Independent Auditor's Report

To the shareholders of Pacific Basin Shipping Limited

(incorporated in Bermuda with limited liability)

OPINION

What we have audited

The consolidated financial statements of Pacific Basin Shipping Limited (“PBSL” or the “Company”) and its subsidiaries (the “Group”) set out on pages 53 to 90, which comprise:

  • the consolidated balance sheet as at 31 December 2018;
  • the consolidated income statement for the year then ended;
  • the consolidated statement of comprehensive income for the year then ended;
  • the consolidated statement of changes in equity for the year then ended;
  • the consolidated cash flow statement for the year then ended; and
  • the notes to the consolidated financial statements, which include a summary of significant accounting policies.
Our opinion

In our opinion, the consolidated financial statements give a true and fair view of the consolidated financial position of the Group as at 31 December 2018, and of its consolidated financial performance and its consolidated cash flows for the year then ended in accordance with Hong Kong Financial Reporting Standards (“HKFRSs”) issued by the Hong Kong Institute of Certified Public Accountants (“HKICPA”) and have been properly prepared in compliance with the disclosure requirements of the Hong Kong Companies Ordinance.

BASIS FOR OPINION

We conducted our audit in accordance with Hong Kong Standards on Auditing (“HKSAs”) issued by the HKICPA. Our responsibilities under those standards are further described in the Auditor’s Responsibilities for the Audit of the Consolidated Financial Statements section of our report.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.

Independence

We are independent of the Group in accordance with the HKICPA’s Code of Ethics for Professional Accountants (“the Code”), and we have fulfilled our other ethical responsibilities in accordance with the Code.

KEY AUDIT MATTERS

Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the consolidated financial statements of the current year. These matters were addressed in the context of our audit of the consolidated financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters.

Key audit matters identified in our audit are summarised as follows:

  • Carrying value of dry bulk vessels
  • Provision for onerous contracts

KEY AUDIT MATTER

Carrying value of dry bulk vessels
Refer to note 6 to the consolidated financial statements

As at 31 December 2018, the Group has a fleet of dry bulk vessels, totalling US$1,802 million. The owned vessels are separated into two Cash-Generating Units (“CGUs”) (Handysize and Supramax) as the vessels within each of these CGUs are considered to be interchangeable.

The net asset value of the Group at 31 December 2018 is more than its market capitalisation. This is considered as indicator of possible impairment. Management has therefore performed an impairment assessment of the Group’s dry bulk vessels.

The carrying value of the dry bulk vessels is supported by value-in-use calculations which are based on future discounted cash flows of each CGU.

Management concluded that the dry bulk vessels were not impaired based on the results of the assessment which involved significant judgements, including forecast utilisation, daily time-charter equivalent (“TCE”) rates, inflation rates and discount rates applied to the future cash flows.

HOW OUR AUDIT ADDRESSED THE KEY AUDIT MATTER

We evaluated management’s impairment assessment by assessing the valuation methodology, the future discounted cash flows used in the value-in-use model and the process by which they are drawn up, including comparing them to the latest Board of Directors approved budgets, and assessing the underlying assumptions, including:

  • the forecast daily TCE rates were compared with long term historical actual results and published external industry forecasts;
  • the inflation rates of operating expenses and general and administrative expenses were compared with economic forecasts;
  • the forecast utilisation rates were compared with historical actual results;
  • the discount rate was assessed with our specialist knowledge of discount rates for the industry and with comparable organisations;
  • we evaluated the reasonableness of historical budgets and forecasts, this includes, comparing the forecast utilisation, charter rates and operating expenses used in the prior year value-in-use model against the actual performance of the business in the current year;
  • we performed sensitivity analyses over the assumptions set out above by reference to our knowledge of the business and industry.

We found the Group’s judgements and assumptions used in the impairment assessment to be reasonable based on the available evidence.

KEY AUDIT MATTER

Provision for onerous contracts


Refer to note 16 to the consolidated financial statements

The Group has entered into a number of charter-in contracts and is therefore committed to significant future lease payments.

Provision for onerous contacts has been made in prior years for the Group’s charter-in contracts where the cost of those obligations exceeds the economic benefits expected to be received under the lease. Following the market recovery, management therefore performed a reassessment of the Group’s charter-in contracts to identify any onerous contracts that may still require provisioning.

The onerous contracts are assessed on a fleet basis. The charter-in dry bulk fleet has been separated as two sub-categories, namely Handysize and Supramax, as the vessels within each of these sub-categories are considered to be interchangeable. Management compared the expected future cash inflows against the committed costs under the operation of the charter-in contracts, and concluded that as at 31 December 2018, an onerous contracts provision is no longer required. The conclusion is based on significant judgements including economic benefits expected under the contracts, calculated using expected daily TCE rates and utilisation rates for the remaining period of the charter term to determine future cash inflows.

HOW OUR AUDIT ADDRESSED THE KEY AUDIT MATTER

Our procedures performed to evaluate management’s assessment of the need for a provision for onerous contracts included:

  • Checking the completeness of the lease commitments list, which is used to compile the onerous contract assessment, by reference to charter-hire expense of the chartered in vessels charged to the income statement in the current year.
  • Agreeing details of the charter-in contracts on the lease commitments list, such as the charter-hire rate and charter-in period, to the charter-in contracts on a sample basis.
  • Assessing the reasonableness of key assumptions, including TCE rates and utilisation rates as used in the impairment assessment of the dry bulk vessels.
  • Checking the calculations including the difference between expected future cash inflows and committed costs.

We found the Group’s judgements and assumptions used in the onerous contract assessment to be reasonable based on the available evidence.

OTHER INFORMATION

The directors of the Company are responsible for the other information. The other information comprises all of the information included in the Annual Report other than the consolidated financial statements and our auditor’s report thereon.

Our opinion on the consolidated financial statements does not cover the other information and we do not express any form of assurance conclusion thereon.

In connection with our audit of the consolidated financial statements, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the consolidated financial statements or our knowledge obtained in the audit or otherwise appears to be materially misstated.

If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard.

RESPONSIBILITIES OF DIRECTORS AND THOSE CHARGED WITH GOVERNANCE FOR THE CONSOLIDATED FINANCIAL STATEMENTS

The directors of the Company are responsible for the preparation of the consolidated financial statements that give a true and fair view in accordance with HKFRSs issued by the HKICPA and the disclosure requirements of the Hong Kong Companies Ordinance, and for such internal control as the directors determine is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.

In preparing the consolidated financial statements, the directors are responsible for assessing the Group’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the directors either intend to liquidate the Group or to cease operations, or have no realistic alternative but to do so.

Those charged with governance are responsible for overseeing the Group’s financial reporting process.

AUDITOR’S RESPONSIBILITIES FOR THE AUDIT OF THE CONSOLIDATED FINANCIAL STATEMENTS

Our objectives are to obtain reasonable assurance about whether the consolidated financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. We report our opinion solely to you, as a body, in accordance with Section 90 of the Companies Act 1981 of Bermuda and for no other purpose. We do not assume responsibility towards or accept liability to any other person for the contents of this report.

Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with HKSAs will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these consolidated financial statements.

As part of an audit in accordance with HKSAs, we exercise professional judgement and maintain professional scepticism throughout the audit. We also:

  • Identify and assess the risks of material misstatement of the consolidated financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control.
  • Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Group’s internal control.
  • Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by the directors.
  • Conclude on the appropriateness of the directors’ use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Group’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s report to the related disclosures in the consolidated financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor’s report. However, future events or conditions may cause the Group to cease to continue as a going concern.
  • Evaluate the overall presentation, structure and content of the consolidated financial statements, including the disclosures, and whether the consolidated financial statements represent the underlying transactions and events in a manner that achieves fair presentation.
  • Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the Group to express an opinion on the consolidated financial statements. We are responsible for the direction, supervision and performance of the group audit. We remain solely responsible for our audit opinion.

We communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit.

We also provide those charged with governance with a statement that we have complied with relevant ethical requirements regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards.

From the matters communicated with those charged with governance, we determine those matters that were of most significance in the audit of the consolidated financial statements of the current period and are therefore the key audit matters. We describe these matters in our auditor’s report unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we determine that a matter should not be communicated in our report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication.

The engagement partner on the audit resulting in this independent auditor’s report is John J. Ryan.

PricewaterhouseCoopers

Certified Public Accountants

Hong Kong, 28 February 2019

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