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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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- SMG Consultants - Indonesia
- Medco Energi Mining Internasional
- Anglo American - United Kingdom
- San Jose City I Power Corp, Philippines
- Asia Pacific Energy Resources Ventures Inc, Philippines
- Bank of Tokyo Mitsubishi UFJ Ltd
- PetroVietnam Power Coal Import and Supply Company
- Chettinad Cement Corporation Ltd - India
- Kartika Selabumi Mining - Indonesia
- Manunggal Multi Energi - Indonesia
- Jindal Steel & Power Ltd - India
- Carbofer General Trading SA - India
- Coal and Oil Company - UAE
- Billiton Holdings Pty Ltd - Australia
- Timah Investasi Mineral - Indoneisa
- Neyveli Lignite Corporation Ltd, - India
- Price Waterhouse Coopers - Russia
- Global Coal Blending Company Limited - Australia
- Jaiprakash Power Ventures ltd
- Salva Resources Pvt Ltd - India
- Independent Power Producers Association of India
- Gujarat Mineral Development Corp Ltd - India
- Trasteel International SA, Italy
- Simpson Spence & Young - Indonesia
- New Zealand Coal & Carbon
- Tata Chemicals Ltd - India
- Australian Commodity Traders Exchange
- Barasentosa Lestari - Indonesia
- ICICI Bank Limited - India
- Singapore Mercantile Exchange
- Directorate Of Revenue Intelligence - India
- Port Waratah Coal Services - Australia
- Larsen & Toubro Limited - India
- Formosa Plastics Group - Taiwan
- Coalindo Energy - Indonesia
- Asmin Koalindo Tuhup - Indonesia
- McConnell Dowell - Australia
- Directorate General of MIneral and Coal - Indonesia
- Indian Energy Exchange, India
- Globalindo Alam Lestari - Indonesia
- Bhushan Steel Limited - India
- Baramulti Group, Indonesia
- GVK Power & Infra Limited - India
- Samtan Co., Ltd - South Korea
- Marubeni Corporation - India
- India Bulls Power Limited - India
- Kideco Jaya Agung - Indonesia
- Indogreen Group - Indonesia
- Bharathi Cement Corporation - India
- GAC Shipping (India) Pvt Ltd
- Dalmia Cement Bharat India
- Star Paper Mills Limited - India
- Binh Thuan Hamico - Vietnam
- Krishnapatnam Port Company Ltd. - India
- TNB Fuel Sdn Bhd - Malaysia
- Petron Corporation, Philippines
- Semirara Mining and Power Corporation, Philippines
- GN Power Mariveles Coal Plant, Philippines
- Leighton Contractors Pty Ltd - Australia
- Power Finance Corporation Ltd., India
- Cement Manufacturers Association - India
- Deloitte Consulting - India
- Indonesian Coal Mining Association
- Australian Coal Association
- Thai Mozambique Logistica
- Eastern Coal Council - USA
- Indo Tambangraya Megah - Indonesia
- Vizag Seaport Private Limited - India
- Wood Mackenzie - Singapore
- Renaissance Capital - South Africa
- Kalimantan Lumbung Energi - Indonesia
- Aboitiz Power Corporation - Philippines
- Parry Sugars Refinery, India
- MS Steel International - UAE
- Jorong Barutama Greston.PT - Indonesia
- Goldman Sachs - Singapore
- Wilmar Investment Holdings
- Bulk Trading Sa - Switzerland
- Intertek Mineral Services - Indonesia
- Karaikal Port Pvt Ltd - India
- Chamber of Mines of South Africa
- TeaM Sual Corporation - Philippines
- Merrill Lynch Commodities Europe
- Maharashtra Electricity Regulatory Commission - India
- Karbindo Abesyapradhi - Indoneisa
- Sakthi Sugars Limited - India
- Borneo Indobara - Indonesia
- Bhatia International Limited - India
- AsiaOL BioFuels Corp., Philippines
- Bayan Resources Tbk. - Indonesia
- GMR Energy Limited - India
- Truba Alam Manunggal Engineering.Tbk - Indonesia
- Ministry of Finance - Indonesia
- Meenaskhi Energy Private Limited - India
- Posco Energy - South Korea
- Standard Chartered Bank - UAE
- Indika Energy - Indonesia
- Global Green Power PLC Corporation, Philippines
- Malabar Cements Ltd - India
- Gujarat Electricity Regulatory Commission - India
- Videocon Industries ltd - India
- Kepco SPC Power Corporation, Philippines
- Bhoruka Overseas - Indonesia
- Sical Logistics Limited - India
- Mercuria Energy - Indonesia
- Eastern Energy - Thailand
- Kapuas Tunggal Persada - Indonesia
- Rio Tinto Coal - Australia
- Riau Bara Harum - Indonesia
- Orica Australia Pty. Ltd.
- Gujarat Sidhee Cement - India
- Africa Commodities Group - South Africa
- Semirara Mining Corp, Philippines
- Alfred C Toepfer International GmbH - Germany
- Energy Development Corp, Philippines
- Coastal Gujarat Power Limited - India
- Tamil Nadu electricity Board
- International Coal Ventures Pvt Ltd - India
- OPG Power Generation Pvt Ltd - India
- SN Aboitiz Power Inc, Philippines
- LBH Netherlands Bv - Netherlands
- Offshore Bulk Terminal Pte Ltd, Singapore
- Toyota Tsusho Corporation, Japan
- Mintek Dendrill Indonesia
- Edison Trading Spa - Italy
- Central Electricity Authority - India
- The Treasury - Australian Government
- Miang Besar Coal Terminal - Indonesia
- Mjunction Services Limited - India
- Sree Jayajothi Cements Limited - India
- Ambuja Cements Ltd - India
- IEA Clean Coal Centre - UK
- White Energy Company Limited
- Ministry of Mines - Canada
- Global Business Power Corporation, Philippines
- Vijayanagar Sugar Pvt Ltd - India
- Orica Mining Services - Indonesia
- Antam Resourcindo - Indonesia
- The State Trading Corporation of India Ltd
- Sindya Power Generating Company Private Ltd
- Grasim Industreis Ltd - India
- Uttam Galva Steels Limited - India
- Planning Commission, India
- Romanian Commodities Exchange
- Dr Ramakrishna Prasad Power Pvt Ltd - India
- Maheswari Brothers Coal Limited - India
- Metalloyd Limited - United Kingdom
- Dong Bac Coal Mineral Investment Coporation - Vietnam
- Indian Oil Corporation Limited
- Sojitz Corporation - Japan
- Interocean Group of Companies - India
- Mercator Lines Limited - India
- Makarim & Taira - Indonesia
- Latin American Coal - Colombia
- Banpu Public Company Limited - Thailand
- Savvy Resources Ltd - HongKong
- Central Java Power - Indonesia
- Siam City Cement PLC, Thailand
- Kaltim Prima Coal - Indonesia
- Madhucon Powers Ltd - India
- Economic Council, Georgia
- Lanco Infratech Ltd - India
- Oldendorff Carriers - Singapore
- European Bulk Services B.V. - Netherlands
- Xindia Steels Limited - India
- Ceylon Electricity Board - Sri Lanka
- Georgia Ports Authority, United States
- VISA Power Limited - India
- Kobexindo Tractors - Indoneisa
- Kohat Cement Company Ltd. - Pakistan
- Sinarmas Energy and Mining - Indonesia
- ASAPP Information Group - India
- Parliament of New Zealand
- Therma Luzon, Inc, Philippines
- Kumho Petrochemical, South Korea
- Meralco Power Generation, Philippines
- Heidelberg Cement - Germany
- Pendopo Energi Batubara - Indonesia
- Pipit Mutiara Jaya. PT, Indonesia
- Siam City Cement - Thailand
- Altura Mining Limited, Indonesia
- Bahari Cakrawala Sebuku - Indonesia
- Bukit Asam (Persero) Tbk - Indonesia
- Minerals Council of Australia
- Iligan Light & Power Inc, Philippines
- Electricity Generating Authority of Thailand
- London Commodity Brokers - England
- Energy Link Ltd, New Zealand
- Agrawal Coal Company - India
- Electricity Authority, New Zealand
- Petrochimia International Co. Ltd.- Taiwan
- Commonwealth Bank - Australia
- CIMB Investment Bank - Malaysia
- IHS Mccloskey Coal Group - USA
- South Luzon Thermal Energy Corporation
- Sarangani Energy Corporation, Philippines
- Filglen & Citicon Mining (HK) Ltd - Hong Kong
- Vedanta Resources Plc - India
- PNOC Exploration Corporation - Philippines
- Straits Asia Resources Limited - Singapore
- PowerSource Philippines DevCo
- Attock Cement Pakistan Limited
- SMC Global Power, Philippines
- PTC India Limited - India
- Aditya Birla Group - India
- The University of Queensland
- Holcim Trading Pte Ltd - Singapore
- Essar Steel Hazira Ltd - India
- Ind-Barath Power Infra Limited - India
- Bangladesh Power Developement Board
- Bukit Baiduri Energy - Indonesia
- Ministry of Transport, Egypt
- Cigading International Bulk Terminal - Indonesia
- Rashtriya Ispat Nigam Limited - India
- CNBM International Corporation - China
- Thiess Contractors Indonesia
- Bukit Makmur.PT - Indonesia
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