Accounting for the Restructuring of Debt in the Maritime Industry

Debt restructuring and refinancing arrangements are very common in the maritime industry especially in the current economic climate. For a vessel-owning company, the outstanding debt is substantially the biggest liability on the face of the statement of financial position. Understanding the impact a debt restructuring plan will have on the financial statements is important to all users of the company’s financial information. It is vital to understand that depending on the specific changes in the loan terms and the circumstances surrounding the restructuring, the accounting and financial reporting treatment, may be very different. This, in turn, will significantly affect the presentation and disclosure of the financial statements, as well as numerous KPIs.

More specifically, depending on whether the change in the terms of the loan is a substantial or a non-substantial one, under the International Financial Reporting Standards (IFRS), the change will be accounted for as a modification or as an extinguishment. The accounting treatment will then determine the impact on the bottom line.  

Having an underlying understanding of the aforementioned resulting impact of a debt restructuring, especially at the time that the debt restructuring plan is being negotiated with the lenders, may be a factor to consider while making those ever so important negotiations with the lenders.

In addition, because of the significance of the outstanding liability on the financial statements, it is an area that key stakeholders like investors and analysts, are always very interested in. And of course, an area that auditors usually challenge. Getting the accounting treatment right is essential to ensure that financial information is considered reliable and relevant to decision makers.

Last but not least, IFRS and USGAAP present differences when it comes to debt restructuring. Preparers of financial information, as well as analysts and decision makers should be aware of the key differences between the two bases of preparation.