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T R A N S P O RT

Shipping Insights
Accounting and financial reporting in the shipping industry
A DV I S O RY

Contents
Introduction Executive summary Critical accounting policies within the sector Appendices Information sources KPMGs global shipping practice contacts 25 1 2

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

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

Shipping Insights 1

Introduction
We are pleased to present KPMGs first survey of the global shipping industry. The pace of accounting and financial reporting change in recent years has affected all sectors. In this survey, we consider how the shipping industry has responded and where further improvements in stakeholder communication can be made. About this publication
We live in an environment where there is increasing focus on the quality and transparency of company reporting. Against a back-drop of rapidly changing accounting standards, the average annual report and accounts for each company is becoming far more complex and voluminous. Standard setters want to achieve more consistency of financial reporting, more clarity over accounting policies and more openness to the drivers of financial performance. 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 value adding communication with the capital markets, customers, suppliers and employees. 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 the way 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 potential suitors may struggle to appraise businesses if basic information, such as tonnage and vessel values, is not readily available. Coupled with a lack of common accounting 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 financial performance and position of every company what is less clear, is how it will affect 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.

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

2 Shipping Insights

Executive summary
The results of our survey suggest that the sector is lagging best practice 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 players operating within it. Just locating published financial information has been difficult. We were unsuccessful in locating an Annual Report for 44 percent of those surveyed 1. 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 financial reporting territories. However we hope even those businesses will find this survey useful as no doubt they are preparing unpublished financial information for their key stakeholders such as shareholders and bankers. Of those publishing financial statements there is a broadly equal split between IFRS, US GAAP and other GAAP reporters over a dozen different GAAPs being applied in total (albeit many may be aligning to IFRS in practice). The chart below highlights just how difficult it has been to obtain clear and comparable information within the sector. Which GAAP? Japanese Indian Korean Chilean Hong Kong Taiwanese Chinese

John Luke Partner, KPMG Global Head of Shipping

Iranian Malaysian Saudi Arabian

IFRS

Singaporean

Not identified

US

This is, however, only part of the issue. The application of adopted accounting policies across these entities can be quite judgmental. The results of our survey show wide ranging inconsistencies in the detailed adoption of accounting policies. Readers of financial information may struggle to understand how headline policies have been applied. This is key information for investors as highlighted by a recent KPMG survey which indicated that 78 percent of respondents required
1

Details of companies surveyed are included in Appendix 1.

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

Shipping Insights 3

more information on the basis of assumptions. Additionally 89 percent of respondents wanted to see alignment of accounting policies. The desire for transparency is echoed by the national accounting bodies the Financial Reporting 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 some more 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 of estimation required to accommodate the operational reality of revenue and cost recognition on a global container voyage. Combining this with the judgement surrounding policy choice, and the degree of objectivity in arriving at a profit number for a shipping company is significantly accentuated. A transparent and robust financial report should discuss these judgments and perhaps indicate the sensitivity of the result and the risk that the estimates prove inaccurate. Finally, in many ship owning and liner businesses, it is the composition of the fleet (along with the competence of the employees and management) which will drive future performance. So it is perhaps surprising that few in the sector publish technical data or market values of their assets. Compared to the property sector, 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 do you believe participants already have sufficient sector knowledge? Are capital markets 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.

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

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

kpmg.com

Contact KPMG in Belgium


Serge Cosijns Head of LOB Transport & Logistics Partner KPMG Bedrijfsrevisoren Rviseurs dEntreprises +32 3 821 18 07 scosijns@kpmg.com

The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. 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 and opinions of KPMG International and KPMG member firms.

2008 KPMG International. KPMG International is a Swiss cooperative. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm vis--vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved. Printed in the United Kingdom. KPMG and the KPMG logo are registered trademarks of 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.