In the application of the Group’s and Company’s accounting policies, the Directors are required to make judgements, estimates and assumptions about the carrying amounts of assets and liabilities. The estimates and associated assumptions are based on historical experience and other factors that are considered to be relevant. Actual results may differ from these amounts. The estimates and underlying assumptions are reviewed on an ongoing basis.
Key sources of estimation uncertainty and critical accounting judgements are as follows:
The Group’s and Company’s total obligation in respect of defined benefit pension obligations is calculated by independent, qualified actuaries, updated at least annually. The size of the obligation is sensitive to actuarial assumptions. These include demographic assumptions covering mortality and longevity, and economic assumptions covering price inflation, benefit and salary increases together with the discount rate used. The size of the scheme assets is also sensitive to asset return levels and the level of contributions from the Group and Company. Further details are set out in note 31. Many of the actuarial assumptions are dependent on market developments and are outside the control of the Company and Group and movements may give rise to material adjustments in future estimates of post-employment obligations.
The Group and Company is a participating employer in the Merchant Navy Officer Pension Fund (MNOPF), a multi-employer defined benefit pension scheme. The MNOPF was in surplus at the most recent valuation date of 31 March 2021. Under the rules of the fund all employers are jointly and severally liable for the deficit. The deficit included in the financial statements for the Group and Company represents an apportionment of the overall scheme deficit based on the most recent notification received from the trustees dated May 2013 and which was 1.04% for the Group and 0.33% for the Company, less any deficit payments made. Should other participating employers’ default on their obligations, the Group and Company will be required to absorb a larger share of the scheme deficit calculated in the same manner as the current apportionment.
Useful lives for property, plant and equipment
Long lived assets comprising primarily of property, plant and equipment represent a significant portion of total assets. The annual depreciation and amortisation charge depends primarily on the estimated useful lives of each type of asset. Management regularly reviews these useful lives and change them, if necessary, to reflect current conditions. In determining these useful lives management considers technological change, patterns of consumption, physical condition and expected economic utilisation of the asset. Changes in the useful lives may have a significant impact on the annual depreciation and amortisation charge. Details of the useful lives are included in the accounting policy headed property, plant and equipment. Further details are set out in note 12.
In relation to one vessel which had reached 25 years from date of construction, the remaining useful life was increased from five years to ten years. This decision was taken following a rigorous review which considered the record and condition of the vessel, expected future regulation including environmental regulations, recent capital expenditure and the result of the fleet impairment review. The effect of the increase in useful life was to reduce the depreciation charge in the reporting period by €1.5 million.
Critical accounting judgements
The Group does not hold any assets, including goodwill, which requires an annual assessment of recoverable amount.
In line with the requirements of IAS36: Impairment of assets, the Group assessed its property, plant and equipment and intangible assets to determine if there were any indications of impairment. Factors considered in identifying whether there were any indications of impairment included the economic performance of assets, technological developments, new rules and regulations including environmental regulation, shipbuilding costs and carrying value versus market capitalisation of the Group.
During 2020 and 2021, the Group experienced a reduced level of passenger carryings due to the imposition of government restrictions placed on travel in the jurisdictions that we offer services. These restrictions, first introduced in March 2020 were fully removed in January 2022. The profitability of the Irish Ferries branded operations was materially affected in financial years 2021 and 2020, which was subsequently assessed as an indication of impairment. Having completed a recoverability assessment at 31 December 2021 and 2020, no impairment charges were recognised.
Following the lifting of all travel restrictions in early 2022, passenger carryings recovered but remained behind pre-pandemic 2019 levels, which was in line with management expectations as previously modelled in the prior year recoverability assessments.
The Group revenues are generated from passenger traffic, including tourism, and freight movements between Ireland and Britain, Ireland and continental Europe and Britain and Continental Europe. The performance of these markets are in turn dependent to a significant degree on macro-economic factors including economic growth both local and global, inflation, interest rates and exchange rates. These same factors feed into our input costs. Current geo-political issues including the war in Ukraine and post-pandemic recovery have resulted in a significant increase in energy costs, leading to higher general inflation, with policy makers increasing interest rates in response. The Group also notes the progress of negotiations concerning the Northern Ireland Protocol and trade negotiations between the United Kingdom and the European Union. These have created uncertainty around the short-term economic growth rates in the markets in which the Group operates and hence the likely growth rates to be achieved in our businesses. While the Group acknowledges that it cannot control macro-economic factors, it has demonstrated as part of its business model its capacity to pass increased costs through the logistics chain. Unlike the circumstances of the Covid-19 pandemic, the Group views the current uncertainty as a more normal part of conducting business.
The Directors also considered known and expected environmental regulation expected over the remaining life of its existing fleet. While the Group has mapped known requirements against the current status of its fleet, it is not in a position to cost compliance as in many cases technological solutions are currently not commercially available or developed. Given the current low rate of renewal of global fleets, partially related to the absence of proven pathways to compliance with new regulation, the Directors consider that the additional regulation will not lead to accelerated obsolescence of its fleet but may result in increased costs. The most significant item in the short term is the introduction by the EU of an Emissions Trading System applicable to vessel operators, with a similar scheme expected to be endorsed by the United Kingdom. The EU system will be effective for CO2 emissions from 1 January 2024, which will require the payment of a levy based on the volume of emissions. Similar to the actions taken in relation to the IMO2020 regulations which required the consumption of more expensive fuel oils, the maritime sector has been signalling to the market that the costs of the Emission Trading Systems will be passed through to customers. Given the experience of the Group with the previous IMO2020 levies, the Group will be passing through the increased cost of these regulations to our customers.
In the first half of 2022, the container vessel charter market performed strongly with charter rates continuing the rise experienced throughout 2021. However, in the second half of the year, rates plateaued before declining in the last quarter, a trend which has continued into early 2023. This has created uncertainty around future renewal rates and consequently likely future market value of vessels.
The Group has undertaken an impairment test to assess the recoverable value of its fleet assets based on the conditions and information available at the reporting date.
The Group engaged independent shipbroker Simsonship AB and Ernst Russ Shipbrokers GMBH & Co KG to provide valuations on its fleet. These valuations are prepared on standard market terms on the assumption of assets being encumbrance free with a willing buyer and seller. The Group adjusted these valuations for an estimate of disposal costs to arrive at a fair value less cost of disposal (FVLCOD) valuation of the fleet. The Group was satisfied that the carrying value of the fleet was strongly supported by the FVLCOD estimate at 31 December 2022.
Notwithstanding the headroom over carrying value indicated by the FVLCOD estimate, the Group acknowledges the potential shortcoming limitations of such valuation estimates where there are limited transactions and certain vessels in the Group’s fleet are bespoke to its requirements and true value can only be assessed if offered for sale to one or more willing purchasers. Against that background, the Group sought to derive its own valuations through performance of a value in use exercise. Due to the inter-dependence of ferries across routes and transferability of vessels between routes, the Group considers its ferries to comprise a single cash generation unit. Such inter-dependence is not as evident in respect of the container vessels due to contractual arrangements and these vessels were individually assessed.
The value in use exercise involved projecting cash flows over a ten year period and discounting these to a present value using an estimate of the weighted average cost of capital. Vessels were assigned a terminal value at the end of the projection period based on the unexpired portion of the year end broker valuations based on a straight line write down of those valuations over the remaining useful life of the vessel. The starting position for projecting cashflows was to use the 2023 budget, as approved by the Board. For 2024 and subsequent years, the passenger revenues and freight revenues were projected to increase based on market growth assumptions and expected strategic positioning of the Group. Energy costs were based of crude oil prices of $88 per barrel over the projection period. Fuel price movements are mitigated through surcharge mechanisms which are included in certain contracts. Charter revenues at next renewal were estimated at rates below indicative charter rates at 31 December 2022. The cash flows included an allowance for maintenance capital principally comprising estimated drydock costs based on each vessel’s maintenance plan. The cashflow projections for years 1 to 5 were consistent with the base scenario used in the viability assessment.
Sensitivity on this base scenario was performed for a number of downside scenarios flexing the revenue growth rates, fuel costs, the discount rate and terminal values. The Directors have concluded that any reasonably possible movement in the assumptions used in the impairment test at 31 December 2022 would not result in the identification of an impairment.
The Directors are satisfied that the value in use projections robustly supported the broker valuations and consequently the carrying value of the fleet at 31 December 2022. The Directors have reviewed the methodology, key assumptions and the results of the impairment testing as described above.
Consequently, the Directors concluded that the recoverability assessment described above, supported the carrying value of the Group’s fleet assets and that no provision for impairment was required at 31 December 2022.
The Financial Statements have been prepared on the going concern basis. The Directors report that, after making inquiries, they have a reasonable expectation at the time of approving the Financial Statements, that the Group and Company are going concerns, having adequate financial resources to continue in operational existence for the foreseeable future. In forming this view, the Directors have considered the future cash requirements of the Group and Company in the context of the economic environment at the reporting date, the principal risks and uncertainties facing the Group (pages 65 to 69), the Group’s 2023 budget plan and the medium-term strategy of the Group, including capital investment plans. The future cash requirements have been compared to bank facilities which are available to the Group and Company.
The introduction of measures in response to Covid-19 by governments in the jurisdictions in which we operate services in March 2020 materially affected the Group’s financial results for both years ended 31 December 2021 and 2022. This was particularly concentrated on our passenger business where international travel was affected resulting in a material reduction in passenger revenues compared to pre pandemic levels. In early 2022, these restrictions were removed and passenger carrying increased significantly over the prior year, broadly in line with the Directors post-recovery expectations. Other revenue streams from the Group’s RoRo, LoLo, chartering and port stevedoring services had been largely unaffected by the Covid-19 measures.
The Group generated cash from operations of €132.0 million (2021: €67.0 million) in financial year 2022, with free cash flow of €108.0 million (2021: €44.3 million) after maintenance capital expenditure. The Group retained cash balances and committed undrawn facilities at 31 December 2022 of €67.4 million. The leverage covenant level at 31 December 2022 calculated in accordance with the lending agreements, was 1.2 times EBITDA, within maximum permitted levels of 3.0 times.
In making their going concern assessment, the Directors have considered a number of trading scenarios. including a re-imposition of travel restrictions. The base scenario assumptions assume no re-emergence of community borne infections resulting in imposition of travel restrictions. Taking into consideration current macro-economic uncertainty around growth rates in the economies in which we provide services and continuing inflationary pressures, the downside has considered lower activity levels across our businesses. Notwithstanding this lower activity, the downside modelling assumed a full schedule of services being maintained by the Group. The modelling further assumed that there were no changes to the Group’s existing contractual financing arrangements, with earliest maturities occurring in late 2024. Based on this modelling, the Directors believe the Group retains sufficient liquidity to operate for at least the period up to March 2024.