New accounting rules expose container shipping's debt dilemma
CONTAINERSHIP leases can no longer be recorded as operating costs and must be noted on the balance sheet under new accounting rules which came into effect in January
CONTAINERSHIP leases can no longer be recorded as operating costs and must be noted on the balance sheet under new accounting rules which came into effect in January.
The IFRS 16 rule requires lessees to capitalise all leases, except for short-term leases and those of low-value assets, resulting in some operators with large charter fleets ending up with an increased debt burden.
The new lease accounting standards will lead to greater transparency of the worrisome finances of liner shipping carriers, a sector that had been hiding a large chunk of debts through off-balance-sheet borrowing.
This is a significant change from the previous rules IAS 17, whereby operating leases were recorded as rental expenses and not included on the balance sheet, reports Lloyd's List.
Container shipping is an industry that relies heavily on off-balance-sheet finance, according to Alphaliner principal analyst Tan Hua Joo.
The revelation of these incognito debts from this year would make shipping lines' balance sheets 'extremely ugly', he added.
Under IFRS 16, operating leases are required to be recognised on the balance sheet with a right-of-use asset and a lease liability, which will result in more expenses in profit or loss during the earlier life of a lease, according to a recent report by accountants PwC.
'In some cases, liabilities would double from where they were previously,' Mr Tan said. 'There will be a lot more transparency in terms of the relative financial health of various companies.'
Cosco Shipping Holdings (CSH) disclosed in its first quarter results this year that the new accounting standard had increased the company's debts by CNY27.8 billion (US$4 billion), about 16 per cent of its total liabilities at the end of last year. Its debt ratio as of the end of March has increased by about 3 per cent, accordingly.
German-based Hapag-Lloyd, the fifth largest carrier, said in its first-quarter results that it recognised additional lease liabilities of $1.1 billion as at January 1, 2019, making up about 10 per cent of its total liabilities at the end of 2018.
The jump in debts driven by the accounting methods, however, were only on paper, and hence would not change the way the market operates, Mr Tan argued.
CSH chief financial officer Zhang Mingwen said the increase of the company's debts was 'manageable' and its cashflow and financing abilities would remain unaffected. He added that the financial institutions had already seen the changes coming.
Danish Ship Finance senior relationship manager Berit Koertz said the arrival of IFRS 16 had been expected for some years since the measure was issued by the International Accounting Standards Board in 2016.
'I think any prudent lender would have considered the leasing obligations,' Ms Koertz told a recent Marine Money conference in Hong Kong. 'Covenants have been renegotiated on a good footing level with all our customers. And I think most lenders have done that.'
HSBC director of export and specialised finance Alasdair Walker echoed the view.
'From a net creditor perspective, leases have been capitalised back to the balance sheet for a while now. I think equity analysts have been looking at the companies at the same base,' Mr Walker said.
Further, he suggested that the new accounting rules were unlikely to stop shipping lines from continuing to engage in operating leases.