Demurrage and despatch

What are laytime, demurrage and despatch?

A voyage charter sets the laytime, the time allowed for loading and discharging, either as a number of days or as a rate of cargo handling. Laytime starts after the vessel tenders a notice of readiness, subject to the charter's exceptions for weather, holidays and shifting between berths. If loading and discharging take longer, the charterer pays demurrage for each extra day at the agreed rate. If they take less time, some charters require the owner to pay despatch, often at half the demurrage rate. The calculation is set out in a laytime statement prepared from the port time sheets after the voyage.

How is demurrage treated under IFRS 15?

Demurrage is not a separate promise: the owner provides the same voyage, and demurrage changes the price because the vessel is used for longer than planned. So it is variable consideration in the voyage's transaction price, recognised as the voyage is performed. In practice, owners recognise demurrage as the delays happen, because that is when the variable amount becomes estimable and relates to the service being provided. The amount included is estimated using the expected value or the most likely amount, and IFRS 15's constraint limits it to the amount for which a significant reversal is highly unlikely. See variable consideration.

Demurrage on a voyage

A voyage charter for a freight of US$ 1,750 thousand allows 5 days of laytime at the load and discharge ports combined, with demurrage at 25 thousand a day. Port congestion means the vessel spends 8 days, so the owner claims 3 days of demurrage, 75 thousand. Past claims of this kind have been settled at about 90% of the amount claimed after negotiation over the laytime statement, and the owner expects the same here.

The owner recognises 67.5 thousand of demurrage revenue as the delays occur, not the full claim, because experience shows that the rest is likely to be conceded. If the charterer settles for the full amount, the extra 7.5 thousand is recognised then; if it settles for less, revenue is reduced. Until the claim is agreed and invoiced, the owner's right is conditional on the laytime calculation being accepted, so the amount is a contract asset rather than a receivable.

How is despatch treated?

If the cargo had been loaded one day faster than the laytime, the owner would owe despatch of 12.5 thousand. Despatch is a payment to the customer that reduces the transaction price, so it reduces revenue, estimated as the cargo operations progress. Owners and charterers may net demurrage and despatch across load and discharge ports, depending on whether laytime is reversible under the charter.

Price concession or credit loss?

When a demurrage claim is not collected in full, the reason matters. If the owner expects to accept less because of negotiation over the laytime calculation or to keep a good customer, that is an implicit price concession: variable consideration that reduces revenue. If the charterer agrees the claim but cannot pay, that is a credit loss on a receivable, recognised under IFRS 9's expected credit loss model and presented separately from revenue. Owners keep the two apart in their estimates and disclosures. See expected credit losses.

How does the charterer account for demurrage?

For a commodity buyer or trader that charters a vessel to move its cargo, demurrage paid is a cost of transporting the goods. Normal demurrage can be included in the cost of the inventory under IAS 2 as part of bringing it to its location, while abnormal amounts, such as the cost of severe delays caused by the buyer's own logistics failures, are expensed. Demurrage claims passed on to the seller or receiver of the cargo under the sale contract are accounted for under those contracts. See IAS 2 inventories.

Does demurrage arise under time charters?

No. Under a time charter, the charterer pays hire for every day the vessel is at its disposal, including time in port, so delays are the charterer's cost and there is no demurrage between owner and charterer. A time charterer that sub-lets the vessel on voyage charters can itself earn demurrage from its own customers. See time charters: lease or service.

How does US GAAP differ?

ASC 606 gives the same answers: demurrage is variable consideration within the voyage, and many US GAAP shipping companies recognise it as the delays occur, net of amounts they expect not to collect for reasons other than credit. See voyage revenue recognition and shipping accounting.

This guide is general information. It is not tax or legal advice for your situation.