2 Basis of Preparation

2.1 Objective and accounting standards

The objective of these consolidated financial statements is to present and explain the results of the year ended 31 December 2018 and the financial position of the Group on that date, together with comparative information.

The financial statements have been prepared in accordance with all applicable Hong Kong Financial Reporting Standards (“HKFRS”) issued by the Hong Kong Institute of Certified Public Accountants (“HKICPA”). The financial statements have been prepared under the historical cost basis, except for certain financial assets and liabilities (including derivative instruments) and assets held for sale, which are carried at fair value.

The preparation of financial statements in conformity with HKFRS requires the use of certain critical accounting estimates. It also requires management to exercise its judgement in the process of applying the Group’s accounting policies. The areas involving a higher degree of judgement or complexity, or areas where assumptions and estimates are significant to these financial statements are listed under Note 3.

2.2 Impact of new accounting policies

The following new standards are mandatory for the accounting period beginning on or after 1 January 2018 and are relevant to the Group’s operation.

HKFRS 9
Financial instruments
HKFRS 15
Revenue from contracts with customers

The impact of the adoption of these standards and the new accounting policies are disclosed in Note 2.2(a) below. Other new standards that became effective in this accounting period do not have any impact on the Group’s accounting policies and do not require any adjustments.

Certain new and amended standards and improvements to HKFRS (“New Standards”) have been issued but are not yet effective for the accounting period beginning on 1 January 2018. The new standard that is relevant to the Group’s operation is as follows:

HKFRS 16
Leases

The Group has concluded its assessment of the impact of these New Standards. Key changes are expected from HKFRS 16. According to HKFRS 16, charter-in operating leases of longer than 12 months will be accounted for on balance sheet as rightof- use assets and lease liabilities. Operating lease expenses in the income statement net of non-lease component will be replaced by a combination of depreciation and interest expenses. Interest expenses will be calculated by reference to the interest rates implicit in the leases (or the lessee’s incremental borrowing rate if the interest rates cannot be readily determined) and will produce a constant periodic rate of interest on the remaining balance of the lease liabilities, both of which will reduce over time. Charter-in contracts of less than 12 months, representing over 50% of our existing charter-in fleet, will not be affected.

Management has concluded to separately account for the lease component (i.e. bareboat charter) and the non-lease component (i.e. technical management services) in a time charter contract. Consideration of the lease component and non-lease component is allocated with reference to the stand-alone market prices which is benchmarked against market data available from the industry reports.

(a) Changes in accounting policies

(i)Impact on the Group’s financial statement

Following the adoption of new standards as disclosed above, the Group has elected to use a modified retrospective approach for transition. The reclassifications and the adjustments arising from the new standards are therefore not restated in the balance sheet as at 31 December 2017, but are recognised in the opening balance sheet on 1 January 2018. Please refer to Notes 2(a)(ii) and 2(a)(iii) for detailed explanations.

The table below shows the adjustments recognised in the opening balances of each individual financial statement line item. Line items that were not affected by the changes have not been included.

Balance Sheet (extract)

 31 December
2017
HKFRS 15HKFRS 91 January
2018
US$'000(as previously
reported)
(Note(a)(ii))(Note (a)(iii)) (restated)
Non-current assets
FVOCI1--569569
AFS2569-(569)-
Current assets
Trade and other
receivables
- current
80,275(8,784)71,491
Equity
Retained profits154,387(8,784)1,619147,222
Other reserves963,194-(1,619)961,575

(ii) HKFRS 15 “Revenue from contracts with customers”

With the adoption of HKFRS 15, the Group’s recognition basis of freight income from voyage charter has changed from “discharge to discharge” to “loading to discharge”.

The Group has elected to use a modified retrospective approach for transition which allows the Group to recognise the cumulative effects as an adjustment to the opening balances of retained profits and trade and other receivables as at 1 January 2018 with the exemption to restate comparative figures as shown in Note 2(a)(i).

The amount by which each financial statement line item is affected by the application of HKFRS 15 as compared to HKAS 18 (previously in effect) is as follows:

Balance Sheet (extract)

As at 31 December 2018
US$'000Before
adoption of
HKFRS15
Effects of
adopting
HKFRS 15
As reported
Trade and other
    receivables
    -current
98,852(10,173)88,679
Retained profits212,435(10,173)202,262

Income Statement (extract)

 For the year ended 31 December 2018
US$’000Before
adoption of
HKFRS 15
Effects of
adopting
HKFRS 15
As reported
Revenue1,592,953(1,389)1,591,564

The adoption of HKFRS 15 has no impact to the net cash flow from operating, investing and financing activities on the consolidated cash flow statement.

(iii) HKFRS 9 “Financial Instruments”

Financial assets at fair value through other comprehensive income (“FVOCI”)

The Group has elected to present changes in the fair value of its listed equity securities (previously classified as available-for-sale financial assets (“AFS”)) (Note 9) in other comprehensive income as they are neither held for trading nor contingent consideration in business combination under HKFRS 9.

Under this election, only qualifying dividends are recognised in profit or loss unless they clearly represent recovery of a part of the cost of the investment. Changes in fair value are recognised in other comprehensive income and never recycled to profit or loss. If the asset is derecognised, the cumulative gain or loss is reclassified to retained profits.

As permitted under HKFRS 9, the Group has elected for exemption to restate its comparatives. As a result, the comparatives continue to be accounted as available-for-sale while its opening balances were reclassified to fair value through other comprehensive income with no adjustments on carrying amount on the date of initial adoption (i.e. 1 January 2018) as shown in Note 2(a)(i).

Trade and other receivables

The Group’s impairment methodology and classification are aligned with the expected credit loss requirements of HKFRS 9. No adjustments are therefore required.

Derivatives and hedging activities

Forward foreign exchange contracts and interest rate swap contracts continued to qualify as cash flow hedges under HKFRS 9. The Group’s risk management strategies and hedging documentation are aligned with the requirements of HKFRS 9. No adjustments are therefore required.

2.3 Accounting policies navigator

Accounting policiesLocation
Assets held for saleNote 14
BorrowingsNote 17
Cash and cash equivalentsNote 12
Consolidation
Joint operationNote 8
SubsidiariesNote 2.4
Contingent liabilities and contingent assetsNote 30
Convertible bonds ("CB")Note 17(c)
Current and deferred income taxNote 22
Derivative financial instruments and hedging activities:
   i) cash flow hedges, and ii) derivatives not qualifying for hedge accounting
Note 10
DividendsNote 23
Employee benefitsRemuneration Report
Financial assets at fair value through other comprehensive income ("FVOCI")/
   available-for-sale financial assets ("AFS")
Note 9
Financial assets at fair value through profit or lossNote 10
Financial guarantee contractsNote 29
Foreign currency translationNote 2.5
GoodwillNote 7
Impairment of i) investments and non-financial assets and ii) trade and other receivablesNote 5
InventoriesNote 13
Offsetting financial instrumentsNote 10
Operating leases where the Group is the lessor or lesseeNote 26(b)
Property, plant and equipment ("PP&E") including:
   i) vessels and vessel component costs, ii) vessels under construction, iii) borrowing costs,
   iv) other property, plant and equipment, v) subsequent expenditure, vi) depreciation,
   vii) residual value and useful lives, and viii) gains or losses on disposal
Note 6
ProvisionsNote 2.6
Provision for onerous contractsNote 16
Revenue recognition for freight and charter-hire, and other revenueNote 4
Segment reportingNote 4
Share capitalNote 18
Trade receivablesNote 11
Trade payablesNote 15

The Group’s principal accounting policies have been consistently applied to each of the years presented in these financial statements.

2.4 Consolidation

A subsidiary is an entity (including a structured entity) over which the Group has control. The Group controls an entity when the Group is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect those returns through its power over the entity.

The existence and effect of potential voting rights that are currently exercisable or convertible are considered when assessing whether the Group controls another entity.

Subsidiaries are fully consolidated from the date on which control is transferred to the Group. They are deconsolidated from the date that control ceases.

The Group uses the acquisition method to account for business combinations. The consideration transferred for the acquisition of a subsidiary is the fair value of the assets transferred, the liabilities incurred and the equity interests issued by the Group. The consideration transferred includes the fair value of any asset or liability resulting from a contingent consideration arrangement. Acquisition-related costs are expensed as incurred. Identifiable assets and liabilities and contingent liabilities assumed in a business combination are measured initially at their fair values at the acquisition date.

The excess of the consideration transferred, the amount of any non-controlling interest in the acquiree and the acquisition-date fair value of any previous equity interest in the acquiree over the fair value of the identifiable net assets acquired is recorded as goodwill. If this is less than the fair value of the net assets of the subsidiary acquired, the difference is recognised directly in the income statement. In each acquisition case, the Group recognises any non-controlling interest in the acquiree either at fair value or at the non-controlling interest’s proportionate share of the acquiree’s net assets.

Intercompany transactions, balances and unrealised gains on transactions between group companies are eliminated. Unrealised losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred. The financial information of subsidiaries has been changed where necessary to ensure consistency with the policies adopted by the Group.

In the Company’s balance sheet, the investments in subsidiaries are stated at cost less provision for impairment losses. Cost is adjusted to reflect changes in consideration arising from contingent consideration amendments. Cost also includes direct attributable costs of investments. The results of subsidiaries are accounted for by the Company on the basis of dividends received and receivable.

Please refer to Note 5 for the accounting policy on impairment.

2.5 Foreign currency translation

(a) Functional and presentation currency
The financial statements are presented in United States Dollars, which is the Company’s functional and the Group’s presentation currency. Items included in the financial statements of each of the Group’s entities are measured using the currency of the primary economic environment in which the entity operates (the “functional currency”).

(b) Transactions and balances
Foreign currency transactions are translated into the functional currency at the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in “direct G&A overheads included in cost of services” or “indirect G&A overheads” of the income statement, except when deferred in equity as qualifying cash flow hedges.

Translation difference on non-monetary financial assets and liabilities such as equities held at fair value through profit or loss are recognised in the income statement as part of the fair value gain or loss. Translation differences on non-monetary financial assets and liabilities such as equities classified as FVOCI/AFS are included in the investment valuation reserve.

(c) Group companies
The results and financial position of each of the Group entities (none of which has the currency of a hyperinflationary economy) whose functional currency is different from the presentation currency is translated into the presentation currency as follows:

  1. assets and liabilities are translated at the closing rate on the balance sheet date;
  2. income and expenses are translated at the average exchange rates (unless this average is not a reasonable approximation of the cumulative effect of the rates prevailing on the transaction dates, in which case income and expenses are translated at the dates of the transactions); and
  3. all resulting exchange differences are recognised as a separate component of other comprehensive income.

Goodwill and fair value adjustments arising from the acquisition of a foreign entity are treated as assets and liabilities of the foreign entity and translated at the closing rate. Exchange differences arising are recognised in other comprehensive income.

When a foreign operation is partially or totally disposed of, exchange differences that were recorded in equity are reclassified to the consolidated income statement.

2.6 Provisions

Provisions are recognised when the Group has a present legal or constructive obligation as a result of past events; it is probable that an outflow of resources will be required to settle the obligation; and a reliable estimate of the amount can be made. Provisions are not recognised for future operating losses.

Where there are a number of similar obligations, the likelihood that an outflow will be required in settlement is determined by considering the class of obligations as a whole. A provision is recognised even if the likelihood of an outflow with respect to any one item included in the same class of obligations may be small.

Provisions are measured at the present value of the expenditures expected to be required to settle the obligation using a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the obligation. The increase in the provision due to the passage of time is recognised as interest expense.

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