Demurrage and detention charges as variable consideration

Demurrage and detention fees charged when containers, trailers or vessels are held beyond agreed free time are variable consideration that must be estimated and constrained at contract inception and re-estimated each period, not recognized only when invoiced or agreed. Recognizing only on cash collection or customer agreement systematically understates revenue during the period the service was actually provided and can create large, lumpy true-ups later.

Do contracts include a defined free-time allowance after which demurrage or detention charges accrue automatically under the contract terms? Based on lane-specific and customer-specific history, is the fee typically enforced and collected, or frequently negotiated down or waived, and does that history support applying a constraint to the estimate? Is the expected value or most-likely-amount method used consistently and is it the better predictor of the ultimate constrained consideration given the size and pattern of the container/trailer population?

1) Identify contracts with free-time allowances after which demurrage/detention accrues automatically per the contract terms. 2) Estimate expected demurrage/detention using either the expected value method (probability-weighted across a large population of similar containers/trailers) or the most likely amount method (for a single significant case), whichever better predicts the entity's actual entitlement. 3) Apply the variable consideration constraint: include in the transaction price only the amount for which it is highly probable a significant revenue reversal will not occur, based on historical waiver/dispute experience by lane and customer. 4) Track amounts billed but likely to be waived separately from amounts genuinely expected to be collected, to keep the constraint well-informed. 5) Reassess the estimate and constraint at each reporting date as new waiver/collection information emerges, adjusting revenue prospectively.

Measure the gross demurrage/detention entitlement as free-time-exceeded days/units multiplied by the contractual rate; then apply the constraint by deducting the portion expected to be waived or disputed based on lane-specific and customer-specific historical patterns, to arrive at the constrained variable consideration included in revenue. Update this estimate at each reporting date and whenever a pattern shift in waiver rates becomes evident (e.g. a change in port authority enforcement practice).

Disclose: (1) the nature of variable consideration arising from demurrage and detention within the variable consideration disclosures required by IFRS 15; (2) the estimation method applied (expected value or most likely amount); (3) the extent to which amounts are constrained and the basis for the constraint; (4) significant changes in estimate between periods and their revenue impact; (5) any contract assets/liabilities arising from timing differences between billing and recognition of demurrage revenue.

• Recognizing demurrage/detention revenue only when the customer agrees to pay or when cash is received, understating revenue during the period the service was actually delivered
• failing to constrain the estimate despite a consistent pattern of commercial waivers, overstating revenue
• applying a single blanket waiver rate across all trade lanes/customers when waiver behavior actually varies significantly
• not updating the constraint as waiver negotiation outcomes become known shortly after period end.