Basis of financial statement presentation

In this report Orient-Express Hotels Ltd. is referred to as the “Company”, and the Company and its subsidiaries are referred to collectively as “OEH”.

“FASB” means Financial Accounting Standards Board. “ASC” means the Accounting Standards Codification of the FASB and “ASU” means an Accounting Standards Update of the FASB.

(a) Accounting policies

The accompanying condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the U.S. Securities and Exchange Commission for reporting on Form 10-Q. Accordingly, they do not include all of the information and footnotes required by U.S. generally accepted accounting principles (“U.S. GAAP”) for complete financial statements. In the opinion of the management of the Company, all adjustments (consisting of normal recurring adjustments) necessary for a fair presentation of financial position, operating results and cash flows have been included in these condensed consolidated financial statements.

Interim results are not necessarily indicative of results that may be expected for the year ending December 31, 2012.

These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and footnotes thereto included in the Company’s periodic filings, including the Company’s Annual Report on Form 10-K for the year ended December 31, 2011. See Note 1 to the consolidated financial statements in the 2011 Form 10-K for additional information regarding significant accounting policies.

For interim income tax reporting purposes, the Company generally determines its best estimate of an annual effective tax rate and applies that rate on a year-to-date basis applicable to its ordinary income. The Company’s estimated annual effective tax rate excludes significant, unusual or infrequently occurring items, jurisdictions for which a reliable estimate cannot be made or where the estimated benefit of losses cannot be recognized, and certain other items excluded pursuant to the U.S. GAAP authoritative guidance. The income tax expense (or benefit) related to all other items is individually computed and recognized when the items occur.

The accounting policies used in preparing these condensed consolidated financial statements are the same as those applied in the prior year, except for escrow and prepaid customer deposits described below and changes made to ASC-codified items as described below.

Escrow and prepaid customer deposits

During 2012, management determined that amounts previously reported within investing activities related to escrow and prepaid customer deposits should be presented in cash flows from operating activities based on the nature of these cash deposits in relation to Company’s business operations. As a result, the statement of condensed consolidated cash flows for the nine months ended September 30, 2011 has been adjusted to reflect the impact of this change in presentation which resulted in a decrease to cash provided by operating activities and an increase to net cash provided by investing activities of $538,000. The reclassification of escrow and prepaid deposits from cash flows provided by investing activities to cash flows provided by operating activities from continuing operations has no impact on changes in cash or cash equivalents on the condensed consolidated balance sheets or on the statements of condensed consolidated operations, comprehensive income or total equity for the periods presented.

Recently adopted accounting pronouncements

In September 2011, the FASB issued new guidance related to annual goodwill impairment assessments that gives companies the option to perform a qualitative assessment before calculating the fair value of the reporting unit. Under this guidance, if this option is selected, a company is not required to calculate the fair value of a reporting unit unless the entity determines that it is more likely than not that its fair value is less than its carrying amount. This guidance became effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. The Company does not expect the adoption of this guidance to have a material impact on its consolidated financial statements.

In June 2011, the FASB issued guidance concerning the presentation of comprehensive income in the financial statements. Under the amendments to the existing guidance, an entity has the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. Under either option, an entity is required to present each component of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income, and a total amount for comprehensive income. The amendments eliminate the option to present the components of other comprehensive income as part of the statement of changes in total equity. The amendments in this update do not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income. This guidance is effective for fiscal years and interim periods beginning after December 15, 2011 and requires retrospective application. The FASB subsequently deferred the effective date of certain provisions of this standard pertaining to the reclassification of items out of accumulated other comprehensive income, pending the issuance of further guidance on that matter. The Company adopted this guidance as of January 1, 2012, and has presented total comprehensive income in separate statements of condensed consolidated comprehensive income. There was no other impact on the Company's condensed consolidated financial statements as of and for the three and nine months ended September 30, 2012.

In May 2011, the FASB issued guidance on fair value measurement and disclosure requirements. The amendments in this update result in a convergence in the fair value measurement and disclosure requirements under U.S. GAAP with those required under International Financial Reporting Standards (“IFRS”). Consequently, the amendments change the wording used to describe many of the requirements in U.S. GAAP for measuring fair value and for disclosing information about fair value measurements. Additional disclosure requirements in the update include: (1) for Level 3 fair value measurements, quantitative information about unobservable inputs used, a description of the valuation processes used by the entity, and a qualitative discussion about the sensitivity of the measurements to changes in the unobservable inputs; (2) for an entity’s use of a nonfinancial asset that is different from the asset’s highest and best use, the reason for the difference; (3) for financial instruments not measured at fair value but for which disclosure of fair value is required, the fair value hierarchy level in which the fair value measurements were determined; and (4) the disclosure of all transfers between Level 1 and Level 2 of the fair value hierarchy. On January 1, 2012 the Company adopted this guidance, the impact of which did not materially affect the Company’s condensed consolidated financial statements as of and for the three and nine months ended September 30, 2012.

Accounting pronouncements to be adopted

In December 2011, the FASB issued accounting guidance that requires companies to provide new disclosures about offsetting assets and liabilities and related arrangements for financial instruments and derivatives. The provisions of this guidance are effective for annual reporting periods beginning on or after January 1, 2013, and are required to be applied retrospectively. The Company is currently evaluating the impact that adoption of this guidance will have on its consolidated financial statements.

(b) Net earnings/(losses) per share

The weighted average number of shares used in computing basic and diluted earnings/(losses) per share was as follows:



	Three months ended		Nine months ended
	September 30, 2012	September 30, 2011	September 30, 2012	September 30, 2011
	‘000	‘000	‘000	‘000
Basic	102,893	102,604	102,833	102,502
Effect of dilution	2,784	—	2,327	—

Diluted	105,677	102,604	105,160	102,502

For the three and nine months ended September 30, 2012, the share options below were excluded from the calculation of the diluted weighted average number of shares because the exercise prices were greater than the average market prices for the applicable periods. For the three and nine months ended September 30, 2011, all share options and share-based awards were excluded from the calculation of the diluted weighted average number of shares because OEH incurred a net loss in these periods and the effect of their inclusion would be anti-dilutive.

The total number of share options and share-based awards excluded from computing diluted earnings per share were as follows:



	Three months ended		Nine months ended
	September 30, 2012	September 30, 2011	September 30, 2012	September 30, 2011
Share options	1,241,150	2,542,300	1,241,150	2,542,300
Share-based awards	—	686,485	—	686,485

	1,241,150	3,228,785	1,241,150	3,228,785

The number of share options and share-based awards unexercised at September 30, 2012 was 4,025,349 (September 30, 2011 - 3,228,785).