Fair value measures for non-financial assets
The non-financial assets and liabilities measured at fair value in the statement of financial position are grouped into three levels of fair value hierarchy. The three levels are defined based on the observability of relevant data for the measuring, as follows:
| · | Level 1: quoted prices (without adjustment) in active markets for identical assets and liabilities; |
| · | Level 2: data other than the quoted prices included in Level 1 that are observable for the asset and liability, either directly or indirectly; |
| · | Level 3: non-observable data for the asset or liability. |
At December 31, 2017 and 2016 non-financial assets measured at fair value are classified in Level 3 of this hierarchy, as described below:
| | | 2017 | | | 2016 | |
Level 3 | | | | | | |
Vessels | | $ | 1,118,250 | | | $ | 8,028,276 | |
Buildings and facilities | | | 242,204 | | | | 253,396 | |
Land | | | 1,184,427 | | | | 1,060,661 | |
| | | $ | 2,544,881 | | | $ | 9,342,333 | |
As of December 31, 2016, the fair value of the principal vessels and properties of Grupo TMM was estimated based on appraisals prepared by independent naval engineers specializing in sea vessels and artifacts, and also independent, qualified real estate appraisers, likewise some vessels were determined using the revenue technique (expected future cash flows). As of December 31, 2017, the revalued amounts for all the vessels were determined using the revenue technique.
The important information and assumptions are prepared in close collaboration with Management. The valuation processes and changes in the fair value are reviewed by the Administration and Finance Department on the financial reporting date. Additional information on fair value measurement is as follows.
Vessels (Level 3)
For the year ended December 31, 2017, the fair values for the offshore vessels, tugboats, and parcel tankers are estimated based on revenue that capitalizes the estimated revenue cash flows from the leasing of vessels net of operating costs projected, using an appropriate discount rate that reflects the required performance for similar assets. Cash flows are calculated based on the average of international charter rates and operating costs (including maintenance), and also the historical utilization level. The value of vessels is sensitive to changes in these variables.
The most significant information, which is not observable, is the value of the estimated daily rates, the assumptions for the percentage of utilization and the discount rate. The fair value increases if the estimated daily rates and the percentage of utilization increase or if the discount rate (market yields) decreases. The appraisals in general are sensitive to these three assumptions.
Management believes that the range of reasonably possible alternatives is greater for the value of the rates and the percentage of use, and also that there is a correlation between these factors.
The information used for the measurement of fair value at December 31, 2017 was:
| | | Tugboats | | | Offshore vessels | | | Parcel Tankers | |
Daily rate or fee | | 22,042 usd | | | 9,016 usd | | | 11,919 usd | |
Average percentage of utilization | | | 94 | % | | | 83 | % | | | 94 | % |
Discount rate | | | 7.18 | % | | | 7.18 | % | | | 7.18 | % |
Offshore vessels and tugboats
For the year ended December 31, 2016, the fair values for the offshore vessels and tugboats were estimated using a market focus that reflects the recent market prices observed for comparable vessels and incorporates adjustments for factors specific to the vessel in question, principally including those related to dimensions, capacity, propulsion power, and vessel age. The adjustments incorporated depend on the characteristics of each vessel.
The most significant information used, which is not observable, is the adjustment for factors specific to the vessels. The magnitude and direction of this adjustment factor depends on the characteristics of observable market transactions for similar vessels used as the end point for the appraisal. Although this information is subjective, Management considers that the global appraisal will not be materially affected by reasonably possible alternatives.
Buildings, facilities and land (Level 3)
The valuation was prepared based on a market focus that reflects the prices observed on recent market transactions involving similar properties and incorporates adjustments for factors specific to the property in question, including land size, location, attachments, and current use.
The most significant information used, which is not observable, is the adjustment for factors specific to the properties in question. The magnitude and direction of this adjustment depends on the characteristics of observable market transactions for similar properties used as the end point for the valuation. Although this information is subjective, Management considers that the global valuation will not be materially affected by reasonably possible alternatives.
At December 31, 2017 and 2016, the reconciliation between the carrying amounts of non-financial assets classified within Level 3 is as follows:
| | | Vessels | | | Buildings and facilities | |
Balance at January 1, 2017 | | $ | 8,028,276 | | | $ | 1,314,057 | |
Amount recognized in other comprehensive income: | | | | | | | | |
Revaluation surplus of vessels | | | 941,957 | | | | - | |
Amount recognized in statements of operations: | | | | | | | | |
Loss on revaluation of vessels | | | (56,213 | ) | | | - | |
| | | | 885,744 | | | | - | |
Additions and disposals, net | | | (7,795,770 | ) | | | 137,574 | |
Balance at December 31, 2017 | | $ | 1,118,250 | | | $ | 1,451,631 | |
Balance at January 1, 2016 | | $ | 8,131,363 | | | $ | 1,067,557 | |
Amount recognized in other comprehensive income: | | | | | | | | |
Revaluation surplus of vessels | | | 207,669 | | | | 216,965 | |
Amount recognized in statements of operations: | | | | | | | | |
Loss on revaluation of vessels | | | (23,304 | ) | | | - | |
| | | | 184,365 | | | | 216,965 | |
Additions and disposals, net | | | (287,452 | ) | | | 29,535 | |
Balance at December 31, 2016 | | $ | 8,028,276 | | | $ | 1,314,057 | |
At December 31, 2017 and 2016, there were no effects from unrealized gains from fair value measurements.
Financial instruments measured at amortized cost disclosing fair value
See Note 17.
