Almost one-third of US listed shipping companies have absorbed impairment charges in their annual accounts.
Almost one-third of US listed shipping companies have absorbed impairment charges in their annual accounts, according to Moore Stephens, a leading accountancy and business consulting firm.
Moore Stephens also warned that shipping companies planning to use future cash-flow in their accounts as an alternative to broker vessel valuations which were below book value must be able to substantiate their decision.
Writing in the firm"s shipping newsletter, "Bottom Line", Moore Stephens technical partner David Chopping noted that nearly 30% of a sample of 51 US-listed shipping companies have recorded impairment losses.
But he pointed out that only half of those have recorded impairment charges on newbuildings or vessels.
Mr Chopping told that he was a little surprised that more shipping companies had not taken write-downs on their tonnage but added that this probably reflected the high level of uncertainty in markets.
Containership and bulk carrier companies took most hits as Mr Chopping said that tanker values were still holding up at the end of last year, the closing date of accounts.
With vessel values falling, many owners will still need to consider impairment, Moore Stephens says.
?Whatever accounting policy is adopted, vessels will always need to be written down if they are worth less than their current carrying value,? Mr Chopping explained.
?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 and US Generally Accepted Accounting Principles, the existence of impairment is determined by comparing the book value of an asset with its recoverable amount.
The normal starting point for estimating how much you could get from selling a vessel is a broker"s valuation.
But Mr Chopping said these valuations had 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,? he said.
?Secondly, there are differing opinions about whether a broker valuation really reflects "fair value".
?Thirdly, the market has over-reacted.?
If broker valuations were below book value, a company could try to demonstrate that its future cash-flow exceeds that level.
In the cases of both IFRS and US GAAP, there were two main methods of using future cash-flow to support a valuation: the first was to take account of factors not reflected in a broker valuation, such as long-term charters at good rates; more controversially, in those cases where these factors were absent, owners can use their own estimates.
?Where the result of this exceeds book value they can then at least argue that there is no impairment,? Mr Chopping said.
?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.?