Notes
1.
Accounting estimates and judgments
The preparation of the financial statements in conformity with IFRS requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported performance. Management bases its estimates on historical experience and various other assumptions and sources that are believed to be reasonable. Actual results could differ from those estimates.
JL believes the following are the significant accounting estimates and related judgments used in the preparation of its consolidated financial statements.
Critical accounting estimates and judgments
Estimated service life, scrap value and recoverable amount of vessels
The estimated service life and scrap value of the vessels are assessed annually and adjusted if appropriate. Irrespective of indications of impairment the recoverable values of JL's vessels are determined annually based on broker’s valuations and calculated utility values. Significant changes in the estimated service life and scrap values and the result of the annual impairment test of vessels may have an impact on operating income.
In 2005 changes have been made to the accounting estimates regarding service life and scrap value. In 2004 vessels were depreciated over an estimated service life of 20 years to a residual value deemed to be 10% of the purchase price. In 2005 vessels are depreciated over an estimated service life of 25 years to a scrap value calculated as an estimated steel value.
The change in the accounting estimate has increased operating income for 2005 by approximately USD 6.8 million. The change in the accounting estimate will also have a positive impact on operating income for the future years, but due to changes in size and mix of the fleet it is impractical to estimate the effect.
According to the annual impairment test, no vessels have been determined as at risk of impairment as at 31 December 2005, and no foreseeable short term changes in essential assumptions will cause any vessel to be impaired.
Goodwill
Goodwill relates to the acquisition of Cool Carriers AB in 2001 and to the acquisition of Quantum Tankers A/S in 2004. The carrying amount of goodwill related to the acquisition of Quantum Tankers A/S is disclosed in note 10, whereas the goodwill related to the acquisition of Cool Carriers AB is included in the carrying amount of investments in associated companies.
Cool Carriers AB:
As of 1 January 2001 JL acquired all the shares in Cool Carriers AB, a major reefer operator. The operator activity of Lauritzen Reefers A/S was subsequently merged with the acquired business, and the combined business was named LauritzenCool AB. As of 1 January 2005, 50% of LauritzenCool AB was sold to NYK Reefers, and the company was renamed NYKLauritzenCool AB.
At the end of 2004 goodwill amounted to USD 12.3 million after a write-down of USD 2.0 million. The write-down was determined on the basis of the sales price agreed with NYK Reefers. The write-down is disclosed in note 10 and note 16.
As of 31 December 2005 the carrying amount of goodwill after disposal of the 50%, amounts to USD 6.1 million, which is included in the carrying amount of investments in associated companies. The goodwill amount has been tested for impairment using the calculated utility value based on the expected future cash flow.
The cash generating unit comprises the total NYKLauritzenCool Group as it is no longer possible to separate the cash flow originating from the operating activity previously owned by Lauritzen Reefers A/S. The estimated future cash flow covers the period 2006 to 2012 to accommodate for the cyclical nature of the business with the addition of a residual value based on the average cash flow for the same period.
Key assumptions determined by management based on historical information and current market expectations are:
- An unchanged number of vessels in operation.
- An average time charter equivalent, which is 5.5% below the level of 2005.
- An average EBITDA which is 11% below the average EBITDA for 2004 and 2005.
- A risk adjusted weighted average cost of capital of 8%.
The assumptions correspond to the parameters used for the impairment test of reefer vessels.
The utility value exceeds the carrying amount of goodwill and other assets allocated to the cash generating unit at 31 December 2005, and no foreseeable short term changes in key assumptions will cause the carrying amount to exceed the utility value.
Quantum Tankers A/S:
In 2004 JL acquired all the shares in Quantum Tankers A/S (now Lauritzen Tankers A/S), a company operating and managing product tankers.
As the acquisition agreement provides for an adjustment of purchase price contingent on profits for the years 2005 to 2007, an estimate for the adjustment has been included in the acquisition cost. The estimated adjustment is revised annually.
At the end of 2004, goodwill amounted to USD 1.5 million after a write-down of USD of USD 0.3 million. The write-down was determined using a calculated utility value and reflected the uncertainty regarding the future level of EBITDA for the newly acquired business. The write-down is disclosed in note 10 and note 16.
As of 31 December 2005 the carrying amount of goodwill after disposal of the 50%, amounts to USD 6.1 million, which is included in the carrying amount of investments in associated companies. The goodwill amount has been tested for impairment using the calculated utility value based on the expected future cash flow.
The cash generating unit comprises the total NYKLauritzenCool Group as it is no longer possible to separate the cash flow originating from the operating activity previously owned by Lauritzen Reefers A/S. The estimated future cash flow covers the period 2006 to 2012 to accommodate for the cyclical nature of the business with the addition of a residual value based on the average cash flow for the same period.
Key assumptions determined by management based on historical information and current market expectations are:
- An unchanged number of vessels in operation.
- An average time charter equivalent, which is 5.5% below the level of 2005.
- An average EBITDA which is 11% below the average EBITDA for 2004 and 2005.
- A risk adjusted weighted average cost of capital of 8%.
The assumptions correspond to the parameters used for the impairment test of reefer vessels.
The utility value exceeds the carrying amount of goodwill and other assets allocated to the cash generating unit at 31 December 2005, and no foreseeable short term changes in key assumptions will cause the carrying amount to exceed the utility value.
Quantum Tankers A/S:
In 2004 JL acquired all the shares in Quantum Tankers A/S (now Lauritzen Tankers A/S), a company operating and managing product tankers.
As the acquisition agreement provides for an adjustment of purchase price contingent on profits for the years 2005 to 2007, an estimate for the adjustment has been included in the acquisition cost. The estimated adjustment is revised annually.
At the end of 2004, goodwill amounted to USD 1.5 million after a write-down of USD of USD 0.3 million. The write-down was determined using a calculated utility value and reflected the uncertainty regarding the future level of EBITDA for the newly acquired business. The write-down is disclosed in note 10 and note 16.
As of 31 December 2005 the carrying amount of goodwill after re-adjustment of the purchase price amounts to USD 1.7 million. The goodwill amount has been tested for impairment using the calculated utility value based on the expected future cash flow.
The cash generating unit comprises the commercial and technical operation of Lauritzen Tankers A/S, i.e. excluding contribution from owned product tankers. The estimated future cash flow covers the period 2006 to 2012 to accommodate for the cyclical nature of the business with the addition of a residual value based on the average cash flow for the same period.
Key assumptions determined by management based on historical information and current market expectations are:
- An average of 7.7 vessels in operation.
- An average time charter equivalent for a MR size product tanker, which is 30% below the level of 2005.
- An average EBITDA of USD 1.4 million per year.
- A risk adjusted weighted average cost of capital of 7%.
The assumptions correspond to the parameters used for the impairment test of product tankers.
The utility value exceeds the carrying amount of goodwill and other assets allocated to the cash generating unit at 31 December 2005, and no foreseeable short term changes in key assumptions will cause the carrying amount to exceed the utility value.
Critical accounting judgments in applying JL’s accounting policies
Leases:
The Group enters into different contracts regarding chartering (leasing) of vessels. The majority of these contacts can easily be categorized as either operational or financial leases. However, some contracts require judgment as to the substance of the agreement in order to recognise and measure them in accordance with JL’s accounting policies.
Joint operations:
Some vessels are operated jointly with partners. The statutes of these joint operations including global marketing agreements are individually determined with the partners. Furthermore, some joint operations/global marketing agreements are managed by JL while others are managed by third parties. Categorising of joint operations as subsidiaries, associates or joint ventures is based on managerial judgment.
Notes (USDm)
Notes (USD 1,000)
