Shipping-Accounting For Owned Vessels by Shipping Companies

1 IFRS for Shipping | Accounting for owned vessels by shipping companies
IFRS for Shipping

Accounting for owned vessels by
shipping companies

April 2011

Global Shipping & Ports Group

Deloitte
Accounting for owned vessels by shipping companies

Contents Page
Forward 3
1. Introduction and Objective 4
2. Accounting Guidance 5
2.1 Vessel orders and options 5
2.2 Pre-delivery instalments ("PDIs") 6
2.3 Treatment of borrowing costs on PDIs 8
2.4 Elements of the price calculation for a new vessel 9
2.5 Cost allocation and componentisation 10
2.6 Useful life, depreciation basis and residual value 11
2.7 Subsequent maintenance costs 13
2.8 Impairment 14
2.9 Assets held for disposal 16
2.10 Acquisition of vessels in the secondary market 17
3. Practical Examples 18
4. Differences from US GAAP and UK GAAP 23
5. Deloitte Shipping Team 25


Forward

I welcome you to our first of a series of publication focussing on accounting issues for the shipping
industry. This continues our focus at Deloitte to find ways to providing in-depth insights to financial
accountants working across the shipping industry. Vessel fixed asset accounting is a complex area
for all account preparers whether you are working under International Financial Reporting Standards
(IFRS) or other generally accepted accounting principles.

This publication in our series seeks to provide details of the accounting principles involved with
acquiring vessels. It also seeks to be a practical and pragmatic guide on how all of the complex
related accounting rules need to be applied. The manual covers numerous examples, drawing on
real life examples of situations and circumstances that we have encountered over recent years under
IFRS. We would be interested to hear from you if there are other commonly encountered issues that
you believe we should consider in the future.

This publication is based on accounting standards currently on issue and effective under IFRS.
There are currently a number of IFRS new standards and exposure drafts which are likely to change
the accounting over the coming five years; these are not within the scope of this publication.

I would like to take this opportunity of thanking Dina Karsas and Athena Kartsaklis who as part of our
shipping team have contributed significantly to the development of this publication.

So please enjoy and hope you find it useful.

George D. Cambanis
Global Shipping & Ports Leader


1. Introduction and Objective
This publication addresses the accounting for owned vessels through their life cycle from purchase to
disposal or scraping. It is primarily intended as a practical source of guidance for the industry. It
assumes a competent knowledge of IFRS, and some familiarity with the accounting aspects of
vessels.

The shipping industry has made substantial long-term capital investments in new ships. There are
significant risks in these investments and the extent to which they are successfully managed has a
substantial impact on the long-term profitability of both owners and lessors. As a result it is important
to ensure that the exposure of entities to these risks, and their relative success in managing them, is
properly reflected in financial statements.

The purchase of vessels is not a simple matter, even when financing is available. Orders have to be
placed with the major shipyards well ahead of actual delivery. Significant time is put into negotiating
pricing, delivery conditions and on board equipment. As a result it is often difficult to determine how
the contract price compares with the deals obtained by others.

During their lives vessels require major maintenance and the replacement of key components.
Owners spend substantial time managing these maintenance requirements to ensure the optimal
balance of operational efficiency while incurring the lowest possible dry-dock and special survey
costs. The extent to which they are effective in doing this will have a substantial impact on their
reported results.

Within the ship leasing market there is a significant divergence in the extent to which the lessor bears
the risk of the vessel maintenance cost. Given the substantial sums involved, understanding the
maintenance costs and the potential exposure of the lessor to them, is key to maximising value from
ship leases and ultimately in the profitability of both the lessor and the owner involved.

Many ship owners do not intend to retain their vessels until they are scrapped. Depending on their
fleet policies the owners of ships, both lessors and owners, often take substantial risks on the market
value of their ships. A number of factors impact the value of an ship in the secondary market: the
maintenance status of its key components, vessel prices in the secondary market and currency
fluctuations. There are also a number of ways in which exposure to vessel value risk can be
managed and mitigated and there is a wide variation in the approaches adopted and their
effectiveness.

Accounting for ships is a complex area and we have therefore sought in this publication to provide
some practical guidance. The guidance is written from an IFRS perspective. In section 4 we have set
out the key differences between the IFRS treatment outlined in this manual and that under US
Generally Accepted Accounting Principles (US GAAP) or UK Generally Accepted Accounting
Principles (UK GAAP).

When applying the suggested accounting treatments in this manual, the preparer of financial
statements must reflect on three issues:
- materiality;
- ensuring a full understanding of any related legal agreement, including all terms and conditions, of
the transaction; and
- timing of recognition.

This publication is prepared based on our understanding of International Financial Reporting
Standards (IFRSs) effective at the date of publication. The International Accounting Standards
Board (IASB) has released a number of new standards and exposure drafts which will most likely
change the accounting over the coming five years; these are not within the scope of this manual.

This publication covers topics only in general terms and is intended to give a wide audience an
outline understanding of the issues in subject, and therefore cannot be relied on to cover specific
situations. Applications of the principles set out herein will depend on the particular circumstances
involved and do not form an appropriate substitute for considered specific advice tailored to your
circumstances. We recommend that you obtain professional advice before acting or refraining from
acting on any of its contents. We would be pleased to advise you on the application of the principles
discussed in this publication and other matters tailored to your specific circumstances.


2. Accounting Guidance

2.1 Vessel orders and options

2.1.1 Background

Purchasers generally place orders for new vessels well ahead of delivery of the vessel itself. These
orders are typically for a fixed price and provide a guaranteed slot in the delivery or production
queue. These queues can stretch out over a number of years for many vessel types.

These purchase orders often have significant value for several reasons:

The purchaser has obtained volume or other discounts from the shipyard which another shipping
company cannot obtain.
There is a shortage of available vessels in the secondary market.
There is a shortage of available construction slots for the desired delivery dates.

Purchasers often also obtain options for additional vessels when they place orders. These options
also guarantee the purchaser a fixed price and delivery slot for these additional vessels.
Consequently, the options can have significant value.

2.1.2 Determination of accounting treatment

Orders for vessels are purchase commitments for non-financial assets and the amount payable is
required to be disclosed in the financial statements under IFRSs.

Options over vessel are derivatives over non-financial assets and are therefore generally outside of
the scope of IAS 39 Financial Instruments: Recognition and Measurement.

2.1.3 Application of accounting treatment

Typically, a purchaser would place an order or option with the shipyard and so there would not be an
additional cost to them outside the purchase cost of the vessel itself and any related commissions.

However, if the order or option has been purchased in the secondary market, the amount paid to
acquire it should be held on balance sheet and treated as part of the purchase cost of the vessel
itself. The purchased order or option would typically be classified as a prepayment and therefore
would not qualify to be held at fair value. It would normally be classified as a non-monetary item and
therefore not retranslated at each reporting date.



2.2 Pre-delivery instalments (PDIs)

2.2.1 Background

The purpose of pre-delivery instalments (PDIs) is to secure the purchasers place in the delivery
timetable for the vessel and to provide part of the finance for the construction of that vessel to the
shipyard. They form part of the standard contractual terms of most major shipyards.

Under IFRS, it is necessary to consider what type of asset the PDI represents. Historically industry
practice has been to treat PDIs as property, plant and equipment, representing the cost of an asset
under construction for the purchaser specifically.


There are normally two possible ways of accounting for PDIs, which is accounting as part of the
vessel under construction or accounting as a prepayment for a future vessel acquisition. The
appropriate accounting treatment is likely to depend on the specific details of the arrangement
entered into by the purchaser and shipyard and we have seen both approaches being adopted by
shipping companies. However, under the terms of most current vessel delivery contracts with the
major shipyards the second of these options is likely to be the most appropriate. This is because it is
difficult to see why the item should be classified as a fixed asset when the ship owning entity has no
rights of ownership over the vessel at the time the PDI is paid.

1. Accounting as an asset representing the vessel itself which is under construction

In order for an asset to be included within property, plant and equipment, it must meet the definition
of property, plant and equipment under IAS 16 Property, Plant and Equipment. Property, plant and
equipment are tangible items that:

(a) are held for use in the production or supply of goods or services, for rental to others, or for
administrative purposes; and
(b) are expected to be used during more than one period. [IAS 16.6]

PDIs may meet the definition of property, plant and equipment if the payments made represent the
part payment towards an asset in the course of construction by the shipyard for the purchaser: in
other words, if in substance ownership of the underlying asset already rests with the purchaser and it
is being constructed by another party on the purchasers behalf.

There is no specific guidance in IFRSs on when it is appropriate to regard a vessel that is being
constructed as an asset of the purchaser, rather than an asset of the seller. However, we consider
that the principles in IFRIC 15 Agreements for the Construction of Real Estate could be considered
relevant on this point. IFRIC 15 provides guidance on when revenue should be recognised by
companies engaged in the construction of real estate and we believe its principles are inherently
relevant for PDI accounting. Applying this guidance to vessels it would be necessary to consider
whether the buyer is able to specify the major elements of the design of the vessel to such a degree
that the asset is specific to that customer rather than being a generic product that could be sold to a
number of customers.

We do not believe that the terms of many PDI payments would meet these criteria for the ownership
of a portion of the underlying asset to have been transferred to the purchaser on payment of the PDI.
We note that the financing of PDIs is a continued area of difficulty for the industry, partially due to the
fact they do not provide security over the underlying asset in the event of a default by the shipping
company. IFRIC 15 is relatively new guidance that does not directly apply to the shipping industry,
and therefore we believe that it remains acceptable for the industry to continue to adopt the approach
of capitalising PDIs as assets under construction. However this approach may need further
consideration in light of ongoing changes in IFRSs in this area.



2.2 Pre-delivery instalments (PDIs)

2. Accounting as a prepayment in respect of the future acquisition of the vessel

As discussed in 1. above, the ownership of the vessel is unlikely to transfer to the purchaser until the
point of delivery. If this is the case, then the pre-delivery payments could be recorded as
prepayments towards the future purchase of an asset. Because of the inherent difficulties outlined
above under the above option 1., it is likely that this accounting treatment is the most appropriate
based on the terms of the various PDI arrangements we have seen.


1. Treatment as an asset representing the vessel itself which is under construction

As the vessel is constructed the cost of the work undertaken should be accrued for by the entity it is
being constructed for using appropriate exchange rates as the work is accrued. Alternatively, where
the timing of the PDIs materially matches the timing and value of the work undertaken, it may be
appropriate simply to capitalise these. However, both these approaches will require a detailed
understanding of what work is being done and the value of this. Such information is normally
available to parties purchasing vessels via the on site supervision of the construction of the vessel by
representatives of the shipping company.

As assets in the course of construction are non-monetary in nature they should not be retranslated at
each year end. [IAS 21.23]

No depreciation should be provided on the PDIs until the vessel is ready for use, i.e. until it is
delivered. [IAS 16.55]

The payment should be recorded within property, plant and equipment. Where the aggregate amount
of PDIs is material they should be shown separately under a heading such as Vessels under
construction, or Advances for vessel constructions rather than in one of the other classes of
Property, Plant and Equipment. [IAS 16.74b]

2. Treatment as a prepayment in respect of the future acquisition of the vessel

PDIs made in a foreign currency should be recorded on initial recognition in the entitys functional
currency, translated from the foreign currency at the actual exchange rate on the date that the
payment is made, assuming no hedging is in place. [IAS 21.21]

As prepayments are a non-monetary asset they should not be retranslated at each year end date.
[IAS 21.23]

As discussed above, there will often be a significant financing element affecting the amount of such a
prepayment. In such cases, even though a prepayment is not a financial asset, we believe it will be
appropriate to reflect the implicit financing by unwinding the financing discount over time (if material),
using the discount rate implicit in the original transaction.

The amount paid will be recorded as a prepayment within non-current assets. Upon delivery of the
vessel the balance should be included as part of the cost of the asset within Property, Plant and
Equipment.



2.3 Treatment of borrowing costs on PDIs

2.3.1 Background

From periods beginning on or after 1 J anuary 2009, a revised version of IAS 23 Borrowing Costs has
been effective. This revision stipulates that it is mandatory to capitalise borrowing costs that are
directly attributable to the acquisition, construction or production of a qualifying asset. A qualifying
asset is one that necessarily takes a substantial period to get ready for its intended use or sale. Other
borrowing costs continue to be recognised as an expense. Under the previous standard this
approach was one of the allowed alternative treatments for borrowing costs related to a qualifying
asset.


This accounting treatment can only be applied where the company has a qualifying asset in which to
capitalise borrowing costs. This will be the case where the PDI is accounted for as an asset in the
course of construction as discussed in section 2.2. Where an entity is accounting for the PDI as a
prepayment, this would not be considered a qualifying asset under IAS 23. However, there may be
an inherent financing element to the prepayment, and in which case the unwinding of the financing
element would cause the underlying prepayment asset to be increased over time, as described in
section 2.2.and that would likely have the same effect as the capitalisation of the interest expense.

2.3.3 Application of accounting treatment under the revised IAS 23

The borrowing costs may include:

Interest expense calculated using the effective interest method;
Finance charges in respect of finance leases; and
Exchange differences arising from foreign currency borrowings to the extent that they are
regarded as an adjustment to interest costs. [IAS23.6]

The capitalisation of borrowing costs should commence when the PDI is made, providing the
following criteria are being met:

Expenditure for the asset is being incurred;
Borrowing costs are being incurred; and
Activities that are necessary to prepare the asset for its intended use or sale are in progress. [IAS
23.17]

Capitalisation should cease when the vessel is substantially complete. [IAS 23.20] Note that if there
are prolonged periods of suspension of active development of the vessel, capitalisation of the
borrowing costs should be suspended for that period. [IAS 23.21]

To the extent that the purchaser borrows funds specifically for the purpose of obtaining a qualifying
asset (i.e. the vessel), the purchaser should determine the amount of borrowing costs eligible for
capitalisation. These will be the actual borrowing costs incurred on that borrowing during the period
less any investment income on the temporary investment of those borrowings. [IAS 23.12]

To the extent that the purchaser borrows funds generally and uses them for the purpose of obtaining
a qualifying asset (i.e. PDIs), the purchaser should determine the amount of borrowing costs eligible
for capitalisation by applying a capitalisation rate to the expenditures on that asset. The capitalisation
rate should be the weighted average of the borrowing costs applicable to the borrowings of the
purchaser that are outstanding during the period, other than borrowings made specifically for the
purpose of obtaining a qualifying asset. The amount of borrowing costs that the purchaser
capitalises during a period should not exceed the amount of borrowing costs it incurred during that
period. [IAS 23.14]

With respect to disclosure, the purchaser should disclose the amount of borrowing costs capitalised
in the period and the capitalisation rate used to determine the amount of borrowing costs eligible for
capitalisation. [IAS 23.26]


2.4 Elements of the price calculation for a new vessel

2.4.1 Background

A vessel price is agreed via contractual terms often years in advance. There are generally different
arrangements where the vessel is delivered either early or late. Consequently, it is important for the
preparer of financial statements to understand the precise terms of the contract.


IAS 16 requires the total cost of each asset being acquired to be determined. Once this has been
calculated this total value can then be used as the starting point from which to determine individual
component values. The determination of component values is set out in section 2.5 below.

2.4.3 Application of this accounting treatment

The total cost of the newly constructed vessel should therefore be determined by aggregating all of
the following items where they have been incurred and are material:

The total net cash paid to the shipyard in respect of all items. [IAS 16.6];
Any capitalised borrowing costs or finance charges accrued as a result of making PDIs to the
shipyard;
Vessel registration and certifications;
Seaworthiness certificates;
Legal costs and other related professional fees which are directly associated with the purchase of
the vessel;
Amounts paid to acquire purchase options in respect of the vessel; and
Any other costs directly attributable to bringing the vessel to the location and condition necessary
for it to be capable of operating in the manner intended by management. For instance, this may
include the costs of lubricants and bunkers consumed prior to delivery for example during the sea
trials, supervision costs incurred during the construction period.

The net cash paid for the vessel will be the aggregate of the PDIs and the balancing payment made.
Where the PDIs are denominated in a foreign currency and as they are non-monetary items (see
section 2.2) each of these payments will be held on balance sheet at the historic rate on the date the
payment was made. The net cash paid for the vessel will therefore consist of a weighted average
blend of the exchange rates prevailing at the date of payments.


2.5 Cost allocation and componentisation

2.5.1 Background

Vessels may have a number of components which require either replacement or major overhaul at
intervals during the vessels operational life cycle. The frequency of the work is usually determined in
accordance with the rules and regulations of the vessels classification society on the basis of the
time period since the last work was undertaken. Unplanned events can arise when vessel experience
technical problems and as a result major overhauls and repairs arise on an unplanned basis.


IAS 16 requires that Each part of an item of property, plant and equipment with a cost that is
significant in relation to the total cost of the item shall be depreciated separately. [IAS 16.43]

However, the standard also allows that if the useful life and depreciation method of two components
are materially the same they may be grouped together. [IAS 16.45]

Components of vessel that should be separately identified include not only the physical items that will
require replacement during the life of the vessel, but also the notional overhaul element for items that
require major overhaul in the future, , during the life of the vessel.


Example 1 in section 3 illustrates the depreciation of separate components of a vessel.

We have seen most dry-bulk, tanker and container companies identify two groups of components.

Cost of major overhaul or dry-docking.
Cost of the vessel excluding projected dry-docking.

The fair value of each of these components should be identified at the date of acquisition of the
vessel. Prices for each of these individual components are often not specified in the purchase
agreement for the vessel. It will therefore be necessary to estimate the fair value of the dry-docking
component taking into account the vessels last and next scheduled dry-docking. The fair value could
be estimated by obtaining values from other sources such as the shipyard(s), in-house specialists,
the maintenance providers or independent vessel appraisers. The fair value will be the actual value at
which the entity is able to obtain these components, including any discounts from list price it receives
from the component or service provider. Other vessel types, such as cruise ships or ferries, will
generally also have hotel type components which are expected to be replaced at regular intervals.

A vessel will require seaworthiness checks, under water inspections, intermediate surveys as well as
special surveys throughout its useful economic life. An asset should be carved out from the main
vessel asset for each type of these checks. In practice, only the dry-docking and special survey
checks will be sufficiently material to warrant separate capitalisation. For instance, a tanker may
require a special survey every 5 years and an intermediate survey in between. Separate assets for
each of these should be created when the initial componentisation of the vessel is done, if expected
to be material.

Typically a new vessel will be assumed to be supplied with each of these components brand new.
In other words the vessel will be assumed to be in the condition that it would be had it just been
through each of the checks and overhauls required so that the full cost of each of these will be carved
out as separate components in the initial allocation.

Depending on whether there are any PDIs and how the cost of the vessel is recorded in the books,
as described in sections 2.2 and 2.4, the elements of the cost may be recorded at different exchange
rates. For the purposes of the componentisation it would be appropriate to translate all the
components at the same rate on initial recognition based on the blended average rates used for the
amounts paid for the vessel. Subsequent expenditure on maintenance which is capitalised should be
translated at the appropriate rate when it is incurred.


2.6 Useful life, depreciation basis and residual value

2.6.1 Background

Vessel owners will all have different intentions about how they intend to use their vessel, how long
they intend to keep them and how they intend to dispose of them. These choices will have a
significant impact on the value which they are able to obtain from each vessel over its lifetime. How
the depreciation charge is determined needs to reflect these choices in order to reflect the differences
in the way vessels are managed between businesses.


Useful life

Useful life is the period over which an asset is expected to be available for use by an entity.

Vessel hull and engine

The vessel hull and engine component will be depreciated over their useful life to their residual value.
Because it is often not possible to replace the engines prior to disposal of the vessel the engine will
have the same useful life as the hull. The useful life will not change unless there is a change in the
intended period of ownership of the vessel. Maintenance of the vessel should have no impact on the
depreciation of the vessel hull and engine component.

Some examples of estimated useful lives we have typically seen in practice are:

- container vessels: 25 - 30 years
- dry-bulk vessels: 25 - 28 years
- tanker vessels: 25 years

Dry-docking component

The dry-docking component of a vessel will be amortized to the date of the next expected dry-
docking. If the new dry-docking is performed prior to the initial expected dry-docking date, the useful
life should be adjusted prospectively as a change in estimate.

Depreciation basis

IAS 16 does not specify which approach should be used to allocate depreciation between periods.
The approach of using a straight line basis has the benefit of simplicity and is used by many vessel
owners.

Residual value

The residual value of an asset is the estimated amount that an entity would currently obtain from
disposal of the asset, after deducting the estimated costs of disposal, if the asset were already of the
age and in the condition expected at the end of its useful life. [IAS 16.6]



2.6 Useful life, depreciation basis and residual value

2.6.2 Determination of accounting treatment - Continued

Changes to estimates

The judgements made for useful lives and residual values should be revisited at each reporting date
or at least annually. Material changes in the policy covering ownership of vessel will need to be
reflected in such judgements.

Where the estimated useful life or estimated residual value for a vessel change for any reason, this
change should be accounted for prospectively. [IAS 16.51] In other words if the estimated residual
value of a vessel falls, the additional depreciation charge should be spread over the remaining useful
life of the vessel, without any catch up charge for the vessels life to date.


Depreciation basis

Finance teams require access to special survey and dry-docking data including the next expected
dry- docking date, in order to calculate the depreciation charge for the dry-docking component.

Residual value

The residual value of the dry-docking component is typically assumed to be zero as they will be fully
replaced when the next relevant overhaul is undertaken. It is not usually possible to determine the
residual value of a maintenance component part way through its life. A common approach is
therefore to assume that the residual value is determined by reference to the original cost and
reduces over time in line with the chosen depreciation method, assuming there is no evidence to the
contrary. The net book value on the date of disposal is assumed to be its residual value.

To determine the residual value of a vessel it is normally necessary to obtain the light weight tons of
the steel within the vessel and an appropriate rate for the steel scrapping value. In practice, an
average market steel value is often used to compute the scrap value.

The residual value should be stated net of anticipated costs to scrap the vessel. This will be unique to
each owner and will depend on factors such as where the owner intends to scrap the vessel. In
addition to the steel scrap value, there may be other costs to consider such as costs to arrive at the
scrap yard or commissions.

By choosing to dispose of a vessel significantly before the end of its life an owner is taking a
substantial economic risk on the residual value of the vessel and this is reflected in the potential
volatility in the depreciation charge. The commercial rationale for such accounting is limited to the
fact that owning the vessel will always give the shipping company or lessor a valuation risk
concerning the value of the vessel at the date of disposal. The accounting principles require that this
risk is effectively re-measured at each balance sheet date based on the latest market value data. IAS
16 is very clear in its definition of residual value that preparers of accounts should not take the long-
term view of value but specifically reflect the change in value through the depreciation charge at
each reporting date.



2.7 Subsequent maintenance costs

2.7.1 Background

During a vessels useful life three types of maintenance work will be undertaken:

- Planned major maintenance work;
- Unplanned or emergency major maintenance work; and
- Day to day maintenance work.


An entity does not recognise in the carrying amount of an item of property, plant and equipment the
costs of the day-to-day servicing of the item. [IAS 16.12]

An entity recognises in the carrying amount of an item of property, plant and equipment the cost of
replacing parts of such an item when that cost is incurred if the recognition criteria are met, [IAS
16.13] and the amount in itself is deemed to be material.

The accounting treatment for unplanned maintenance work depends upon the work undertaken. If it
replaces a component which has been separately identified for depreciation purposes and therefore
fully restores this previously partially depreciated component then it will be accounted for as a
replacement of that component.

If the unplanned maintenance work replaces a component which has not previously been depreciated
separately, then it should accounted for the disposal of the existing component anyway.

All day to day maintenance work which does not materially enhance the asset will be expensed as
incurred.


It is likely that the cost of major planned maintenance will increase over the life of a vessel due to
inflation and the age of the vessel. This additional cost will be capitalised when incurred and therefore
the depreciation charge on these components will be greater in the later stages of a vessels life.

When major planned maintenance work is undertaken the cost should be capitalised. For instance
when an engine overhaul is undertaken the cost of the overhaul will be capitalised as a new asset
that will then be depreciated over the period to the next overhaul. The depreciation of the previous
overhaul will typically have been calculated such that it had a net book value of nil when the current
overhaul was undertaken. If this was not the case, e.g. because the work was required earlier than
expected, then any remaining net book value of the old component should be expensed immediately.
[IAS 16.14]

The initial carve out of components should include all major maintenance events which are likely to
occur over the currently adopted useful life of the vessel. Sometimes, it may subsequently be found
that the initial allocation was insufficiently detailed, in that not all components were identified. In this
situation it is necessary to determine what the net book value of the component would currently be
had it been initially identified. This will sometimes require the initial cost to be determined by
reference to the replacement cost and the associated accumulated depreciation charge determined
using the rate used for the residual hull. This is likely to leave a significant net book value in the
component being replaced which will need to be written off at the time the replacement is capitalised.
[IAS 16.14]



2.8 Impairment

2.8.1 Background

Vessels often have volatile values. These vessels values depend on numerous macro economic
factors such as world trade requirements, demand for raw materials and finished goods by industrial
societies and the supply of vessels available to meet the demand.


If, and only if, the recoverable amount of an asset is less than its carrying amount, the carrying
amount of the asset shall be reduced to its recoverable amount. [IAS 36.59]

The recoverable amount of an asset or a cash-generating unit is the higher of its fair value less costs
to sell and its value in use. [IAS 36.6]

If there is any indication that an asset may be impaired, a recoverable amount shall be determined for
the individual asset. If it is not possible to estimate the recoverable amount of the individual asset, an
entity shall determine the recoverable amount of the cash-generating unit to which the asset belongs
(the asset's cash-generating unit). [IAS 36.66]


For accounting purposes it is not normally possible to determine impairment of a particular vessel
component separately from that of the other components of that vessel unless there has been
specific physical damage to that component. An individual vessel may be considered as an individual
cash generating unit which can be assessed for impairment. However, where vessels are operated
as a fleet, for instance with individual vessels being inter-changeable in accordance with the charter
party or contract of affreightment, it may be more appropriate to consider each fleet as a cash
generating unit.

Determination of fair value

There is significant volatility in market prices for vessels generally. While it is relatively easy to
forecast vessel supply, based on production rates of the major shipyards, demand is directly linked to
wider economic conditions. There is therefore cyclicality in vessel prices.

There is also significant volatility in demand for particular vessel types. This will depend upon factors
such as the availability of substitutes or the development of new vessels in that class, the liquidity of
the market in that type of vessel and the fortunes of particular market segments. Brokers can provide
vessel values by reference to transactions of which they are aware and where there are no
transactions for a particular model of vessel they will normally extrapolate a value from transactions
for similar types of vessel. In such situations it is important to understand the judgements involved
and, if necessary, obtain a second independent valuation.

Unless they have undertaken a physical inspection of the vessel, brokers normally provide a value
based on historical sales and purchase data of similar vessels. Where this is used to determine the
fair value for accounting purposes it will be necessary to take into account the actual maintenance
condition of the vessel and adjust the brokers value accordingly. Where this is considered to be
material it may be necessary to arrange a physical inspection of the vessel. The maintenance
adjusted market value should then be used in the impairment review of the entire vessel, including
the separately capitalised and depreciated components.


2.8 Impairment

Finally, for entities whose functional currency is not US Dollars there is also exposure to exchange
rates as the large majority of vessel transactions are conducted in US Dollars. The spot exchange
rate on the date of the impairment assessment should be used for the purposes of determining the
current resale price.

Determination of costs to sell

If a ship-owner decides to sell a vessel, the vessel may require substantial marketing. This can be
undertaken either in house, if there is the appropriate expertise, or outsourced to a broker.

Determination of value in use

Shipping companies typically have robust estimates of the daily costs of operating a particular vessel
which can be used as the basis for a cash flow projection for a value in use calculation. However,
allowances should be made in the model for volatile costs, with reasonable estimates made of likely
price increases and a sensitivity analysis undertaken.

In addition revenue estimates, have significant potential volatility, with significant exposure to both
general economic conditions and unforeseen events. Reasonable revenue estimates should
therefore be made and sensitivities considered.

For lessors future cash flows are normally more predictable, although estimates will need to be made
where future cash flows are dependent upon extending an existing charter or entering into new
charter agreements. These estimates should be based on what management consider to be the most
probable likely outcome.

A suitable discount rate should also be determined, which takes into account the significant risks to
which the shipping industry in general is exposed and those affecting the particular vessel.



2.9 Assets held for disposal

2.9.1 Background

When vessels are to be sold, and the criteria in IFRS 5, Non-current assets held for sale and
discontinued operations, are met, the vessels are reclassified on the balance sheet as held for sale
assets. The vessel may still be operated while in this category, as long as they are available for
immediate sale and being actively marketed, resulting in revenues with no associated depreciation
charge on the vessel.


Classification to and from held for sale assets

Where a decision is made to dispose of a vessel currently held, the shipping company will need to be
reasonably certain of being able to dispose of them within the coming year, in the current market
conditions, for them to be classified as held for sale assets.

Where vessels have previously been classified as held for sale but have not been sold within one
year of the classification, IFRS 5.B1 (c) contains specific requirements if the vessels are to continue
to be classified as held for sale. We note that the used vessel market has been volatile in recent
years and the decision to dispose of vessels will need to take account of short term liquidity
considerations as well as the current market prices of vessels. Furthermore, in the current market
conditions potential purchasers of the vessel may not be able to find the necessary finance.

Whilst it is permitted for vessels to be included in the category of assets held for sale while the
vessels are being used, in the event that they cease to qualify as held for sale a reclassification to
fixed assets would be required, with an adjustment to the net book value to account for the
depreciation that would have been charged on the assets, had they not been reclassified to held for
sale assets.

Accounting treatment upon classification to held for sale

Once an asset is classified as held for sale, depreciation should cease on the asset and it should be
reclassified to held for sale assets (in current assets) at the lower of the carrying amount and fair
value less costs to sell. Subsequently, the held for sale asset should be re-measured to the lower of
these amounts at each period end, by comparing the carrying amount to the fair value less costs to
sell. The fair value less costs to sell should be measured in the sale currency of the likely disposal
contract (usually US$), taking account of the period end exchange rate.

Accounting treatment for subsequent expenditure

Where subsequent expenditure on a vessel improves its marketability or sale price this should be
capitalised into the carrying value of the held for sale asset. The new carrying value of the vessel
should be compared with the new fair value less costs to sell, and written down to the latter if lower,
with any reduction in the carrying value being taken to the income statement. In addition, if
subsequent expenditure does not meet the definition of an asset it should be expensed.


Note that where a vessel classified as held for sale is still being used, there is an effective
depreciation saving on the vessel compared with the vessels which remain in fixed assets.



2.10 Acquisition of vessels in the secondary market

2.10.1 Background

Many shipping company and lessors buy vessels in the secondary market. This raises a different set
of accounting issues from buying a new vessel. The purchaser must consider how to account for
related professional costs, and certain ongoing lease conditions when they arise, such as a
favourable or unfavourable attached time charter.


Professional costs

IAS 16 stipulates that directly attributable costs should be included in the recorded cost of the vessel
[IAS 16.16]. These may include related professional fees incurred on an incremental basis. These
are often more significant for the purchaser of a vessel in the secondary market as they are borne
primarily by the shipyard when buying a new vessel. It should be noted however that those fees
incurred whilst searching for a suitable vessel are not directly attributable to a specific asset and
should therefore be expensed as incurred.

Lease conditions

IFRS does not specifically address how to account for favourable or unfavourable attached time
charters acquired with the vessel. However, IAS 16.44 provides some guidance indicating that if an
entity that acquires property, plant and equipment subject to an operating lease in which it is the
lessor, it may be appropriate to depreciate separately amounts reflected in the cost of that item that
are attributable to favourable or unfavourable lease terms relative to market terms [IAS 16.44]. By
applying this guidance, if the purchaser obtains a vessel with a favourable attached time charter, the
element of the purchase price that relates to the time charter would be capitalised separately and
depreciated over the period that the shipping company will benefit from these favourable charter hire
rates. Conversely, if there are unfavourable attached charter hire terms, this accounting will have the
effect of reducing the purchase price of the vessel. However, in the absence of explicit guidance
under IFRS, practice may be mixed on the accounting for favourable or unfavourable attached time
charters acquired with the vessel, and we have seen companies present the element of the purchase
price that relates to favourable or unfavourable attached time charter as an intangible or a liability,
respectively, which is amortised over the remaining period of the charter agreement into revenue.


The application of the above accounting policies will mean that the vessel is recorded at its cost in
accordance with IAS 16.

3. Practical Examples

Example 1 Component depreciation

In the example below for simplicity we have assumed a vessel which has only two components
identified which it has purchased a vessel excluding the dry-dock component and a dry-dock
overhaul component. As described in section 2.5.3 depending on the vessel type there could be a
number of other major components to be separately identified and depreciated.

An entity purchases a ship for CU40 million. This ship will be required to undergo a dry-dock (DD)
overhaul every five years to restore its service potential. At the time of purchase, the service potential
that will be required to be restored by the overhaul can be measured based on the cost of the dry-
docking if it had been performed at the time of the purchase of the ship, e.g. CU4 million.

The following shows the calculation of the depreciation of the ship for Years 1 to 5, using the straight-
line method.

Amount $ 000 Useful life (years)
Cost of vessel 40,000
Comprising:
- the vessel, excluding the DD 36,000 30
- the projected dry-docking 4,000 5

For years 1-5 depreciation charges p.a. are:
- the vessel, excluding the DD 1,200
- the projected dry-docking 800

By the end of Year 5, the service potential would be fully depreciated. When a dry-docking is carried
out in Year 6, the expenditure is capitalised to reflect the restoration of service potential, which is then
depreciated over the period to the next overhaul in Years 6 to 10.

The process in Years 6 to 10 repeats every five years from Year 11 onwards until Year 30, when both
ship and the cost of dry-docking are fully depreciated and a new ship is acquired.

Note that the entity is required to use its best efforts to identify separately components such as the
DD component when the asset is first acquired or constructed. That separate identification, and the
subsequent separate depreciation of the DDl component, is not, however, a necessary condition for
the capitalisation of the subsequent expenditure on the overhaul as part of the cost of the asset.

If, in the example above, the entity had failed to identify the DD component at the date of acquisition
because it was not considered significant, and had not depreciated that component separately during
Years 1 to 5, the expenditure on the overhaul in Year 6 would still be capitalised as part of the cost of
the asset, provided that the general recognition criteria were met. In this circumstance, the entity
would be required to estimate the remaining carrying amount of the DD component at the date of the
first overhaul (which would be approximately CU3.33 million, i.e. CU4 million depreciated for 5 years
out of 30), and to derecognise that carrying amount at the same time as the expenditure on the
overhaul is capitalised.



Example 2 Vessel held for sale

During October 2010 Poseidonos Shipping Company decided to sell one of its vessels. The
Company obtained approval from its directors during October 2010, and started looking for a buyer.
Also during October 2010, the Company started to actively market the vessel contacting brokers,
started negotiating sales price, etc.

During December 2010, the Company entered into a Memorandum of Agreement (MOA) with an
unrelated party to sell vessel A, with a NBV of $60 million, for $41 million (including approximately $1
million of costs to sell), which will approximate to a $20 million loss.

Also consider the following two different scenarios:

A. Vessel A is on a time charter (TC) with Charterer X until J uly 2013. The charter party
agreement prohibits that vessel A, then on a time charter with Charterer X would not be sold
until J anuary 20, 2011, or later until completion of the trip that had already been arranged by
the Charterer.

B. During October 2010 vessel A was on a TC with Charterer X. The Charter Party allows the
owners of the vessel to sell the vessel to a third party and the Charterers cannot
unreasonably refuse this sale.

Criteria Action taken Case A Case B
Available for immediate sale in
its present condition
Case A: the sale restriction in the
CP agreement means the vessel is
not available for immediate sale.

Case B: the vessel is available for
immediate sale as the transfer of
ownership is not restricted. This is
customary in the shipping industry.

The sale must be highly
probable.

Commitment to sell the vessel

The Company obtained approval
from its directors to sell the vessel.

Actively seeking to locate buyer
During October 2010, the Company
started to actively market the
vessel.

Sale probable within 1 year
During December 2010 the
Company signed an MOA with an
unrelated party for a price of $40
million.

Reasonable price Refer above.

Case A Case B
Vessel will be classified as asset held and
used as of December 31, 2010.
Vessel will be classified as asset held for sale as
of December 31, 2010.



Example 3 Borrowing Costs

Poseidon Shipping Company entered into a contract with a shipyard on J uly 1, 2010 for the
construction and purchase of two Panamax vessels. The contract price was $50 million per vessel,
with a scheduled delivery date of December 1, 2011. The payment terms are as follows:

Timing Date Percentage Amount
Upon entering into agreement J uly 1, 2010 10% contract $10 million
Steel cutting December 1, 2010 40% contract $40 million
Keel laying-Launching February 1, 2011 15% contract $15 million
Delivery December 1, 2011 35% contract $35 million
Total $100 million

We assume that construction activities commence upon payment of 1st installment.

Poseidon Shipping has the following outstanding debt:

- Directly related to the vessels: bank loan at variable rate (Libor+margin) to cover 70% of the
cost of the vessels. Interest due quarterly, beginning on date of first draw. For 2010, we
assume that the variable loan rate was 5% throughout the year.

General corporate debt: weighted average interest rate of 4.5%

Poseidon also incurred the following other costs in 2010:

Description Amount
Construction related costs, supervision, travel, vessel inspection, site team $50,000
Brokers commission (4% of construction value due up front) $4,000,000
Legal fees to establish the title of vessel owning companies $5,000
Office overhead (general and administrative) and other expenses $4,000
Total $4,059,000



Example 3 Borrowing Costs - Continued

Step 1: Identifying vessel acquisition costs to capitalize for year ended December 31,2 010

Installment payments to shipyards.
Indirect costs related to construction (supervision costs etc).
Brokers commissions.
Legal fees.
Direct interest expenses.
Indirect interest expenses.

Description Amount to
capitalize
Construction related costs, supervision, travel, vessel inspection, site team $50,000
Brokers commission (4% of construction value due up front) $4,000,000
Legal fees to establish the title of vessel owning companies $5,000
Office overhead (general and administrative) and other expenses -
Total capitalizable expenses $4,055,000

Step 2: Identify expenditures eligible for interest capitalization IAS 23

Eligible expenditures include capitalized expenditures (net of progress payment collections) for the
qualifying asset that have required the payment of cash, the transfer of other assets, or the incurring
of a liability on which interest is recognized.

Description Amount
Installment payment, financed through bank loans (70%) $70,000,000
Installment payments, financed from equity (30%) $30,000,000
Other capitalized costs (initial expenses), financed from equity $4,055,000
Total $104,055,000

Step 3: Calculate the appropriate capitalization rate

The most appropriate rate to use as the capitalization rate is the rate applicable to specific new debt
resulting from the need to finance the acquired assets.

Specific borrowings: Average eligible capitalized expenditures x interest rate on specific
borrowings.
If there is no specific new debt, the capitalization rate is a weighted-average of the rates of
the other borrowings of the entity
Other borrowings: Average eligible capitalized expenditures x weighted average rates of
borrowings.


Example 3 Borrowing Costs - Continued

Step 4: Calculate capitalized interest as of December 31, 2010

Description Calculation Amount
Interest on 1
st
$ 7,000,000*5%*6/12
installment payment, financed
through bank loans
$175,000
Interest on 2
nd
$28,000,000*5%*1/12
through bank loans
$116,667
Interest on 1
st
$ 3,000,000*4.5%*6/12
from equity
$67,500
Interest on 2
nd
$12,000,000*4.5%*1/12
from equity
$45,000
Interest on indirect costs (*) $ 4,055,000*4.5%*6/12 $91,238
Total $495,405

(*) Indirect costs were assumed to be incurred on July 1, 2010, as they related to the brokers
commissions and other costs due up-front.

Step 5: Calculate total capitalized costs as of December 31, 2010

Description Amount
Installment payments $50,000,000
Capitalized expenses $4,055,000
Capitalized interest $495,405
Total $54,550,405

4 Differences from US GAAP and UK GAAP

Many of the key principles outlined in this manual are also applicable under UK GAAP. However,
there are some key areas of difference which we have outlined below. These differences are not
intended to be exhaustive and individual circumstances should be considered carefully.

Area IFRS
treatment
UK GAAP
treatment
US GAAP
Treatment

Vessel
Recognition Basis
Cost or revaluation
basis permitted.
Cost or revaluation
basis permitted.
Cost basis must be
used. Revaluation
basis is prohibited.

Asset
Depreciation
IFRS requires a
component approach
for depreciation where
assets must be
separated into
significant individual
components and
depreciated over their
useful lives.
UK GAAP requires a
component approach
for depreciation where
assets must be
separated into
significant individual
components and
depreciated over their
useful lives.
Component accounting
is permitted, but not
required.

Major Maintenance
/ Overhaul Costs
(Dry-docking and
Special Survey
Costs)
Costs are generally
capitalized in asset
costs and depreciated
according to the
component approach.
Costs are generally
capitalized in asset
costs and depreciated
according to the
component approach.
Costs are either
expensed as incurred,
deferred and amortized
until the next overhaul,
or accounted for as a
part of the cost of the
asset.

Acquired Time
Charters with
Vessel
Acquisition
Diversity in practice
may exist. IAS 16
indicates that the
element of the
purchase price that
relates to favourable or
unfavourable attached
time charter be treated
as a separate
component of the
vessel cost and
depreciated over the
remaining charter
period
The element of the
purchase price that
relates to favourable
or unfavourable
attached time charter
will be a separate
component of the
vessel cost and
depreciated over the
remaining charter
period.
The element of the
purchase price that
relates to favourable
or unfavourable
attached time charter
will be presented as an
intangible or a liability
respectively and will be
amortized over the
remaining period of the
charter agreement into
revenue.

Borrowing
Costs
Borrowing costs in
relation to qualifying
assets must be
capitalised as part of
the cost of that asset.
Preparers have an
accounting policy
choice on whether to
capitalise borrowing
costs. The policy must
be applied consistently
to all tangible fixed
assets.
Borrowing costs in
relation to qualifying
assets must be
capitalised as part of
the cost of that asset.


4 Differences from US GAAP and UK GAAP

Area IFRS
Treatment
UK GAAP
treatment
US GAAP
treatment

Asset
Impairment
A one-step impairment
test based on
recoverable amount.
Impairment losses
may be reversed if
recovery occurs.
A one-step impairment
test based on
recoverable amount.
Impairment losses
may be reversed if
recovery occurs.
A two-step impairment
test. First the carrying
value of the asset or
asset group is
compared with the
undiscounted value of
the future cash flows.
If the carrying value is
higher, then the asset
or asset group is
written-down to fair
value based on
recoverable amount.
Reversal of
impairment losses are
not permitted.

Asset
Residual Values
Estimates of useful
life, residual value and
depreciation methods
are reviewed at least
annually.

Residual value may be
adjusted upwards and
downwards.

Residual value
represents the current
net selling price
assuming the assets
were already of the
age and in the
condition expected at
the end of its useful
life.
Under FRS 15,
residual value is
measured using prices
that existed at the time
of initial recognition or
most recent
revaluation and does
not take account of
price changes in the
secondary market or
of currency
fluctuations.
Residual value may
only be adjusted
downwards. Residual
value is generally the
discounted present
value of expected
proceeds on future
disposal.

Assets Held
for Disposal
When vessels qualify
as held for sale they
are separately
classified and
depreciation ceases.
There is no equivalent
classification under
UK GAAP and assets
continue to be
depreciated until they
are disposed of.
When vessels qualify
as held for sale they
are separately
classified and
depreciation ceases.


Deloitte Shipping Team

For further assistance in any of the areas raised in this manual please do not hesitate to contact the Deloitte
shipping team:
Global leadership Cyprus
Costas Georghadjis
+357 25 86 86 60
cgeorghadjis@deloitte.com

Denmark
Torben Okkels
+45 36 10 21 88
tokkels@deloitte.dk

Germany
Christian Dinter
+49 40 32 080 4525
cdinter@deloitte.de

Greece
George D. Cambanis
+30 210 6781101
gcambanis@deloitte.gr

Dina Karsas
+30 210 67 81128
dkarsas@deloitte.gr

Italy
Nicola Zerega
+39 01 05 31 70 11
nzerega@deloitte.it

Elena Tenuta
+39 08 12 48 81 11
etenuta@deloitte.it

Netherlands
Deen Sonneveldt
+31 (0) 88 288 1971
dsonneveldt@deloitte.nl

Norway
Bjarne Ryland
+47 55 21 81 58
bryland@deloitte.no
Singapore
Cheng Kong Michael Kee
+65 62 16 32 49
mkee@deloitte.com

South Africa
Ruwayda Ebrahim
+27 31 560 7115
rebrahim@deloitte.co.za

Switzerland
Chris Jones
+41 (0) 22 747 7075
chrispjones@deloitte.ch

United Arab Emirates
Vincent Snijders
+971 (0) 4331 3211
visnijders@deloitte.com

Anis Sadek
+971 (0) 4331 3211
asadek@deloitte.com

United Kingdom
David Paterson
+44 20 7007 0879
djpaterson@deloitte.co.uk

Syl via Chai
+44 20 7303 3897
sychai@deloitte.co.uk

United States
Jack Azose
+1 212 436 4838
jazose@deloitte.com

Greg Koslow
+1 212 436 2327
grkoslow@deloitte.com

Peter Bommel
Global Industry Leader
Energy & Resources
Deloitte Touche Tohmatsu Limited
+31 882 880 935
pbommel@deloitte.nl

George D. Cambanis
Global Shipping & Ports Leader
Energy & Resources
Deloitte Touche Tohmatsu Limited
+30 210 6781101
gcambanis@deloitte.gr

Regional professionals

Brazil
William Joseph Ballantyne
+55 (21) 3981 0650
wballantyne@deloitte.com

Canada
Joe Read
+1 604 640 4930
josread@deloitte.ca

China
Jay Harrison
+852 2852 6337
jayharrison@deloitte.com.hk

Adi Karev
+852 2852 6442
adikarev@deloitte.com.hk

About Deloitte Shipping & Ports Group
Deloittes Shipping & Ports Group provides professional services to the international deep sea transportation industry which includes oil & gas carriers, dry
bulk carriers, containerships, offshore drill ships and support vessels, marine fuel logistics companies, ports, terminals and harbor authorities. We work with clients
to develop solutions to complex business issues, enhancing their effectiveness in a dynamic industry. The groups network of more than 500 industry professionals
in 56 countries is prepared to serve you, wherever and whenever you may need us.

About Deloitte
Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited, a UK private company limited by guarantee, and its network of member firms, each of which is a
legally separate and independent entity. Please see www.deloitte.com/about for a detailed description of the legal structure of Deloitte Touche Tohmatsu Limited
and its member firms. Deloitte provides audit, tax, consulting, and financial advisory services to public and private clients spanning multiple industries. With a
globally connected network of member firms in 147 countries, Deloitte brings world-class capabilities and deep local expertise to help clients succeed wherever they
operate. Deloitte's more than 170,000 professionals are committed to becoming the standard of excellence.

Shipping-Accounting For Owned Vessels by Shipping Companies

Enviado por

Dados do documento

Título original

Direitos autorais

Formatos disponíveis

Compartilhar este documento

Compartilhar ou incorporar documento

Opções de compartilhamento

Você considera este documento útil?

Este conteúdo é inapropriado?

Direitos autorais:

Formatos disponíveis

Shipping-Accounting For Owned Vessels by Shipping Companies

Enviado por

Direitos autorais:

Formatos disponíveis

1 IFRS for Shipping | Accounting for owned vessels by shipping companies

IFRS for Shipping

Você também pode gostar