Shipping Insights

Shipping InsightsAccounting and financial reporting in the shipping industry

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Contents

Introduction 1

Executive summary 2

Critical accounting policies within the sector 5

Appendices

Information sources 25

KPMG’s global shippingpractice contacts 27

© 2008 KPMG International. KPMG International provides no client services and is a Swiss cooperative withwhich the independent member firms of the KPMG network are affiliated.




Shipping Insights 1

IntroductionWe are pleased to present KPMG’s first survey of the global shippingindustry. The pace of accounting and financial reporting change inrecent years has affected all sectors. In this survey, we consider howthe shipping industry has responded and where further improvementsin stakeholder communication can be made.

About this publicationWe live in an environment where there is increasing focus on the quality andtransparency of company reporting. Against a back-drop of rapidly changingaccounting standards, the average annual report and accounts for each companyis becoming far more complex and voluminous.

Standard setters want to achieve more consistency of financial reporting, moreclarity over accounting policies and more openness to the drivers of financialperformance.

For its’ own sake some might view this as undesirable. However a transparent,robust and consistent annual financial report can act as the backbone for valueadding communication with the capital markets, customers, suppliers andemployees.

Many sectors are moving in the right direction, but such a trend has been slow to materialize in the shipping sector. This is not meant as a criticism of the sector,but recognition of the diverse nature of companies operating within it – both theway they operate and the countries in which they are domiciled.

There has been a considerable amount of corporate activity within the sector over the past two years and further consolidation is expected. But potentialsuitors may struggle to appraise businesses if basic information, such as tonnageand vessel values, is not readily available. Coupled with a lack of commonaccounting principles and a lack of clarity in their detailed application, investors and other stakeholders may struggle to understand value.

The goal of a single body of harmonized accounting standards is moving forward, and it is clear that any further hamonization will impact the financialperformance and position of every company – what is less clear, is how it willaffect shipping companies.

In this KPMG publication, we have sought to compare the annual reporting of the major shipping companies – with some surprising, and possibly some less surprising, results.



2 Shipping Insights

Executive summaryThe results of our survey suggest that the sector is lagging bestpractice – financial information is often difficult to obtain, difficult to assess and difficult to compare.

The results of our survey reflect the global reach of the sector and the big playersoperating within it. Just locating published financial information has been difficult.We were unsuccessful in locating an Annual Report for 44 percent of thosesurveyed1.

This is not surprising given that much of the sector (including some of the largest fleets) is in private ownership and registered in lightly regulated financialreporting territories. However we hope even those businesses will find thissurvey useful as no doubt they are preparing unpublished financial informationfor their key stakeholders such as shareholders and bankers.

Of those publishing financial statements there is a broadly equal split betweenIFRS, US GAAP and other GAAP reporters – over a dozen different GAAP’s beingapplied in total (albeit many may be aligning to IFRS in practice).

The chart below highlights just how difficult it has been to obtain clear andcomparable information within the sector.

Which GAAP?

This is, however, only part of the issue. The application of adopted accountingpolicies across these entities can be quite judgmental. The results of our surveyshow wide ranging inconsistencies in the detailed adoption of accountingpolicies.

Readers of financial information may struggle to understand how headlinepolicies have been applied. This is key information for investors as highlighted bya recent KPMG survey which indicated that 78 percent of respondents required

JapaneseHong Kong

TaiwaneseIndian

Iranian

Saudi Arabian

Singaporean

Malaysian

KoreanChilean

IFRS

Chinese

USNot identified

John Luke

Partner, KPMGGlobal Head of Shipping

1 Details of companies surveyed are included in Appendix 1.



Shipping Insights 3

more information on the ‘basis of assumptions’. Additionally 89 percent ofrespondents wanted to see alignment of accounting policies. The desire fortransparency is echoed by the national accounting bodies – the FinancialReporting Review Panel (in the UK) for example, recently criticized companies for using what it called ‘boiler-plate’ disclosures2.

In the next section we look at a few sector specific accounting policies in somemore detail, focussing on some of the most significant areas within the industry:

• Revenue recognition;

• Pool arrangements;

• Residual value;

• Depreciation;

• Impairment; and

• Component accounting.

Another feature we encountered during the course of our research is the level ofestimation required to accommodate the operational reality of revenue and costrecognition on a global container voyage. Combining this with the judgementsurrounding policy choice, and the degree of objectivity in arriving at a profitnumber for a shipping company is significantly accentuated.

A transparent and robust financial report should discuss these judgments andperhaps indicate the sensitivity of the result and the risk that the estimatesprove inaccurate.

Finally, in many ship owning and liner businesses, it is the composition of thefleet (along with the competence of the employees and management) which will drive future performance. So it is perhaps surprising that few in the sectorpublish technical data or market values of their assets. Compared to the propertysector, ‘floating real estate’ seems a little off the pace on this point.

What do you think?

If you are reading this, you probably have a vested interest in the sector…

What is important to you? Do you think the sector needs greater clarity, or doyou believe participants already have sufficient sector knowledge? Are capitalmarkets important to you?

Over the next year we intend to examine and discuss other financial accounting,reporting and governance issues in the sector.

Whatever your view, we would be delighted to hear from you.

2 Financial Reporting Review Panel, Preliminary Report, IFRS Implementation (4 December 2006).



kpmg.com

© 2008 KPMG International. KPMG International is a Swiss cooperative. Member firms of the KPMGnetwork of independent firms are affiliated withKPMG International. KPMG International provides noclient services. No member firm has any authority toobligate or bind KPMG International or any othermember firm vis-à-vis third parties, nor does KPMGInternational have any such authority to obligate orbind any member firm. All rights reserved. Printed in the United Kingdom.

KPMG and the KPMG logo are registered trademarksof KPMG International, a Swiss cooperative.

Designed and produced by KPMG LLP (UK)’s Design Services.

Publication name: Shipping Insights

Publication number: RRD-102227

Publication date: October 2008

Printed on recycled material.

The information contained herein is of a general nature and is not intended to address the circumstances of anyparticular individual or entity. Although we endeavour to provide accurate and timely information, there can be noguarantee that such information is accurate as of the date it is received or that it will continue to be accurate in thefuture. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.

The views and opinions expressed herein are those of the author and do not necessarily represent the views andopinions of KPMG International and KPMG member firms.


Contact KPMG in Belgium

Serge CosijnsHead of LOB Transport & LogisticsPartner KPMG Bedrijfsrevisoren – Réviseurs d’Entreprises+32 3 821 18 [email protected]

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