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Friday, 13 March 20
TOP 4 ACCOUNTING CONSIDERATIONS AFTER THE IMPLEMENTATION OF IMO 2020 - PWC
 To install or not to install?
Following the IMO 2020 global low sulphur cap for marine fuel effective since 1 January 2020, many shipowners are still evaluating their positioning on whether to install scrubbers or not.
Some shipping companies have already made an initial assessment, have weighed the risks and have taken the decision not to install scrubbers just yet, advocating a “wait and see” approach in an effort to avoid speculation of bunker spreads. They also keep the option (put/call) to install a scrubber later in the future, in case the spreads between HSFO and LSFO / ULSFO increase significantly. On the other hand, there is a large number of shipowners (by January 2020 approximately 11% of the global fleet by tonnage and 4.5% by vessel count*) who have already decided to invest in scrubbers installation (the amounts range between $1,5m – $5m depending on the type of vessel) in order to avoid the uncertainty related to the future supply and prices of LSFO /ULSFO. One of the main drivers behind such investment decisions, is the assumption that these vessels will be more employable in the future as charterers are also being driven by their boards and corporate responsibility initiatives to employ more “green” friendly vessels. Moreover, the vessel owners can also take advantage (i.e. higher rates, lower fuel cost) of scrubber investment programs in a rising market.
Investing in scrubbers is one of the most significant one-off capital improvements having an important impact on the shipping industry over the last decade. The cost of the scrubbers is either being funded by the owners of the vessels, the charterer (lessee) or a combination of both. Where the charterers fully or partially fund the cost of scrubbers, this is done through either an upfront payment or through increased hire charter rates during the lease term.
For those shipping companies that have taken the decision to install scrubbers on their vessels, PwC has identified four main accounting considerations to be taken into account.
Capitalization of scrubbers
In general, an expenditure that adds to the productive capacity or improves the efficiency of an existing asset can be considered a capital item. Some key benefits that vessels with scrubbers are expected to generate in the future include:
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Demand higher charter rates;
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Incur lower fuel costs;
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Increase corporate responsibility – more employable vessels, take advantage of the rising market;
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Reduce environmental footprint;
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Maintain their current speed;
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Possibly a reduction in interest rates (finance costs), as more banks are turning to “green lending” or are now incorporating reduction in interest rates for environmentally friendly assets
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On the other hand, vessels without scrubbers may demand lower charter rates, incur higher fuel costs and potentially slow down their speed
Overall, taking into consideration that scrubbers improve the efficiency of the vessel, a view can be taken that the costs related to scrubber installation qualify for capitalization.
Useful life of the scrubber
The useful life of an asset is defined as the period over which the asset is expected to contribute directly or indirectly to future cash flows, the assessment of which can require a significant amount of judgment dependent on a number of factors.
Based on inquiries with technical departments of shipping companies, it is rather difficult to say that there is a certain useful life for a scrubber. Given that there are no regulations or guidelines yet on scrubbers’ lifecycle and replacement, we can assume that a scrubber with proper maintenance can contribute to the operation of the vessel over the remaining useful life of the asset.
Who is the owner of the asset?
It is generally expected that the owner of the vessel will be the owner of the scrubber as it would be difficult for a charterer to remove a scrubber after the completion of a charter – in which case, probably neither of the two parties would undertake the incremental cost. It is also highly likely that the scrubber will be used by subsequent charterers, regardless of whether the installation was funded by the vessel owner or reimbursed by the charterer. In both cases, the increase in the daily hire rate or the one-time payment from the charterer could be considered as an additional revenue for the owner as it relates to the premium that the charterer is willing to pay in order to benefit from the lower bunker expense. Any potential upfront reimbursements from the charterer for the scrubber could be deferred and amortized over the lease term.
Impairment considerations
To the extent scrubbers will be fitted, there is a need to determine if the cash flow projections used in the long-lived asset impairment tests will need to include an estimate of the relevant outflow (i.e. scrubber costs and future maintenance costs). The effect of any additional operating expenses associated with the scrubber maintenance on the projected cash flows should also be considered.
Currently, vessels predominantly utilize HSFO, and the installation of scrubbers would allow the vessels to continue to utilize this fuel. The ability to consume specific types of fuel could become a new service potential, with vessels’ scrubber installation probably being a cash outflow able to maintain this new service.
Charterers may fund or partially fund the installation of a scrubber through either a one-time payment or an amended charter rate including a potential premium. For cases where one-time payment is received from the charterer, the impairment assessment may not include this payment or the related scrubber cost and accordingly keep the original charter rate until the scrubber is installed. With this approach projected revenue is not overstated and the expense will be included upon installation, to offset the additional charter hire. Ultimately, the impact to the cash flows should be nil or minimal when the charterer is funding or partially funding the cost of the scrubber, respectively.
The above-mentioned accounting considerations include a high level of judgement. Therefore, it is crucial that management assesses the accounting treatment on a case by case basis, taking into consideration its specific characteristics and ensuring that the proper disclosures are made.
Source ING
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Wednesday, 11 March 20
SHIPPING MARKET INSIGHT - INTERMODAL
On the 4th of September the Baltic Dry Index marked its highest level for 2019, reaching 2,518 points, while the rest of the dry indices also recor ...
Tuesday, 10 March 20
SHIPPING MARKET ANALYSIS
It might be already overstated, but it seems to be important to point out once again how peculiar the current circumstances are.
Before the st ...
Tuesday, 10 March 20
EIA FORECASTS U.S ELECTRIC POWER SECTOR DEMAND FOR COAL WILL FALL BY 81 MMST (15%) IN 2020
EIA forecasts that U.S. coal production will total 595 million short tons (MMst) in 2020, down 95 MMst (14%) from 2019. According to EIA's Shor ...
Tuesday, 10 March 20
CORONAVIRUS: DEMAND DOWNGRADES FOR BULK COMMODITIES - WOOD MACKENZIE
The coronavirus outbreak is a rapidly evolving news story – and a real wildcard for bulks demand. Our global experts are monitoring the impac ...
Tuesday, 10 March 20
CHINA'S COAL-RICH PROVINCE ENSURES ENERGY SUPPLY AMID EPIDEMIC - XINHUA
China’s coal-rich province of Shanxi has seen more than 500 coal mines resume production in February, which ensured energy supply amid the ou ...
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- Renaissance Capital - South Africa
- Thiess Contractors Indonesia
- Tata Chemicals Ltd - India
- Kapuas Tunggal Persada - Indonesia
- Attock Cement Pakistan Limited
- Meenaskhi Energy Private Limited - India
- Baramulti Group, Indonesia
- Vedanta Resources Plc - India
- PowerSource Philippines DevCo
- Electricity Authority, New Zealand
- Africa Commodities Group - South Africa
- Goldman Sachs - Singapore
- International Coal Ventures Pvt Ltd - India
- Bukit Baiduri Energy - Indonesia
- ICICI Bank Limited - India
- Dalmia Cement Bharat India
- Kalimantan Lumbung Energi - Indonesia
- Independent Power Producers Association of India
- Commonwealth Bank - Australia
- Asia Pacific Energy Resources Ventures Inc, Philippines
- Eastern Coal Council - USA
- Central Java Power - Indonesia
- Indogreen Group - Indonesia
- Minerals Council of Australia
- Cement Manufacturers Association - India
- Sojitz Corporation - Japan
- San Jose City I Power Corp, Philippines
- Heidelberg Cement - Germany
- GVK Power & Infra Limited - India
- LBH Netherlands Bv - Netherlands
- Trasteel International SA, Italy
- Dong Bac Coal Mineral Investment Coporation - Vietnam
- GMR Energy Limited - India
- Barasentosa Lestari - Indonesia
- Karaikal Port Pvt Ltd - India
- TNB Fuel Sdn Bhd - Malaysia
- Siam City Cement - Thailand
- Mintek Dendrill Indonesia
- Truba Alam Manunggal Engineering.Tbk - Indonesia
- Toyota Tsusho Corporation, Japan
- European Bulk Services B.V. - Netherlands
- Banpu Public Company Limited - Thailand
- Sarangani Energy Corporation, Philippines
- Medco Energi Mining Internasional
- Indian Oil Corporation Limited
- Asmin Koalindo Tuhup - Indonesia
- The State Trading Corporation of India Ltd
- Sical Logistics Limited - India
- Bayan Resources Tbk. - Indonesia
- Jorong Barutama Greston.PT - Indonesia
- Maharashtra Electricity Regulatory Commission - India
- Dr Ramakrishna Prasad Power Pvt Ltd - India
- Bhoruka Overseas - Indonesia
- Electricity Generating Authority of Thailand
- The Treasury - Australian Government
- Lanco Infratech Ltd - India
- Sindya Power Generating Company Private Ltd
- McConnell Dowell - Australia
- Gujarat Sidhee Cement - India
- Riau Bara Harum - Indonesia
- Parliament of New Zealand
- Straits Asia Resources Limited - Singapore
- Kideco Jaya Agung - Indonesia
- PetroVietnam Power Coal Import and Supply Company
- PNOC Exploration Corporation - Philippines
- Deloitte Consulting - India
- South Luzon Thermal Energy Corporation
- Kepco SPC Power Corporation, Philippines
- Georgia Ports Authority, United States
- Pipit Mutiara Jaya. PT, Indonesia
- TeaM Sual Corporation - Philippines
- Tamil Nadu electricity Board
- Wood Mackenzie - Singapore
- SMC Global Power, Philippines
- New Zealand Coal & Carbon
- Rashtriya Ispat Nigam Limited - India
- Standard Chartered Bank - UAE
- Rio Tinto Coal - Australia
- Singapore Mercantile Exchange
- Indo Tambangraya Megah - Indonesia
- Global Green Power PLC Corporation, Philippines
- SMG Consultants - Indonesia
- Neyveli Lignite Corporation Ltd, - India
- Malabar Cements Ltd - India
- Gujarat Mineral Development Corp Ltd - India
- Vijayanagar Sugar Pvt Ltd - India
- Pendopo Energi Batubara - Indonesia
- Aditya Birla Group - India
- Xindia Steels Limited - India
- Therma Luzon, Inc, Philippines
- The University of Queensland
- Aboitiz Power Corporation - Philippines
- CIMB Investment Bank - Malaysia
- Timah Investasi Mineral - Indoneisa
- Makarim & Taira - Indonesia
- OPG Power Generation Pvt Ltd - India
- Iligan Light & Power Inc, Philippines
- Sinarmas Energy and Mining - Indonesia
- Ambuja Cements Ltd - India
- Bhatia International Limited - India
- Anglo American - United Kingdom
- Star Paper Mills Limited - India
- GN Power Mariveles Coal Plant, Philippines
- Ministry of Transport, Egypt
- Merrill Lynch Commodities Europe
- Marubeni Corporation - India
- Kohat Cement Company Ltd. - Pakistan
- Chamber of Mines of South Africa
- Coal and Oil Company - UAE
- Gujarat Electricity Regulatory Commission - India
- Savvy Resources Ltd - HongKong
- Australian Coal Association
- Australian Commodity Traders Exchange
- Samtan Co., Ltd - South Korea
- Krishnapatnam Port Company Ltd. - India
- Bahari Cakrawala Sebuku - Indonesia
- ASAPP Information Group - India
- Offshore Bulk Terminal Pte Ltd, Singapore
- Directorate General of MIneral and Coal - Indonesia
- Ministry of Mines - Canada
- Energy Link Ltd, New Zealand
- Siam City Cement PLC, Thailand
- Ceylon Electricity Board - Sri Lanka
- Coalindo Energy - Indonesia
- Mercuria Energy - Indonesia
- Chettinad Cement Corporation Ltd - India
- Bulk Trading Sa - Switzerland
- Coastal Gujarat Power Limited - India
- Simpson Spence & Young - Indonesia
- Central Electricity Authority - India
- SN Aboitiz Power Inc, Philippines
- Eastern Energy - Thailand
- Maheswari Brothers Coal Limited - India
- Petrochimia International Co. Ltd.- Taiwan
- Filglen & Citicon Mining (HK) Ltd - Hong Kong
- Leighton Contractors Pty Ltd - Australia
- Kaltim Prima Coal - Indonesia
- Miang Besar Coal Terminal - Indonesia
- Bukit Makmur.PT - Indonesia
- Antam Resourcindo - Indonesia
- Karbindo Abesyapradhi - Indoneisa
- Formosa Plastics Group - Taiwan
- Uttam Galva Steels Limited - India
- Bharathi Cement Corporation - India
- Kumho Petrochemical, South Korea
- Essar Steel Hazira Ltd - India
- Vizag Seaport Private Limited - India
- Power Finance Corporation Ltd., India
- Directorate Of Revenue Intelligence - India
- Altura Mining Limited, Indonesia
- Meralco Power Generation, Philippines
- Semirara Mining Corp, Philippines
- Global Business Power Corporation, Philippines
- Price Waterhouse Coopers - Russia
- Wilmar Investment Holdings
- Binh Thuan Hamico - Vietnam
- Indika Energy - Indonesia
- Borneo Indobara - Indonesia
- Alfred C Toepfer International GmbH - Germany
- Bangladesh Power Developement Board
- Economic Council, Georgia
- Manunggal Multi Energi - Indonesia
- Oldendorff Carriers - Singapore
- Billiton Holdings Pty Ltd - Australia
- GAC Shipping (India) Pvt Ltd
- Posco Energy - South Korea
- Mercator Lines Limited - India
- Planning Commission, India
- Romanian Commodities Exchange
- London Commodity Brokers - England
- MS Steel International - UAE
- White Energy Company Limited
- Madhucon Powers Ltd - India
- Cigading International Bulk Terminal - Indonesia
- Bhushan Steel Limited - India
- Semirara Mining and Power Corporation, Philippines
- Carbofer General Trading SA - India
- IHS Mccloskey Coal Group - USA
- Parry Sugars Refinery, India
- Globalindo Alam Lestari - Indonesia
- Interocean Group of Companies - India
- Thai Mozambique Logistica
- Latin American Coal - Colombia
- IEA Clean Coal Centre - UK
- Edison Trading Spa - Italy
- Bukit Asam (Persero) Tbk - Indonesia
- Intertek Mineral Services - Indonesia
- CNBM International Corporation - China
- Jindal Steel & Power Ltd - India
- Indian Energy Exchange, India
- Sree Jayajothi Cements Limited - India
- Kobexindo Tractors - Indoneisa
- Ind-Barath Power Infra Limited - India
- Grasim Industreis Ltd - India
- India Bulls Power Limited - India
- Agrawal Coal Company - India
- Global Coal Blending Company Limited - Australia
- AsiaOL BioFuels Corp., Philippines
- Sakthi Sugars Limited - India
- Bank of Tokyo Mitsubishi UFJ Ltd
- Ministry of Finance - Indonesia
- Orica Australia Pty. Ltd.
- Port Waratah Coal Services - Australia
- Jaiprakash Power Ventures ltd
- Mjunction Services Limited - India
- Salva Resources Pvt Ltd - India
- VISA Power Limited - India
- Petron Corporation, Philippines
- PTC India Limited - India
- Metalloyd Limited - United Kingdom
- Indonesian Coal Mining Association
- Larsen & Toubro Limited - India
- Orica Mining Services - Indonesia
- Kartika Selabumi Mining - Indonesia
- Holcim Trading Pte Ltd - Singapore
- Energy Development Corp, Philippines
- Videocon Industries ltd - India
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