In addition to that, the ship owner might receive something called a ballast bonus, which requires some explanation. In some cases, the ship owner has to move the ship to a port where there’s a cargo in need of a pickup. If the ship is empty during that transfer, the ship owner is moving the ship for free. But, if the cargo owner is desperate – which usually means that there aren’t any other available ships – then this party pays the ship owner a ballast bonus, which offsets the cost of the voyage to the loading port.

And in some cases, a ship owner might receive a subsidy from the government in order to operate on a route that would otherwise be unprofitable. This is pretty common when the government wants to run supplies into a dinky little island in the middle of nowhere that only has a tiny population.

There are lots of other revenue types, but that gives you a feel for it.

Expense Accounting for Ships

Next, let’s look at some of the more unique expenses that a ship owner might incur.

The main cost for a ship is fuel, which can get pretty interesting. A ship owner could enter into a long-term contract with a fuel provider, which locks in the cost of the fuel. Or, the owner could take his chances at the current spot rate, which can vary all over the place. If the choice is to go with the spot rate, then ship owners will keep track of where fuel is cheapest, and so might divert to a nearby port to take on lower-cost fuel.

And another point regarding fuel. It’s called bunker fuel, and it’s basically tar sludge, which is the leftovers from an oil refinery. They have to mix other fuels into it to make it work in a ship’s engines, but – on a cool day – you can actually walk on bunker fuel. And if you’re running that kind of gunk through the engines, it might not be a surprise that their engines stop – as was the case with the container ship that ran into the Baltimore bridge.

Anyways. There’s also the cost of a vessel management company, which lots of ship owners use to hire the crew. Which means that ship owners are not direct employers of the crew – which, by the way, usually come from low-cost countries with a strong seafaring tradition, such as India and the Philippines.

And then there’s the maintenance expense, which is the third-largest expense. It starts fairly low when a ship is brand new, and keeps increasing over the life of the vessel, which is usually about 25 years. At some point, it’s just not economical to keep blowing money on the maintenance for an old ship, so it’s sent to the breakers to be torn apart. Which brings up a depreciation issue, which is the salvage value of a ship. If you’re planning to resell it prior to the end of its useful life, then the salvage value can fluctuate a lot, based on the projected supply and demand for ships. Or, if you plan to keep it for the duration, then the salvage value is the market price of its steel.

The fourth largest expense is insurance. Besides the usual insurance for the hull and machinery, there’s also war risk insurance to cover damage caused by pirates. You also have kidnap and ransom insurance, to cover the cost of negotiating with kidnappers and paying them off. Yeah, and you thought this was a boring accounting podcast.

Let’s touch on a few other good ones. Depending on where a ship is scheduled to travel, you might need to pay for armed guards during any transits through pirate-infested waters. And, there may be the cost of crew training for how to repel boarders, and even insurance to cover the loss of profits if a ship is detained by pirates. Good stuff.

Not quite as exciting are broker fees. Brokers line up the cargos for a ship. The fee for this is about 2½ to three percent of the freight fees earned. There are also consolidator fees. A consolidator firm receives items purchased on behalf of the ship owners, such as food supplies, and then breaks them down by individual ship, and then uses a freight forwarder to send them to the ports at which the owner’s ships are scheduled to arrive. And there are agent fees. These are local agents who represent the ship owner, who take of whatever a ship needs while it’s in port.

There are many more expenses, but I’ll mention just a few. Dockage fees are charged when a ship is berthed alongside a pier, while wharfage fees are assessed if the ship owner uses a wharf to unload cargo. And then we have the port fee, which is the daily fee charged by the harbor operator. As you can see, there are many, many expenses associated with ships. That’s why ship owners have really large accounting departments.

Accounting for Dry Docking

A big item for ship owners is dry docking maintenance. This is a standard ship overhaul that takes place every three to five years, when it’s taken out of the water and thoroughly inspected and repaired. The proper accounting for this is to capitalize its cost and then depreciate it until the date of the next scheduled dry docking. So what you’re doing is spreading the cost of the dry docking over the benefit period.

A related issue is that any components of a vessel that are scheduled to be replaced at the next dry docking should be identified and tracked separately in the accounting records. They should be completely depreciated as of that dry docking date. And, since lots of equipment is replaced over the lifetime of a ship, you can expect that all of them will be separately tracked. This means you could potentially have several hundred asset records associated with a single ship.

Impairment Testing for Ships

One final accounting topic, which is impairment testing. This is the bit where you have to write down the value of an asset if its fair value is less than its carrying amount. This is a problem for ship owners, because fair value is based on the supply of and demand for ships. There are periods when there are far too many ships being constructed, so their value drops. And on top of that, the fair value of a ship declines even more if the ship owner hasn’t kept up on its maintenance. So as you might expect, impairment testing time can be somewhat fraught, with the auditors seeing the need for a massive write-down, while the ship owner claims that the current market conditions are short-term, and fair values will come up again soon. Or not.

Related Courses

Accounting for Ship Owners