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Deloitte-LBG UK screen 4:3 (19.05 cm x 25.40 cm) © 2011 Deloitte LLP. Private and confidential.

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Presentation on theme: "Deloitte-LBG UK screen 4:3 (19.05 cm x 25.40 cm) © 2011 Deloitte LLP. Private and confidential."— Presentation transcript:

1 Deloitte-LBG UK screen 4:3 (19.05 cm x cm) © 2011 Deloitte LLP. Private and confidential.

2 Deloitte-LBG UK screen 4:3 (19.05 cm x cm) © 2011 Deloitte LLP. Private and confidential.

3 Deloitte-LBG UK screen 4:3 (19.05 cm x cm) © 2011 Deloitte LLP. Private and confidential. IFRS developments for the shipping sector A sea change? David Paterson and Bheki Chatira 6 October 2011

4 © 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 4

5 Latest IASB standards

6 ©2011 Deloitte LLP. Private and confidential New/amended standards 6 Effective date IFRS 10Consolidated financial statements 1 Jan 2013 IFRS 11Joint arrangements 1 Jan 2013 IFRS 12Disclosure of interests in other entities 1 Jan 2013 IAS 27Separate financial statements 1 Jan 2013 IAS 28Investments in associates and joint ventures 1 Jan 2013 IFRS 13Fair value measurement1 Jan 2013

7 Subsidiaries, associates and joint arrangements

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

9 IFRS 10 Consolidated financial statements

10 Fundamental principle 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 IAS 27/SIC 12 IFRS 10 IFRS 10 requires extensive use of judgment (IFRS 12 requires disclosure of areas of judgment) 10 ©2011 Deloitte LLP. Private and confidential

11 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 Exposure (rights) to variable returns Exposure (rights) to variable returns Ability of the investor to affect its returns through its power Substantive rights to direct « relevant activities » Potential variability to positive or negative returns (broad definition of returns) Need to determine whether the « decision-maker » is an agent of another investor 11

12 Factors to consider in evaluating existence of power Purpose and design of the investee Relevant activities and how decisions are made with respect to these activities Current ability to direct the relevant activities 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 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 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 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 Consider all substantive rights, giving practical ability to direct Protective vs. participating rights Direct and indirect rights (financing, guarantees, operational ties) Consider all substantive rights, giving practical ability to direct Protective vs. participating rights Direct and indirect rights (financing, guarantees, operational ties) 12 ©2011 Deloitte LLP. Private and confidential

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

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

15 Extent of exposure to risks and rewards Exposure (rights) to variable returns 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 IAS 27/SIC 12 IFRS ©2011 Deloitte LLP. Private and confidential

16 Agent – principal relationship Ability of the investor to affect its returns through its power 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 IAS 27/SIC 12 IFRS 10 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 16 ©2011 Deloitte LLP. Private and confidential

17 Transition Retrospective application Consolidation of an entity not previously consolidated De-consolidation of a previously consolidated entity 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 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 17 ©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 18 ©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 20 ©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 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 Joint ventures (IAS 31) 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 Joint arrangements (IFRS 11) 21 ©2011 Deloitte LLP. Private and confidential

22 How to determine the type of joint arrangement? No Legal form of separate vehicle Joint operation Joint venture Does legal form give parties rights/obligations to assets/obligations? Terms of contractual arrangement Do terms of arrangement give parties rights/obligations to assets/obligations? Other facts and circumstances Is the design of the arrangement such that parties in effect have rights/obligations to assets/obligations? Is the arrangement conducted through a separate vehicle? Yes No 22 ©2011 Deloitte LLP. Private and confidential

23 How to account for joint arrangements? Joint operators Own assets, liabilities, revenue, expenses, including share of those held jointly Parties without right/obligation to assets/liabilities Other IFRSs Participants with significant influence Equity method (IAS 28) Participants without significant influence IAS 39 (or IFRS 9) Joint operations Others with rights/obligations to assets/liabilities Joint venturers Joint ventures 23 ©2011 Deloitte LLP. Private and confidential

24 Transition Jointly controlled entity Equity method Joint operation 1.Derecognise the equity method investment 2.Recognise assets (incl. goodwill) and liabilities 3.Net assets recognised > equity method investment  reduce goodwill (if any) with any excess against retained earnings 4.Net assets recognised < equity method investment  difference against retained earning Jointly controlled entity Proportionate consolidation method Joint venture 1.Derecognise assets (incl. goodwill, if any) and liabilities 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 BeforeAfterAs of beginning of first comparative period 24 ©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 25

26 IFRS 12 Disclosure of interests in other entities

27 Background Pulls together disclosure related to Subsidiaries Joint arrangements Associates Unconsolidated structured entities ObjectiveEstablish 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 27 ©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) 28 ©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 29 ©2011 Deloitte LLP. Private and confidential

30 IAS 27 and IAS 28

31 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 31 ©2011 Deloitte LLP. Private and confidential

32 IFRS 13 Fair value measurement

33 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 IFRS 13 - Fair value measurement 33

34 “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 Definition of fair value Not settlement amounts, i.e. original liability remains outstanding Not between related parties, or forced, e.g. involuntary liquidation, fire sale etc 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 Fair value is the number within bid-ask spread that is most appropriate – as a practical expedient may use mid-prices Market participant is not a related party, must be knowledgeable, able and willing to transact 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 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 Disclosures 36

37 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 Impact of IFRS 13 37

38 Exposure draft revenue

39 ©2011 Deloitte LLP. Private and confidential Background 39 December 2008 DP June 2010 ED November 2011 Second ED ??? Effective date Objectives Convergence IFRS – US GAAP Provide a single, principle-based revenue recognition standard for use across various industries and capital markets 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 October 2010 Comment period ends

40 ©2011 Deloitte LLP. Private and confidential Application of the core principle 40 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 ©2011 Deloitte LLP. Private and confidential 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 2010 Comment period ended Q Second ED ??? Effective date 42

43 ©2011 Deloitte LLP. Private and confidential 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”. Core principles Main effect 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. 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. All lease contracts within definition recorded on balance sheet. 43 ©2011 Deloitte LLP. Private and confidential

44 General principles – leases (continued) Lease term Leasee Lessor “Longest possible term that is more likely than not to occur” - ED Bare-boat charter Time and voyage charters ? Bare-boat charter Time and voyage charters ? Sale of vessel on ‘finance lease’ 44 ©2011 Deloitte LLP. Private and confidential Variable lease payments “Probability-weighted expected outcome approach to estimate lease payment” - ED

45 Questions

46 ©2011 Deloitte LLP. Private and confidential 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 ©2011 Deloitte LLP. Private and confidential 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 ©2011 Deloitte LLP. Private and confidential 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. 48

49 © 2011 Deloitte LLP. Private and confidential This document is confidential and prepared solely for your information. Therefore you should not, without our prior written consent, refer to or use our name or this document for any other purpose, disclose them or refer to them in any prospectus or other document, or make them available or communicate them to any other party. No other party is entitled to rely on our document for any purpose whatsoever and thus we accept no liability to any other party who is shown or gains access to this document. Deloitte LLP is a limited liability partnership registered in England and Wales with registered number OC and its registered office at 2 New Street Square, London EC4A 3BZ, United Kingdom. Deloitte LLP is the United Kingdom member firm of Deloitte Touche Tohmatsu ('DTT'), a Swiss Verein, whose member firms are legally separate and independent entities. Please see for a detailed description of the legal structure of DTT and its member firms.

50 © 2011 Deloitte LLP. Private and confidential

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