Review of financial reporting Jinhui Shipping and Transportation Ltd

The Board of Directors
26/F Yardley Commercial Building
1-6 Connaught Road West
 HONG KONG

Partly exempt from Public disclosure

Enquiries to: Tine Svae
Dir. line. +47 22 93 97 84
 Our reference: 13/7292
Date: 15.10.2014

Where "*" is inserted, text has been deleted pursuant to the Freedom of Information Act § 13(1), cf. the Public Administration Act § 13 (1) no 2.

 

1. Introduction

Finanstilsynet has reviewed certain aspects of the 2012 consolidated financial statements of Jinhui Shipping and Transportation Group ("Jinhui") in accordance with the Securities Trading Act section 15-1 subsection (3). The review has covered, inter alia, Jinhui's valuation of the company's vessels. Per year end 2012, there existed indications that the vessels were impaired, and Jinhui consequently calculated the assets' recoverable amounts.

Reference is made to correspondence in the present matter, most recently Jinhui's letter of 17 July 2014.

In point 2 below, Finanstilsynet provides its assessments of the impairment tests Jinhui has performed of its vessels 31 December 2012. In Finanstilsynet's view, some of the assumptions the company applied in the impairment tests seem too optimistic given the market information available at the time. Based on the fact that Jinhui to some extent has considered external evidence, Finanstilsynet has none the less noted Jinhui's impairment tests for the record. The company is requested to refine and adjust the model used to calculate the recoverable amounts from the date of this letter, see section 2.6.

In section 3 below, other issues covered by the review are commented on.

The review is hereby considered closed.

2. Vessel impairment
2.1 Introduction
Jinhui Group is one of the world's largest Supramax owners, operating a modern fleet of dry bulk carriers. At the time of the impairment tests, 38 vessels were owned by the company.  The vessels are either on voyage contracts or time charter contracts. Subject to market demand and market condition, the group charters the vessels on both short and long-term contracts. Once a contract is concluded, there is no interchangeability between the vessels.

Many of Jinhui's vessels were acquired before the financial crisis when the market conditions in the dry bulk shipping market were favourable. In 2012, the dry bulk market was under severe stress. There was an oversupply of tonnage, which, together with volatile demand in Asia, led to a severe decline in freight rates, as reflected in the Baltic Dry Index and as further described below. As a result of the market conditions, several entities in the dry bulk industry assessed their vessels to be impaired. Several market participants in the dry bulk industry were forced into liquidation following the financial crisis.

Jinhui's share price on the Oslo Stock Exchange per 2 January 2013 was NOK 7.45. The market capitalization of the company was NOK 626.2 million. According to the financial statements for 2012, total book value of the equity of the Jinhui Group was USD 853.5 million. The price/book ratio equalled 0.13. A ratio this low is a strong impairment indicator, see IAS 36 Impairment of assets, paragraph 12(d).

Jinhui did not record any impairment loss on its vessels in the 2012 financial statements, however, Jinhui had recognised impairments in the years 2010 and 2011. In Jinhui's financial statements for 2012, note 5 Critical accounting estimates and judgements, Jinhui has disclosed that management considers impairment of owned vessels and vessels under construction to be critical accounting estimates. As there was no further information on impairment tests performed by the company in the financial statements, Finanstilsynet raised questions on the impairment tests performed by the company in 2012.

According to IAS 36.6, an asset's recoverable amount is the higher of its fair value less cost to sell and its value in use for the owner of the asset. If the recoverable amount is less than the book value of an asset, an impairment loss shall be recorded, cf. IAS 36.59. Jinhui has obtained the estimated market value of each vessel from the ship broking company [*]. Estimated fair value less costs to sell was significantly lower than book value for the majority of the vessels per year end 2012. Jinhui consequently calculated the value in use of each vessel by discounting expected future cash flows. The future cash flows over the remaining useful life of each vessel were based on the management's assessments of cash inflows from estimated future earnings, outflows of expected operating costs and residual values. Each individual vessel is considered to be a separate cash generating unit and tested for impairment.

The differences in the values may be illustrated as follows for the fleet in total (numbers in MUSD):

Book value	Broker estimate	Calculated value in use
1 167	[*]	[*]
[*]	[*]	[*]

2.2 Revenues in cash flow projections

2.2.1 General
The most important input for Jinhui's estimated future earnings is the expected time charter rates.
Jinhui has presented the estimated market hire rates used in the impairment tests of each individual ship, unless the ship is on a committed charter contract, in which case the agreed rates are applied for the relevant period. The general assumptions of the daily Supramax time charter rates as per year end 2012 were as follows:

Year	2013	2014	2015	2016	2017
Rate (USD)	[*]	[*]	[*]	[*]	[*]
Age > [*] years	[*]	[*]	[*]	[*]	[*]
Age > [*] years	[*]	[*]	[*]	[*]	[*]
Increase compared to last year		[*]	[*]	[*]	[*]

For vessels above a certain age and vessels built by certain [*], lower rates were applied, as indicated in the table above. A rate reduction of [*] was assumed for a vessel aged over [*] years, and a reduction of [*] was assumed for a vessel aged over [*] years old.

There is a market for financially settled forward freight agreements (FFAs) operated by the Baltic Exchange. The prices in this market were not considered by Jinhui when estimating the future time charter rates as part of the impairment tests.

Jinhui appointed an independent professional valuation expert to assist management in determining the discount rate applicable in the vessel impairment test. Finanstilsynet has noted the discount rate applied for the record. 

2.2.2 Jinhui's assessments
Time charter rates
According to Jinhui, the hire rates applied in the 2012 impairment test were based on the management's best estimates, taking into consideration industry cycle, historical performance, available market data and future outlook. The assumptions applied in the impairment tests are, in the company's view, reasonable and supportable. Jinhui argues that the company included an expectation of a moderate rebound in dry bulk shipping market in the coming five years. After the shipping market had bottomed out, a mild recovery was therefore expected to take place over the coming years. The company expected that the daily hire rates would range between USD [*]in year 2013 and improve to an average level of USD [*]after five years, which, according to Jinhui, was considered to be prudent in a volatile shipping industry.

The company further argues that the rates applied were in line with the average historical three-year charter rates for the years 2009-2011. The average rate earned by a Jinhui Supramax in the period was calculated to be USD [*]. The historical rates for the years 2009-2011 were referred to, whilst the rates for 2012 were excluded because (i) the years 2009-2011 represented a period of rising cycle subsequent to the slump in 2008, (ii) a sharp fall in the shipping market was seen in the beginning of 2012 and (iii) historical rates earned by Jinhui's fleet during year 2009-2011 represented a reference range of hire rates that the group may earn during a period of rising cycle.

From 2018 onwards, the daily hire rate applied was constant. Jinhui has stated that the dry bulk shipping market is both volatile and cyclical. The average historical level is, however, considered as one of the best bases and references for the cash flow projections. According to the company, it was a reasonable expectation that the fall in dry bulk market in 2011-2012 would soon bottom out when supply and demand normalized in the coming years. In the company's opinion, conservative assumptions were applied when assuming constant hire rates and operating costs from 2018 onwards.

Jinhui has in its correspondence with Finanstilsynet made reference to actual fixed rates for Supramax vessels in early 2013 which were at a very promising level: USD [*] in January ([*] Jan 2013) and USD [*] in February ([*] Feb 2013). Jinhui has also presented three [*] reports to support the assumptions used in the impairment test. The [*] reports state that the dry bulk market will recover, and that the growth in capacity will not continue. The December 2012 report states that for the Supramax segment, [*] per day interval. In the February 2013 report it follows that for the Supramax segment [*] freight rates to remain in the USD [*] per day interval. Jinhui has presented one slide from a [*] where it is stated that the average rates achieved for Handymax vessels in the years 2000 – 2011 are USD [*], including the years 2007 and 2008. According to Jinhui, the daily rates for Handymax- and Supramax vessels are relatively similar. The [*] includes an expectation on future rates as of USD [*] in 2013, [*] in 2014 and [*] in 2015.

Furthermore, the company has presented reports from 2014 to support the assumptions made in 2012 with respect to the expected cash flows for 2013, where the company assumed rates of USD [*].

Jinhui has informed Finanstilsynet that slow steaming is not considered in the company's calculations of value in use. Jinhui considers that eco-friendly vessels have yet to become mainstream in the shipping market. Such vessels' potential impact is not considered significant to non-eco-friendly vessels or to Jinhui's fleet, at least at the moment. Jinhui is of the view that its fleet remains competitive and that slow steaming was not a significant factor to be considered in the 2012 impairment test.

Jinhui has in the impairment test made adjustments for vessels reaching a certain age or constructed at certain shipyards. The company views this to be the best estimate of the earning capability of these vessels in the value in use calculation.

The company has not used information from the Baltic Exchange in the impairment test performed. In the company's opinion, the rates on Supramax charter hire are not a representative benchmark of the spot market. The Baltic Exchange only has data from a limited number of shipbrokers, not all transactions in the market are disclosed and the population of samples is limited from a statistical point of view.

Scenario analysis
Following its correspondence with Finanstilsynet, Jinhui has presented an analysis to demonstrate different scenarios for the value in use on 4 of the vessels as per year end 2012. The company used the scenarios to present how cyclical effects may result in a similar value in use as in the original calculation. Expected time charter rate for 2013 were in the new tests based on actually achieved rates for 2013. Expected time charter rates for the years 2014 – 2015 were derived from the abovementioned presentation made by [*].  The rates per day applied for the first scenario are (in USD):

2013	2014	2015
[*]	[*]	[*]

As from 2016, Jinhui applied a constant growth rate of 4 % on the rates, with year 2015 as the basis year. Furthermore, discounts of 20 % and 30 % were made on the rates, when the vessels turn [*] years respectively.

Four additional scenarios were also presented:

1. 3 % growth after 2015.
2. Cycles every 6 years, where the cycle raises the first six years with 177 % compared to 2013, prior to a fall of 20 % for one year. After that the rate grows with 5 – 20 % yearly the following 6 years prior to a new fall of 20 %.
3. An accumulated increase of 177 % in the rates from 2013 - 2018, then a decline of 20 % in 2019. In 2020 there is a growth of 5 % and in 2021 the growth is 10 %, thereafter the rates remain constant.
4. An accumulated increase of 227 % in the rates from 2013 - 2018, then a decline of 40 % in 2019. In 2020 there is a growth of 10 % and in 2021 the growth is 20 %. The rates remain constant thereafter.

According to Jinhui, when the five scenarios are given the same weight, the weighted net present value calculated is above the value in use calculated in 2012.

Other market information
Jinhui did not consider the new building costs or resale prices of existing vessels when the future rates were estimated as part of the 2012 impairment tests. Jinhui is of the opinion that neither a new contract price nor the resale price of a vessel is relevant when estimating value in use. The vessels' quality and specifications will differ depending on the shipyards that build the vessels. The company argues that vessels are not universally built at the same standards. Jinhui has also underlined that the difficulties of refunding guarantees from certain [*] will affect a vessels value. 

As part of its future cash flow projections, Jinhui has not considered the financially settled forward freight agreements ("FFA") traded at the Baltic Exchange. Participants in the FFA market are not necessarily shipping companies, and the market is considered by Jinhui to have low relevance to the shipping operations of the company. Furthermore, the futures pricing is not considered publicly available since access to FFA information is limited by subscription. The FFA market is also not considered liquid enough to give a good picture of expected future rates. According to Jinhui, amounts to be paid or received from FFAs are not cash flows expected to be derived from a physical asset, as IAS 36 requires.

Summary
In conclusion, Jinhui has argued that the value in use calculation in the financial statements for 2012 was based on management's best estimate of the range of economic conditions that will exist over the remaining useful life of the asset. The fact that greater weight shall be given to external evidence does not preclude management from making its own estimates based on internally developed assumptions, provided these are reasonable and supportable.

2.2.3 Finanstilsynet's assessments
Time charter rates
Jinhui's quarterly revenues have showed a declining trend from 2009. At the same time Jinhui's fleet of owned vessels has grown from 24 vessels in 2009 to 38 vessels at year end 2012.

The key assumption in Jinhui's impairment tests per year end 2012, is the estimated daily time charter rate. When calculating the value in use for the vessels, Jinhui has for the period 2013 to 2017 applied an annual growth rate of more than 20 percent. The estimated rate for a vessel in 2017 is more [*] (for a vessel under [*] years of age: [*] USD per day to [*] USD per day).

Finanstilsynet has investigated the dry bulk rate forecasts made by [*] and [*] that were available when Jinhui's financial statements for 2012 were prepared. The forecasts only covered a limited numbers of years, and some of the rate estimates were for Handymax and Panamax vessels. The average and median estimates in USD per day are presented below, together with Jinhui's own estimates.
 

	2013	2014	2015
Average rate estimate	10 050	12 113	14 900
Median rate estimate	9 046	11 289	15 300
Jinhui's rate estimate	[*]	[*]	[*]

For all three years, Jinhui's rate estimates for young vessels are above the average and median rate. For 2013, Jinhui's estimate is below [*] estimates. For 2014, Jinhui's estimate is below [*] estimate. For 2015, Jinhui's estimate is below [*].

In Finanstilsynet's view, on a stand-alone basis, the rate estimates made by Jinhui the period 2013 to 2017 seem high, but still reasonable and supportable given that they are within the higher range of estimates made by market participants.

Looking beyond the time period covered by the above-mentioned estimates, Jinhui has applied a long term revenue assumption to the remainder of the vessel's life of USD [*] per day, where a reduction of [*] and [*] is applied when the vessels reach [*] years of age respectively.

Compared to the historical rates achieved, the long term daily revenue assumption seems high. According to the Baltic Exchange, the average spot rate for Supramax vessels in the period 2002 to 2012, when excluding 2007 and 2008, was USD [*]. The median for the same period, also excluding 2007 and 2008, is USD [*]. Finanstilsynet has noted that Jinhui historically has achieved somewhat higher rates than many other market participants. 

Other market information
In measuring value in use, greater weight shall be given to external evidence compared to the company's own assessments, cf. IAS 36.33 (a). In Finanstilsynet's view there is market information that is relevant and that Jinhui should have considered. There is a market for second-hand vessels, and the prices for second-hand Supramax vessels are available market information. Risks and capacity in the market will influence the second-hand value of a vessel. An investor's view on the expected returns of a vessel in both short- and long-term, will affect the price that the investor is willing to pay for a vessel. Information on the price of a new-building contract for a Supramax is also available. The price of a new vessel is affected by the market's expectations for future returns on the investment.

Second-hand value or the price of a newly built vessel will be a close approximation to a vessel's fair value less costs to sell. A fair value less costs to sell is based on a market participant's view. In a value in use calculation the entity may apply its own assumptions, considering entity-specific circumstances. Thus, there may be differences between fair value less costs to sell and value in use. The difference will, for example, stem from the fact that an issuer may have information about future cash flows that is superior to the information available in the marketplace. Also, an issuer may plan to use an asset in a manner different from the market's view of the best use, see IAS 36 BCZ17. The requirements of using reasonable and supportable assumptions and giving greater weight to external evidence are set to prevent an enterprise from using assumptions different from the market place that are unjustified, see IAS 36 BCZ20.

The value in use of Jinhui's fleet in total is [*] of the broker estimates, and the book value is [*] % of the broker estimates. [*] of the individual vessels' book value exceeds [*] % of the broker estimates. When the difference between an entity's calculated value in use and the estimated broker values of an asset is of the magnitude as demonstrated in this case, management should analyse the differences and ensure that such a difference is supportable.

According to [*], the price of a second-hand vessel, five years old, was at year end 2012 approximately USD [*], and a new vessel was resold in the range USD [*]. The price of a newbuilding contract was at the same time USD [*]. Vessels built between 2007 and 2012 would be expected to have a fair value less costs of sales in the range between USD [*]. Jinhui has 9 Supramax vessels built in 2008 and 2009 with a book value of more than USD [*], 2 vessels at an age over 10 years with a book value of USD [*] each and 5 vessels built in 2010 with a book value over USD [*]. A few of the vessels are committed on time charter contracts, but the contracts explain an insignificant amount of the total difference. Information about the second-hand value and new building costs for vessels may be relevant when estimating value in use. 

The nature of dry bulk shipping, being a commodity industry with strong competition and little room for niche/premium pricing, may indicate that there should not be a large spread between observable second-hand prices and a value in use estimate.

In addition to information of historical spot rates, the Baltic Exchange provides forward rates on dry bulk forward freight agreements. The information is available, and Finanstilsynet has observed that it is used by other market participants in impairment tests. Per year end 2012, the average forward TC rate for Supramaxes for 2013 was approximately USD [*]. For 2014 it was USD [*] and for the years 2015 – 2019 there were observable rates from USD [*]. For the same period of time, Jinhui applied TC rates ranging from USD [*].

Jinhui has argued that the freight derivatives market is not a highly liquid market. In addition, Jinhui mentions that not all transactions in the market are disclosed. According to the company, the forward freight agreements traded are not representative of the market due to a limited population of samples from a statistical point of view. Finanstilsynet is aware that the numbers of transactions in the futures market vary. However, even if the number of reported transactions in periods may be low, information about the futures market may be relevant when estimating value in use.

Volatility and cyclicality
Historically, the dry bulk shipping market has been cyclical. There is a common understanding in the industry that the expectation of cyclicality is valid also going forward, as dry bulk shipping is dependent on the demand of transport services for commodities. The company considers average historical rates for the years 2009-2011 as reasonable assumptions for future rates. According to Jinhui, 2009-2011 was a period of rising cycle in shipping market, with an expectation that the market had bottomed out. In Finanstilsynet's view it is not necessarily reasonable merely to consider years with a rising cycle.

It is not obvious that historically earned charter rates are to be used as a prediction of future rates, as the historical rates not necessarily will reflect the future market rates. Care must be taken to ensure that periods with rates that are particularly high or low due to special circumstances, are excluded. Finanstilsynet is informed that it is common in the dry bulk industry to use historically achieved rates as a basis for the estimate for future rates. However, Finanstilsynet has observed that the historically achieved rates are calculated based on longer periods of time, where the years 2007 – 2008 are excluded. Finanstilsynet is critical to the method that Jinhui has applied when calculating historically achieved rates, where the years 2009 - 2011 are used as a basis. In Finanstilsynet's view, when the market is volatile, a longer time series should be used. Finanstilsynet has also questioned why 2012 has not been included in the base, 2012 being the most recent market information as per year end 2012.

According to Jinhui the impairment tests at year-end 2012 are supported by external evidence, including [*].

In the [*] reports, an interval of the expected time charter rates is given. The [*] forecasts rates for Supramax for the next [*]. Jinhui's cash-flow projections in the impairment test generally cover a period of 25 years. The [*] do not, in Finanstilsynet's view, document that Jinhui's applied rates are in line with market expectations. However, the reports support Jinhui's view that the dry bulk market is expected to strengthen.

[*]2013 state that there have been some actual fixtures of Supramax at promising hire rates. The average rates obtained are USD [*] for [*] respectively.  However, the average for both months is calculated based on only three fixtures. In [*] the lowest fixture was USD [*] and for [*] the lowest rate was USD [*].

The company has presented an outlook for the years 2013 – 2015, prepared by [*]. The company  has in addition presented market reports from other market participants, all of which present rate forecasts for a short time period. There are many market participants, and for the relevant period Jinhui seems to have based its cash flow projections to a large extent on one market participant's view.

The company has presented an analysis to demonstrate different scenarios for the value in use for four vessels at year-end 2012 by presenting five different scenarios. The rate assumptions from 2016 onwards have varying assumptions on growth in the five different scenarios. However, none of the scenarios have downward trend of any significant period. In Finanstilsynet's view a company performing a scenario analysis should also consider the downside risks.

Events subsequent to the reporting date
In 2014 Jinhui sold two vessels, Jin Yang and Jin Ze. The vessels were sold at a total amount of USD 55.4 million, resulting in a loss of USD 12.8 million. The calculated value in use, which is a net present value of the future cash flows of the vessels, as per year end 2012 was in total USD [*]. A value in use calculation should consider the risks inherent in the assets as well as the expectations of variations in the cash flows, see IAS 36.30. A company that is willing to sell an asset at a price almost [*] below the discounted expected cash flows of an asset is expected to be under severe pressure. Jinhui has confirmed that the company is not experiencing such a pressure.  Finanstilsynet therefore questions if risks are adequately reflected in the value in use calculations as per year end 2012. The company argues that there are [*], and that this information is new compared to year end 2012.

Summary
In Finanstilsynet's view there are several sources of external information that the company should consider when estimating the vessels' value in use in the future. The shipping market is transparent compared to many other industries. Fixed spot rates, estimated future rates, new-building prices, resale prices for both new building vessels and second-hand prices are available for all types of vessels.

IAS 36.30 requires that expectations about possible variations in the amount or timing of future cash flows should be reflected in the value in use calculations, and that the price for bearing the uncertainty inherent in the asset should be reflected. According to IAS 36.32, the expected present value of the future cash flows should reflect the weighted average of all possible outcomes. Given that shipping is a cyclical industry, the weighted average will be of importance. Finanstilsynet has questioned if the uncertainty is reflected adequately in the value in use calculations performed by the company.

In Finanstilsynet's view, the expected cash flow approach may, for example when running a scenario analysis, be a more effective measurement tool than adjusting for uncertainty to the discount rate. A scenario analysis should also include scenarios with less favourable outcomes.

2.3 Utilization rates
The number of a vessel's operational days is considered to be a significant input in the calculation of the recoverable amounts of the vessel. Jinhui has used 360 operating days for each vessel a year, which equals 98.6 % revenue generating days a year. In the reassessment performed in 2014, Jinhui has used 358 days, which equals 98.06 %. Finanstilsynet notes this for the record.

Finanstilsynet observes that for the second quarter 2014, Jinhui reports that utilization rates have been lower than expected. Finanstilsynet expects that this new information will be taken into account when performing future impairment tests.

2.4 Disclosures on sources of estimation uncertainty
According to IAS 36.132, an entity is encouraged to disclose assumptions used to determine the recoverable amount of assets during the period. As the requirements are not mandatory, the company has not disclosed the information about the assumptions applied in the impairment tests performed.
 
In Finanstilsynet’s view information of the assumptions applied in an impairment test is often useful information, particularly in cases with strong impairment indicators, as in this case.

Finanstilsynet emphasises that an obligation to disclose information may also be present where no impairment loss is recognised. This follows from the provisions of IAS 1.125 concerning estimation uncertainty. As many estimates in an impairment test are subject to uncertainty, there is a significant risk of material adjustment of carrying amounts. IAS 1.125 requires entities to disclose information about the assumptions they make about the future and about other major sources of estimation uncertainty. In Finanstilsynet’s view the assumptions used in the calculation of value in use are often of this nature. Given the current state of the dry bulk shipping segment, and the significant volatility inherent in this business, Finanstilsynet expects that the company in the future will provide information on how the important assumptions used in the value in use calculation are made. The disclosures are expected to provide information on what data is used to calculate the rates applied, what the expected growth is, together with information on the discount rate and the expected utilization of the fleet.

2.5 Expenses related to classification and major inspections
Jinhui has informed Finanstilsynet that expenses related to classification and major inspections are not included in the calculations of value in use as per 2012, and that these inspections/overhauls take place every 2 – 3 years. Furthermore, Jinhui has informed Finanstilsynet that these costs approximately double when a vessel reaches 10 years of age.

Finanstilsynet's assessment is that Jinhui's cash flow models should be more sophisticated, and that the costs of inspections, classifications and overhauls should be quantified and included in the calculation of the recoverable amounts of the vessels. Inspections, classifications and overhauls are considered to be cash outflows to be derived from continuing use of the vessels, cf. IAS 36.31 a).

Jinhui is expected to include these costs in the future value in use calculations.

2.6 Conclusion
IAS 36 requires that an impairment test should be based on reasonable and supportable assumptions. Jinhui has stated that the assumptions applied in the value in use calculations are based on management's best estimate.

In Finanstilsynet's view, assumptions applied in the impairment test performed at year end 2012 seem optimistic. Finanstilsynet has been critical of the assumptions, but given the fact that Jinhui to some extent has considered external evidence, Finanstilsynet has noted these for the record.

For future impairment tests, Finanstilsynet assumes that Jinhui will take into account the following information when preparing the assumptions:

• When using historical rates to estimate future earnings, the time series applied should be a longer period of time. Rates that are particularly high or low due to special circumstances should be excluded. The information should also include data from the most recent year/period
• The second-hand values of vessels or the price of a newly built vessel, as expectations of future time charter rates may be deduced from these
• Other relevant market information should be considered

Jinhui is expected to include in its scenario analysis also scenarios with less favourable outcomes.

Jinhui is expected to refine the model for impairment testing to include expected costs of classification and major inspections. The model should be adjusted to include the new information on expectations of utilization rates going forward.

In addition to refining the procedures and the model applied for impairment testing in the future, Finanstilsynet expects more extensive information in the notes. The risks associated with the value in use calculations are considered significant given the volatility in the dry bulk market. Jinhui should explain the procedures performed and the assessments that are made in respect to the value in use calculations, including information about the assumptions used.

3. Other issues
3.1 Revenue and other income
Finanstilsynet has requested a more entity-specific description of revenue recognition principles, both for recognizing time charter revenue and voyage charters revenue. Furthermore, Finanstilsynet has requested Jinhui to disclose revenue from time charters and voyage charters separately. Jinhui has amended the disclosures in the 2013 financial statements. Finanstilsynet notes this for the record.

3.2 Segment disclosures
IFRS 8.33( a) requires that an entity reports revenues from external customers attributed to:
 
i) the entity's country of domicile and
ii) to all foreign countries in total.

If revenues from external customers attributed to an individual foreign country are material, those revenues shall be disclosed separately. An entity shall disclose the basis for attributing revenues from external customers to individual countries. The information shall be reported unless the necessary information is not available and the cost to develop it would be excessive. These disclosures are required, independently on an entity's internal reporting, see IFRS 8.31.

The required information is not presented in the financial statements of Jinhui.

Jinhui is expected to comply with IFRS 8.33 in future annual financial statements.

4. Closing

Finanstilsynet has not considered whether the above matters are subject to the securities legislation's provisions regarding the requirement to disclose inside information in accordance with the Securities Trading Act section 5-2 subsection (1) and section 3-2. Finanstilsynet expects the undertaking to consider its requirement to disclose inside information on a continuous basis.

Finanstilsynet has forwarded a copy of this letter to the issuer's appointed auditor and to Oslo Børs.

On behalf of Finanstilsynet.

Gaute S. Gravir
Head of Section

Cathrine Husebye Rein
Senior Adviser