Performance obligations for "revenue from contracts with customers" principle in the shipping industry
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abstract
PurposeThe aim of this paper is to investigate the gap between cost-based and time-based revenue recognition schemes in the accounting of ship-owning corporations, and to propose cost-based revenue recognition (as in general accounting practice) in connection with the performance obligations.Design/methodology/approachFor a comparative analysis of time-based (traditional approach) and cost-based schemes, a sample of dry bulk ships is selected and voyage estimations are performed by certified professional shipbrokers (Fellow of the Institute of Chartered Shipbrokers) (data collection and voyage estimation by practitioner). Performance obligations are also defined by certified shipbrokers (i.e. survey and expert opinion) and certified public accountant based on common shipping business practice and accounting practice in general.FindingsEmpirical results indicate the significant gap between two alternative schemes. Cost-based revenue recognition accelerates the revenue recognition (benefit of shipowner), and it enables comparability among other industries since cost-based allocation is the common practice in accounting (matching principle, Generally Accepted Accounting Principles).Research limitations/implicationsIt is obviously impossible to observe all kinds of freight market transactions for all different kinds of vessel particulars. The sample size does not undervalue the current study since the central idea of this paper is not the verification of the cost-based recognition in all possible transactions.Practical implicationsThe proposed approach debiases the existing recognition practice as well as improving the speed of revenue recognition. In the existing practice, time-based recognition is still based on voyage estimations (time estimation). Voyage estimations conventionally answer two questions: What is the cost of the voyage? and What is the duration of the voyage? Therefore, the proposed approach does not require any additional work done. Common practice also clarifies the cost-based schedule for revenue recognition.Originality/valueThis paper addresses the unconventional accounting practice and its incomparability problem for the first time. To the best of the authors knowledge, this paper is also the first study on accounting economics of the shipping business. This paper proposes a practical solution to the debate raised by Financial Accounting Standards Board 2014-09 regulation on accounting standards by utilizing a staging approach and cost-based revenue allocation.
