IFRS requires management to make estimates and judgments that affect the reported amounts of assets and liabilities, as well as income and expenses in the financial statements. The final reported outcomes may deviate from the original estimates.
Certain amounts included in, or that have an effect on, the ac- counts and the associated notes require estimation, which in turn entails that the Company must make assessments related to values and circumstances that are not known at the point in time when the accounts are prepared.
A significant accounting estimate is an estimate that is important to provide a complete picture of the Company’s financial position, which at the same time is the result of difficult, subjective and complex assessments performed by the management. Such estimates are often uncertain by nature.
Management evaluates such estimates continuously based on historical data and experience, consultation with experts, trend analysis and other factors that are relevant for the individual estimate, including expectations of future events that are believed to be reasonable under the circumstances.
Estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year, as well as judgments made by management, in the process of applying the Company’s accounting policies, that have the most significant effect on the amounts recognized in the financial statements, are discussed below.Revenue recognition – percentage-of-completion for off-shore cable contracts
The Company uses the percentage-of-completion method in accounting for its fixed price construction contracts related to the segment Submarine Power Cable Installation.
Use of the percentage of completion method requires the group to estimate the services performed to data as a proportion of the total services to be performed. Management estimates completion based on an assessment of certain technical criteria in the project execution plan that have to be met in order to achieve a certain level of percentage of completion, as opposed to using costs incurred as a measure of completion.
The primary risk in the execution of projects relates to the offshore installation phase. Hence, profit margin is not recorded until the progress of the project has reached a stage of minimum 25 percent technical completion and that the offshore installation phase has commenced.
Projects must have progressed into the cable-laying phase before the minimum 25 percentage of technical completion is reached. Prior to reaching a progress of minimum 25 percent technical completion,and subject to a foreseen positive project margin, project revenue is accrued to match the actual costs incurred at the estimated stage.
Were the progress to differ by +/- 10% from management’s estimates, the amount of revenue recognized in 2017 would be +/- USD 20.3 million (2016: USD 8.9 million).
Impairment of vessels
On the reporting date, the Company has assessed whether there are any indicators related to its vessels. Indicators include external broker estimates, significant changes in charter hire contracts, day rates, operating costs or adverse market conditions.
When such indications exist, an impairment test is performed in accordance with Company policy. The recoverable amount of the vessel is estimated. An impairment loss is recognized for the amount by which the vessel’s carrying value exceeds its recoverable amount.
The recoverable amount for vessels is estimated by means of broker estimates and value in use calculations based on projected discounted cash flows for the remaining charter hire period or over the next ten years if no charter contract exists, together with an assumption of a terminal value of the vessel.
The market for offshore service vessels is expected to remain weak for several years. For vessels fixed on firm contracts during the period from 2018 through 2024, the assumption is that the contract remains unchanged during the remaining contract period, and that the rate levels remain low but will increase gradually towards 2027. Options included in charter hire agreements to extend the charter party are not considered in the value in use calculations.
The key assumptions used to determine the recoverable amount, including a sensitivity analysis, are disclosed and further explained in Note 5.Impairment of goodwill
The Company tests whether goodwill has suffered any impairment in accordance with the accounting policy stated in note 1.11. The recoverable amounts of cash-generating unit have been determined based on value-in-use calculation. This calculation requires the use of estimates (Note 5).