Financial Reporting Requirements Undergo Further Change

International accountant and shipping consultant Moore Stephens has warned that changes to international financial reporting requirements could lead to alterations in the way in which shipping companies prepare their accounts.

Moore Stephens Technical Partner David Chopping says, “A few years ago, the International Accounting Standards Board (IASB) took note of the complaint that it kept changing things. It therefore agreed to have a few years when standards didn’t change - a so-called ‘stable platform’ period. But that period ends in 2009 and, for companies with a December year-end, there are 26 new or changed standards to consider, as well as some new interpretations. In practice, many of the changes are small, and no company will be affected by all of them. Some are significant, but have been around for a long time. A few have come in during 2009.

“Disclosure on financial instruments will change again this year, with companies having to categorise financial instruments carried at fair value between those at market values, those at values based on market data, and those where management has had to use estimates. Companies which have treated tonnage tax as income tax will have to change their practice, as the standard-setter has clarified that this is not an acceptable accounting treatment.”

Some companies can also consider whether they wish to make massive changes to their accounts this year. In July, the IASB issued the International Financial Reporting Standard (IFRS) for SMEs (small and medium-sized entities) which, in principle, is immediately available to companies which are not listed and which do not have a public interest dimension. This standard replaces all other standards, uses simpler accounting treatments and requires less disclosure. But Chopping warns, “Although this sounds good, there is a catch - or rather two catches. Firstly, there are many jurisdictions where the standard is not currently available. Companies in the EU, for example, will not be able to adopt it now as it has not yet gone through the necessary process with the European Commission. Secondly, the simpler treatments which the standard for SMEs requires are not always the ones that companies would choose. For example, they prohibit all capitalisation of borrowing costs, which must be written off immediately as an expense - not necessarily appealing if you are in the middle of a newbuilding programme.”

A few things have not changed in the year. Chopping explains, “It seems unlikely that impairment issues will disappear. Companies will again have to consider whether they can support the carrying value of their fleets. For those that have previously used discounted expected cashflows to support carrying values, there will be a difference this year: there will be a year’s worth of actual data to be compared with last year’s projections. This is potentially helpful for those who have met or exceeded their previous estimates, but not quite so helpful for those who haven’t.

“Similarly, the possibility of covenant breaches will probably need to be considered again. It is worth stressing that IFRS requires liabilities to be classified based on conditions at the date of the statement of financial position (the balance sheet date). So negotiations with the bank concluded after this date are of no relevance, other than for disclosure. The simple message coming out of this is that companies which already have, or which foresee, a problem with their covenants need to be talking to their banks now and trying to sort out the position before the end of the year.”