PwC Greece: From US GAAP/IFRS Reporting to New Greek Tax Regimes to ESG to Cyber Security – Key updates on the shipping industry finance landscape
PwC Greece, for another consecutive year, shared insights with 150 shipping executives on emerging developments from an accounting reporting perspective but also on shipping market trends during the two-day virtual event “The Annual Finance Update for the Shipping Industry”, held on 19 & 20 January 2022.
As the maritime industry continues to wade through the effects of the ongoing pandemic, growth has also been shown in certain areas. On the first day of the event, PwC experts summarised the requirements and updates on accounting and financial reporting under US GAAP and IFRS, covering topics that included Lease modifications, Asset Acquisitions, IBOR Reform, IAS19 and reporting requirements for Climate Change and Covid-19. On the second day, PwC’s tax experts provided an introduction to the new Incentive Tax Regimes in Greece, which may also apply to the shipping community. The PwC tax experts also provided an update on how the new regulation for myData in Greece impacts ship-management companies. As the Environmental, Social and Governance (ESG) activities of companies will continue to be a priority for stakeholders in the current market, PwC’s Advisory professionals focused on how companies can apply a holistic transformation to address these and how available technology, in this case an SAP solution, can assist finance departments cover the ESG agenda and requirements from a monitoring and reporting perspective. Finally, while Cybersecurity has continued to cause major disruptions to businesses in 2021, PwC’s Technology experts emphasised how cybersecurity should be the core of their operations.
Some key highlights from the PwC topics covered during the event are:
Lease Modifications
PwC’s overview of the market indicated that contract renewals of time charters are on the rise and companies need to ensure they are properly assessing the charter renewals under lease modifications accounting. Other than an increase in the number of time charter contracts, there has also been a rise in the number of renewals that are being agreed up to 6 months to 1 year in advance of the current time charter contract termination, especially in the containership sector. In the event that the contract renewal meets the modification criteria, the impact can under certain circumstances be significant, such as when the renewal is agreed well in advance of the termination of the existing charter, or if the renewal hire rate is significantly different to that of the current charter.
Asset acquisitions
There has been significant activity in Asset acquisitions with a high level of Sales & Purchases transactions being recorded. These transactions include large vessels and their time charter contracts. PwC pointed out that each acquisition needs to be separately evaluated through the asset vs. business accounting model to ensure the proper accounting is applied.
Climate change
The momentum continues around the shipping industry with regards to climate change and as Mariela Mylona, Senior Manager, and a member of the Global Accounting Consulting Services team at PwC Greece explained, the main focus from an accounting perspective has been on climate-risk disclosures. From a shipping perspective climate change impacts key areas such as: impairment of non-financial assets, fair value measurements, expected credit loss models for financial assets, financial statement disclosures, emission trading schemes and accounting for green loans. On the latter, Mariela commented: “In the event that a green loan’s interest rate is linked to a certain sustainability (green) measure such as compliance with emissions standards, energy efficiency metrics, or even a combination of different green measures, the borrower should first consider whether such a feature gives rise to an embedded derivative, which should be separately accounted for as a derivative.”
Covid-19 accounting and reporting reminders
As the Pandemic continues with waves of new variants, accounting and reporting challenges continue for shipping companies when preparing interim and annual financial statements. One of PwC’s key highlights is that companies need to continuously evaluate its impact on liquidity and the ability to continue as a going concern, as well as focus on having appropriate and transparent disclosures in the financial statements.
SEC and capital market updates
From the US Capital markets standpoint Santos Equitz, Managing Director, Shipping Industry and Capital Markets Leader, PwC Greece, reported that there has been a significant amount of activity in the US capital markets in 2021, especially in SPAC transactions, which is one path for a company to become listed in the US. Specifically, the US capital markets set all-time records in both issuance volume and proceeds, with 951 IPOs raising $282 billion in 2021. SPACs raised $145 billion across 613 IPOs, the largest annual number of SPAC IPOs yet. There were 274 SPAC merger announcements but there are still nearly 570 SPACs with $134 billion looking for deals within the next couple of years.One of the highlights of the capital markets transactions in Shipping during 2021 was that there were no Shipping SPAC transactions and only one US IPO. On the other hand, for the first time, two US listed shipping entities issued bonds on the Athens Exchange in 2021.In reference to SEC updates, the Commission has increased their enforcement focus on cyber security incidents and disclosures with the issuance of multiple fines. In addition, SEC has a new commitment to the development of ESG reporting.
SAP & ESG: How shipping technology can support ESG requirements
Dimitris Sakipis, ESG Leader, PwC Greece, emphasised that ESG is of critical importance due to the regulatory initiatives, investor expectations and stakeholders demand.
He commented that the 2020s will be a decade of action for climate for the shipping industry. Long-term investment scenarios suggest that approximately $1 trillion of newbuild orders may be needed for fleet renewal this decade.
Shipping companies need to consider their approach to designing ESG and decarbonization strategies, creating a new operating model with governance, roles and responsibilities and compliance and reporting. The required technology to cover the ESG agenda and transformation, as explained by Ilias Oikonomakis, Advisory Manager, PwC Greece, can be provided by the SAP Profitability and Performance Management solution which delivers speed, flexibility, reliability, automation, process large volumes of data, and adaptability. An overview of SAP’s platform was discussed, together with PwC’s ESG Intelligence tool that is used to assist companies to monitor and report their Environmental, Social and Governance performance – generating, among others, full transparency, automation and permanent optimisation.
Cyber security and the shipping industry
The past year was again a disruptive year when it came to cyber attacks, especially for the maritime sector. Since February 2020, there has been a 400% increase in attempted hacks. With the maritime industry entering the digitization era – fast, and as the IT/OT ecosystem is expanding, this creates new attack surfaces. George Vavitsas, Advisory Senior Manager, PwC Greece, commented: “It is important more than ever for shipping companies to have cyber security at the core of their operations. It is not about reducing risk to zero, it’s about rebalancing risk as the context shifts.” He continued to clarify that the weakest links in cyber security are still the users and that 90% of intrusions begin with a phishing email. To keep data safe a layered defence needs to be built.
New incentive tax regimes
Dimitra Giantamidou, Senior Tax Manager in PwC Greece, gave focus to the new tax incentive schemes that have been recently introduced to attract non-Greek tax residents and legal entities in Greece, as long as certain conditions are met. Those more interesting to the shipping community are the High Net worth Individuals / Investors (5A regime) and Employees (5C regime) regimes along with the family offices.
As an overview, more than 80 foreign investors have applied to become Greek tax residents and 75 of them have already remitted taxes of €9.4m for 2020 and 2021. Most have come from the UK, Switzerland and Cyprus, but applications are also coming from Monaco, UAE, Hong Kong. In addition, more than 1.000 applications have been filed for 2021 by individuals being employed in Greece under new employment positions. Dimitra Giantamidou commented “These numbers show that there is a high attraction of individuals wanting to establish themselves in Greece. It verifies that Regimes 5A and 5C have proven to be very successful.”
MyData: New tax regulation impacting ship management companies
Recently AADE issued the Ministerial Circular 1138/2020 which specifies to what extent ebooks apply, the exceptions, the data to be transmitted, the timing, the transmission method, the classification of revenues/expenses and the entities’ obligations. In accordance with the Ministry of Finance, myData also applies to ship-management companies with operating offices in Greece under L.89/1967and important to note that here, simplifications apply.
Mr. Socrates Leptos-Bourgi, Partner, PwC Global Shipping & Ports Leader, commented:
“As the shipping business environment evolves, so do the challenges faced by finance professionals working within shipping companies. Through our broad experience servicing this sector, this annual event seeks to provide insights on what lies ahead from regulators, standard setters and practice, as well as give a broader perspective on topics that remain top of the agenda of all stakeholders that finance departments of shipping companies seek to serve. This is part of our commitment to the shipping industry, which is a key industry for PwC”.
PwC Greece – Annual Finance Update for the Shipping Industry
PwC Greece shared its insights on the key topics that are currently shaping the landscape for the shipping industry during a virtual, 2 days event titled “The Annual PwC Update for Shipping Industry Finance Professionals”. The event was organized in January 2021 and was attended by more than 100 shipping finance professionals who were updated by PwC experts on a number of key issues that impact shipping companies.
In a constantly challenging and unpredictable business landscape, the maritime industry is reshaping and gradually adapts to the new developments. Μs. Santos Equitz, Managing Director, Shipping Industry Leader, PwC Greece, mentioned that issues like the COVID 19 pandemic, the new ESG reporting and other regulations affecting shipping finance providers and new tax legislations result in a demanding business environment for shipping companies to which finance professionals are required to timely and effectively respond. Implementing the right technology, establishing appropriate Corporate Governance and the development of ESG strategies are key tools in addressing these challenges.
Covid 19 reporting implications
The COVID 19 pandemic, coupled with the current stock market volatility, has created an economic environment likely to have significant accounting and reporting implications. PwC provided their insight on those implications that may impact the shipping industry. The shipping industry has been impacted by business disruption and significant operational challenges, particularly in relation to crew management and ongoing maintenance on their vessels. Specifically, PwC noted that impairment testing impacts several areas of the financial statements, with underlying assumptions being subject to uncertainty in the market. PwC also encouraged companies to engage early with their banks when they foresee potential breaches of covenants, as debt classification has a significant impact on the liquidity and going concern assessments. The current environment is driving the need for transparent disclosures, with your stakeholders looking for a clear understanding of how shipping companies addressed the COVID 19 related implications.
Stephanie Dias, Assurance Director, believes that the key takeaway from the finance update is for shipping companies to be proactive in discussions with their lenders as the current market conditions might increase liquidity and counterparty risk. Companies should have a good understanding of their ability to obtain additional financing or to refinance existing loans, as debt servicing requirements have a significant impact on going concern assessments.
Corporate governance trends
The current trends in corporate governance and their impact on the financial results of shipping companies were also addressed during the event. According to PwC Greece, the shipping industry has to take immediate action to improve in the area of Corporate Governance as it will be shortly affected by the new trends in ESG reporting and new regulations. Recent research has shown that shipping companies with stronger corporate governance had an increased equity performance compared to their peers in the industry. Additionally, finance providers are looking into ESG reports to determine the long-term risks on a company’s future growth. Since the majority Greek shipping companies are family owned, Corporate Governance that is developed in tandem with strong family governance will enhance creditors’ confidence. It is expected that the viability of the business and its credibility with external stakeholders will be significantly influenced by the effectiveness of family governance.
George Drellas, Senior Manager, Governance, Risk & Compliance, PwC Greece commented: “Corporate Governance is an important challenge for shipping companies since there is a wide spectrum of stakeholders, including the owners, employees, finance providers, charteres, society and others, who are looking to see that their interests will be addressed by a formal system of governance in the business, which ensures accountability, oversight and control. As such, Corporate Governance is not only a matter of concern for public shipping companies but also for private ones”.
ESG reporting developments and their impact on shipping finance
The ESG and climate change landscape continue to rapidly evolve and remain a major challenge for the shipping industry according to PwC. As new ESG regulations and requirements have a significant impact on shipping finance, shipping companies have numerous issues to consider like managing the ESG rating agencies, addressing the changing investor requirements, establishing “investor grade” ESG reporting, enhancing governance, designing a Net Zero and green transition strategy and being tech-enabled in providing ESG information to stakeholders. In addition, as ESG commitments and Net Zero strategy become a more and more pressing issue for society, there are some key considerations to be taken into account by shipping companies, such as their fleet size and age, the applicability of the existing technical and operational measures and the need for continuous access to data.
Dimitris Sakipis, Senior Manager, ESG, Sustainability & Climate Change, PwC Greece, commented: “As ESG has become an important factor in shipping financing, shipping companies that wish to deliver on their ESG transformation should consider end-to-end business transformation elements. These include the design of Net Zero and emission reduction strategies, the operationalization of ESG across all business functions and the establishment of ESG reporting mechanisms that meet the requirements of various stakeholder groups, including financial institutions, charterers, insurance providers and regulators.
The impact on Basel IV regulations on financial institutions and their impact on shipping finance
PwC experts also referred to the implementation of Basel IV by financial institutions, which is a remarkable challenge for the European banking landscape as methodologies for the determination of capital requirements are to be revised. In doing so, capital calculations across all risk types will be fundamentally amended. Specifically for the shipping industry, Basel IV introduces a new exposure class for shipping exposures for the purpose of their capital requirements calculation under the standardized approach. The capital impact for shipping exposures depends on the approach followed by each Bank for calculating capital requirements for credit risk. The expected increase in capital requirements for banks will likely impact on their cost of capital allocation, potentially driving up the pricing allocated on shipping loans.According to Evangelos Venizelos, Partner, Assurance in PwC Greece: “As the Basel IV regulations are expected to make traditional loan finance more expensive, shipping companies may start considering alternative sources for ship financing such as the increasing use of lease finance, especially when the leasing company is not a subsidiary of a bank, private placements and high yield bonds”.
Using technology to address challenges of finance departments of shipping companies
Digitisation and technology have been transforming the way the shipping industry operates and PwC Greece shared thoughts and insights on the emerging challenges as well as the new opportunities for the finance departments by applying specific tools.
The modern finance transformation agenda focuses on topics like process excellence and automation, cloud ERP and digital platforms, advanced analytics, automated and predictive controls. This agenda requires a strategic shift in the operating model in parallel with the digital enablement of the shipping companies. According to PwC Greece, SAP S4HΑΝΑ is a solution that enables finance departments to respond to financial challenges such as the time consuming and not standardized reporting and monitoring, the lack of transparency in the procurement processes and the delayed invoice payments, and the existence of multiple systems and different process leading to insufficient resource utilization and increased need for out of system controls.
Ioannis Potamitis, Director, Applications stated: “The SAP S/4 HANA solution offers unified and centralized information in line with GAAP and IFRS principles and gives standardized, reliable, timely and easily accessed management reporting. Additionally, PO, delivery, invoicing and payment processes are integrated, sharing of common data becomes easier and system architecture is simplified. A unified data model, an integrated solution and the use of intelligence to accelerate performance are the key elements for shipping companies to consider during their technological transformation journey”.
Tax update: Implications of EU economic substance rules and DAC 6 reporting on shipping companies
On the tax side, as Stavroula Marousaki, Tax Director, commented the Greek tax shipping regime has been stabilized since 2019 and no further developments are expected in the near future. Thus, we had a glance at the EU economic substance rules & and the new reporting obligations under DAC 6.
According to Christina Tsironi, Manager, Tax, PwC Greece: “Τhe introduction of EU Economic Substance Rules marks a significant change for International Financial Centers. These rules are the flip side of international tax rules implementing measures to prevent base erosion and profit shifting (BEPS) from higher tax jurisdictions to lower tax jurisdictions. Companies engaged worldwide in the shipping industry should monitor, on a regular basis, their portfolios to identify any group structures with companies in zero/low-tax jurisdictions and check the substance requirements in those territories”.
Antonia Zahaki, Manager, Tax, PwC Greece also noted: “DAC6 introduces new reporting obligations regarding companies’ cross-border transactions. The new reporting obligations burden primarily the external business consultants of the companies, in certain instances through the reporting obligation shifts to the company itself. Since there is no sectoral exemption from the reporting obligation, the shipping industry may be affected as well”.
Mr. Socrates Leptos, Partner, Global Shipping & Ports Leader, PwC Greece commented:“In PwC Greece, we are closely observing the rapidly changing business environment for the shipping industry and we remain close to the shipping industry professionals by sharing our insights. Nowadays, shipping companies are facing multiple, diverse and unexpected challenges that deeply affect their core operations. PwC has extensive experience in servicing the shipping industry and our experts can support shipping companies on successfully dealing with these new challenges”.