The annual report has been prepared in accordance with International Financial Reporting Standards as adopted by the EU and additional Danish disclosure requirements for annual reports of reporting class C large enterprises, see the statutory order on the adoption of IFRS issued pursuant to the Danish Financial Statements Act. In addition, the annual report has been prepared in compliance with the International Financial Reporting Standards issued by the IASB.
New financial reporting standards
As of January 1, 2007 JL has applied IFRS 7 Financial Instruments: Disclosures as well as IAS 1 (revised 2005) Presentation of Financial Statements and IAS 32 (revised 2005) Financial Instruments: Presentation. JL has furthermore applied IFRIC 7-10.
The new international financial reporting standards and interpretations do not have any impact on recognition and measurement and the applied accounting policies are therefore consistent with those of last year. The new standards are only introducing changes to the disclosures. Comparative figures are adjusted in the notes.
Basis of preparation
The financial statements are presented in US dollars, rounded to the nearest thousand. They are prepared under the historical cost convention, except that the following assets and liabilities are stated at their fair value:
- Derivative financial instruments
- Investments held for trading
- Investments available for sale
The accounting policies set out below have been applied consistently by all JL entities and to all periods presented in these consolidated financial statements.
The preparation of financial statements in conformity with IFRS’s requires management to make judgements, estimates and assumptions that effect the application of policies and reported amounts of assets and liabilities, income and expenses. Judgements made by management in the application of IFRS’s that have a significant effect on the financial statements and estimates with a significant risk of material adjustment in the next year are discussed in note 1.
Basis of consolidation
The Annual Report comprises the Parent Company, J. Lauritzen A/S, and subsidiaries in which the Parent Company has directly or indirectly the power to govern the financial and operating policies. This is normally accomplished by holding more than 50% of the voting rights. The existence and effect of potential voting rights that are currently exercisable or convertible are considered when assessing whether JL has control or significant influence over another entity.
Enterprises in which JL has a significant influence, but not control are classified as associates.
Joint ventures are recognised in the consolidated financial statements, and in the financial statements of the parent company using the equity method.
The Consolidated Financial Statements are prepared on the basis of the financial statements of the Parent Company and its subsidiaries, by combining items of a uniform nature and eliminating inter-company transactions and balances, and are based on financial statements prepared in compliance with JL’s accounting policies.
Acquisitions, disposals and entities formed during the year are included in the financial statements during the period of JL’s control or significant influence. Comparative figures are not adjusted for acquisitions. Disposals or liquidations are presented as discontinued operations.
On acquisition of businesses, the purchase method is applied, according to which the identifiable assets, liabilities and contingent liabilities acquired are measured at their fair values on the date of acquisition. The excess of the cost of acquisition over the fair value of JL’s share of the identifiable assets, liabilities and contingent liabilities acquired are recorded as goodwill. If the cost of acquisition is less than the fair value of the net assets of the business acquired (negative goodwill), the difference is recognised directly in the income statement.
Gains or losses from the disposal or liquidation of subsidiaries or associates are stated as the difference between the proceeds from disposal or liquidation and the book value of the net assets at the date of disposal or liquidation. This includes any goodwill as well as any anticipated disposal or liquidation costs.
Translation of foreign currencies
Items included in the financial statements of each of JL’s entities are measured using the currency of the primary economic environment in which the entity operates (the functional currency). The consolidated and the parent company’s financial statements of JL are stated in USD which is both JL’s functional and presentation currency.
Foreign currency transactions are translated into the functional currency at the exchange rate of the date when initially recognised. Gains and losses arising between the exchange rate of the transaction date and that of the settlement date are recognised in the income statement under financial items.
Receivables, payables and other monetary items in foreign currencies that have not been settled at the balance sheet date are translated at the exchange rates then prevailing. Any differences between the exchange rates at the balance sheet date and the transaction date rates are recognised in the income statement under financial items.
The results and financial position of any JL entity that has a functional currency different from JL’s presentation currency are translated into the presentation currency as follows:
- Assets and liabilities, including goodwill and fair value adjustments arising on consolidation are translated at the closing rates at the date of the balance sheet.
- Income and expenses for each income statement are translated at exchange rates approximating the exchange rate of the date of transaction date, and
- All resulting exchange differences are recognised as a separate component of equity.
Exchange differences arising from the translation of the net investment in foreign subsidiaries or associates, and of borrowings or other currency instruments relating to hedging such investments are recognised directly in the translation reserve of equity. Exchange differences are released to the income statement upon disposal of the net investment.
Derivative financial instruments and hedging activities
JL uses derivative financial instruments to hedge its exposure to foreign exchange risks, interest rate risks and price risks arising from operational, financing and investment activities. In accordance with its treasury policy, JL does not hold or issue derivative financial instruments for trading purposes. However, derivatives that do not qualify for hedge accounting are accounted for as trading instruments.
Derivatives are recognised initially at cost. Subsequently, derivatives are re-measured at fair value. The gain or loss on re-measurement to fair value is recognised immediately in the income statement, unless the derivative qualifies for hedge accounting, where recognition of any resultant gain or loss depends upon the nature of the item being hedged.
JL documents at the inception of the transaction the relationship between the hedge and the items hedged, as well as its risk management objectives and strategy for undertaking various hedge transactions. JL also documents from start to finish of a hedge whether the derivatives used in the hedge are highly effective in offsetting changes in the fair values or cash flows of the hedged items.
Fair value hedge
Changes in the fair value of derivatives designated as and qualifying for recognition as a hedge of the fair value of a recognised asset or liability are recognised in the income statement together with changes in the fair value of the hedged asset or liability.
Cash flow hedge
Where a derivative financial instrument is designated as a hedge of a highly probable forecasted transaction, the effective part of any gain or loss on it is recognised directly in equity. When the forecasted transaction subsequently is realised, the associated cumulative gain or loss is removed from equity and recognised in the income statement in the same period or periods during which the hedged forecasted transaction affects profit or loss. The ineffective part of any gain or loss is recognised in the income statement immediately.
When a hedging instrument expires or is sold, terminated or exercised, or the entity revokes designation of the hedge relationship but the hedged forecast transaction still is expected to occur, the cumulative gain or loss at that point remains in equity and is recognised in accordance with the above policy when the transaction occurs. If the hedged transaction is no longer expected to take place, the cumulative unrealised gain or loss recognised in equity is recognised in the income statement immediately.
Net investment hedge
Derivatives used to hedge net investments in foreign subsidiaries or associated companies are accounted for similarly to cash flow hedges. Any gain or loss on the hedging instrument relating to the effective portion of the hedge is recognised in equity; the gain and loss relating to the ineffective portion is recognised immediately recognised in the income statement.
Derivatives that do not qualify for hedge accounting
For derivatives that do not qualify for hedge accounting, changes in fair value are recognised in the income statement as they occur.
Determination of fair value
A number of the Group’s accounting policies and disclosures require the determination of fair value. Fair value has been determined for measurement and/or disclosure purposes based on the following methods:
Fair value has been determined by independent brokers.
Securities at fair value through profit or loss
For listed shares the fair value is determined as the stock exchange closing price at the balance sheet date.
The fair value of investments in bonds is based on the closing price at the balance sheet date obtained directly from the market or from third parties. The fair value of bond related products where an active and liquid market does not exist, is obtained by using a “best approximation” value calculated by the counterparty with whom JL has made the relevant trade.
The fair values of derivative instruments are based on their listed market price, if available, or estimated using appropriate market rates prevailing at the balance sheet date. These are based on rates obtained from third parties (banks, oil companies, brokers and trading houses).
Non-derivative financial liabilities and non current receivables
The fair value is calculated based on the present value of future principal and interest cash flows, discounted at the market interest rate at the balance sheet date.
Segment information on key business areas is disclosed in line with JL’s internal financial management, risks and accounting policies.
JL has only one geographical segment because JL considers the global market as a whole and individual vessels are not limited to specific parts of the world. Non current assets in a segment comprise those that are directly attributable to the segment’s operations, including intangible assets, vessels, property, equipment and investments in associated companies.
Current assets in a segment comprise those that are directly employed in the segment’s operation, including inventories, trade and other receivables, prepayments and cash.
Liabilities in a segment comprise those that are directly employed in the segment’s operation, including trade payables, accruals and other liabilities.
Revenues comprise freight and demurrage revenues from the vessels, and revenues from land based operations. Revenues are recognised in the income statement as services are delivered. Uncompleted voyages are recognised with the share related to the financial year. Earnings from vessels which are engaged in jointly controlled operation are recognised in revenue on a net distribution basis.
Operating cost of vessels
Operating cost of vessels includes maintenance and repairs, insurance of hulls and machinery, consumption of lubricants and supplies etc.
Other operating costs
Other operating costs include bunker oil, port costs, agent’s commissions and other voyage related costs. Furthermore other operating costs include fair value changes on financial bunkers contracts which are entered into for the purpose of hedging JL’s bunkers costs as hedge accounting is not applied for these transactions.
Results in associated companies
The proportionate share of the net result after tax in associated companies, after the elimination of inter-company profits/losses is recognised in the consolidated income statement of JL.
Financial items include interest income and expense, realised and unrealised exchange gains and losses, financial expenses in respect of finance leases, adjustments to the value of securities and certain financial instruments and other financial income and expenses.
Interest expenses related to the financing of assets under construction are capitalised as part of the cost of the asset.
In the income statement of the parent company dividends received during the year from subsidiaries and associates are shown under financial income.
Income tax consists of tax calculated according to the regulations of the Danish Tonnage Tax Act for shipping activities and according to general tax regulations for other activities, as well as adjustments related to deferred tax. Income tax is recognised in the income statement except to the extent that it relates to items recognised directly to equity, in which case it is recognised in equity.
All business combinations are accounted for by applying the purchase method. Goodwill represents amounts arising on acquisition of subsidiaries, associates and joint ventures. In respect of business acquisitions that have occurred since 1 January 2004, goodwill represents the difference between the cost of the acquisition and the fair value of the net identifiable assets acquired.
In respect of acquisitions prior to this date, goodwill is included on the basis of its deemed cost, which represents the amount recorded under previous GAAP. In accordance with IFRS 1 the classification and accounting treatment of business combinations that occurred prior to 1 January 2004 has not been reconsidered in preparing JL’s opening IFRS balance sheet at 1 January 2004.
Goodwill is stated at cost less any accumulated impairment losses. Goodwill is allocated to cash-generating units and is tested annually for impairment. In respect of associates, the carrying amount of goodwill is included in the carrying amount of the investment in the associate.
Other intangible assets
Patents and Rights are measured at historical cost less accumulated amortisation. Patents are amortised over the remaining patent period, or service life if shorter. Other intangible assets are stated at historical cost less accumulated amortisation.
Amortisation is charged to the income statement on a straight-line basis over the estimated service lives of the intangible assets from the date they are available for use.
Vessels, property and equipment
Vessels are measured at cost less accumulated depreciation and accumulated impairment losses.
Vessels acquired by way of finance leases are stated at the lower of fair value, and the present value of the minimum lease payments at the inception of the lease, less accumulated depreciation and impairment losses.
Costs relating to dry dockings are capitalised and depreciated over the period between dockings. In most cases this is 30 months except for reefers and some gas vessels where it is 60 months.
Rebuilding of vessels is capitalised if the rebuilding is intended to extend the service life and/or improve the earning potential. Rebuilding is depreciated over the expected service life of the investment.
Vessels under construction are measured at cost incurred until the time the vessel is taken into service.
Vessels are depreciated on a straight line method to an estimated scrap value. The estimated scrap value and estimated service life of a vessel are assessed annually and adjusted if appropriate.
Impairment tests of vessels are carried out annually on an asset by asset basis. Vessels are written down to the recoverable amount if this is lower than the book value. When a vessel has been written down to its residual value, it continues to be depreciated on a straight line method based on an assessment of the remaining service life and estimated scrap value.
Land is measured at cost.
Buildings are measured at cost less accumulated depreciation and accumulated impairment losses.
Machinery, tools and equipment
Machinery, tools and equipment are measured at cost less accumulated depreciation and accumulated impairment losses.
The straight-line method of depreciation is applied as follows:
Gains and losses on the disposal of tangible assets are calculated as the difference between the sales price less cost of sales and the net book value at the time of sale. Gains and losses on the disposal of machinery and equipment are recognised in the income statement under the line item “other sales and administrative costs”. Gains and losses on the disposal of vessels are recognised in the income statement as a separate line item.
Investments in associates – consolidated financial statements
In JL’s consolidated financial statements, investments in associated companies are recognised according to the equity method of accounting.
Any goodwill resulting from the acquisition is included in the carrying value of the investment. It is tested for impairment as described below.
Associates with negative equity are measured at USD 0 (nil), unless JL has a legal or constructive obligation to cover the negative balance of the associate.
Investments in subsidiaries and associates – parent company financial statements
In the financial statements of the parent company, investments in subsidiaries and associates are carried at cost less accumulated impairment losses. Dividends are recognised in the income statement as received.
The carrying amount of vessels, goodwill, intangible assets with indefinite service lives and intangible assets not yet available for use are tested annually for impairment.
The carrying amounts of other non current assets, other than deferred tax assets, are reviewed at each balance sheet date to determine whether there is any indication of impairment. If any such indication exists, the asset’s recoverable amount is estimated based on either discounted future cash flows (utility value) or appraised values (broker’s valuation).
An impairment loss is recognised whenever the carrying amount of an asset or its cash-generating unit exceeds its recoverable amount. Impairment losses are recognised in the income statement.
Impairment losses recognised in respect of cash generating units are allocated first to reduce the carrying amount of any goodwill allocated to cash generating units (group of units) and then, to reduce the carrying amount of the other assets in the unit (group of units) on a pro rata basis.
In discounting the estimated future cash flows, JL uses its risk adjusted weighted average cost of capital (WACC).
Bunker oil is measured at cost according to the FIFO principle. Major spare parts purchased and stored ashore for subsequent use are measured at cost less individually assessed write-down. Other inventories are recognised at the lower of cost or net realisable value.
Trade and other receivables are recognised at amortised cost less impairment losses. Impairment losses are determined on an individual basis and are recognised as a reduction in revenue.
Prepayments recognised under assets include payments relating to costs in subsequent periods after the balance sheet date.
Listed securities are classified as financial instruments at fair value through profit or loss and are recognised as current assets at fair value as from the settlement date.
Unlisted shares are classified as available for sale and are recognised as non-current assets at fair value. Fair value adjustments are recognised directly in equity, except for impairment losses, which are recognised in the income statement. To the extent that fair value can not be determined reliably, the shares are carried at cost.
Proposed dividend is recognised as a separate item under equity until approved at the Annual General Meeting, when it is recognised as a liability.
Mortgage debt and other interest bearing debt to credit institutions are initially recognised as the proceeds received less any transaction costs incurred. Subsequently, financial liabilities are measured at amortised cost using the effective interest rate method, such that the difference between the proceeds and the redemption value is recognised in the income statement over the lifetime of the loan.
Financial liabilities also include lease obligations on finance leases.
Trade payables and other amounts payable are measured at amortised cost.
A provision is recognised in the balance sheet when JL has a present legal or constructive obligation as a result of a past event, and it is probable that an outflow of economic benefits will be required to settle the obligation. If the effect is material, provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money and, where appropriate, the risks specific to the liability.
Accruals include prepayments regarding income relating to periods after the balance sheet date.
Corporate and deferred tax
Corporate tax is the expected tax payable on the taxable income for the year, using tax rates enacted or substantially enacted at the balance sheet date, and any adjustment to tax payable in respect of previous years.
Deferred tax is provided using the balance sheet liability method, providing for temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. The following temporary differences are not provided for: goodwill not deductible for tax purposes, the initial recognition of assets or liabilities that affect neither accounting nor taxable profit, nor differences relating to investments in subsidiaries to the extent that they will probably not reverse in the foreseeable future. The amount of deferred tax provided is based on the expected manner of realisation or settlement of the carrying amount of assets and liabilities, using tax rates enacted or substantively enacted at the balance sheet date.
A deferred tax asset is recognised only to the extent that it is probable that future taxable profits will be available against which the asset can be utilised. Deferred tax assets are reduced to the extent that it is no longer probable that the related tax benefit will be realised.
J. Lauritzen A/S is jointly taxed with Vesterhavet A/S and various Danish subsidiaries.
Cash flow statement
The cash flow statement has been prepared according to the indirect method and shows the cash flows from operating, investing and financing activities for the year.
Cash flows from operating activities are calculated as the results for the year as adjusted for non-cash operational items, changes in working capital and corporate tax payments.
Cash flows from investment activities cover receipts or payments related to acquisition and disinvestment of companies and/or activities, transactions relating to non current assets and purchase or sale of securities.
Cash flows from financing activities comprise changes in the size and mix and the JL’s share capital including related costs, raising and re-payment of interest bearing debt, plus payment of dividend to shareholders.
Cash and cash equivalents include bank deposits and short term deposits that without restriction can be exchanged into cash funds and where there is insignificant risk of value fluctuations, with the deduction of short term bank loans.