O TTO M ARINE L IMITED - Microsoft Internet Explorer - SGX

OTTO MARINE LIMITED AND ITS SUBSIDIARIES
Key Sources of Estimation Uncertainty
The key assumptions concerning the future, and other key sources of estimation uncertainty at the
balance sheet date, that have a significant risk of causing a material adjustment to the carrying amounts
of assets and liabilities within the next financial year, are discussed below.
Impairment of Goodwill
In respect of certain cash generating unit (CGU), determining whether goodwill is impaired requires
an estimation of the value in use of the cash-generating units to which goodwill has been allocated. The
value in use calculation requires the entity to estimate the future cash flows expected to arise from the
cash-generating unit and a suitable discount rate in order to calculate present value. The carrying amount
of goodwill for which the management uses the value in use to assess its impairment at the balance
sheet date was $3,384,000 (2006: $922,000; 2005: $Nil). With regards to the other CGU to which the
remaining goodwill of $1,717,000 (2006: $Nil; 2005: $Nil) relates, whereby the estimate of future cash
flows cannot be determined reasonably as it is newly acquired and managed by the Group, the Company
uses its market value to assess its impairment. Details of the impairment calculation are provided in
Note 14.
Useful Lives and Residual Values of Property, Plant and Equipment
The management exercises their judgement in estimating the useful lives and residual values of the
depreciable assets.
Depreciation is provided to write off the cost of property, plant and equipment, adjusted for residual
value, over their estimated useful lives, using the straight-line method. The carrying amounts of property,
plant and equipment are disclosed in Note 15.
4 Financial Risks and Management
i) Foreign Currency Risk
The Company has a number of investments in foreign subsidiaries, whose net assets are
exposed to currency translation risk. The Group has substantial revenue denominated in United
States dollar and the Group’s purchases are mainly denominated in United States dollar and Euro.
Exposures to foreign currency risks are managed as far as possible by natural hedges of matching
assets and liabilities.
The management does not adopt a formal policy to hedge the Group’s foreign exchange risk.
From time to time, the Group uses foreign exchange contracts to manage the Group’s foreign
exchange exposure.
ii) Interest Rate Risk
Interest rate risk refers to the risk experienced by the Company and the Group as a result of
the fluctuation in interest rates. The Group’s bank borrowings are at floating rates and thus exposed
the Group to cash flow interest rate risk. The Group also has interest-bearing fixed deposits, finance
leases and loan from related parties. The interest rates of the fixed deposits, bank borrowings,
finance leases and loan from related parties are disclosed in Notes 6, 16, 20 and 21.
iii) Credit Risk
Credit risk refers to the risk that a counterparty will default on its contractual obligations
resulting in a loss to the Group. The Group has adopted a policy of dealing with creditworthy
counterparties and when necessary, will require advance payments from customers with no track
record of credit history.
For shipbuilding revenue, the Group typically requires customers to place a down payment
upon signing of the sales memorandum. The remaining contract value is payable through progress
payments and upon delivery of the vessels. The credit terms granted are normally 30 days.
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