Voyage revenue recognition

Is a voyage charter a service or a lease?

A voyage charter is a service. The route, ports and cargo are fixed in the contract, and the owner operates the ship and decides how the voyage is performed, so the charterer does not direct the use of the vessel and there is no lease under IFRS 16, unlike most time charters. The owner's promise is to carry the cargo from load port to discharge port, a single performance obligation, with the freight and any demurrage as its price.

Why is voyage revenue recognised over time?

IFRS 15 recognises revenue over time when the customer simultaneously receives and consumes the benefits as the company performs. If the owner stopped halfway, another carrier would not need to redo the part of the voyage already completed, which is the test IFRS 15 uses for this, so the charterer benefits as the cargo moves. Progress is measured by time elapsed, which reflects the transfer of the service reasonably well because costs and effort are spread evenly over the voyage. See over time or point in time.

When does the voyage start?

Before IFRS 15, many owners recognised revenue from the end of the previous discharge to the end of the next, including the ballast leg. Under IFRS 15, most use load-to-discharge: performance starts when loading begins, because sailing empty to the load port does not transfer anything to the charterer. Some start from arrival at the load port or from the notice of readiness, depending on the charter terms. Whatever the policy, it is applied consistently and disclosed.

Voyage revenue across a year end

An owner fixes a voyage charter to carry 50,000 tonnes of grain at US$ 35 per tonne, a freight of 1,750 thousand. The vessel sails 10 days in ballast to the load port, loads for 3 days, sails 20 days laden and discharges for 2 days. The year ends 15 days after loading starts.

If the freight was paid on signing the bills of lading, as is common, the 700 thousand not yet earned is a contract liability; if it is paid on delivery, the 1,050 thousand earned is a contract asset until it is due. Voyage costs incurred during loading, the laden passage and discharge, such as bunkers and port charges, are expensed as incurred. See bunker fuel.

How are ballast costs treated?

IFRS 15 capitalises costs to fulfil a contract if they relate directly to an identified contract, create resources used in satisfying it and are expected to be recovered. Bunkers burned and port costs incurred sailing to the load port after the charter is fixed meet those tests, so many owners capitalise them and amortise them over the voyage. Costs incurred before a charter is fixed, while the vessel sails to an area of expected demand, do not relate to an identified contract and are expensed. See contract costs.

How are commissions treated?

Charters often include an address commission, typically around 3.75% of the freight, which is effectively a discount to the charterer: as consideration payable to the customer, it reduces revenue. Brokerage commissions, often around 1.25% to each broker, are paid to third parties and are costs. They are incremental costs of obtaining the contract, but because a voyage is usually completed within a year, owners can use the practical expedient to expense them as incurred.

What about contracts of affreightment?

A contract of affreightment commits the owner to carry a set volume of cargo over a period, using vessels of its choice. Each voyage is usually a separate performance obligation, or the contract is a series of distinct voyages, with revenue recognised over each voyage as above. Minimum volume commitments and shortfall payments are variable consideration. Because the owner chooses the vessels, there is no lease.

How does US GAAP differ?

ASC 606 gives the same answers, and US GAAP shipping companies also moved from discharge-to-discharge to load-to-discharge when they adopted it. Vessels employed in pools, where revenue is shared among members, raise different questions; see shipping pools. See shipping accounting.

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