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6 Property, Plant and Equipment

US$'000 Vessels and vessel component costs Vessels under construction Buildings Leasehold improve-
ments
Furniture, fixtures and equipment Motor vehicles Total
Cost
At 1 January 2016 2,000,221 46,921 1,096 4,309 9,327 32 2,061,906
Additions 22,571 157,745 - - 1,024 - 181,340
Disposals (38,114) - (491) - - - (38,605)
Write offs (15,197) - - - (556) - (15,753)
Assets held for sale (Note 16) (24,783) - - - - - (24,783)
Exchange differences 1,099 - (5) (48) (57) (3) 986
Reclassifications 147,406 (147,406) - - - - -
At 31 December 2016 2,093,203 57,260 600 4,261 9,738 29 2,165,091
               
Accumulated depreciation and impairment
At 1 January 2016 439,787 - 117 3,293 7,677 32 450,906
Charge for the year 97,109 - 35 560 1,063 - 98,767
Impairment for the year 15,245 - - - - - 15,245
Disposals (18,867) - (93) - - - (18,960)
Write offs (15,197) - - - (556) - (15,753)
Assets held for sale (Note 16) (18,963) - - - - - (18,963)
Exchange differences 500 - - (44) (37) (3) 416
At 31 December 2016 499,614 - 59 3,809 8,147 29 511,658
Net book value
At 31 December 2016 1,593,589 57,260 541 452 1,591 - 1,653,433
Estimated useful lives                      
for the year ended 2016
and 2015
Dry bulk vessels:

Towage vessels:

Vessel component costs:




Vessels under construction:
25 years

30 years

estimated
period to
the next
drydocking

N/A
50 years 4 to 5
years
or the
remaining
lease
period
if shorter
3 to 5
years
4 to 5
years
US$'000 Vessels and vessel component costs Vessels under construction Buildings Leasehold improve-
ments
Furniture, fixtures and equipment Motor vehicles Total
Cost
At 1 January 2015 1,940,704 53,259 1,172 4,627 8,774 47 2,008,583
Additions 32,372 112,985 - 116 935 - 146,408
Disposals (69,988) - - (382) (112) (13) (70,495)
Write offs (15,142) - - - (196) - (15,338)
Exchange differences (7,048) - (76) (52) (74) (2) (7,252)
Reclassifications 119,323 (119,323) - - - - -
At 31 December 2015 2,000,221 46,921 1,096 4,309 9,327 32 2,061,906
Accumulated depreciation and impairment
At 1 January 2015 413,378 - 107 3,121 7,014 39 423,659
Charge for the year 98,322 - 13 594 1,015 2 99,946
Disposals (53,069) - - (382) (103) (7) (53,561)
Write offs (15,142) - - - (196) - (15,338)
Exchange differences (3,702) - (3) (40) (53) (2) (3,800)
At 31 December 2015 439,787 - 117 3,293 7,677 32 450,906
Net book value
At 31 December 2015 1,560,434 46,921 979 1,016 1,650 - 1,611,000
(a) As at 31 December 2016, vessel and vessel component costs include the aggregate cost and accumulated depreciation
     of the vessel component costs amounted to US$55,507,000 (2015: US$52,659,000) and US$27,087,000 (2015:
     US$25,242,000) respectively.
(b) Certain owned vessels of net book value of US$1,419,515,000 (2015: US$1,470,156,000) were pledged to banks as
      securities for bank loans granted to the Group (Note 19(a)(i)).
      Certain owned vessels of net book value of US$79,384,000 (2015: Nil) were effectively pledged as securities to other
      secured borrowings (Note 19(b)) as the rights to the vessels revert to the lessors in the event of default.
(c) During the year, the Group had capitalised borrowing costs amounting to US$1,995,000 (2015: US$964,000) on
      qualifying assets (Note 23). Borrowing costs were capitalised at the weighted average rate of 4.3% (2015: 4.2%) of the
      Group's general borrowings.
(d) The impairment charge related to the remaining towage vessels (US$8,062,000) and one Supramax vessel
      which was sold after the year end (US$7,183,000). The recoverable amount of the impaired assets was calculated as the fair
      value less cost to sell. Fair value assumes a willing buyer and willing seller basis under general market conditions, and
      it is considered a Level 3 valuation in accordance with HKFRS 13. Please refer to Note 11 (Fair value levels) for the
      definition of different levels.
(e) In 2015, vessels under construction included an amount of US$31,703,000 paid by the Group in relation to
      vessels whose construction work had not yet commenced.

Accounting policy

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

(i) Vessels and vessel component costs

Vessels are stated at cost less accumulated depreciation and accumulated impairment losses. The cost of an asset comprises its purchase price and any directly attributable cost of bringing the asset to its working condition for its intended use. Cost may also include transfers from equity of any gains/losses on qualifying cash flow hedges of foreign currency purchases of vessels.

Vessel component costs include the cost of major components which are usually replaced or renewed at drydockings. The assets are stated at cost less accumulated depreciation and accumulated impairment losses. The Group subsequently capitalises drydocking costs as they are incurred.

(ii) Vessels under construction

Vessels under construction are stated at cost and are not subject to depreciation. All cost of services relating to the construction of vessels, including borrowing costs (see below) during the construction period, are capitalised as cost of vessels. When the assets concerned are brought into use, the costs are transferred to vessels and vessel component costs and depreciated in accordance with the policy on depreciation.

(iii) Borrowing costs

Borrowing costs incurred for the construction of any qualifying asset are capitalised during the period of time that is required to complete and prepare the asset for its intended use. Other borrowing costs are expensed.

(iv) Other property, plant and equipment

Other property, plant and equipment, comprising buildings, leasehold improvements, furniture, fixtures and equipment and motor vehicles, are stated at cost less accumulated depreciation and accumulated impairment losses.

(v) Subsequent expenditure

Subsequent expenditure is either included in the carrying amount of the assets or recognised as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the expenditure will accrue to the Group and such expenditure can be measured reliably. The carrying amount of a replaced part is written off. All other repairs and maintenance are expensed in the income statement during the financial period in which they are incurred.

(vi) Depreciation

Depreciation of property, plant and equipment is calculated using straight-line method to allocate their cost to their residual values over their remaining estimated useful lives.

(vii) Residual values and useful lives

The residual values of the Group’s assets are defined as the estimated amounts that the Group would obtain from disposal of the assets, after deducting the estimated costs of disposals, as if the assets were already of the age and in the conditions expected at the end of their useful lives.

Useful lives of the Group’s vessels and vessel component costs are defined as the period over which they are expected to be available for use by the Group.

The assets’ residual values and useful lives are reviewed, and adjusted if appropriate, at each balance sheet date.

(viii) Gains or losses on disposal

Gains or losses on disposal are determined by comparing the proceeds with the carrying amounts and are recognised in the income statement.




Critical accounting estimates and judgements

Residual values of property, plant and equipment

The Group estimates residual values of its vessels by reference to the lightweight tonnes of the vessels and the average demolition steel price of similar vessels in the Far East market and Indian Sub-Continent market.

  • Sensitivity analysis:

    With all other variables held constant, if the residual value increases/decreases by 10% from management estimates, the depreciation expense would decrease/ increase by US$1.6 million in the next year.

Useful lives of vessels and vessel component costs

The Group estimates the useful life of its vessels with reference to the average historical useful life of similar vessels, their expected usage, expected repair and maintenance programme, and technical or commercial obsolescence arising from changes or improvements in the shipping market.

The Group estimates the useful life of its vessel component costs by reference to the average historical periods between drydocking cycles of vessels of similar age, and the expected usage of the vessel until its next drydock.

  • Sensitivity analysis:

    With all other variables held constant, if the useful lives increase/decrease by 3 years from management estimates, the depreciation expense would decrease by US$13.4 million or increase by US$21.2 million in the next year.

Impairment of vessels and vessels under construction

The Group tests whether the carrying values of vessels and vessels under construction have suffered any impairment in accordance with the accounting policy on impairment of investments and non-financial assets (Note 5). In assessing the indicators of potential impairment, internal and external sources of information such as reported sale and purchase prices, market demand and general market conditions are considered. In assessing the fair market value and value-in-use, the information above as well as market valuations from leading, independent and internationally recognised shipbroking companies are considered.

The owned dry bulk vessels are separated as two cashgenerating units (“CGUs”) (Handysize and Supramax) as the vessels within each of these CGUs are considered to be interchangeable.

The value-in-use of the vessels is an assessment of assumptions and estimates of vessel future earnings and appropriate discount rates to derive the present value of those earnings. The discount rates used are based on the industry sector risk premium relevant to the CGU and the applicable gearing ratio of the CGU.

For the value-in-use assessments, the applicable discount rates are 6.8% (2015: 7.9%).

  • Sensitivity analysis:

    With all other variables held constant, increasing the discount rates by 100 basis points from the original estimate will not give rise to any impairment.

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