Odfjell SE Annual Report 2012

odfjell group
by the lessor are classified as operating
leases. Payments made under operating
leases are charged to the net result on a
straight-line basis over the lease term, see
note 16 and note 20.
2.13 Goodwill
Excess value on the purchase of an operation
that cannot be allocated to fair value on the
acquisition date is shown in the balance sheet
as goodwill. In the case of investments in
associates, goodwill is included in the carrying
amount of the investment. Goodwill
is not amortized, but goodwill is allocated
to the relevant cash generating unit and an
assessment is made each year as to whether
the carrying amount can be justified by future
earnings, see note 2.14 impairment of assets.
2.14 Impairment of assets
Non-financial assets
At each reporting date the accounts are
assessed whether there is an indication
that an asset may be impaired. If any such
indication exists, or when annual impairment
testing for an asset is required, estimates
of the asset’s recoverable amount are done.
The recoverable amount is the highest of
the fair market value of the asset, less cost
to sell, and the net present value (NPV) of
future estimated cash flow from the employment
of the asset ('value in use'). The NPV
is based on an interest rate according to a
weighted average cost of capital ('WACC')
reflecting the required rate of return. The
WACC is calculated based on the Company's
long-term borrowing rate and a risk free
rate plus a risk premium for the equity. If
the recoverable amount is lower than the
book value, impairment has occurred and the
asset shall be revalued. Impairment losses
are recognised in the net result. Assets are
grouped at the lowest level where there are
separately identifiable independent cash
flows. We have made the following assumptions
when calculating the 'value in use' for
material tangible and intangible assets:
(i) Ships
Future cash flow is based on an assessment
of what is our expected time charter earning
and estimated level of operating expenses for
each type of ship over the remaining useful
life of the ship. As the Odfjell ships are
interchangeable and the regional chemical
tankers are integrated with the deep sea
chemical tankers through a logistical system,
all chemical tankers are seen together as
a portfolio of ships. In addition the pool of
officers and crew are used throughout the
fleet. Odfjell has a strategy of a total crew
composition and how the crew is dedicated
to the individual ships varies. Changing the
crew between two ships can change the net
present value per ship without any effect for
the Group. This also is an argument for evaluating
the fleet together. As a consequence,
ships will only be impaired if the total value
of the ships based on future estimated cash
flows is lower than the total book value.
(ii) Tank terminals
Future cash flow is based on our expected
result for each terminal. We have calculated
the 'value in use' based on estimated five
years operating result before depreciation
less planned capital expenditures each year
plus a residual value after five years.
(iii) Goodwill
Goodwill acquired through business combinations
has been allocated to the relevant
cash generating unit (CGU). An assessment
is made as to whether the carrying amount
of the goodwill can be justified by future
earnings from the CGU to which the goodwill
relates.
We have calculated 'value in use' based on
net present value of future cash flows. If
'value in use' of the CGU is less than the
carrying amount of the CGU, including
goodwill, goodwill will be written down first.
Thereafter the carrying amount of the CGU
will be written down.
(iiii) Customers relationship
Customers relationship acquired through
business combinations has been allocated
to the relevant cash generating unit (CGU).
An assessment is made as to whether the
carrying amount of the customers relationship
can be justified by future earnings from
the CGU to which the customers relationship
relates. We have calculated 'value in use'
based on net present value of future cash
flows. Impairment exists when the carrying
amount is not recoverable and exceeds its
fair value.
Financial assets
At each reporting date the Group assesses
whether a financial asset or a group of
financial assets is impaired.
(i) Assets carried at amortised cost
If there is objective evidence that an impairment
loss on assets carried at amortised
cost has been incurred, the amount of the
loss is measured as the difference between
the asset’s carrying amount and the present
value of estimated future cash flows
discounted at the financial asset’s original
effective interest rate.
(ii) Available-for-sale-investments
If an available-for-sale-investment is
impaired, an amount comprising the difference
between its cost and its current fair
value, less any impairment loss previously
recognised in profit or loss, is transferred
from equity to profit and loss. This normally
applies in a situation with changes exceeding
20% of the value or expected to last for more
than six months, both based on original cost.
With the exception of goodwill, impairment
losses included in net result for previous
periods are reversed when there is information
that the basis for the impairment
loss no longer exists or is not as great as it
was. This reversal is classified in revenue
as an impairment reversal. The increased
carrying amount of an asset attributable to
a reversal of an impairment loss shall not
exceed the carrying amount that would have
been determined (net of depreciation) had
no impairment loss been recognised for the
asset in prior years.
2.15 Derivative financial instruments
and hedging
Derivative financial instruments are recognised
on the balance sheet at fair value. The
method of recognising the gain or loss is
dependent on the nature of the item being
hedged. On the date a derivative contract is
entered into, we designate certain derivatives
as either a hedge of the fair value of a
recognised asset or liability (fair value hedge),
or a hedge of a highly probable forecasted
transaction (cash flow hedge) or of a firm
commitment (fair value hedge).
Changes in the fair value of derivatives
that qualify as fair value hedges and that
are highly effective both prospectively and
retrospectively are included in net result
together with any changes in the fair value
of the hedged asset, liability or firm commitment
that is attributable to the hedged risk.
Changes in the fair value of derivatives
that qualify as cash flow hedges and that
are highly effective both prospectively and
retrospectively are recognised in statement
of other comprehensive income. Amounts
deferred in statement of other comprehensive
income are transferred and classified in
net result when the underlying hedged items
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odfjell annual report 2012