shipping note spring 2012 (1)
TRANSCRIPT
Shipping Note
“ Understanding the GAAP between value and net assets.”
Page 2
“ Plus ça change on revenue recognition.”
Page 2
“Confidence up but new investment appetite wanes.” Page 3
“The devil’s dictionary.” Pages 3 & 4
Shipping must adopt model guidelines
Inside
Businesses must be able to produce
properly documented and timely financial
information for their stakeholders, which
should include a view of the future. In
good times, when charter rates exceeded
operating expenses, little attention needed
to be paid to future cash flows and debt
service. But today, it is essential to be able
to anticipate, to the extent it is possible,
future cash flows and pinch points.
Dawn Webb, a Partner of Moore Stephens
Chartered Accountants says, “It is
essential to provide banks with detailed
information in the event that it becomes
clear that a company may default on the
terms of a loan. It is better still if this can
be done before any covenants are
breached or payments missed. In these
difficult times, the key is for businesses to
help banks to help them, by anticipating
defaults or breaches and presenting a
solution, rather than waiting for the
default. This cannot be achieved without
a proper financial model.
“Clearly a model is not a panacea for
difficult trading conditions but working
with a bank to present its credit
committee with a potential solution,
rather than with a problem, is more
likely to engender a positive attitude
to any restructuring.”
Spring 2012
PREC ISE . PROVEN. PERFORMANCE .
Shipping is experiencing tough times. An increasing number of companies are unable to repay, or in some cases, even service their debts. That could mean an uncomfortable meeting with the bank. But too many companies are not properly prepared for such an encounter.
Financial modelling is a key component
of any renegotiation of facilities. A viable
model, typically including integrated
balance sheet, profit and loss account
and cash flow statement, can help to
support a restructuring proposal, by
demonstrating the impact of changes on
future cash flow.
Financial modelling doesn’t change the
economic fundamentals of a business.
But it is a tool with which to identify
ways to manage the impact of a volatile
market. A good quality financial model is
also an invaluable, ongoing management
tool. It can be used to make longer-term
strategic decisions and to determine the
nature and structure of future investments
and the potential returns on investment.
Experienced, external advice can help
reduce the time and money spent on
resolving problems. Moore Stephens has
worked with companies in the shipping
industry and with their stakeholders, both
prior to and following bank intervention.
We have concluded a number of
successful independent business reviews.
Our combined corporate finance and
shipping industry expertise could make all
the difference in today’s difficult market.
Moore Stephens Isle of ManAudit and Consulting
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Under IFRS, this does not apply, with the result that impairments
are less likely to be recorded under US GAAP than under IFRS.
One thing is for sure. If directors are going to report net assets
at substantially more than the company’s market capitalisation,
they need to be ready to explain why. While Nelson may have
seen no ships, some directors might be accused of seeing the
ships, but not the problems associated with them.
Comparing the market capitalisation of many listed shipping
companies with their reported net assets, the equity markets
seem to have decided that a number of shipping companies are
not worth the values they have been reporting in their balance
sheets. We saw a plethora of bad news affecting shipping in
late 2011, little of which will have been reflected by companies
which reported third-quarter results, and none by companies
listed on exchanges which only require six-monthly figures to
be published. This raises the question of whether the values
reported in the balance sheet can continue to be appropriate.
It matters which accounting standards are being applied. Under
US GAAP, for example, one dollar of expected profit in fifteen
years’ time is given the same weighting as a dollar of expected
profit tomorrow in deciding whether or not assets are impaired.
Understanding the GAAP between value and net assetsThe difference between a company’s value and its reported net assets can be substantial. The general rule is that companies are worth, at least, their net assets, and often substantially more. Today, that rule is being broken frequently, in shipping as much as anywhere else.
Plus ça change on revenue recognitionThe project on accounting for revenue
had been put back, with the next
documents issued being more proposals
rather than a final standard. The revised
proposals have now been published.
The original proposals would have
changed the way in which shipping
companies recognise income, primarily
on voyage charters. This would often
have meant recognising revenue - and
profit – as voyages completed. Despite
this, they were seen as fairly small beer
since the changes were likely to be minor.
They would have led to a slight deferral
of accumulated profit over current
practice, but would have had little impact
on the results reported for each year.
The larger the fleet, the smaller the
impact would probably have been, as
voyages completed shortly before and
shortly after the end of the year would
be likely to balance out.
Even this minor change now seems
unlikely. The new proposals would
normally lead to continuation of current
accounting treatments, as the standard-
setters have reconsidered how to deal
with the provision of services, such as
shipping services. In many cases, services
will continue to be accounted for on a
time basis, and profits on voyage charters
will therefore be recognised over the
duration of the voyage.
So it looks as though accounting for
revenue is not likely to change very much
in the next few years. Now, when it comes
to leasing…
Moore Stephens Isle of ManAudit and Consulting
According to our latest shipping confidence survey, the average
confidence level expressed by respondents in the markets in
which they operate was 5.5 on a scale of 1 (low) to 10 (high),
marginally up on the figure of 5.4 recorded in November 2011.
The overall number of respondents expecting to make a major
investment or significant development over the next twelve
months fell, on a scale of 1 to 10, from 5.2 to 4.9 – the lowest
figure for three years.
Demand trends, competition and finance costs continued to
dominate the top three factors cited by respondents as those
likely to influence performance most significantly over the next
year. There was an 8 percentage point drop in the number of
respondents overall who expected finance costs to increase over
the next twelve months, and a 2 percentage point increase in
the number of respondents who thought that finance costs
would come down.
Respondents across all tonnage types were more confident of
rate increases than they were three months previously. In the
tanker sector, the number of respondents expecting rates to
Confidence up but new investment appetite wanes
increase over the coming year rose from 30% to 35%. In the dry
bulk sector, there was a 15 percentage point increase, to 38%, in
the overall number of respondents who thought that rates would
rise. And in the container ship market, 31% of respondents
expected rates to go up, as opposed to 23% last time.
Read the full survey report at
www.moorestephens.co.uk/shippingconfidence
Average confidence over time
Overall confidence levels in the shipping industry increased slightly in the three months ended February 2012. This is the third successive quarter in which there has been a small uptick in confidence.
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The ninth in a series looking at classic and alternative definitions
of shipping and accountancy terms.
Textbook definitionImpairment is a reduction in the value of an asset as a result of
the asset no longer generating the benefits expected earlier as
determined by a company through periodic assessments.
The alternative definition If your market capitalisation falls below net assets, you are
impaired. This is bad luck. The other possibility is that you are
lying through your teeth. But it is not the end of the world. If
you are using US GAAP, you are less likely to be impaired than
you would be if you were using IFRS, or almost any other
acronym. That’s a relief.
Shipowners are particularly susceptible to impairment. This may
be because they buy at the top of the market, sell at the
bottom, and operate at a loss for twelve months of the year.
This is called entrepreneurialism. Once shipowners have decided
that an asset is impaired, however, they can write it down.
This is better than simply trying to remember it. As long as it
is written down, they can carry on using the asset. How fair
is that?
Shipping has suffered from impairment since the Battle of
Copenhagen. Here, Nelson saw no ships and always wore a hat.
Some shipowners see the ships but don’t wear a hat at all. In
this way, they lose 90% of their body heat, according to their
mums. The remaining 10% is written down.
What the eye doesn’t see, the heart doesn’t grieve over.
The devil’s dictionary: I is for impairment
Moore Stephens Isle of ManAudit and Consulting
The tenth in a series looking at classic and alternative definitions
of shipping and accountancy terms.
Textbook definitionThe Jones Act, or Merchant Marine Act 1920, requires that
cargo moving between US ports must be carried in US-built
and registered ships owned by US citizens.
The alternative definition The Jones Act has always been a hot potato. In 1954, the Mills
Brothers had a hit single with ‘The Whole Town’s Talking About
the Jones Act’ which was only prevented from reaching number
one by the Stargazers’ version of ‘I See the Moon (the Moon
Sees Me)’. Today, Jones is a cold potato because people have
more important things to worry about.
Under the Jones Act, cabotage is all one-way, unlike in Europe.
The Americans have a better currency and nicer weather,
however. Jones also provides welfare benefits for US seafarers,
who are allowed to claim damages if they spend at least 30%
of their time working on US ships. If they are injured, they can
claim more. A whole community of Jones Act lawyers has
grown up over the years, with one leading attorney exhorting
seafarers via his website, “Don’t try to hide prior injuries or fudge.”
Critics claim that it prices US shipbuilders out of the international
market and that it hinders free trade and is particularly hard on
Hawaii. It is the only US state made up of a mixture of islands
and vowels which does not observe daylight saving, the other
being Arizona.
More is less.
The devil’s dictionary: J is for Jones Act
For more information please go to:
www.msiom.im
Follow us on Twitter: @MSIOM
Follow us on Twitter @MSIOM
Dawn Webb
S dawn.webb.msiom
Andrew Dixon
S andrew.dixon.msiom
Moore Stephens Chartered Accountants and Consulting
Limited
PO Box 25, 26-28 Athol Street
Douglas, Isle of Man, IM99 1BD British Isles
T +44 (0)1624 662020
www.msca.im
www.mscl.im
This bulletin is prepared by Moore Stephens Chartered Accountants and Moore Stephens Consulting Limited. Shipping Note is designed to keep readers abreast of current developments and trends. It is a general guide only and is not intended to be comprehensive. No liability is accepted for the opinions it contains, or for any errors or omissions. In all cases you should seek professional advice specific to your circumstances. Printed and published by © Moore Stephens Isle of Man a member firm of Moore Stephens International Limited. Moore Stephens International Limited is regarded as one of the world’s leading accounting and consulting networks with 636 member and correspondent offices in some 100 countries. April2012FA406.1
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