Finanstilsynet has reviewed certain aspects of the 2012 consolidated financial statements of Jinhui Shipping and Transportation Group ("Jinhui"). The review has covered, inter alia, the impairment tests of Jinhui's vessels.
Jinhui is a dry bulk ship owner listed on the Oslo Stock Exchange. Many of Jinhui's vessels were acquired before the financial crisis when the market conditions in the dry bulk shipping market were favourable. In 2012, the dry bulk market was under severe stress. There was an oversupply of tonnages, which, together with a volatile demand in Asia, led to a severe decline in freight rates. As a result of the market conditions, several entities in the dry bulk industry assessed that their vessels were impaired.
As of 2 January 2013, Jinhui's market capitalization on the Oslo Stock Exchange was NOK 626.2 million. According to the financial statements for 2012, total book value of the equity of Jinhui was USD 853.5 million. The price/book ratio equalled 0.13. A ratio this low is a clear impairment indicator.
In the financial statements for 2012, Jinhui has disclosed that management considers impairment of owned vessels and vessels under construction to be critical accounting estimates. No further information on the impairment tests performed was included in the financial statements. Jinhui did not record any impairment loss on its vessels in the 2012 financial statements.
An issuer shall as part of an impairment test calculate the relevant asset's recoverable amount. According to IFRS, an asset's recoverable amount is the higher of the fair value less costs to sell and the value in use. In the financial statements, Jinhui has calculated each ship's value in use by estimating the present value of the future expected cash flows. IFRS requires that an impairment test should be based on reasonable and supportable assumptions.
In Finanstilsynet's view, assumptions applied in the impairment test performed per year end 2012 seem optimistic given the market information available at the date of the impairment test. Finanstilsynet has been critical of the assumptions, but given the fact that Jinhui to some extent has considered external evidence as part of its tests, Finanstilsynet has noted these for the record.
For future impairment tests, Finanstilsynet expects that Jinhui will take into account the following:
- When using historical rates to estimate future earnings, the time series applied should be a longer period of time. Rates that are particularly high or low due to special circumstances should be excluded. The information should include data also from the most recent year/period
- The second-hand values of vessels or the price of a newly built vessel, as expectations of future time charter rates may be deduced from these
- Other relevant market information should be considered
The company is also expected to include in its scenario analysis, scenarios with less favourable outcomes, and to refine the model for impairment testing to include expected costs of classification and major inspections. The model should be adjusted to include the new information on expectations of utilization rates going forward.
Finanstilsynet lastly expects more extensive information in the notes related to the procedures performed and the assessments that are made in respect to the value in use calculations, including information about the assumptions used.