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© 2011 Deloitte LLP. Private and confidential.
© 2011 Deloitte LLP. Private and confidential.
A sea change?
IFRS developments for the shipping sector
David Paterson and Bheki Chatira
6 October 2011
© 2011 Deloitte LLP. Private and confidential.
Today’s agenda
IFRS 10
IFRS 11
IFRS 12
IFRS 13
Exposure draft revenue recognition
Exposure draft leases
Appendix: Shipping examples
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© 2011 Deloitte LLP. Private and confidential
Latest IASB standards
New/amended standards
Effective date
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IFRS 10
Consolidated financial statements
IFRS 11
Joint arrangements
IFRS 12
Disclosure of interests in other entities
IAS 27
Separate financial statements
IAS 28
Investments in associates and joint ventures
IFRS 13
Fair value measurement
1 Jan 2013
1 Jan 2013
1 Jan 2013
1 Jan 2013
1 Jan 2013
1 Jan 2013
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Subsidiaries, associates and joint
arrangements
New standards and amendments to existing standards
Before
IAS 27
Consolidated and separate
financial statements
SIC 12
Consolidation – special purpose
entities
After
IFRS 10
Consolidated financial statements
IAS 27
Separate financial statements
IAS 28
Investments in associates
SIC 13
Jointly controlled entities – nonmonetary contributions by
venturers
IAS 28
Investments in associates and joint
ventures
IAS 31
Interests in joint ventures
IFRS 11
Joint arrangements
IFRS 12
Disclosure
of interests
in other
entities
All five standards must be adopted at the same time
Effective date: 1 Jan 2013
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IFRS 10
Consolidated financial
statements
Fundamental principle
IAS 27/SIC 12
• Consolidation is based on control
• IAS 27: control is the power to
govern the financial and operating
policies of an entity so as to obtain
benefits
• SIC 12: in an SPE, exposure to the
majority of risks and rewards may
be the determining factor in
establishing control
IFRS 10
• Consolidation is based on control
• Control may be obtained in various
manners, and not solely as a result
of the power to direct the financial
and operating policies
• Exposure to risks/rewards is one of
the factors necessary in order
control, but it is never the
determining factor
• Need to consider all substantive
rights over investee, including voting
and other contractual rights
IFRS 10 requires extensive use of judgment
(IFRS 12 requires disclosure of areas of judgment)
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Definition of control
An investor controls an investee when it is exposed, or has rights, to variable returns
from its involvement with the investee and has the ability to affect those returns through its
power over the investee
Power
Substantive rights to direct « relevant activities »
Exposure (rights) to
variable returns
Potential variability to positive or negative returns
(broad definition of returns)
Ability of the investor to affect its
returns through its power
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Need to determine whether the « decision-maker »
is an agent of another investor
Factors to consider in evaluating existence of power
• Relevance of voting rights held by shareholders in directing
relevant activities
Purpose and design of
the investee
• If power is not exercised through voting rights, identification
of the risks (upside or downside) related to the entity and
how these risks are transferred to investors
• Activities that significantly affect the returns
Relevant activities and
how decisions are made
with respect to these
activities
Current ability to direct
the relevant activities
12
• Establishing operating and capital decisions, budgets,
appointment and remuneration of key management
personnel
• Including decisions that arise only in response to specific
circumstances
• Consider all substantive rights, giving practical ability to
direct
• Protective vs. participating rights
• Direct and indirect rights (financing, guarantees, operational
ties)
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De facto control
IAS 27/SIC 12
• Not specifically addressed
• Diversity in practice
IFRS 10
• Specifically addressed
Examples of situations where an investor may have power with less than majority of voting
rights
• Contractual arrangements between the investor and other vote holders
• Rights arising from other contractual arrangements, such as operational or financial
agreements that may provide significant substantive rights
• Relative size of the investor’s % of vote and dispersion of the voting rights
Assess past attendance at shareholders’ meeting
• Potential voting rights of the investor and/or other investors
See next slide
• Combination of others
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Potential voting rights
IAS 27/SIC 12
 Include in analysis only if currently
exerciseable
IFRS 10
Currently
exercisable
or not
 Include in analysis when they
are substantive
When are potential voting rights substantive?
•
•
•
•
Must represent substantive rights, considering exercise price, date, procedures
Purpose and design of the instruments
Combination of potential voting rights and other rights (voting or contractual)
Ability to exercise the potential voting rights when decisions about the relevant activities
are made
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Extent of exposure to risks and rewards
Exposure
(rights) to
variable returns
IAS 27/SIC 12
• Control of an SPE generally requires
exposure to the majority of risks and
rewards related to the SPE
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IFRS 10
• Control can exist only if the investor is
exposed to variable returns
• But no specified threshold is required in
order for control to exist
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Agent – principal relationship
IAS 27/SIC 12
• Not addressed
Ability of the investor to affect
its returns through its power
IFRS 10
• An investor can exercise power on
behalf of another investor
• The agent does not control
• The principal must treat the
delegated rights as its own
When is the decision-maker an agent?
• Scope of the authority over relevant activities
• Degree of independence in the decision-making process
• Substantive rights held by other parties
• Kick-out right without cause
• Remuneration of the decision-maker
• Indexation based on returns
• Commensurate to service rendered and market conditions
• Exposure to variability of returns from other interests
• The greater the magnitude, the more likely the decision-maker is a principal
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Transition
Retrospective application
Consolidation of an entity not previously consolidated
• Retrospective application of IFRS 3 from the date of control
• If impracticable, apply IFRS 3 at the earliest possible date
• Impact on transition recognised in equity
De-consolidation of a previously consolidated entity
• Retrospective application from the date of loss of control
• If impracticable, application at the earliest possible date
• Application of IAS 27 (2004) or IAS 27 (2008) based on the date
at which control is lost
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Bottom line
• No change to the fundamental principles but much more detailed application guidance
• Extensive use of judgment required, numerous indicators and factors to consider
• Need to reconsider the assessment performed under IAS 27/SIC 12, in particular when
the following factors are present
Potential voting rights
Special purpose entities
De facto control
Different parties have rights over different activities
Related parties
• Increased likelihood that reassessment will lead to change in accounting treatment
(consolidation vs. significant influence) even though there is no change in voting rights
held => resulting in re-evaluation to fair value in P&L for previously held interest
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IFRS 11
Joint arrangements
Background
• Establish a principle-based approach to the accounting for joint
arrangements
• Under IAS 31, the legal structure is key
Objectives
• Improve the quality of financial reporting by eliminating the choice
between proportionate consolidation and equity method
• Thereby converging with US GAAP
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Overview of changes
• Two categories distinguished based on contractual rights and obligations of parties
• No accounting choice available
• Definition of “joint control” is largely the same as it was in IAS 31
Joint ventures (IAS 31)
Jointly controlled operations
Recognise own assets/liabilities
and income/expenses
Jointly controlled assets
Recognise own assets/liabilities
and income/expenses
Jointly controlled entities
Choice between proportionate
consolidation (recommended)
and equity method
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Joint arrangements (IFRS 11)
Joint operations
Rights/obligations to
assets/liabilities
With or without separate vehicle
Recognise assets, liabilities,
income, expenses
Joint venture
Rights on net assets
Separate vehicle
Equity method
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How to determine the type of joint arrangement?
Is the arrangement conducted through a
separate vehicle?
No
Yes
Legal form of
separate
vehicle
Does legal form give parties
rights/obligations to assets/obligations?
Yes
Joint
operation
No
Terms of
contractual
arrangement
Do terms of arrangement give parties
rights/obligations to assets/obligations?
Yes
No
Other facts and
circumstances
Is the design of the arrangement such that
parties in effect have rights/obligations to
assets/obligations?
Yes
No
Joint venture
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How to account for joint arrangements?
Joint operations
Joint operators
Others with rights/obligations to
assets/liabilities
Own assets, liabilities, revenue, expenses,
including share of those held jointly
Parties without right/obligation to
assets/liabilities
Other IFRSs
Joint ventures
Joint venturers
Equity method (IAS 28)
Participants with significant
influence
Participants without significant
influence
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IAS 39 (or IFRS 9)
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Transition
Before
After
As of beginning of first comparative period
1. Derecognise the equity method investment
Jointly
controlled
entity
2. Recognise assets (incl. goodwill) and liabilities
Joint
operation
3. Net assets recognised > equity method investment 
reduce goodwill (if any) with any excess against
retained earnings
Equity method
4. Net assets recognised < equity method investment 
difference against retained earning
Jointly
controlled
entity
Proportionate
consolidation
method
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1. Derecognise assets (incl. goodwill, if any) and liabilities
Joint venture
2. Recognise equity method investment
3. Perform impairment loss test on opening balance of
investment and impairment loss, if any, recognised as
adjustment of retained earnings
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IFRS 11 Joint arrangements – key points
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‒
Proportional consolidation no longer permitted for joint ventures
‒
Jointly controlled entity may now be a jointly controlled operation
IFRS 12
Disclosure of interests in
other entities
Background
Subsidiaries
Joint arrangements
Pulls together disclosure related to
Associates
Unconsolidated structured
entities
Objective
Establish the information necessary to evaluate
Nature of, and risks associated with, interests in other entities
Effects of those interests on the financial position, financial
performance and cash flows
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Extensive information to be provided on ….
• Significant judgments and assumptions, including
• How the entity determined that it controls (or does not control) another entity
• Subsidiaries, including
• NCI (distinct information for material non-controlling interests)
‒
name and principal place of business
‒
proportion held by NCI
‒
NCI share of profit
‒
NCI closing interest
‒
summarised financial information about subsidiary
• Ability to transfer cash to or from other entities in the group
• Risks associated with consolidated structured entities (including current intentions to
provide financial support)
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Extensive information to be provided on ….
• Joint arrangements and associates, for each material interest
• name and principal place of business
• nature of relationship (e.g. nature of activities, whether strategic)
• proportion of ownership interest/voting rights (if applicable)
• Associates and joint ventures, including
• summarised financial information for each material associate or joint venture
• current period and cumulative share of any losses not recognised under equity
accounting
• restrictions
• Interest in unconsolidated structured entities, including
• Nature of the interest: quantitative and qualitative information, income from the
structured entity and carrying amount of assets transferred
• Nature of the risks: quantitative information, tabular format
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IAS 27 and IAS 28
Amendements to IAS 27 and IAS 28
• IAS 27 (2011)
• Addresses only individual financial statements
• Retains exemptions from preparing consolidated accounts
• Disclosure of principal place of business (not just country of incorporation)
• IAS 28 (2011)
• Addresses the application of the equity method to associates and interests in joint
ventures
• Partial disposal of an associate or a joint venture: IFRS 5 only applies to the portion
sold
• Partial disposal resulting in a joint venture becoming an associate: gain/loss only with
respect to the portion sold
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IFRS 13
Fair value measurement
IFRS 13 - Fair value measurement
• Final standard issued May 2011
• Aims to replace all FV measurement guidance in IFRS
• Global crisis – importance of consistency between IFRS and US GAAP
• Same objective and very similar to FAS 157 in US GAAP
• Scope: very broad (both financial & non-financial assets)
• Transactions within IFRS 2 and IAS 17 scoped out
• Timing: Applies for periods beginning on or after 1 January 2013 (prospectively)
• No need to restate comparatives
Defines fair value, provides guidance on how to measure fair value and requires
disclosure about fair value, it doesn’t change what is measured or disclosed at fair
value
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Definition of fair value
“the price that would be received to sell an asset or paid to transfer a liability in an
orderly transaction between market participants at the measurement date”
Not between related
parties, or forced, e.g.
involuntary liquidation,
fire sale etc
Exit price based model
- may be hypothetical
Market based measurement – not entity specific
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Not settlement amounts,
i.e. original liability
remains outstanding
Fair value measurement – framework
The price in the principal
market for the asset or
liability. In the absence of
this – the most
advantageous market
Market participant is not a
related party, must be
knowledgeable, able and
willing to transact
Assets specifically:
Liabilities specifically:
Assumes highest and
best use – even if entity’s
use differs
Where no observable
market for a liability –
assume it is equal to the
fair value in the hands of
the counterparty
Whether used in
combination with other
assets
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Include own credit risk
Fair value is the number
within bid-ask spread that
is most appropriate – as a
practical expedient may
use mid-prices
Valuation technique:
- Market approach
- Income approach
- Cost approach (i.e.
current replacement cost)
Disclosures
• Same disclosures as IFRS 7. Use of 3-level hierarchy.
• Scope is much broader than IFRS 7 – applies for all assets and liabilities measured, at
fair value (e.g. investment property).
• Extent of disclosure depends on whether fair valued on a recurring or non-recurring basis
• Disclosures include:
‒ analysis of fair value between levels 1, 2 and 3
‒ significant transfers between levels 1 and 2 (recurring only)
‒ Valuation techniques and inputs used for fair value measurement
‒ level 3 reconciliation from opening to closing balances (recurring only)
‒ total gains or losses relating to assets/liabilities held at reporting date
‒ Quantitative sensitivity analysis for level 3 items (recurring only)
‒ Description of valuation process
‒ for assets, where current use is not highest and best, analysis between value for
current use and incremental value for highest and best use, and reason for current
use
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Impact of IFRS 13
• Will not change the extent to which transactions are measured at fair value
• Makes measurement objective explicit – exit price
• Different guidance re. use of bid and ask prices
• Explicit about market in which transactions take place
• Extensive disclosures
‒ Financial and non-financial
‒ Required even if fair value disclosed not reflected in balance sheet
• Fair values determined in business combination/ initial recognition not in scope
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Exposure draft revenue
Background
Objectives
Convergence IFRS – US GAAP
Provide a single, principle-based revenue recognition standard
for use across various industries and capital markets
December
2008
June
2010
October
2010
November
2011
DP
ED
Comment
period ends
Second ED
Core
principle
39
•
•
•
???
Effective
date
To depict the transfer of goods or services to customers in an
amount that reflects the consideration the entity receives or
expects to receive
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Application of the core principle
Step 1: Identify contract(s) with customer
Step 2: Identify separate performance obligations in
contract(s)
Step 3: Determine transaction price
Step 4: Allocate transaction price to separate performance
obligation
Step 5: Recognise revenue when entity satisfies each
performance obligation
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Exposure draft leases – an update
Background
Objectives
• Convergence IFRS – US GAAP
• Eliminate the subjective distinction between operating and capital
leases  All lease contracts on balance sheet
March
2009
August
2010
December
2010
Q1
2012
???
DP
ED
Comment
period ended
Second ED
Effective
date
4
2
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General principles - leases
The exposure draft defines a lease as “a contract in which the right to use a specified
asset or assets is conveyed, for a period of time, in exchange for consideration”.
• The fulfillment of a contract depends on providing
a specified asset or assets
Core principles
Main effect
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• The contract conveys the right to control the use
of the specified asset for an agreed period of
time.
All lease contracts within definition recorded on
balance sheet.
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General principles – leases (continued)
Leasee
Lessor
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• Bare-boat charter
•Time and voyage charters ?
• Sale of vessel on ‘finance lease’
Lease term
“Longest possible term that is more likely than not
to occur” - ED
Variable lease payments
“Probability-weighted expected outcome approach
to estimate lease payment” - ED
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Questions
Example – IFRS 10
Agent A manages vessels on behalf of the principals under a pool management
agreement as follows:
•
Agent A markets the vessels and negotiates on time charters, voyages and contracts
of affreightment.
•
Agent A is responsible for commercial operation of the vessels including bunkering
and appointing sub-agents.
•
Each principal shall pay to the agent (1) a flat fee of $300 per day per vessels and (2)
1.25% of gross freight, demurrage, misc revenue and/or charter hire
•
A pool committee (comprised one representative of each principal) meets twice a year
to review performance of the pool. The agent attends these meetings but has no
voting power
•
The pool will monitor and supervise the Agent’s services as well as review financial
accounts and budgets
•
Each vessel is registered as a company.
Question: Should agent A consolidate the results of the each vessel?
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Examples – IFRS 11
Example 1
Example 2
• Two companies A and B form a 50/50 ‘joint
• Company D and E contributes equal amount of
venture through a new legal entity Company C. C money to buy a vessel from a shipyard
leases containers of various shapes/sizes to
• On completion Company E will provide diveshipping companies.
support computer equipment to enable diving
support vessel capabilities.
• Each of Company A and B contributed equal
number of containers into the joint venture and
after 5 years (useful life of 20 years) these
containers are returned to either company A or B
• Company C in addition buys its own containers
from revenue generated from operations. These
containers belong to Company C
• Rights (e.g. profits) and obligations(e.g. taxes,
costs) shall be shared in proportion to
shareholding
• A and B have 5 directors each on board,
unanimous consent required
• Company E will then bare-boat charter the vessel
on a 10 year contract followed by 3 year rolling
renewal contracts for a total period of 21 years.
• At the end of its useful life the vessel will be sold
and the proceeds proportionally distributed to
Companies D and E.
• Rights (e.g. profits) and obligations(e.g. taxes,
costs) shall be shared in proportion to
shareholding
Question: Joint venture or joint operation?
Question: Joint venture or Joint operation?
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Contact details:
David Paterson
Bheki Chatira
Audit Partner – Energy & Resources
Audit Senior Manager – Energy & Resources
Tel: +44 (0)20 7007 0879
Tel: +44 (0)20 7007 7545
Email: [email protected]
Email: [email protected]
David is an audit partner with 20 years’ experience
specialising in multi-national organisations in both the
shipping and extractive industry sectors. David is
responsible for the audit of Scorpio Tankers Inc and until
recently he also coordinated the global audit of StoltNielsen S.A giving him a sound understanding of the
global shipping sector. From 2002 to 2006 David was also
a senior audit partner for Acergy, an oilfield services
company which owns and operates a fleet of specialised
deepwater construction and pipelay ships. During this
period he played a leading role in the acceleration of their
year end reporting timetable and implementation of
Sarbanes Oxley. David’s other major clients include
Vedanta, OMV, Kuwait Petroleum, Salamander Energy,
SOCO, and Afren.
Bheki is a senior manager in Deloitte’s Energy &
Resources audit practice and has worked within Deloitte’s
shipping sector in the UK, USA and Southern Africa for
over ten. He has significant experience in leading large
engagements, working closely with teams to deliver a
coordinated, multi-disciplinary approach. He has also
worked on a number of specialist projects including due
diligence and transaction support. His major clients
include Subsea 7, Scorpio Tankers Inc, Ge SeaCo Srl,
and Eclipse Shipping.
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