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Annual Report 2012

Annual Report 2012

GROUPImpairmentThe

GROUPImpairmentThe Company has defined the whole fleet as one Cash Generating Unit (CGU) as the vessels are operated as aportfolio and each vessel is dependent of each other. An individual vessel can be chartered on behalf ofseveral clients and trade lanes throughout the world. No vessels are defined for a specific type of cargo ortrade within a particular geographical area. Refer to note 12 for further information on the impairmentassessment.Operating versus finance lease agreementsBased on the content of a leasing agreement, Eitzen Chemical determines whether the agreement isconsidered as an operating or a finance lease agreement. In this determination, assumptions are made and ifthe same assumptions were judged differently, it could have an effect on the income statement and thestatement of financial position. One of the most significant judgments is the forecasted future market value ofthe leased vessel at the dates when the purchase option is expected to be declared.Estimates and assumptionsManagement has made estimates and assumptions which have significant effect on the amounts recognised inthe financial statements. In general, accounting estimates are considered significant if:- the estimates require assumptions about matters that are highly uncertain at the time the estimatesare made- different estimates could have been used- changes in the estimates have a material impact on Eitzen Chemical’s financial positionCarrying amount of vessels, depreciation and residual valuesIn addition to the purchase price, the carrying amount of vessels is based on management’s assumptions ofuseful life and residual value of the vessels. Useful life may change due to change in technologicaldevelopments, competition, environmental and legal requirements, freight rates and steel prices.The residual value of the vessel is calculated as the light displacement of the vessel multiplied with theestimated steel prices minus the estimated cost in connection with the scrapping. Residual values arechallenging to estimate given the long lives of the vessels, the uncertainty as to future economic conditionsand the future price of steel, which is considered as the main determinant of the residual price. EitzenChemical currently estimates residual value annually based upon the average steel price for the last five years.ImpairmentWhen value in use calculations are performed, management estimate the expected future cash flows from theassets or cash-generating unit and determine a suitable discount rate in order to calculate the present value ofthose cash flows. This will be based on management’s evaluations, including estimating future performance,revenue generating capacity, and assumptions of future market conditions and appropriate discount rates.Changes in circumstances and in management’s evaluations and assumptions may give rise to impairmentlosses. While management believes that the estimates of future cash flows are reasonable, differentassumptions regarding such cash flows could materially affect the evaluations.At each reporting date, management assesses indicators of impairment for non-financial assets and whetherthe assumptions in the value in use calculations are reasonable.Onerous contractsAt each reporting date, management assesses if there are contracts in which the unavoidable costs of meetingthe obligations under the contract exceed the economic benefits expected to be received. A provision isrecorded by estimating the present obligation under the contract.28

GROUPFinance leasesAgreements to charter in vessels where Eitzen Chemical has substantially all risks and rewards of ownership,are recognised in the balance sheet as finance lease. Finance leased assets are at the inception of the leasemeasured at the lower of the fair value and the present value of minimum lease payments determined in theagreement. For the purpose of calculating the net present value, the interest rate implicit in the lease or theCompany’s incremental borrowing rate is used as a discount factor.ProvisionsProvisions are based on management’s best estimate. Provisions are reviewed at each balance sheet date toreflect the best estimate of the liability.Note 2.3 - Summary of significant accounting policiesPresentation and classificationIncome statementAs permitted by IAS 1 the income statement is prepared based on a mix of nature and function, since this givesthe most relevant presentation of the income statement.Consolidated statement of financial positionCurrent assets and current liabilities include items due in less than one year from the balance sheet date, itemsused in the daily operation of the business and assets held primarily for the purpose of being traded. Thecurrent portion of long-term debt is classified under current liabilities.Cash flow statementThe cash flow statement is prepared using the indirect method.Participation in poolsRevenue and expenses, assets and liabilities from pool vessels are proportionately consolidated, based on therelative interest in the pools, calculated by a pool point system.Revenue and expenseAll voyage revenues and voyage expenses are recognised on a percentage of completion basis. Eitzen Chemicaluses a discharge-to-discharge principle in determining the percentage of completion for all spot voyages andvoyages under contracts of affreightment (CoAs). Under this method voyage revenue is recognised evenly overthe period from the departure of a vessel from its original discharge port to departure from the next dischargeport. For vessels without signed contracts in place at discharge no revenue is recognised before a new contractis signed. Voyage expenses incurred for vessels in the idle time are expensed. Revenues from time charters(T/C) and bareboat charters (B/B) accounted for as operating leases are recognised over the rental periods ofsuch charters, as service is performed. Demurrage is included if a claim is considered probable. Losses arisingfrom time or voyage charters are provided for in full when they become probable.Other incomeManagement fee and other income are recognised at or during time of delivery.VesselsVessels are recorded at historical cost less accumulated depreciation and any accumulated impairmentcharges. Cost includes expenditures that are directly attributable to the acquisition of the vessels. The cost isdecomposed into vessel, docking and coating.29

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