The new accounting standard IFRS 15, Revenue from Contracts with Customers, comes into force from 1 January 2018. Ship owners need to make sure they understand the impact on the timing and nature of the revenues they recognise.
Some forms of shipping will be more affected than others. For example, IFRS 15 does not cover leasing revenues, so income from bareboat charters and the asset element of time charters will not be affected. However, voyage charters and the service element of time charters will be.
The big change is that IFRS 15 requires revenue to be recognised when, and only when, an entity transfers a promised good or service to a customer – not as the entity undertakes activities connected with the promised good or service. This means there is a much greater focus on what the customer is getting from the seller and when.
The standard is built around the concept of a ‘performance obligation’ – a promise to transfer a distinct good or service to a customer. Under a voyage charter, this performance obligation would be the transporting of cargo from its load port to its discharge port. Revenue will therefore be recognised over a period beginning with the loading of the cargo and ending when the vessel has discharged its cargo. This approach will need to replace the discharge-to-discharge or load-to-load bases that are currently widely used.
The amount of cash actually received will not change, of course – only the timing of revenue recognition. Total revenue will only change under IFRS 15 in relation to voyages, or periods of relocation, that straddle the end of a year.
IFRS 15 also has a more robust model for determining the amount of revenue to be recognised – the transaction price. Particular challenges arise where there are potential variations to that price, as with demurrage. Variable consideration should only be included in the transaction price when it is highly probable that it will be due and that there will not subsequently be a significant reversal of the revenue. Ship owners will need to assess the probability of demurrage becoming due as a voyage progresses.
Other details in IFRS 15 include how to distinguish between and account for separate performance obligations and the method to use when estimating a transaction price. These and other issues and their application in the shipping sector are considered in our shipping-focused IFRS 15 factsheet, available to download here.
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Source: Moore Stephens