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Penalty Income

11 November 2009 258 views 5 Comments

Dear all,

We have given a contract to ship builders for construcing a vessel. As per the contract terms, if the builder delay the delivery of the vessel beyond agreed delivery date, they have to give us penalty of USD 10,000 per day. Now they have delivered the vessel after 373 days of the agreed date and we have received the penalty from them. How we can account the penalty income in our books, either as penalty income or by reducing the capital cost of the vessel. Kindly refer relevant IFRS or standard

Thank you

shas

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5 Comments »

  • admin (author) said:

    Message from Femi.

    It does not form part of the capital cost of the vessel and thus should be accounted for as an income in the Company’s books. The penalty is not a refund of the capital cost and thus should not be netted off the cpital cost. Also, netting off the penalty will only understate the cost of building the vessel.

    Regards,

    Femi

    # 11 November 2009 at 4:22 pm
  • admin (author) said:

    Message from Veeraraghavan

    Incidental expenditure during construction is capitalised or allowed to be done so.
    There are two aspects in this receipt(unless it is treated so,this money shall not be nomenclatured as Income).One is that it is a receipt incidental to construction of the vessel.another aspect is by virtue of the delay there are incidental losses to the revenue,during the delayed period, if budgeted,can be netted through these receipt,Notional loss of revenue can also be estimated later.There is a whole lot of networked business cycle that is lost due to this delay and this receipt is a compensation for such a loss.

    IFRS….Blink!!!

    With Warm Regards
    Veeraraghavan

    # 11 November 2009 at 4:23 pm
  • admin (author) said:

    Message from Benaya

    The vessel is an asset. Economic benefits would have been flowing to your entity had the vessel been delivered on time. Most likely the penalty was based on the estimated loss of economic benefit due to the delay. As a result the penalty received may be classified under other income. I feel The penalty can not be classified under IAS 18 as it did not come from the core operations of the entity or from the use of the vessel.

    Another possibility is to subtract the penalty received from the cost of the vessel and amortise it separately over the life of the vessel something similar the accounting for government grant.

    Am sue other experts may have different view from the above.

    Benaya

    # 11 November 2009 at 4:25 pm
  • adey786 said:

    I think it should not be netted against cost as it is not cost of acquisition of the vessel even though the compensation is connected in connection with delayed delivery of the vessel.

    It would be more appropriate to classify it as “other income” than classifying under main stream of revenues. If the amount is material and this kind of event rarely happens then it may be classified as extraordinary events.

    Regards

    # 12 November 2009 at 12:39 pm
  • riyer said:

    If it can substantiated the penalty was for loss of revenue, it needs to be shown under other income. Other wise the penalty is required to be adjusted with the cost of the ship, under IAS 16.

    # 22 December 2009 at 10:49 am

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