Simon Jeffery - Associate Director
Over 20 years in shipping, including 3 years as CFO and over 20 years in leading analytical roles.
Devising innovative solutions for solving complex problems across all parts of the shipping organisation – including finance, sales & marketing, operations and fleet management.
Transforming and automating decision-critical information flows using advanced data analytical tools and techniques.
Natasha Sirén - Senior Manager
Leading Theta’s IFRS 16 / Leasing practice, and delivering complex finance transformation and financial reporting projects across a wide range of industries
Providing expert advice and hands-on project management for delivering multifaceted and large projects across a wide range of complex finance and cross-functional operational challenges, and implementing new accounting standards.
Shipping industry volatility means that significant judgment might be required on both the initial and subsequent measurement of lease liability when there are purchase or extension options, or in identifying triggering events which might require reassessment of the lease. The increase in contract renewals of time charters and number of renewals agreed up to 6 – 12 months in advance particularly in the containership sector makes it vital that charterers have appropriate processes and controls to correctly determine and monitor the circumstances that require reassessment of leases.
Many shipping companies may also act as a lessor and lessee, and the application of IFRS 16 needs to be determined accordingly. Whilst lessor accounting is substantially unchanged by IFRS 16, careful consideration needs to be given in particular to subleases and sale and leaseback transactions. Subleases are recorded for all companies that charter-in vessels that are subsequently sub-chartered out. Also, any sale and leaseback transactions including large vessels and their time charter contracts need to be thoroughly analysed to determine the correct accounting treatment.
Shipping companies also have challenges in financial reporting due to lease accounting impact. They typically report earnings either in EBITDA/EBIT or net income. Due to market specific changes resulting mainly from Covid, charterers’ leasing costs and charter lease durations have dramatically increased. As a consequence, they have even more lease payment expenses accounted for as depreciation and interest on their income statements under IFRS 16.
EBITDA includes operating costs but excludes depreciation, but depreciation of leased right-of-use assets under IFRS 16 is a cash item. Hence the reported earnings would include the positive cash effect of freight revenue by liner companies from their leased ships and exclude the negative cash impact of charter payments carriers make for the very vessels allowing them to earn the freight revenue. EBIT does cover the lease cost effect of long-term charters on depreciation but not the interest. Net income on the other hand includes the bottom-line impact of interest and taxes, but the impact of IFRS 16 on net income is determined by multiple factors such as the size and maturity of the lease portfolio, discount rates and average lease term.
Most of the major charter contracts in the shipping industry will be classified as a lease. Bareboat charters are essentially contracts for the hire of a vessel for an agreed period during which the charterers acquire most of the rights of the owners and usually pay all costs except capital costs. Time charters often contain a lease and non-lease components.
IFRS 16 allows companies as an accounting policy choice to choose whether to combine the lease and non-lease components as a single lease component. By adopting this policy, the accounting is simplified in practical terms but as a result balance sheet values for lease liabilities and right-of-use assets will increase (impacting key profit metrics).
Voyage charter contracts are a commonly used form of charter party in the shipping industry. They are contracts between a shipowner and a charterer to provide the services of a ship for voyages to carry cargo between agreed loading and discharging ports. They are often characterised as service contracts but require detailed analysis of the restrictions specifying the destination of each voyage, the overall number of voyages and what the ship transports define the scope of the customer’s right to use the ship. And the same applies to contracts of affreightment.
At Theta we understand that shipping is a capital-intensive and complicated business and your need to optimise shipping operations by harnessing your operational data.
We can advise you on all your IFRS 16 accounting implications and build an effective database with all of the financing and leasing data, and create automated payment schedules, schedules with future obligations and a comprehensive dashboard to provide an overview and summary data for all leases and ability to drill into any necessary detail. These will help shipping businesses to make better decisions, spot problems early on, address any issues and improve financial reporting.
We can also offer you expert advice on any complex lease accounting challenge and provide you with audit proof analysis and documentation.
Under IFRS 16, an agreement contains a lease if the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration.
Lessees in the shipping industry should have the right to direct the operations of the ship without the owner having the right to change those operating instructions, or design the leased asset in a way that pre-determines how and for what purpose the ship will be used throughout the period of use.
Therefore, IFRS 16 applies when it can be demonstrated that the shipping company can dictate how the leased asset is used and what freight will be transported.
Leases are common both as a source of capital to fund new build programmes and second-hand purchases, and as a way to do business through bare-boat and time-charter arrangements. The container leasing market is set to increase as the global economy and trade are highly dependent on seaborne trade, but the fluctuations in leasing rates will be challenging. Leasing rates are dependent on the price of steel, global trade and the demand for and supply of containers.
Since the implementation of IFRS 16 accounting standard in 2019, millions of dollars have been moved to the balance sheet for almost all operating leases that were previously recorded as a rent expense on the income statement.
To see how we can help you navigate complex lease accounting, please select a time in our calendar through the link below for a no-obligation chat.
IFRS 16 at a glance.
Lease accounting under IFRS 16 can be a complex exercise for many companies in the shipping industry due to the large volume and diversity of leased transportation and other equipment that are crucial to shipping businesses.
In applying IFRS 16, there are several key factors for shipping companies to consider such as:
Does the contract clearly state who decides which goods are transported and how often?
How often is the ship used and is there a minimum capacity at which it operates?
Who decides which route is taken?
Does the contract contain non-lease components, such as the crew, maintenance or insurance cost?
Does the contract contain purchase or extension options?
Are you the lessor or lessee, or both?
Shipping industry volatility means that significant judgment might be required on both the initial and subsequent measurement of lease liability when there are purchase or extension options, or in identifying triggering events which might require reassessment of the lease. The increase in contract renewals of time charters and number of renewals agreed up to 6 – 12 months in advance particularly in the containership sector makes it vital that charterers have appropriate processes and controls to correctly determine and monitor the circumstances that require reassessment of leases.
Many shipping companies may also act as a lessor and lessee, and the application of IFRS 16 needs to be determined accordingly. Whilst lessor accounting is substantially unchanged by IFRS 16, careful consideration needs to be given in particular to subleases and sale and leaseback transactions. Subleases are recorded for all companies that charter-in vessels that are subsequently sub-chartered out. Also, any sale and leaseback transactions including large vessels and their time charter contracts need to be thoroughly analysed to determine the correct accounting treatment.
Shipping companies also have challenges in financial reporting due to lease accounting impact. They typically report earnings either in EBITDA/EBIT or net income. Due to market specific changes resulting mainly from Covid, charterers’ leasing costs and charter lease durations have dramatically increased. As a consequence, they have even more lease payment expenses accounted for as depreciation and interest on their income statements under IFRS 16.
EBITDA includes operating costs but excludes depreciation, but depreciation of leased right-of-use assets under IFRS 16 is a cash item. Hence the reported earnings would include the positive cash effect of freight revenue by liner companies from their leased ships and exclude the negative cash impact of charter payments carriers make for the very vessels allowing them to earn the freight revenue. EBIT does cover the lease cost effect of long-term charters on depreciation but not the interest. Net income on the other hand includes the bottom-line impact of interest and taxes, but the impact of IFRS 16 on net income is determined by multiple factors such as the size and maturity of the lease portfolio, discount rates and average lease term.
At Theta we understand that shipping is a capital-intensive and complicated business and your need to optimise shipping operations by harnessing your operational data.
We can advise you on all your IFRS 16 accounting implications and build an effective database with all of the financing and leasing data, and create automated payment schedules, schedules with future obligations and a comprehensive dashboard to provide an overview and summary data for all leases and ability to drill into any necessary detail. These will help shipping businesses to make better decisions, spot problems early on, address any issues and improve financial reporting.
We can also offer you expert advice on any complex lease accounting challenge and provide you with audit proof analysis and documentation.
To see how we can help you navigate complex lease accounting, please select a time in our calendar through the link below for a no-obligation chat.
Simon Jeffery - Associate Director
Over 20 years in shipping, including 3 years as CFO and over 20 years in leading analytical roles.
Devising innovative solutions for solving complex problems across all parts of the shipping organisation – including finance, sales & marketing, operations and fleet management.
Transforming and automating decision-critical information flows using advanced data analytical tools and techniques.
Natasha Sirén - Senior Manager
Leading Theta’s IFRS 16 / Leasing practice, and delivering complex finance transformation and financial reporting projects across a wide range of industries
Providing expert advice and hands-on project management for delivering multifaceted and large projects across a wide range of complex finance and cross-functional operational challenges, and implementing new accounting standards.
Most of the major charter contracts in the shipping industry will be classified as a lease. Bareboat charters are essentially contracts for the hire of a vessel for an agreed period during which the charterers acquire most of the rights of the owners and usually pay all costs except capital costs. Time charters often contain a lease and non-lease components.
IFRS 16 allows companies as an accounting policy choice to choose whether to combine the lease and non-lease components as a single lease component. By adopting this policy, the accounting is simplified in practical terms but as a result balance sheet values for lease liabilities and right-of-use assets will increase (impacting key profit metrics).
Voyage charter contracts are a commonly used form of charter party in the shipping industry. They are contracts between a shipowner and a charterer to provide the services of a ship for voyages to carry cargo between agreed loading and discharging ports. They are often characterised as service contracts but require detailed analysis of the restrictions specifying the destination of each voyage, the overall number of voyages and what the ship transports define the scope of the customer’s right to use the ship. And the same applies to contracts of affreightment.
Under IFRS 16, an agreement contains a lease if the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration.
Lessees in the shipping industry should have the right to direct the operations of the ship without the owner having the right to change those operating instructions, or design the leased asset in a way that pre-determines how and for what purpose the ship will be used throughout the period of use.
Therefore, IFRS 16 applies when it can be demonstrated that the shipping company can dictate how the leased asset is used and what freight will be transported.
Does the contract clearly state who decides which goods are transported and how often?
How often is the ship used and is there a minimum capacity at which it operates?
Who decides which route is taken?
Does the contract contain non-lease components, such as the crew, maintenance or insurance cost?
Does the contract contain purchase or extension options?
Are you the lessor or lessee, or both?
Leases are common both as a source of capital to fund new build programmes and second-hand purchases, and as a way to do business through bare-boat and time-charter arrangements. The container leasing market is set to increase as the global economy and trade are highly dependent on seaborne trade, but the fluctuations in leasing rates will be challenging. Leasing rates are dependent on the price of steel, global trade and the demand for and supply of containers.
Since the implementation of IFRS 16 accounting standard in 2019, millions of dollars have been moved to the balance sheet for almost all operating leases that were previously recorded as a rent expense on the income statement.
IFRS 16 at a glance.
Lease accounting under IFRS 16 can be a complex exercise for many companies in the shipping industry due to the large volume and diversity of leased transportation and other equipment that are crucial to shipping businesses.