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Impairment of Maritime Assets

Impairment of Maritime Assets

Pinelopi Kassani

For a vessel-owning company, the vessel is the most substantial and valuable part of the total assets within the statement of financial position. Essentially, for the financial statements to present a true and fair view of the company’s financial position as at the year-end date, the carrying amount of its vessel should be fairly stated. 

The main reason why that may not be the case is the existence of impairment indicators, internal or external, that may signify that the vessel’s recoverable amount is less than what is recorded in the company’s books and records. 

Impairment indicators that may cause the value of the vessel to decline may relate to the vessel specifically, such as damages or the need for technological advances. They may also relate to industry developments such as market conditions on the specific shipping sector.  If there are impairment indicators present, management must estimate the recoverable amount. This recoverable amount is the fair value of the vessel, less costs to sell, or the present value of the future cashflows anticipated to be derived from the continuous use of the vessel, up to the end of its economic life - whichever of the two is higher.
This exercise takes place at each reporting period end. As one would expect, getting the impairment assessment right is fundamental. Given that the figures involved are material, it is an area that key stakeholders like banks and investors, are always very interested in. And of course an area that auditors usually challenge. 

The assessment of a vessel’s recoverable amount is a highly judgmental area.  And, where there is judgement, there is also room for debate. It is therefore essential for companies to ensure that they have a well-documented and consistent impairment assessment methodology that is applied by suitably trained accountants.