Shipping companies are experiencing difficult financial times with many unable to repay or service debts. It is essential for companies to have properly documented and timely financial information, including financial models projecting future cash flows, to present to banks in the event of potential defaults. Financial modelling can help identify ways to manage volatility and support restructuring proposals. Experienced external advisors like Moore Stephens can help companies reduce costs associated with resolving financial problems by working with stakeholders before and after bank intervention.

1. Spring 2012
Shipping Note
Moore Stephens Isle of Man
PRECISE. PROVEN. PERFORMANCE.
Audit and Consulting
Shipping must adopt model guidelines
Shipping is experiencing tough times. An increasing number of
companies are unable to repay, or in some cases, even service their
debts. That could mean an uncomfortable meeting with the bank. But Inside
too many companies are not properly prepared for such an encounter.
Businesses must be able to produce Financial modelling is a key component “ Understanding the
properly documented and timely financial of any renegotiation of facilities. A viable GAAP between value
information for their stakeholders, which model, typically including integrated and net assets.”
should include a view of the future. In balance sheet, profit and loss account
Page 2
good times, when charter rates exceeded and cash flow statement, can help to
operating expenses, little attention needed support a restructuring proposal, by
“
Plus ça change on
to be paid to future cash flows and debt demonstrating the impact of changes on
service. But today, it is essential to be able future cash flow.
revenue recognition.”
to anticipate, to the extent it is possible, Page 2
future cash flows and pinch points. Financial modelling doesn’t change the
economic fundamentals of a business. “Confidence up but new
Dawn Webb, a Partner of Moore Stephens But it is a tool with which to identify investment appetite
Chartered Accountants says, “It is ways to manage the impact of a volatile wanes.”
essential to provide banks with detailed market. A good quality financial model is
Page 3
information in the event that it becomes also an invaluable, ongoing management
clear that a company may default on the tool. It can be used to make longer-term
“The devil’s dictionary.”
terms of a loan. It is better still if this can strategic decisions and to determine the
Pages 3 4
be done before any covenants are nature and structure of future investments
breached or payments missed. In these and the potential returns on investment.
difficult times, the key is for businesses to
help banks to help them, by anticipating Experienced, external advice can help
defaults or breaches and presenting a reduce the time and money spent on
solution, rather than waiting for the resolving problems. Moore Stephens has
default. This cannot be achieved without worked with companies in the shipping
a proper financial model. industry and with their stakeholders, both
prior to and following bank intervention.
“Clearly a model is not a panacea for We have concluded a number of
difficult trading conditions but working successful independent business reviews.
with a bank to present its credit Our combined corporate finance and
committee with a potential solution, shipping industry expertise could make all
rather than with a problem, is more the difference in today’s difficult market.
likely to engender a positive attitude
dawn.webb@moorestephens.co.im
to any restructuring.”

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Audit and Consulting
Understanding the GAAP between
value and net assets
The difference between a company’s value and its reported net assets can be substantial. The general
rule is that companies are worth, at least, their net assets, and often substantially more. Today, that
rule is being broken frequently, in shipping as much as anywhere else.
Comparing the market capitalisation of many listed shipping
companies with their reported net assets, the equity markets
seem to have decided that a number of shipping companies are
not worth the values they have been reporting in their balance
sheets. We saw a plethora of bad news affecting shipping in
late 2011, little of which will have been reflected by companies
which reported third-quarter results, and none by companies Under IFRS, this does not apply, with the result that impairments
listed on exchanges which only require six-monthly figures to are less likely to be recorded under US GAAP than under IFRS.
be published. This raises the question of whether the values One thing is for sure. If directors are going to report net assets
reported in the balance sheet can continue to be appropriate. at substantially more than the company’s market capitalisation,
they need to be ready to explain why. While Nelson may have
It matters which accounting standards are being applied. Under seen no ships, some directors might be accused of seeing the
US GAAP, for example, one dollar of expected profit in fifteen ships, but not the problems associated with them.
years’ time is given the same weighting as a dollar of expected
andrew.dixon@moorestephens.co.im
profit tomorrow in deciding whether or not assets are impaired.
Plus ça change on revenue recognition
The project on accounting for revenue shortly after the end of the year would time basis, and profits on voyage charters
had been put back, with the next be likely to balance out. will therefore be recognised over the
documents issued being more proposals duration of the voyage.
rather than a final standard. The revised Even this minor change now seems
proposals have now been published. unlikely. The new proposals would So it looks as though accounting for
normally lead to continuation of current revenue is not likely to change very much
The original proposals would have accounting treatments, as the standard- in the next few years. Now, when it comes
changed the way in which shipping setters have reconsidered how to deal to leasing…
companies recognise income, primarily with the provision of services, such as
on voyage charters. This would often shipping services. In many cases, services
have meant recognising revenue - and will continue to be accounted for on a andrew.dixon@moorestephens.co.im
profit – as voyages completed. Despite
this, they were seen as fairly small beer
since the changes were likely to be minor.
They would have led to a slight deferral
of accumulated profit over current
practice, but would have had little impact
on the results reported for each year.
The larger the fleet, the smaller the
impact would probably have been, as
voyages completed shortly before and

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Audit and Consulting
Confidence up but new
investment appetite wanes
Overall confidence levels in the shipping industry increased slightly in the three
months ended February 2012. This is the third successive quarter in which there
has been a small uptick in confidence.
According to our latest shipping confidence survey, the average increase over the coming year rose from 30% to 35%. In the dry
confidence level expressed by respondents in the markets in bulk sector, there was a 15 percentage point increase, to 38%, in
which they operate was 5.5 on a scale of 1 (low) to 10 (high), the overall number of respondents who thought that rates would
marginally up on the figure of 5.4 recorded in November 2011. rise. And in the container ship market, 31% of respondents
The overall number of respondents expecting to make a major expected rates to go up, as opposed to 23% last time.
investment or significant development over the next twelve
months fell, on a scale of 1 to 10, from 5.2 to 4.9 – the lowest Read the full survey report at
figure for three years. www.moorestephens.co.uk/shippingconfidence
Demand trends, competition and finance costs continued to Average confidence over time
dominate the top three factors cited by respondents as those
likely to influence performance most significantly over the next
year. There was an 8 percentage point drop in the number of
respondents overall who expected finance costs to increase over
the next twelve months, and a 2 percentage point increase in
the number of respondents who thought that finance costs
would come down.
Respondents across all tonnage types were more confident of
rate increases than they were three months previously. In the
andrew.dixon@moorestephens.co.im
tanker sector, the number of respondents expecting rates to
The devil’s dictionary: I is for impairment
The ninth in a series looking at classic and alternative definitions Shipowners are particularly susceptible to impairment. This may
of shipping and accountancy terms. be because they buy at the top of the market, sell at the
bottom, and operate at a loss for twelve months of the year.
Textbook definition This is called entrepreneurialism. Once shipowners have decided
Impairment is a reduction in the value of an asset as a result of that an asset is impaired, however, they can write it down.
the asset no longer generating the benefits expected earlier as This is better than simply trying to remember it. As long as it
determined by a company through periodic assessments. is written down, they can carry on using the asset. How fair
is that?
The alternative definition
If your market capitalisation falls below net assets, you are Shipping has suffered from impairment since the Battle of
impaired. This is bad luck. The other possibility is that you are Copenhagen. Here, Nelson saw no ships and always wore a hat.
lying through your teeth. But it is not the end of the world. If Some shipowners see the ships but don’t wear a hat at all. In
you are using US GAAP, you are less likely to be impaired than this way, they lose 90% of their body heat, according to their
you would be if you were using IFRS, or almost any other mums. The remaining 10% is written down.
acronym. That’s a relief.
What the eye doesn’t see, the heart doesn’t grieve over.

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Audit and Consulting
The devil’s dictionary: J is for Jones Act
The tenth in a series looking at classic and alternative definitions who are allowed to claim damages if they spend at least 30%
of shipping and accountancy terms. of their time working on US ships. If they are injured, they can
claim more. A whole community of Jones Act lawyers has
Textbook definition grown up over the years, with one leading attorney exhorting
The Jones Act, or Merchant Marine Act 1920, requires that seafarers via his website, “Don’t try to hide prior injuries or fudge.”
cargo moving between US ports must be carried in US-built
and registered ships owned by US citizens. Critics claim that it prices US shipbuilders out of the international
market and that it hinders free trade and is particularly hard on
The alternative definition Hawaii. It is the only US state made up of a mixture of islands
The Jones Act has always been a hot potato. In 1954, the Mills and vowels which does not observe daylight saving, the other
Brothers had a hit single with ‘The Whole Town’s Talking About being Arizona.
the Jones Act’ which was only prevented from reaching number
one by the Stargazers’ version of ‘I See the Moon (the Moon More is less.
Sees Me)’. Today, Jones is a cold potato because people have
more important things to worry about.
For more information please go to:
Under the Jones Act, cabotage is all one-way, unlike in Europe. www.msiom.im
The Americans have a better currency and nicer weather, Follow us on Twitter: @MSIOM
however. Jones also provides welfare benefits for US seafarers,
Dawn Webb
dawn.webb@moorestephens.co.im
S dawn.webb.msiom
Andrew Dixon
andrew.dixon@moorestephens.co.im
S andrew.dixon.msiom
Moore Stephens Chartered Accountants and Consulting
Limited
PO Box 25, 26-28 Athol Street
Douglas, Isle of Man, IM99 1BD British Isles
T +44 (0)1624 662020
www.msca.im
www.mscl.im
This bulletin is prepared by Moore Stephens Chartered Accountants and Moore Stephens Consulting Limited. Shipping Note is designed to keep readers abreast of current developments
and trends. It is a general guide only and is not intended to be comprehensive. No liability is accepted for the opinions it contains, or for any errors or omissions. In all cases you should
seek professional advice specific to your circumstances. Printed and published by © Moore Stephens Isle of Man a member firm of Moore Stephens International Limited. Moore Stephens
International Limited is regarded as one of the world’s leading accounting and consulting networks with 636 member and correspondent offices in some 100 countries. April2012FA406.1