Shipping pools

How do shipping pools work?

Each member places one or more vessels in the pool under a pool agreement, while keeping ownership and usually the technical management, crewing and operating costs. The pool manager, often a company owned by one or more of the members, decides where the vessels trade, fixes voyage and time charters with cargo owners, pays voyage costs and collects freight. Each period, net pool earnings, freight and hire less voyage costs and pool expenses, are shared among the members using a distribution key. Members often contribute working capital to the pool when a vessel joins and receive it back when the vessel leaves.

Shipping pools: sharing the earnings

A pool has three vessels. Each is given pool points for its earning capacity, based on size, speed and fuel consumption, and earnings are shared in proportion to points multiplied by days in the pool. Net pool earnings for the year are US$ 15 million.

Vessel C joined the pool part-way through the year, so it shares in earnings only for its 300 days. Each member recognises its distribution as revenue, with its vessel's own operating costs, crew, maintenance and insurance, as expenses. The freight the pool earned from cargo owners, and the voyage costs it paid, do not appear in the members' accounts.

Is the pool a customer or a lessee?

Because the pool manager decides how and for what purpose the vessel is used, a member does not control the voyages and is not the principal in the pool's contracts with cargo owners, so it does not report freight gross. Practice then splits. Many members treat the pool as their customer under IFRS 15: they provide the vessel and crew to the pool, and the distributions are variable consideration, recognised as the service is provided and estimated at each period end. Others conclude that the pool agreement contains a lease of the vessel to the pool, because the pool directs the use of an identified vessel, with distributions as variable lease payments that depend on pool performance rather than an index, recognised as income when earned. Both views lead to net revenue; the difference is mainly in presentation and disclosure. See time charters: lease or service.

How are pool distributions estimated?

Pools usually pay members monthly on estimates, with final distributions after voyages are completed and costs settled, sometimes months later. Members recognise revenue for the period based on the pool's best estimate of net earnings, including voyages in progress, and constrain amounts that could reverse, such as disputed demurrage claims. Adjustments to earlier estimates are recognised when known. Members need information from the pool manager to do this, so pool agreements usually require monthly reporting.

How are working capital contributions treated?

Amounts a member pays into the pool to fund bunkers and other working capital are financial assets, receivables from the pool, measured at amortised cost and assessed for expected credit losses. They are usually repaid when the vessel leaves the pool, sometimes over several months. Bunkers on board when a vessel enters or leaves the pool are bought or sold in the same way as on delivery into a time charter; see bunker fuel.

How does the pool manager account for the pool?

The pool manager earns a commercial management fee, often a percentage of gross pool revenue, around 1.25% or more, plus a fixed fee per vessel per day. These are revenue under IFRS 15, recognised as the management service is provided. Whether the manager consolidates the pool depends on IFRS 10: although it directs the pool's activities, it does so on behalf of the members, its fees are commensurate with the services and it has no significant exposure to the pool's results, so it is usually an agent and does not consolidate. A manager that is also a large member needs a closer look. See principal versus agent.

Do pools affect impairment testing?

They can. Because a pooled vessel's cash inflows depend on the earnings of the whole pool, an owner with several vessels in the same pool may conclude that they form one cash-generating unit, while a single vessel in a pool of others' ships is usually still tested on its own, using expected pool distributions. See vessel impairment.

How does US GAAP differ?

The same split exists under US GAAP: some owners account for pool revenue under ASC 606 and others treat pool arrangements as operating leases under ASC 842 with variable lease income. Their revenue lines are labelled accordingly, so pool revenue should be read alongside the accounting policy. See shipping accounting.

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