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Due to my lack of experience, i find below interesting, quoted from page 2 of Q4:
The Group had previously recorded its ship owning revenue based on actual daily charter income in accordance with the terms of the charter hire agreements.
This was the approach consistently adopted by the Group up to and including the interim unaudited financial results announcement issued on 10 February 2016 for the nine month period ended 31 December 2015.
This year, following a change of audit partner, the Group was strongly advised that for such charter hire agreements, it is more appropriate to adopt a "straight-line" revenue recognition over the entire period of the charter instead (this despite declining charter hire rates in subsequent years).
Following extensive consultations, the Group has decided to conform recognition with straight-line
Accordingly, prior reporting periods have been restated to be consistent with the accounting treatment in the current reporting period. Had the Group continued with its previous recognition approach, net profit for FY2016 and FY2015 would be US$13.8 million and US$9.3 million respectively.
=========end quote
I could be very wrong, but my interpretations of that:
1. the charter hire contracts are using reversed accelerated rate.
Higher rate at first then going down across the years.
Take note of the deferred income of Q4 ($1M) and FY2016 ($4M).
The cashflow remains about the same, but IFRS earning is affected.
I reckon the deferred income will go down over the years.
2. The idea of IFRS is to smoothen the earning, but realistically the rate is lower because the ship is older, right? Hence is it wrong to recognize higher rate then lower in subsequent years?
3. IMO, the contracts were designed in such a way that it actually smoothen the earning. However, with the straight line revenue recognition, now it makes the earnings lumpy.
Don't forget the initial Finance cost for first few years will no longer be there.
So what will happen after another 8 years (debts paid off), the earning will be a lot more.
Hence the lumpiness of the earning and not cashflow.
Is this the case of theory versus real world practice?
In theory there's no difference between theory and practice, but in practice there is.
<vested>
The Group had previously recorded its ship owning revenue based on actual daily charter income in accordance with the terms of the charter hire agreements.
This was the approach consistently adopted by the Group up to and including the interim unaudited financial results announcement issued on 10 February 2016 for the nine month period ended 31 December 2015.
This year, following a change of audit partner, the Group was strongly advised that for such charter hire agreements, it is more appropriate to adopt a "straight-line" revenue recognition over the entire period of the charter instead (this despite declining charter hire rates in subsequent years).
Following extensive consultations, the Group has decided to conform recognition with straight-line
Accordingly, prior reporting periods have been restated to be consistent with the accounting treatment in the current reporting period. Had the Group continued with its previous recognition approach, net profit for FY2016 and FY2015 would be US$13.8 million and US$9.3 million respectively.
=========end quote
I could be very wrong, but my interpretations of that:
1. the charter hire contracts are using reversed accelerated rate.
Higher rate at first then going down across the years.
Take note of the deferred income of Q4 ($1M) and FY2016 ($4M).
The cashflow remains about the same, but IFRS earning is affected.
I reckon the deferred income will go down over the years.
2. The idea of IFRS is to smoothen the earning, but realistically the rate is lower because the ship is older, right? Hence is it wrong to recognize higher rate then lower in subsequent years?
3. IMO, the contracts were designed in such a way that it actually smoothen the earning. However, with the straight line revenue recognition, now it makes the earnings lumpy.
Don't forget the initial Finance cost for first few years will no longer be there.
So what will happen after another 8 years (debts paid off), the earning will be a lot more.
Hence the lumpiness of the earning and not cashflow.
Is this the case of theory versus real world practice?
In theory there's no difference between theory and practice, but in practice there is.
<vested>
My views are your Gilbert & Sullivan's:
"The flowers that bloom in the spring, have nothing to do with the case".
"The flowers that bloom in the spring, have nothing to do with the case".