Leading accountant and shipping industry adviser Moore Stephens* says it expects to see an increase in the sort of pressure recently exerted on shipping companies by the US Securities and Exchange Commission (SEC) to make disclosure when the market value of their vessels is less than their carrying value.
The pressure for this type of disclosure, often referred to as ‘incipient impairment’, has been reflected in the 2011 filings of many SEC registrants. Moore Stephens partner David Chopping says, “The SEC has seen impairment charges in the accounts of a number of shipping companies in the last few years. But it has apparently not seen quite as many as it might have been expecting. It is easy to understand why the SEC, and others, might consider disclosure of market value to be useful information and want to see it more widely disseminated. It is more objective than valuations based on management estimates, it is more comparable across companies, and it sets benchmarks against which companies’ own policies can be assessed. Indeed, for some parties, the information might seem far more important than valuations based on projected future income streams.
“At the same time, it is equally easy to visualise objections to such disclosure. Values are to be determined on an unfixed basis, so are arguably of only limited relevance where vessels are fixed for fairly long periods with high-quality charterers. Similarly, while values may look comparable, if the fixture position differs significantly, then such comparability might be considered spurious. And even if a vessel is operating in the spot market, or a fixture is going to be ending shortly, whilst other objections might be less compelling, there are still concerns about the volatility of market values. How relevant is a valuation at a point of time in a volatile market where an asset might have many years still to operate?
“Nonetheless, it seems very unlikely that the SEC will change its mind and decide that such disclosure is not useful. It is far more likely that other bodies, and indeed investors, will start expecting to see such information. This can happen without any need for changes in the rules, and indeed the SEC has not explicitly changed the disclosure requirements. It seems to have relied more on the ‘Al Capone’ approach of a kind word; everyone already knows it has a gun!”
* Moore Stephens LLP is noted for a number of industry specialisations and is widely acknowledged as a leading shipping and insurance adviser.
Moore Stephens LLP is a member firm of Moore Stephens International Limited, one of the world’s leading accounting and consulting associations, with 636 offices of independent member firms in 100 countries, employing 21, 197 people and generating revenues in 2011 of $2.3 billion.