noncurrent deferred tax liability.

January

2016,

the FASB issued ASU

2016

01,

(“ASU

2016

01”),

Financial Instruments - Overall (Subtopic

825

10):

Recognition and Measurement of Financial Assets and Financial Liabilities

. The updated guidance enhances the reporting model for financial instruments, which includes amendments to address aspects of recognition, measurement, presentation and disclosure. ASU

2016

is effective for annual and interim periods beginning after

December

15,

2017.

With certain exceptions, early adoption is not permitted.

The Company has performed a preliminary analysis of the effects of adopting this guidance. This analysis consisted of the following items:

●

categorize securities as either equity securities or debt securities,

●

determine which securities held by the Company have readily determinable fair values,

●

determine that the exit price notion will be used when measuring the fair value of financial instruments for disclosure purposes,

●

consider the need for a valuation allowance related to a deferred tax asset on available-for-sale securities in combination with the Company’s other deferred tax assets.

Based upon this evaluation, the effects of adopting this guidance is not expected to have a significant impact on the Company’s financial condition or cash flows but it is expected to have a significant impact on the Company’s results of operations through the recognition of increases or decreases in market value each reporting period rather than recognizing them through comprehensive income.

February

2016,

the FASB issued ASU

2016

02,

(“ASU

2016

02”),

eases

(Topic

842)

. This update seeks to increase the transparency and comparability among entities by requiring public entities to recognize lease assets and lease liabilities on the balance sheet and disclose key information about leasing arrangements. To satisfy the standard’s objective, a lessee will recognize a right-of-use asset representing its right to use the underlying asset for the lease term and a lease liability for the obligation to make lease payments. Both the right-of-use asset and lease liability will initially be measured at the present value of the lease payments, with subsequent measurement dependent on the classification of the lease as either a finance or an operating lease. For leases with a term of

twelve

months or less, a lessee is permitted to make an accounting policy election by class of underlying asset not to recognize lease assets and lease liabilities. If a lessee makes this election, it should recognize lease expense for such leases generally on a straight-line basis over the lease term. Accounting by lessors will remain mostly unchanged from current U.S. GAAP.

In transition, lessees and lessors will be required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach. The modified retrospective approach includes a number of optional practical expedients that companies

may

elect to apply. These practical expedients relate to the identification and classification of leases that commenced before the effective date, initial direct costs for leases that commenced before the effective date, and the ability to use hindsight in evaluating lessee options to extend or terminate a lease or to purchase the underlying asset. The transition guidance also provides specific guidance for sale and leaseback transactions, build-to-suit leases, leveraged leases, and amounts previously recognized in accordance with the business combinations guidance for leases. The new standard is effective for public companies for annual periods beginning after

December

15,

2018,

and interim periods within those years, with early adoption permitted. The Company is evaluating the new guidance, but does not expect it to have a material impact on its financial condition, results of operations, or cash flows since the Company’s current leases will expire prior to the effective date of this guidance.

March

2016,

the FASB issued ASU No.

2016

(“ASU

2016

08”),

Revenue from Contracts with Customers (Topic

606):

Principal versus Agent Considerations (Reporting Revenue Gross versus Net)

. ASU

2016

clarifies the implementation guidance on principal versus agent considerations. The guidance includes indicators to assist an entity in determining whether it controls a specified good or service before it is transferred to the customers. The new guidance is effective for annual reporting periods (including interim periods within those periods) beginning after

December

15,

2017

for public companies. Early adoption is not permitted. The Company has evaluated the effects of adopting this guidance and it is not expected to have a significant impact on the Company’s financial condition, results of operations, or cash flows.

March

2016,

the FASB issued ASU No.

2016

(“ASU

2016

09”),

Compensation – Stock Compensation

(Topic

718).

ASU

2016

identifies areas for simplification involving several aspects of accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liability, an option to recognize gross stock compensation expense with actual forfeitures recognized as they occur, as well as certain classifications on the statement of cash flows. ASU

2016

is effective for annual and interim periods beginning after

December

15,

2016,

with early adoption permitted. The Company has evaluated the effects of adopting this guidance and it is not expected to have a significant impact on the Company’s financial condition, results of operations, or cash flows.

June

2016,

the FASB issued ASU No.

2016

(“ASU

2016

13”),

Accounting for Credit Losses

(Topic

326)

. ASU

2016

requires the use of an “expected loss” model on certain types of financial instruments. The standard also amends the impairment model for available-for-sale debt securities and requires estimated credit losses to be recorded as allowances instead of reductions to amortized cost of the securities. ASU

2016

is effective for fiscal years, and interim periods within those years, beginning after

December

15,

2019,

with early adoption permitted. The Company is evaluating the new guidance, but does not expect it to have a material impact on its financial condition, results of operations, or cash flows.

August

2016,

the FASB issued ASU No.

2016

(“ASU

2016

15”),

Statement of Cash Flows (Topic

230):

Classification of Certain Cash Receipts and Cash Payments

. ASU

2016

amends the guidance in Accounting Standards Codification

230,

Statement of Cash Flows, and clarifies how entities should classify certain cash receipts and cash payments on the statement of cash flows with the objective of reducing the existing diversity in practice related to

eight

specific cash flow issues. The amendments in this update are effective for annual periods beginning after

December

15,

2017,

and interim periods within those fiscal years. Early adoption is permitted. The Company has evaluated the effects of adopting ASU

2016

and does not expect it to have a material impact on its financial condition, results of operations, or cash flows.

November

2016,

the FASB issued ASU No.

2016

(“ASU

2016

18”),

Statement of Cash Flows (Topic

230)

. ASU

2016

requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. This standard is intended to reduce diversity in practice in how restricted cash or restricted cash equivalents are presented and classified in the statement of cash flows. ASU No.

2016

is effective for fiscal years, and interim periods, beginning after

December

15,

2017,

with early adoption permitted. The standard requires application using a retrospective transition method. The adoption of ASU No.

2016

will change the presentation and classification of restricted cash and restricted cash equivalents in our consolidated statements of cash flows but is not expected to have a material impact on its financial condition, results of operations, or cash flows.