Note 11

At year end the Havfisk group owned 29.6 cod and haddock trawler licenses, 31.9 saithe trawler licences, eight shrimp trawler licences and three greater silver smelt licences in Norway. The licences are owned through the subsidiaries Nordland Havfiske AS, Finnmark Havfiske AS and Hammerfest Industrifiske AS. No acquisition or sale of quotas/rights occurred in 2015. However several internal movements of structural quotas occurred within the companies Finnmark Havfiske AS and Nordland Havfiske AS. This is connected with the sale of vessels between the two companies in order to achieve maximum use of the quota rights within the group.

A licence for cod, haddock and saithe confers the right to trawl for whitefish above the 62nd parallel and in the North Sea for parts of the year. Similarly, a shrimp and greater silver smelt licence confers rights to harvest these species. In 2014 regulations permitted up to three licence units per vessel. On 23 January 2015, a royal resolution was adopted to increase the number of licence units permitted per vessel from three to four. This will however have a limited effect on the valuation for 2015, since only one vessel has more than 3 cod licences. The volume which can be harvested per licence unit is determined by the Ministry of Fisheries on an annual basis. In addition, transfers - known as "reallocations" - may be made during a year between the various categories of vessel if one vessel category fails to harvest its share of the quota. In 2015, one cod quota corresponded to the right to harvest 1,478 tonnes of cod, 458 tonnes of haddock and 327 tonnes of saithe north of the 62nd parallel. This represented a reduction of 11 per cent for cod and an increase of 24 per cent for haddock compared with 2014, and a reduction of 5 per cent for saithe. Quota changes/redistributions for haddock were performed during the year. The shrimp and greater silver smelt licences are not limited in quantity terms.

To improve the profitability of fishing and to reduce the number of vessels in operation, the fishery authorities have introduced schemes which permit the concentration of more quota units in one vessel in exchange for the permanent removal of vessels which surrender their quotas from the fishing register. Every vessel has a cod trawling permit, a so-called basic quota, and in addition the vessels can have so-called structural quotas for cod trawling. A vessel cannot have more than four quotas per fish species in total. The structural quotas have a limited duration that depends on which scheme applied when the quota was structured. Essentially, there are two schemes with 20 and 25 year structure quota duration respectively. The difference lies in structuring before and after 2007. Structures that were given before 2007 have a 25 year duration counted from 2008, while those that were structured after 2007 have a 20 year duration.

The main purpose of the structuring schemes is to reduce the number of vessels that participate in a given fishery, thereby allowing for improved profitability for the remaining vessels, i.e. improving efficiency within a regulated framework. Secondly, the schemes are intended to help adapt fleet capacity to basic resources. On the expiry of the 20 or 25 year period, the structural quotas lapse and the total quotas will be distributed to the participants in the regulation group as basic quotas. The basic quotas are essentially perpetual.

HAVFISK uses a valuation model based on a method for calculating recoverable amount that is in turn based on discounting future cash flows, ref IAS 36.30-32 (value in use). Future cash flows are based on budgets and forecasts for vessels with associated quotas as the smallest identifiable group of assets that generates cash inflows from continuing use, and that is largely independent of the cash inflows of other assets or groups of assets. It is thus the vessel and associated quotas that forms the basis for the valuation unit with regard to recoverable amount.

The model is made up of separate discounted cash flows for every single unit, i.e. the individual vessel that is tested against book value of quotas and vessel. The model is based on the budget for 2016 and forecast for 2017, which also creates the basis for the period 2018-2025. A terminal value is then added that is based on perpetual cash flows, although with a correction for reduced volume after the expiry of the structural quotas, as explained below. The terminal value is based on the basic quotas being the central assets that create the basis for the company's fishing rights. These have a time limit and when the structural quotas expire the company will have approximately the same harvest quantity because the basic quotas will increase, as explained in the principles note. The model is based on a forecast period of 10 years and then a terminal period. Three of the ten vessels that the company has in operation during the forecast period are newly-built vessels delivered in 2013 and 2014. The annual investment requirement will be significantly lower for a new vessel than for a vessel that is more than ten years old. In order to arrive at a terminal period that is equivalent to a normal year, the model is based on a 10 year forecast period. During the forecast period up to the terminal period, the investment on "new" vessels increases considerably more than the annual growth of 2.5%.

In the period after 2016 and in the terminal value, an annual growth of 2.5% has been added in, which corresponds to Norges Bank's inflation target.

Key assumptions in the model:

Quota development

Harvesting efficiency

Operations-related costs

Price development of the products

Discount rate

Development of TAC (Total Allowable Catch) within the different fish species

Catch per operating day per vessel.

Development of operations-related costs – including bunkerage

Development of price in the different fish species

Development of 10-year risk-free interest and long-term interest margin

The quota development entered into the model is based on forecasts from the ICES (International Council for the Exploration of the Seas) and the Institute of Marine Research. In the model it is anticipated that the cod quota for 2016 is at the same level as in 2015. The haddock and saithe quotas north of 62 degrees have however been increased by 9 and 2 per cent respectively compared to 2015. For 2017 onward, a reduction is expected in cod and haddock quotas of 10 per cent in relation to 2016. The saithe quota is at approximately the same level as in 2016.

Another important assumption in the model is harvesting efficiency, i.e. how much the individual vessel catches per operating day. The model is based on historically achieved catch rates, as well as on the change in the fleet structure that takes into account that three new vessels came into operation in 2013-2014.

Roughly speaking, operations-related costs can be divided into two categories: those that are generated based on the value of the harvest and those that are generated based on the number of operating days. Crew costs and common expenses are mainly related to the value of the harvest and are almost exactly correlated with harvesting revenues. Bunker expenses are the biggest item directly related to the number of operating days. In the model, we have used a bunker price for the period 2016-2017 that is approximately 5 per cent lower than the average for 2015 and considerably higher than bunker prices at the end of 2015. This is based on analyses and expectations of future prices in the oil market performed by external parties including DNB. The forecast also assumed a general price increase of 2.5% per year.

Anticipated price trends for the quantity harvested are largely related to the anticipated increase/reduction in quotas for the different fish species. For the most important fish species, which is cod, the forecast is based on the price level increasing slightly from the present level. Cod prices were considerably reduced in 2012 and 2013 and were then at a historically low level as a result the the large quota increase in 2012 combined with times of economic decline in many of the most important customer countries for cod products. The bottom was reached in the first quarter of 2013, after which there has been a positive price trend. There has been a good, regular price development for cod over the whole year, with the highest prices in the fourth quarter. For 2016, prices are based on the same level as was achieved in the last part of 2015. For 2017 onwards, a 5 per cent price increase is assumed on the basis of the 10 per cent reduction in cod quotas. For haddock, we saw a dramatic fall in prices during the course of 2015. The price of frozen haddock fell from a level above NOK 24 per kilo to NOK 15 per kilo. At the start of the fourth quarter, prices stabilised at this level and the market took out great quantities at the new price level. There was a weakly positive price trend for haddock at the end of 2015. The budget for 2016 assumes a price development for haddock based on the level achieved in the second half of 2015, but lower than the level at the end of 2015. For 2017 onward there is a continued increase of 5% in prices from the level in the budget for 2016. Saithe prices are based on a price level in line with that achieved in 2015, but with a slight reduction in the 2017 forecast period.

The discount rate is estimated based on a weighted average of required return on capital and anticipated debt costs, assuming an anticipated equity ratio of 40 %. Debt costs are based on a risk-free rate (10 year government bonds) with an addition that reflects long-term interest rate margins. The discount rates used are 8.34 % before tax and 7.56 % after tax. The discount rate is initially estimated after tax and then converted into pre-tax using the iterative method.

With regard to sensitivity, the most important key assumptions in the model are quota and price trends. Historically, there has been a correlation between quota and price changes for cod of about 0.5. This means that when quotas increase by 10%, prices will fall by 5%. It is therefore unlikely that these two factors will develop in the same direction over time. A further 10 per cent reduction in the cod quota from 2017 would not mean that book value exceeded recoverable amount. The average price for cod that has been used as a basis for the forecasts is lower than that achieved in 2007 and 2008. The risk of a reduction in the price of cod is therefore considered to be extremely limited as long as quotas are reduced. As regards the other key assumptions such as bunkerage, changes within a reasonable area of probability would not lead to the book value of the units exceeding their recoverable amount. A reasonable area of probability is here defined as a 10 per cent increase in bunker costs from the calculated level in 2016 onward.

The effect of structuring in relation to the "cod trawler" group

The average structuring measured in number of quotas per vessel has been increasing in recent years. At the end of 2015, HAVFISK had an average quota factor per vessel that is 0.257 higher than the total for the "cod trawler" group, which is 2.603. The total number of quotas that a vessel in this group is permitted is four. If this situation is unchanged on the expiry of the structural quotas, this means that HAVFISK will have its harvest quantity reduced from 33.7% to 30.6 % of the total quantity for the "cod trawler" group. In the HAVFISK model for testing loss of value, the reduced quantity after the expiry of the structure period has been incorporated into the model and taken into account when calculating present value. This is done for the individual cash generating unit on the basis of the present structure situation for the cash generating unit in question in relation to the average for the "cod trawler" group.

The structural quotas have a limited duration that depends on which scheme applied when the quota was structured, as explained earlier in the note. This leads to an annual redistribution of relative harvest quantity within the group from the time the first structural quotas expire in 2027 until the end of 2032 when the vast majority of the present structural quotas expire. HAVFISK has assessed the effects of this during the interim period 2027 – 2032 in its model for testing for loss of value. In the company's assessment, redistribution within the trawler group as a result of expiry of structural quotas during this period will not have any significant effect on the calculated value in use of any of the cash generating units. The significance of this in future years will also be gradually reduced as the structural quotas in question will have been depreciated when this occurs.

Supply commitments – industry obligation

The licences carry supply commitments to the regions which issued them, i.e. Finnmark and Nordland. This means that buyers in the relevant regions have a pre-emptive right to buy the fish. The beneficiaries of this supply commitment are determined by the terms for each licence unit. It may be a region, but it may also be a specific buyer. The principle for price determination is the average price obtained for the relevant species over the last 14 days, taking into account condition, size and quality. Havfisk is also under a so-called "industry obligation" in Stamsund, Melbu, Hammerfest, Båtsfjord, Honningsvåg and Kjøllefjord. This means that the licences are linked to the operation of plant in each of these places. Havfisk has however leased the facilities in these places and the tenant is responsible for maintaining the operation, ref. the discussion of lease contracts in note 12. If the tenant should cease operations, the licence terms oblige HAVFISK to maintain operations in these places.

The existing supply commitments and industry obligations have been taken into account in the model for testing for loss of value. HAVFISK has designed the operational pattern of the fleet with regard to the tenant's needs for the delivery of fresh raw materials at times of the year when opportunities of obtaining sufficient raw materials are limited. The consequences of this in terms of increased operating costs and price changes have been incorporated into future budgets and forecasts on which the model is based. The company considers that the obligations that are connected to the quotas do not affect cash flows in the company in any way other than has been taken into consideration in the calculations referred to. This also confirms the company's view that it is the vessel with its associated set of quotas that is the cash generating unit.

In testing in connection with the annual report for 2015 there were no indications of loss of value. The sensitivity analysis shows that there is still good headroom with a reasonable change in the assumptions.

In testing in connection with the annual report for 2014 there were no indications of loss of value. The sensitivity analysis shows that there is still good headroom with a reasonable change in the assumptions.

At year end the Havfisk group owned 29.6 cod and haddock trawler licenses, 31.9 saithe trawler licences, eight shrimp trawler licences and three greater silver smelt licences in Norway. The licences are owned through the subsidiaries Nordland Havfiske AS, Finnmark Havfiske AS and Hammerfest Industrifiske AS. No acquisition or sale of quotas/rights occurred in 2015. However several internal movements of structural quotas occurred within the companies Finnmark Havfiske AS and Nordland Havfiske AS. This is connected with the sale of vessels between the two companies in order to achieve maximum use of the quota rights within the group.

A licence for cod, haddock and saithe confers the right to trawl for whitefish above the 62nd parallel and in the North Sea for parts of the year. Similarly, a shrimp and greater silver smelt licence confers rights to harvest these species. In 2014 regulations permitted up to three licence units per vessel. On 23 January 2015, a royal resolution was adopted to increase the number of licence units permitted per vessel from three to four. This will however have a limited effect on the valuation for 2015, since only one vessel has more than 3 cod licences. The volume which can be harvested per licence unit is determined by the Ministry of Fisheries on an annual basis. In addition, transfers - known as "reallocations" - may be made during a year between the various categories of vessel if one vessel category fails to harvest its share of the quota. In 2015, one cod quota corresponded to the right to harvest 1,478 tonnes of cod, 458 tonnes of haddock and 327 tonnes of saithe north of the 62nd parallel. This represented a reduction of 11 per cent for cod and an increase of 24 per cent for haddock compared with 2014, and a reduction of 5 per cent for saithe. Quota changes/redistributions for haddock were performed during the year. The shrimp and greater silver smelt licences are not limited in quantity terms.

To improve the profitability of fishing and to reduce the number of vessels in operation, the fishery authorities have introduced schemes which permit the concentration of more quota units in one vessel in exchange for the permanent removal of vessels which surrender their quotas from the fishing register. Every vessel has a cod trawling permit, a so-called basic quota, and in addition the vessels can have so-called structural quotas for cod trawling. A vessel cannot have more than four quotas per fish species in total. The structural quotas have a limited duration that depends on which scheme applied when the quota was structured. Essentially, there are two schemes with 20 and 25 year structure quota duration respectively. The difference lies in structuring before and after 2007. Structures that were given before 2007 have a 25 year duration counted from 2008, while those that were structured after 2007 have a 20 year duration.

The main purpose of the structuring schemes is to reduce the number of vessels that participate in a given fishery, thereby allowing for improved profitability for the remaining vessels, i.e. improving efficiency within a regulated framework. Secondly, the schemes are intended to help adapt fleet capacity to basic resources. On the expiry of the 20 or 25 year period, the structural quotas lapse and the total quotas will be distributed to the participants in the regulation group as basic quotas. The basic quotas are essentially perpetual.

HAVFISK uses a valuation model based on a method for calculating recoverable amount that is in turn based on discounting future cash flows, ref IAS 36.30-32 (value in use). Future cash flows are based on budgets and forecasts for vessels with associated quotas as the smallest identifiable group of assets that generates cash inflows from continuing use, and that is largely independent of the cash inflows of other assets or groups of assets. It is thus the vessel and associated quotas that forms the basis for the valuation unit with regard to recoverable amount.

The model is made up of separate discounted cash flows for every single unit, i.e. the individual vessel that is tested against book value of quotas and vessel. The model is based on the budget for 2016 and forecast for 2017, which also creates the basis for the period 2018-2025. A terminal value is then added that is based on perpetual cash flows, although with a correction for reduced volume after the expiry of the structural quotas, as explained below. The terminal value is based on the basic quotas being the central assets that create the basis for the company's fishing rights. These have a time limit and when the structural quotas expire the company will have approximately the same harvest quantity because the basic quotas will increase, as explained in the principles note. The model is based on a forecast period of 10 years and then a terminal period. Three of the ten vessels that the company has in operation during the forecast period are newly-built vessels delivered in 2013 and 2014. The annual investment requirement will be significantly lower for a new vessel than for a vessel that is more than ten years old. In order to arrive at a terminal period that is equivalent to a normal year, the model is based on a 10 year forecast period. During the forecast period up to the terminal period, the investment on "new" vessels increases considerably more than the annual growth of 2.5%.

In the period after 2016 and in the terminal value, an annual growth of 2.5% has been added in, which corresponds to Norges Bank's inflation target.

Key assumptions in the model:

Quota development

Harvesting efficiency

Operations-related costs

Price development of the products

Discount rate

Development of TAC (Total Allowable Catch) within the different fish species

Catch per operating day per vessel.

Development of operations-related costs – including bunkerage

Development of price in the different fish species

Development of 10-year risk-free interest and long-term interest margin

The quota development entered into the model is based on forecasts from the ICES (International Council for the Exploration of the Seas) and the Institute of Marine Research. In the model it is anticipated that the cod quota for 2016 is at the same level as in 2015. The haddock and saithe quotas north of 62 degrees have however been increased by 9 and 2 per cent respectively compared to 2015. For 2017 onward, a reduction is expected in cod and haddock quotas of 10 per cent in relation to 2016. The saithe quota is at approximately the same level as in 2016.

Another important assumption in the model is harvesting efficiency, i.e. how much the individual vessel catches per operating day. The model is based on historically achieved catch rates, as well as on the change in the fleet structure that takes into account that three new vessels came into operation in 2013-2014.

Roughly speaking, operations-related costs can be divided into two categories: those that are generated based on the value of the harvest and those that are generated based on the number of operating days. Crew costs and common expenses are mainly related to the value of the harvest and are almost exactly correlated with harvesting revenues. Bunker expenses are the biggest item directly related to the number of operating days. In the model, we have used a bunker price for the period 2016-2017 that is approximately 5 per cent lower than the average for 2015 and considerably higher than bunker prices at the end of 2015. This is based on analyses and expectations of future prices in the oil market performed by external parties including DNB. The forecast also assumed a general price increase of 2.5% per year.

Anticipated price trends for the quantity harvested are largely related to the anticipated increase/reduction in quotas for the different fish species. For the most important fish species, which is cod, the forecast is based on the price level increasing slightly from the present level. Cod prices were considerably reduced in 2012 and 2013 and were then at a historically low level as a result the the large quota increase in 2012 combined with times of economic decline in many of the most important customer countries for cod products. The bottom was reached in the first quarter of 2013, after which there has been a positive price trend. There has been a good, regular price development for cod over the whole year, with the highest prices in the fourth quarter. For 2016, prices are based on the same level as was achieved in the last part of 2015. For 2017 onwards, a 5 per cent price increase is assumed on the basis of the 10 per cent reduction in cod quotas. For haddock, we saw a dramatic fall in prices during the course of 2015. The price of frozen haddock fell from a level above NOK 24 per kilo to NOK 15 per kilo. At the start of the fourth quarter, prices stabilised at this level and the market took out great quantities at the new price level. There was a weakly positive price trend for haddock at the end of 2015. The budget for 2016 assumes a price development for haddock based on the level achieved in the second half of 2015, but lower than the level at the end of 2015. For 2017 onward there is a continued increase of 5% in prices from the level in the budget for 2016. Saithe prices are based on a price level in line with that achieved in 2015, but with a slight reduction in the 2017 forecast period.

The discount rate is estimated based on a weighted average of required return on capital and anticipated debt costs, assuming an anticipated equity ratio of 40 %. Debt costs are based on a risk-free rate (10 year government bonds) with an addition that reflects long-term interest rate margins. The discount rates used are 8.34 % before tax and 7.56 % after tax. The discount rate is initially estimated after tax and then converted into pre-tax using the iterative method.

With regard to sensitivity, the most important key assumptions in the model are quota and price trends. Historically, there has been a correlation between quota and price changes for cod of about 0.5. This means that when quotas increase by 10%, prices will fall by 5%. It is therefore unlikely that these two factors will develop in the same direction over time. A further 10 per cent reduction in the cod quota from 2017 would not mean that book value exceeded recoverable amount. The average price for cod that has been used as a basis for the forecasts is lower than that achieved in 2007 and 2008. The risk of a reduction in the price of cod is therefore considered to be extremely limited as long as quotas are reduced. As regards the other key assumptions such as bunkerage, changes within a reasonable area of probability would not lead to the book value of the units exceeding their recoverable amount. A reasonable area of probability is here defined as a 10 per cent increase in bunker costs from the calculated level in 2016 onward.

The effect of structuring in relation to the "cod trawler" group

The average structuring measured in number of quotas per vessel has been increasing in recent years. At the end of 2015, HAVFISK had an average quota factor per vessel that is 0.257 higher than the total for the "cod trawler" group, which is 2.603. The total number of quotas that a vessel in this group is permitted is four. If this situation is unchanged on the expiry of the structural quotas, this means that HAVFISK will have its harvest quantity reduced from 33.7% to 30.6 % of the total quantity for the "cod trawler" group. In the HAVFISK model for testing loss of value, the reduced quantity after the expiry of the structure period has been incorporated into the model and taken into account when calculating present value. This is done for the individual cash generating unit on the basis of the present structure situation for the cash generating unit in question in relation to the average for the "cod trawler" group.

The structural quotas have a limited duration that depends on which scheme applied when the quota was structured, as explained earlier in the note. This leads to an annual redistribution of relative harvest quantity within the group from the time the first structural quotas expire in 2027 until the end of 2032 when the vast majority of the present structural quotas expire. HAVFISK has assessed the effects of this during the interim period 2027 – 2032 in its model for testing for loss of value. In the company's assessment, redistribution within the trawler group as a result of expiry of structural quotas during this period will not have any significant effect on the calculated value in use of any of the cash generating units. The significance of this in future years will also be gradually reduced as the structural quotas in question will have been depreciated when this occurs.

Supply commitments – industry obligation

The licences carry supply commitments to the regions which issued them, i.e. Finnmark and Nordland. This means that buyers in the relevant regions have a pre-emptive right to buy the fish. The beneficiaries of this supply commitment are determined by the terms for each licence unit. It may be a region, but it may also be a specific buyer. The principle for price determination is the average price obtained for the relevant species over the last 14 days, taking into account condition, size and quality. Havfisk is also under a so-called "industry obligation" in Stamsund, Melbu, Hammerfest, Båtsfjord, Honningsvåg and Kjøllefjord. This means that the licences are linked to the operation of plant in each of these places. Havfisk has however leased the facilities in these places and the tenant is responsible for maintaining the operation, ref. the discussion of lease contracts in note 12. If the tenant should cease operations, the licence terms oblige HAVFISK to maintain operations in these places.

The existing supply commitments and industry obligations have been taken into account in the model for testing for loss of value. HAVFISK has designed the operational pattern of the fleet with regard to the tenant's needs for the delivery of fresh raw materials at times of the year when opportunities of obtaining sufficient raw materials are limited. The consequences of this in terms of increased operating costs and price changes have been incorporated into future budgets and forecasts on which the model is based. The company considers that the obligations that are connected to the quotas do not affect cash flows in the company in any way other than has been taken into consideration in the calculations referred to. This also confirms the company's view that it is the vessel with its associated set of quotas that is the cash generating unit.

In testing in connection with the annual report for 2015 there were no indications of loss of value. The sensitivity analysis shows that there is still good headroom with a reasonable change in the assumptions.

In testing in connection with the annual report for 2014 there were no indications of loss of value. The sensitivity analysis shows that there is still good headroom with a reasonable change in the assumptions.

At year end the Havfisk group owned 29.6 cod and haddock trawler licenses, 31.9 saithe trawler licences, eight shrimp trawler licences and three greater silver smelt licences in Norway. The licences are owned through the subsidiaries Nordland Havfiske AS, Finnmark Havfiske AS and Hammerfest Industrifiske AS. No acquisition or sale of quotas/rights occurred in 2015. However several internal movements of structural quotas occurred within the companies Finnmark Havfiske AS and Nordland Havfiske AS. This is connected with the sale of vessels between the two companies in order to achieve maximum use of the quota rights within the group.

A licence for cod, haddock and saithe confers the right to trawl for whitefish above the 62nd parallel and in the North Sea for parts of the year. Similarly, a shrimp and greater silver smelt licence confers rights to harvest these species. In 2014 regulations permitted up to three licence units per vessel. On 23 January 2015, a royal resolution was adopted to increase the number of licence units permitted per vessel from three to four. This will however have a limited effect on the valuation for 2015, since only one vessel has more than 3 cod licences. The volume which can be harvested per licence unit is determined by the Ministry of Fisheries on an annual basis. In addition, transfers - known as "reallocations" - may be made during a year between the various categories of vessel if one vessel category fails to harvest its share of the quota. In 2015, one cod quota corresponded to the right to harvest 1,478 tonnes of cod, 458 tonnes of haddock and 327 tonnes of saithe north of the 62nd parallel. This represented a reduction of 11 per cent for cod and an increase of 24 per cent for haddock compared with 2014, and a reduction of 5 per cent for saithe. Quota changes/redistributions for haddock were performed during the year. The shrimp and greater silver smelt licences are not limited in quantity terms.

To improve the profitability of fishing and to reduce the number of vessels in operation, the fishery authorities have introduced schemes which permit the concentration of more quota units in one vessel in exchange for the permanent removal of vessels which surrender their quotas from the fishing register. Every vessel has a cod trawling permit, a so-called basic quota, and in addition the vessels can have so-called structural quotas for cod trawling. A vessel cannot have more than four quotas per fish species in total. The structural quotas have a limited duration that depends on which scheme applied when the quota was structured. Essentially, there are two schemes with 20 and 25 year structure quota duration respectively. The difference lies in structuring before and after 2007. Structures that were given before 2007 have a 25 year duration counted from 2008, while those that were structured after 2007 have a 20 year duration.

The main purpose of the structuring schemes is to reduce the number of vessels that participate in a given fishery, thereby allowing for improved profitability for the remaining vessels, i.e. improving efficiency within a regulated framework. Secondly, the schemes are intended to help adapt fleet capacity to basic resources. On the expiry of the 20 or 25 year period, the structural quotas lapse and the total quotas will be distributed to the participants in the regulation group as basic quotas. The basic quotas are essentially perpetual.

HAVFISK uses a valuation model based on a method for calculating recoverable amount that is in turn based on discounting future cash flows, ref IAS 36.30-32 (value in use). Future cash flows are based on budgets and forecasts for vessels with associated quotas as the smallest identifiable group of assets that generates cash inflows from continuing use, and that is largely independent of the cash inflows of other assets or groups of assets. It is thus the vessel and associated quotas that forms the basis for the valuation unit with regard to recoverable amount.

The model is made up of separate discounted cash flows for every single unit, i.e. the individual vessel that is tested against book value of quotas and vessel. The model is based on the budget for 2016 and forecast for 2017, which also creates the basis for the period 2018-2025. A terminal value is then added that is based on perpetual cash flows, although with a correction for reduced volume after the expiry of the structural quotas, as explained below. The terminal value is based on the basic quotas being the central assets that create the basis for the company's fishing rights. These have a time limit and when the structural quotas expire the company will have approximately the same harvest quantity because the basic quotas will increase, as explained in the principles note. The model is based on a forecast period of 10 years and then a terminal period. Three of the ten vessels that the company has in operation during the forecast period are newly-built vessels delivered in 2013 and 2014. The annual investment requirement will be significantly lower for a new vessel than for a vessel that is more than ten years old. In order to arrive at a terminal period that is equivalent to a normal year, the model is based on a 10 year forecast period. During the forecast period up to the terminal period, the investment on "new" vessels increases considerably more than the annual growth of 2.5%.

In the period after 2016 and in the terminal value, an annual growth of 2.5% has been added in, which corresponds to Norges Bank's inflation target.

Key assumptions in the model:

Quota development

Harvesting efficiency

Operations-related costs

Price development of the products

Discount rate

Development of TAC (Total Allowable Catch) within the different fish species

Catch per operating day per vessel.

Development of operations-related costs – including bunkerage

Development of price in the different fish species

Development of 10-year risk-free interest and long-term interest margin

The quota development entered into the model is based on forecasts from the ICES (International Council for the Exploration of the Seas) and the Institute of Marine Research. In the model it is anticipated that the cod quota for 2016 is at the same level as in 2015. The haddock and saithe quotas north of 62 degrees have however been increased by 9 and 2 per cent respectively compared to 2015. For 2017 onward, a reduction is expected in cod and haddock quotas of 10 per cent in relation to 2016. The saithe quota is at approximately the same level as in 2016.

Another important assumption in the model is harvesting efficiency, i.e. how much the individual vessel catches per operating day. The model is based on historically achieved catch rates, as well as on the change in the fleet structure that takes into account that three new vessels came into operation in 2013-2014.

Roughly speaking, operations-related costs can be divided into two categories: those that are generated based on the value of the harvest and those that are generated based on the number of operating days. Crew costs and common expenses are mainly related to the value of the harvest and are almost exactly correlated with harvesting revenues. Bunker expenses are the biggest item directly related to the number of operating days. In the model, we have used a bunker price for the period 2016-2017 that is approximately 5 per cent lower than the average for 2015 and considerably higher than bunker prices at the end of 2015. This is based on analyses and expectations of future prices in the oil market performed by external parties including DNB. The forecast also assumed a general price increase of 2.5% per year.

Anticipated price trends for the quantity harvested are largely related to the anticipated increase/reduction in quotas for the different fish species. For the most important fish species, which is cod, the forecast is based on the price level increasing slightly from the present level. Cod prices were considerably reduced in 2012 and 2013 and were then at a historically low level as a result the the large quota increase in 2012 combined with times of economic decline in many of the most important customer countries for cod products. The bottom was reached in the first quarter of 2013, after which there has been a positive price trend. There has been a good, regular price development for cod over the whole year, with the highest prices in the fourth quarter. For 2016, prices are based on the same level as was achieved in the last part of 2015. For 2017 onwards, a 5 per cent price increase is assumed on the basis of the 10 per cent reduction in cod quotas. For haddock, we saw a dramatic fall in prices during the course of 2015. The price of frozen haddock fell from a level above NOK 24 per kilo to NOK 15 per kilo. At the start of the fourth quarter, prices stabilised at this level and the market took out great quantities at the new price level. There was a weakly positive price trend for haddock at the end of 2015. The budget for 2016 assumes a price development for haddock based on the level achieved in the second half of 2015, but lower than the level at the end of 2015. For 2017 onward there is a continued increase of 5% in prices from the level in the budget for 2016. Saithe prices are based on a price level in line with that achieved in 2015, but with a slight reduction in the 2017 forecast period.

The discount rate is estimated based on a weighted average of required return on capital and anticipated debt costs, assuming an anticipated equity ratio of 40 %. Debt costs are based on a risk-free rate (10 year government bonds) with an addition that reflects long-term interest rate margins. The discount rates used are 8.34 % before tax and 7.56 % after tax. The discount rate is initially estimated after tax and then converted into pre-tax using the iterative method.

With regard to sensitivity, the most important key assumptions in the model are quota and price trends. Historically, there has been a correlation between quota and price changes for cod of about 0.5. This means that when quotas increase by 10%, prices will fall by 5%. It is therefore unlikely that these two factors will develop in the same direction over time. A further 10 per cent reduction in the cod quota from 2017 would not mean that book value exceeded recoverable amount. The average price for cod that has been used as a basis for the forecasts is lower than that achieved in 2007 and 2008. The risk of a reduction in the price of cod is therefore considered to be extremely limited as long as quotas are reduced. As regards the other key assumptions such as bunkerage, changes within a reasonable area of probability would not lead to the book value of the units exceeding their recoverable amount. A reasonable area of probability is here defined as a 10 per cent increase in bunker costs from the calculated level in 2016 onward.

The effect of structuring in relation to the "cod trawler" group

The average structuring measured in number of quotas per vessel has been increasing in recent years. At the end of 2015, HAVFISK had an average quota factor per vessel that is 0.257 higher than the total for the "cod trawler" group, which is 2.603. The total number of quotas that a vessel in this group is permitted is four. If this situation is unchanged on the expiry of the structural quotas, this means that HAVFISK will have its harvest quantity reduced from 33.7% to 30.6 % of the total quantity for the "cod trawler" group. In the HAVFISK model for testing loss of value, the reduced quantity after the expiry of the structure period has been incorporated into the model and taken into account when calculating present value. This is done for the individual cash generating unit on the basis of the present structure situation for the cash generating unit in question in relation to the average for the "cod trawler" group.

The structural quotas have a limited duration that depends on which scheme applied when the quota was structured, as explained earlier in the note. This leads to an annual redistribution of relative harvest quantity within the group from the time the first structural quotas expire in 2027 until the end of 2032 when the vast majority of the present structural quotas expire. HAVFISK has assessed the effects of this during the interim period 2027 – 2032 in its model for testing for loss of value. In the company's assessment, redistribution within the trawler group as a result of expiry of structural quotas during this period will not have any significant effect on the calculated value in use of any of the cash generating units. The significance of this in future years will also be gradually reduced as the structural quotas in question will have been depreciated when this occurs.

Supply commitments – industry obligation

The licences carry supply commitments to the regions which issued them, i.e. Finnmark and Nordland. This means that buyers in the relevant regions have a pre-emptive right to buy the fish. The beneficiaries of this supply commitment are determined by the terms for each licence unit. It may be a region, but it may also be a specific buyer. The principle for price determination is the average price obtained for the relevant species over the last 14 days, taking into account condition, size and quality. Havfisk is also under a so-called "industry obligation" in Stamsund, Melbu, Hammerfest, Båtsfjord, Honningsvåg and Kjøllefjord. This means that the licences are linked to the operation of plant in each of these places. Havfisk has however leased the facilities in these places and the tenant is responsible for maintaining the operation, ref. the discussion of lease contracts in note 12. If the tenant should cease operations, the licence terms oblige HAVFISK to maintain operations in these places.

The existing supply commitments and industry obligations have been taken into account in the model for testing for loss of value. HAVFISK has designed the operational pattern of the fleet with regard to the tenant's needs for the delivery of fresh raw materials at times of the year when opportunities of obtaining sufficient raw materials are limited. The consequences of this in terms of increased operating costs and price changes have been incorporated into future budgets and forecasts on which the model is based. The company considers that the obligations that are connected to the quotas do not affect cash flows in the company in any way other than has been taken into consideration in the calculations referred to. This also confirms the company's view that it is the vessel with its associated set of quotas that is the cash generating unit.

In testing in connection with the annual report for 2015 there were no indications of loss of value. The sensitivity analysis shows that there is still good headroom with a reasonable change in the assumptions.