Saturday, August 1, 2009
How Much is She Worth?
Accountant and business consultant Moore Stephens has warned that shipping companies must be able to substantiate any decision to use future cashflow as an alternative to broker valuations.Writing in the latest issue of the firm’s shipping newsletter, Bottom Line, Moore Stephens Technical Partner David Chopping said, “In recent months, many of the world's listed shipping companies have released their financial statements. It has been challenging. Companies have, amongst other things, had to consider whether their assets are impaired. Even a brief review of shipping company accounts highlights the number of impairments made. But many relate to items other than vessels and newbuildings. From a sample of 51 US-listed shipping companies, nearly 30 per cent have recorded impairment losses, but only half of those have recorded any on newbuildings or vessels.” With vessel values falling, many owners will need to consider impairment. Whatever accounting policy is adopted, vessels will always need to be written down if they are worth less than their current carrying value. Market values will always be the starting point for such assessments although, in limited circumstances, it may also be possible to look at future long-term income streams.Under both International Financial Reporting Standards (IFRS) and US Generally Accepted Accounting Principles (US GAAP), the existence of impairment is determined by comparing the book value of an asset with its recoverable amount. The starting point for estimating how much you could get from selling a vessel is a broker's valuation. Such valuations have been called into question by some shipping companies, on three main grounds. Firstly, in a thin market, determining a price will be difficult, so the margin of error increases. Secondly, there are differing opinions about whether a broker valuation really reflects 'fair value'. Thirdly, the market has overreacted. David Chopping explained, “If broker valuations are below book value, a company can still try to demonstrate that its future cashflow exceeds that value. Here IFRS and US GAAP diverge, with the IFRS test based on the present value of future cashflow, and the US test based on nominal amounts. This means that impairments are much less likely under US GAAP.“In both cases, there are two main methods of using future cashflow to support a valuation. The first is to take account of factors not reflected in a broker valuation, such as long-term charters at good rates. Secondly, and more controversially, in those cases where companies have no such factors to take account of, they can use their own estimates.”“Where the result of this exceeds book value they can then at least argue that there is no impairment. However, under IFRS, this does require an assumption that the market is currently mispricing vessels. The assumption will need to be supported, and to survive the sceptical scrutiny of the company's auditor. Only time will tell if such projections were reasonable or unduly optimistic.”