{"id":54971,"date":"2024-08-09T11:22:57","date_gmt":"2024-08-09T10:22:57","guid":{"rendered":"https:\/\/valuesque.com\/en\/?p=54971"},"modified":"2025-06-01T21:10:20","modified_gmt":"2025-06-01T20:10:20","slug":"sbm-offshores-directional-accounting-read-across-to-iasbs-disclosure-project-and-to-ifrs-10-11","status":"publish","type":"post","link":"https:\/\/valuesque.com\/en\/blog\/2024\/08\/09\/sbm-offshores-directional-accounting-read-across-to-iasbs-disclosure-project-and-to-ifrs-10-11\/","title":{"rendered":"SBM Offshore\u2019s \u201cDirectional Accounting\u201d: Read-Across to IASB\u2019s Disclosure Project (and to IFRS 10\/11)"},"content":{"rendered":"

In 2011, the International Accounting Standards Board (IASB) disclosed a whole package of new and revised standards that all addressed the topic \u2018reporting entity\u2019. Amongst these standards were the new IFRS 10 Consolidated Financial Statements<\/em> and IFRS 11 Joint Arrangements<\/em>. One of the core messages of these two new standards was: The so far existent policy choice of \u2018proportionate consolidation\u2019 for jointly controlled entities (i.e. joint ventures) has been eliminated. Starting at 1 January 2014, the date where IFRS 10 and 11 become effective, such jointly controlled entities either have to fully consolidated (if controlled) or accounted for at-equity (if not controlled).<\/p>\n

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For financial presentation reasons this meant: While with the former possibility of proportionate consolidation, companies could take assets, liabilities, revenues and costs of investee companies at the percentage of ownership into their books, they now have to take them at 100% (full consolidation) or not at all (only the equity-participation value shows up at the asset-side of the balance sheet, net earnings contribution shows up as part of the financial result).<\/p>\n

The change in opinion of the IASB came a bit as a surprise. In fact, the old IAS 31 Joint Ventures<\/em> (which regulated joint ventures accounting before) did not recommend the application of the equity method with the statement that proportionate consolidation better reflected the substance and economic reality of an entity\u2019s interest in a jointly controlled entity. Now, with the introduction of IFRS 10 and 11 the IAS staff explained that it is now believed that the \u2018economic substance\u2019 of the arrangement is rather defined by the \u2018rights and obligations\u2019 assumed by the parties when carrying out the activities of the arrangement. And these rights follow rather the contractual arrangements of control (or not control).<\/p>\n

Many companies and investors were not very happy with this new set of rules. In fact, proportionate consolidation helped a lot both in presenting the share of performance of such investee companies but also in analysing the performance contribution of these holdings. But since 2014, proportionate consolidation is history in IFRS.<\/p>\n

SBM Offshore N.V., a dutch supplier to the oil and gas industry, was also rather dissatisfied with the developments in IFRS. The company is building and operating floating production and storage facilities for offshore drilling activities. Their main products are floating production storage and offloading (FPSO) units \u2013 floating vessels that can be used for production and processing of hydrocarbons, and for the storage of them. The vessels are either owned and operated by SBM Offshore and leased to its clients (Lease and Operate arrangements) or supplied on a Turnkey sale basis (construction contracts). Even in the latter case, the vessels can be operated by the Company, under a separate operating and maintenance agreement, after transfer to the clients. But due to SBM also delivering operation services of these vessels they are often not leased or sold in full but only a share in it, so that they can be run as a joint venture. As a result, the asset portfolio of SBM offshore is a big collection of participations in such or similar projects with ownership between 30% and 75%.<\/p>\n

SBM has already been quite unhappy with the rules for leasing from the lessor point of view (IAS 17 at that time, now IFRS 16). The rules for finance leases led to revenue and profit recognition quite early in the construction phase, well before rents are invoiced to, and paid by, the client. This led to a disconnect of earnings and cash flows and a lot of need for explanation to investors. Now, with the introduction of IFRS 10\/11 it all seemed a bit too much for SBM Offshore.<\/p>\n

As a consequence, in June 2013, SBM offshore introduced the \u2018Directional Reporting\u2019 methodology in addition to IFRS, in order \u201cto provide greater transparency of the underlying business performance.\u201d (Source: SBM AR 2013, p. 57.) but also to allow investors to follow management\u2019s approach to running the business: \u201cIn addition to reporting under International Financial Reporting Standards (IFRS) guidelines, the Company’s Directional reporting methodology was implemented to reflect Management\u2019s view of the Company and how it monitors and assesses financial performance.\u201d (SBM AR 2019, p. 36).<\/p>\n

And SBM took it seriously. Bruno Chabas, CEO of SBM Offshore, said in the Q4\/2013 Earnings Conference Call: \u201cSo the guidance; I’m pleased to tell you that the guidance will be based on directional reporting. That’s – you’re never going to hear me any more speak about IFRS; never. Peter [van Rossum, former CFO, my complement], for sure, but not me (laughter).\u201d Source: Reuters Street Events, Transcript to the Q4\/2013 Earnings Conference Call, 6 February 2020. And as far as we know, Bruno Chabas lived up to his promise \u2013 except for mentioning the effect of IFRS 16 Leasing<\/em> on the Directional guidance a couple of times.<\/p>\n

The main features of SBM\u2019s \u2018Directional Reporting\u2019 are the following:<\/p>\n

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Source: SBM AR 2014, p. 116<\/p>\n

The effects of this \u2018Directional Reporting\u2019 are as follows:<\/p>\n