3. IFRS developments for the shipping sector
A sea change?
IFRS developments for the shipping sector
David Paterson and Bheki Chatira 6 October 2011

4. Today’s agenda
IFRS 10 IFRS 11 IFRS 12 IFRS 13 Exposure draft revenue recognition Exposure draft leases Appendix: Shipping examples

5. Latest IASB standards

6. New/amended standards
Effective date
IFRS 10
Consolidated financial statements
1 Jan 2013
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

7. Subsidiaries, associates and joint arrangements

8. New standards and amendments to existing standards
Before
After
IAS 27
Consolidated and separate financial statements
SIC 12
Consolidation – special purpose entities
IFRS 10
Consolidated financial statements
IFRS 12 Disclosure of interests in other entities
IAS 27
Separate financial statements
IAS 28
Investments in associates
SIC 13
Jointly controlled entities – non-monetary contributions by venturers
IAS 28
Investments in associates and joint ventures
IAS 31
Interests in joint ventures
IFRS 11
Joint arrangements
All five standards must be adopted at the same time
Effective date: 1 Jan 2013
©2011 Deloitte LLP. Private and confidential

9. IFRS 10 Consolidated financial statements

10. Fundamental principle
IAS 27/SIC 12
IFRS 10
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
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)
©2011 Deloitte LLP. Private and confidential

11. Ability of the investor to affect its returns through its power
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
Need to determine whether the « decision-maker » is an agent of another investor

12. Factors to consider in evaluating existence of power
Purpose and design of the investee
Relevance of voting rights held by shareholders in directing relevant activities
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
Relevant activities and how decisions are made with respect to these activities
Activities that significantly affect the returns
Establishing operating and capital decisions, budgets, appointment and remuneration of key management personnel
Including decisions that arise only in response to specific circumstances
Current ability to direct the relevant activities
Consider all substantive rights, giving practical ability to direct
Protective vs. participating rights
Direct and indirect rights (financing, guarantees, operational ties)
©2011 Deloitte LLP. Private and confidential

13. De facto control IAS 27/SIC 12 IFRS 10 Not specifically addressed
Diversity in practice
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
©2011 Deloitte LLP. Private and confidential

14. Potential voting rights
Currently exercisable or not
IAS 27/SIC 12
IFRS 10
Include in analysis only if currently exerciseable
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
©2011 Deloitte LLP. Private and confidential

15. Extent of exposure to risks and rewards
Exposure (rights) to variable returns
IAS 27/SIC 12
IFRS 10
Control of an SPE generally requires exposure to the majority of risks and rewards related to the SPE
Control can exist only if the investor is exposed to variable returns
But no specified threshold is required in order for control to exist
©2011 Deloitte LLP. Private and confidential

16. Agent – principal relationship
Ability of the investor to affect its returns through its power
Agent – principal relationship
IAS 27/SIC 12
IFRS 10
Not addressed
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
©2011 Deloitte LLP. Private and confidential

17. 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
©2011 Deloitte LLP. Private and confidential

18. 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
©2011 Deloitte LLP. Private and confidential

19. IFRS 11 Joint arrangements

20. Background
Objectives
Establish a principle-based approach to the accounting for joint arrangements
Under IAS 31, the legal structure is key
Improve the quality of financial reporting by eliminating the choice between proportionate consolidation and equity method
Thereby converging with US GAAP
©2011 Deloitte LLP. Private and confidential

21. 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)
Joint arrangements (IFRS 11)
Jointly controlled operations
Recognise own assets/liabilities and income/expenses
Joint operations
Rights/obligations to assets/liabilities
With or without separate vehicle
Recognise assets, liabilities, income, expenses
Jointly controlled assets
Recognise own assets/liabilities and income/expenses
Joint venture
Rights on net assets
Separate vehicle
Equity method
Jointly controlled entities
Choice between proportionate consolidation (recommended) and equity method
©2011 Deloitte LLP. Private and confidential

22. How to determine the type of joint arrangement?
Is the arrangement conducted through a separate vehicle?
Joint operation No
Yes
Legal form of separate vehicle
Does legal form give parties
rights/obligations to assets/obligations?
Yes 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
©2011 Deloitte LLP. Private and confidential

23. How to account for joint arrangements?
Joint operations
Joint operators
Own assets, liabilities, revenue, expenses, including share of those held jointly
Others with rights/obligations to assets/liabilities
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
IAS 39 (or IFRS 9)
©2011 Deloitte LLP. Private and confidential

24. Transition Before After As of beginning of first comparative period
Jointly controlled entity
Equity method
Joint operation
Derecognise the equity method investment
Recognise assets (incl. goodwill) and liabilities
Net assets recognised > equity method investment  reduce goodwill (if any) with any excess against retained earnings
Net assets recognised < equity method investment  difference against retained earning
Jointly controlled entity
Proportionate consolidation
method
Joint venture
Derecognise assets (incl. goodwill, if any) and liabilities
Recognise equity method investment
Perform impairment loss test on opening balance of investment and impairment loss, if any, recognised as adjustment of retained earnings
©2011 Deloitte LLP. Private and confidential

25. IFRS 11 Joint arrangements – key points
Proportional consolidation no longer permitted for joint ventures
Jointly controlled entity may now be a jointly controlled operation

26. IFRS 12 Disclosure of interests in other entities

27. Unconsolidated structured 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
©2011 Deloitte LLP. Private and confidential

28. 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)
©2011 Deloitte LLP. Private and confidential

29. 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
©2011 Deloitte LLP. Private and confidential

30. IAS 27 and IAS 28

31. Amendements to IAS 27 and IAS 28
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
©2011 Deloitte LLP. Private and confidential

32. IFRS 13 Fair value measurement

33. 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 33

34. 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”
Market based measurement – not entity specific
Not between related parties, or forced, e.g. involuntary liquidation, fire sale etc
Not settlement amounts, i.e. original liability remains outstanding
Exit price based model - may be hypothetical 34

35. 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
Fair value is the number within bid-ask spread that is most appropriate – as a practical expedient may use mid-prices
Assets specifically:
Assumes highest and best use – even if entity’s use differs
Whether used in combination with other assets
Liabilities specifically:
Where no observable market for a liability – assume it is equal to the fair value in the hands of the counterparty
Include own credit risk
Valuation technique:
Market approach
Income approach
Cost approach (i.e. current replacement cost) 35

36. 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 36

37. 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 37

38. Exposure draft revenue

39. 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
Effective date
Core principle
To depict the transfer of goods or services to customers in an amount that reflects the consideration the entity receives or expects to receive

40. 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

41. Exposure draft leases – an update

42. Background Objectives Convergence IFRS – US GAAP
Eliminate the subjective distinction between operating and capital leases  All lease contracts on balance sheet
March
2009 DP
August
2010 ED
December
Comment period ended Q1
2012
Second ED
???
Effective date

43. 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
The contract conveys the right to control the use of the specified asset for an agreed period of time.
Core principles
Main effect
All lease contracts within definition recorded on balance sheet.
©2011 Deloitte LLP. Private and confidential

44. General principles – leases (continued)
Leasee
Bare-boat charter
Time and voyage charters ?
Lessor
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
©2011 Deloitte LLP. Private and confidential

45. Questions

46. 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?

47. Examples – IFRS 11 Example 1
Two companies A and B form a 50/50 ‘joint venture through a new legal entity Company C. C leases containers of various shapes/sizes to shipping companies.
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
Question: Joint venture or Joint operation?
Example 2
Company D and E contributes equal amount of money to buy a vessel from a shipyard
On completion Company E will provide dive- support computer equipment to enable diving support vessel capabilities.
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?

48. Contact details:
David Paterson Audit Partner – Energy & Resources Tel: +44 (0) 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 Stolt- Nielsen 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 Chatira Audit Senior Manager – Energy & Resources Tel: +44 (0) 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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