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:
Estimates
Post-employment benefits
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 32. 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 1.53% for the Group and 0.51% 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 13.
In relation to one vessel, which is operated on a seasonal basis and primarily dedicated to passenger only carryings and was not operated during 2020, the Directors noted that this vessel had been maintained in line with all regulatory and class requirements during the lay-up period and the Directors determined that no revision in remaining useful life was warranted. The vessel returned to service during Summer 2021.
Critical accounting judgements
Impairment
The Group does not hold any assets, including goodwill, which requires an annual assessment of recoverable amount.
In line with the requirements of IAS 36: 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, shipbuilding costs and carrying value versus market capitalisation of the Group.
During the period ended 31 December 2021, the Group experienced a continuation of the 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, continued in various forms up to January 2022, and have materially affected the profitability outcome from our Irish Ferries branded operations for financial years 2021 and 2020. The impact of Covid related restrictions has had a significant impact on Passenger traffic with car volumes on a like for like basis (excluding Dover Calais) down 60% (2020: 66%) compared with 2019. However, reassuringly with the easing of restrictions during the second half of 2021, car volumes increased 64% versus the prior year (down 45% compared with the same period in 2019). As against this, the Container and Terminal Division continued to perform strongly in both 2020 and 2021.
Having actively participated in the market during 2021, there are no indicators of general declines in the market value of the types of vessels included in the Group’s fleet noted. The Group’s market participation included the agreement for the acquisition of two ferries and two container vessels, (including a vessel contracted for in early 2022) and numerous charter agreements of both ferries and container vessels. Indeed, the Group’s observation was that both vessel values and charter rates increased significantly during 2021. Nonetheless, in referencing accounting standard IAS 36: Impairment of Assets, management, having considered each of the events described at paragraph 12 of the standard, assessed the decline in profitability from its passenger operations amounted to an indicator of impairment for its ferry fleet at 31 December 2021 and on reassessment also at 31 December 2020. The Group’s position as previously reported in the 31 December 2020 financial statements, was that the remaining useful lives of the vessels were sufficiently long to allow the downturn in performance and cash generated by the vessels noted in 2020 to be temporary and therefore not regarded as an impairment indicator.
Having concluded that an impairment indicator existed, the Group sought to assess the recoverable amount of the ferry fleet employed by Irish Ferries based on the conditions and information available at each reporting date. At 31 December 2021 Irish Ferries was expected to operate a ferry fleet of six (2020: five) owned and two (2020: one) chartered vessels operating over four (2020: three) routes between Ireland, the UK and France, including one additional vessel which was contracted at 31 December 2021 and delivered in January 2022. There is a large interdependency between the vessels and routes, vessels are interchangeable between routes and certain customer contracts are based on the Group operating services across multiple routes. Consequently, the Group views the Irish Ferries ferry fleet as a single cash generating unit and has undertaken impairment testing on that basis.
The Group engaged an independent shipbroker Simsonship (2020: Clarkson’s Valuation Services) to provide valuations on its ferry fleet on an unseen basis. 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 by providing 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 ferry fleet was strongly supported by the FVLCOD estimate both at 31 December 2021 and 2020.
Notwithstanding the headroom over carrying value indicated by the FVLCOD estimate, the Group acknowledges the potential limitations of such valuation estimates where there are limited transactions, the majority of the Group’s fleet by value is 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.
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. Assets were assigned a terminal value at the end of the projection period based on the straight line write down of year-end broker valuations over the remaining useful life of the asset. The starting position for projecting cashflows at 31 December 2021 and 2020 was to use the budget as approved by the Board for the subsequent year and to project forward for the following years assuming that passenger car markets will recover to 2019 levels by 2024 and 2023 respectively. Thereafter, revenue growth of 2% over inflation was assumed. Other key assumptions include those relating to capital expenditure, fuel costs and other operating costs. The cashflow projections for years 1 to 5 were consistent with the base scenario used for the viability assessment.
Sensitivity on this base scenario was performed for a number of downside scenarios, including assuming a longer recovery period as well as assuming higher fuel and dry-docking costs, flexing the discount rate and terminal values. 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 2021 and 2020. The Directors have reviewed the methodology, key assumptions and results of the impairment testing as described above and concluded that any reasonably possible movement in the assumptions used in the impairment test at 31 December 2021 or 2020 would not result in the identification of an impairment.
One vessel which is operated on a seasonal basis and primarily dedicated to passenger only carryings was not operated during 2020. Within the assessment carried out above, this temporary surplus to operational requirements was not deemed to be an indication of impairment at 31 December 2020 as it was then intended to return this vessel to service when restrictions lift and it was being maintained in an operational ready state. This vessel returned to service during Summer 2021. The standalone FVLCOD for this vessel based of the independent broker valuation at 31 December 2021 and 2020 together the results of management’s value in use calculation for the ferry fleet as a single CGU supported the carrying value of this vessel at 31 December 2021 and 2020.
Consequently, based on the recoverability assessment described above, the Directors concluded that no provision for impairment against the carrying value of the Group’s ferry fleet was required at 31 December 2021 or 2020.
Going Concern
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 of 2022, the principal risks and uncertainties facing the Group (pages 67 to 71), the Group’s 2022 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 and which have continued in various forms throughout the period to 31 December 2021 had a material effect on the Group’s financial results. 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. The Group has, despite the imposition of restrictions, continued to operate its passenger services on all routes in conjunction with its RoRo services. Following the ending of the Brexit transition period, the Group experienced changed travel patterns with a reduction in RoRo carryings overall but revenue losses on the UK routes were significantly replaced with higher yielding revenues on our direct services to France.
Notwithstanding the downturn in profitability due to reduced passenger revenues, the Group’s RoRo, LoLo, chartering and port stevedoring services operated largely in line with expectations and the Group generated cash from operations of €66.0 million (2020: €51.2 million) in financial year 2021, with free cash flow of €43.3 million (2020: €35.3 million) after maintenance capital expenditure. The Group retained cash balances and committed undrawn facilities at 31 December 2021 of €118.9 million. From 1 January 2022 maximum leverage covenants have reverted to the previous contracted levels of 3 times EBITDA. The leverage covenant level at 31 December 2021 calculated in accordance with the lending agreements, was within maximum permitted levels at 2.6 times EBITDA.
Government imposed travel restrictions have been largely removed from the beginning of 2022 for passengers who are fully vaccinated and passenger volumes have increased over the prior year levels. However there remains a risk of a resurgence of Covid infections and the possibility of re-imposition of restriction in the future. All other revenue streams are performing satisfactorily up to the date of the approval of the financial statements.
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 included a return of passenger volumes following the easing of travel restrictions, but remaining behind pre-pandemic activity levels. The downside scenario assumptions included passenger carryings at similar levels to 2021. This modelling assumed a full schedule of services of the conventional ferry fleet and reduced services on the fast craft route in the downside scenario. The modelling further assumed that there were no changes to the Group’s existing contractual financing arrangements. Based on this modelling the Directors believe the Group retains sufficient liquidity to operate for at least the period up to March 2023.