Accounting for Commercial Fishing Operations (#290)
/In this podcast episode, we discuss the accounting for commercial fishing operations. Key points made are noted below.
Accounting for Fishing Permits and Quotas
A lot of this accounting, and really, the viability of a fishing operation, centers around the main purchases that are involved. Let’s start with fishing permits, which vary by state. They might limit the catch to a certain type of fish, and limit fishing activities to just the permit holder, or to the permit holder and a certain number of crew members. These permits are usually called limited entry fishing permits; they designate the area that can be fished, and when it can be fished. These permits usually don’t have an expiration date, and they can be transferred to another person. Which brings us to the first accounting issue, which is that many fishing operations buy their permits from someone else, which puts an intangible asset on their balance sheets. Which has to be amortized.
You might have noticed that those permits didn’t put a restriction on the amount of fish you can catch. That’s because quantity restrictions are covered by the individual fishing quota, which states a fisherman’s share of the total allowable catch. And, yes, quotas can be sold, which means that fishing operations may need to buy their quotas from someone else, which puts another intangible asset on their balance sheets. Along with the loans to pay for them.
The Fishing Operation Breakeven Point
Then we get to the fishing vessel. A small one that’s under 50 feet long will cost around $200,000, while a medium-sized one that’s up to 90 feet long will cost up to $500,000. A large one that’s up to 150 feet long will set the owners back as much as $5 million.
So as you can see, there’s a lot of fixed costs and debt associated with a commercial fishing operation. Which brings up the issue of the breakeven point. This is the sales level at which the operation can pay all of its fixed expenses. Except that for a fishing operation, what’s actually more important is the pounds of fish that have to be sold in order to break even, rather than the sales level in dollars. Which means that the breakeven calculation is total fixed expenses divided by the average contribution margin per pound of fish.
Unusual Fishing Accounts
And then we have some unusual accounts – ones that you really won’t find anywhere else. For example, there’s prepaid expenses, which is used to record any fees paid in advance for mooring or boatyard storage.
And there are some different fixed asset accounts. Obviously, there’s the fishing boat, but there are also accounts for vessel electronics, fish processing equipment, and fishing gear. The processing equipment can include things like holding tanks, separators, and my personal favorite, the automatic deheader. The fishing gear depends on the type of fish the operator has a permit for, such as crab pots, lobster traps, nets, and oyster dredges.
And then there are some unique expenses. Obviously, there’s fuel for the boat, groceries to feed the crew, bait expense, and ice expense. But in particular, there’s crew shares. The crew gets a share of the net profits from a voyage, and this can be a very large part of the total expense.
Commercial Fishing Payroll Issues
But beyond that, there’s an unusual payroll issue here. The crew might not be classified as employees, but rather as contractors. This happens when they’re only paid a share of the boat’s catch. Under this arrangement, the computation of their share of the catch includes deductions for their share of the bait, fuel and supplies. Or, if the arrangement is different on some voyages, they might be classified as employees instead. And, yes, that means they could be contractors on one voyage, employees on the next one, and contractors again on the voyage after that. It just depends on the arrangement each time.
The Capital Construction Fund
Another interesting item is the capital construction fund. This is a program that was established as part of the Merchant Marine Act of 1936. It allows a fisherman to establish a tax-deferred reserve fund to pay for the purchase of another boat, as long as it’s built in the United States. This represents quite a tax advantage, so many commercial fishing operations invest their excess cash in one of these funds, and so avoid paying income taxes. It also keeps them locked into the industry, since they avoid taxation only if they keep buying replacement fishing boats.
Permit and Quota Amortization
And then we have amortization of the amounts paid to acquire a permit and quota. These are intangible assets, so they have to be amortized over time, which reduces their carrying amount. Eventually, a fisherman might choose to go out of business, in which case the permit and quota are sold off. Since these assets have been amortized, their carrying values may be pretty low by the time they’re sold, which means that there’s probably going to be a gain on the sale – which is taxable.
A variation on this is that a permit or license can be condemned by the government, which happens when they want to reduce the total amount of fishing activity. When a condemnation occurs, the government pays out a condemnation award to the holder of the permit or quota – which results in the calculation of a gain or loss.
Fishing Accounts Receivable
The one area of accounting that’s easier for a fishing operation is accounts receivable. Most of them sell their catch to a single fish processing outfit, which means that there’s just one account receivable to deal with. Some alternatives are direct sales to auction houses and restaurants, but overall, the number of customers is quite limited.