How Much is a Ship Worth?

Tuesday, July 21, 2009

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.”

Maritime Reporter July 2015 Digital Edition
FREE Maritime Reporter Subscription
Latest Maritime News    rss feeds

Finance

Egypt Says Finishes Work on New Suez Canal

Egypt has finished building its New Suez Canal, its overseer said on Wednesday, a project President Abdel Fattah al-Sisi sees as a symbol of national pride and

Harper Government Invests in Naufrage Harbor

The Honorable Gail Shea, Minister of Fisheries and Oceans, announced today an investment to improve safety and working conditions for fishermen at Naufrage Harbor, Prince Edward Island.

Strategic Marine’s Stock Program Full Power Ahead

Strategic Marine, the specialist shipbuilder and fabricator, has confirmed its stock program of personnel transport vessels is market-ready. “Our stock program

 
 
Maritime Contracts Maritime Security Maritime Standards Navigation Pipelines Pod Propulsion Port Authority Salvage Ship Simulators Winch
rss | archive | history | articles | privacy | contributors | top maritime news | about us | copyright | maritime magazines
maritime security news | shipbuilding news | maritime industry | shipping news | maritime reporting | workboats news | ship design | maritime business

Time taken: 0.1382 sec (7 req/sec)