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How To Add $100m To Your Company's Annual P&L With One Paragraph

China Shipping Development, listed in Hong Kong and Shanghai with about $2 billion market, is the largest Chinese tanker and coastal dry-bulk operator, heavily expanding in large wet and dry tonnage. I was browsing its 2012 H1 Results (a loss of RMB395 million or about $62 million) when I stumbled upon the following paragraph:

"During the period, the Group adjusted the estimated useful life of vessels from the range of 17 to 25 years to 25 years. Residual values of vessels were adjusted from USD180 (approximately RMB1,350) per light displacement ton to USD470 (approximately RMB2,960) per light displacement ton. As a result of these changes in accounting estimates, the depreciation decreased by approximately RMB300,897,000 for the period and will also decrease by approximately RMB601,794,000 for year ended 31 December 2012."

In other words, the change in depreciation policy added some $50 million to the result for 2012 H1 and will add some $100 million to the full year - reducing the expected losses accordingly.

This is at a time when it is quite clear that estimates of useful life of shipping assets should be reduced, not increased. Oversupply, charterer vetting procedures and new vessel designs make vessels older than 15 years less competitive and older than 20 years useless for international trade. Scrap steel prices are also on a downtrend and in any event the long-term average is nowhere near USD470 per ldt.

Straight-line depreciation may not be very much appropriate for a highly cyclical sector like shipping. It is also a non-cash expense. However, using and planning around conservative accounting policies means respect for the shareholder. A number of posts in this instablog expand on depreciation policies in shipping.

But whatever works for China Shipping Development, which is down 40% for the year and going nowhere. And anyway this is peanuts compared to Groupon accounting: