Valuation Method and Risk Statement

Research evidence excerpt

Valuation Method and Risk Statement

FPSOs (floating production, storage, and offloading) units have become larger in recent years.

One unit can cost more than $3bn. Construction requires two to three years, and revenue is

recognised using the percentage-of-completion method. As a result, earnings can be volatile.

Also, as progress is made on construction, the level of deferred profits can

change.Construction profits may worsen more than expected as a result of unexpected cost

increases during construction periods and because of costs stemming from project delays.

If oil prices change as a result of political or economic trends, or if they stay weak, investment

trends at oil development companies can be affected. The company has minimised risks of

disruption in lease, charter, and operations services owing to natural disasters or political

developments by clarifying liabilities with oil development companies, and it has avoided

losses with insurance. However, if projects are disrupted by unforeseen developments,

financial results could be impacted.

If a financial crisis develops, development projects could be delayed or decline in number.

Nearly 100% of overseas sales and purchases related to construction work are denominated

in foreign currencies. Most transactions and the bulk of net interest income are also

denominated in foreign currencies, mainly the US dollar. Changes in exchange rates on the

day books are closed can affect consolidated results because high proportions of foreign

currency-denominated assets, liabilities, income, and expenses are translated into yen.

Interest rates affect lease and charter service revenue. The company uses interest rate swaps

to hedge its interest rate risk from the time it receives an order until a lease begins. It similarly