Variable Interest Entities (VIEs)

12 Months Ended

Dec. 31, 2012

Variable Interest Entities (VIEs) [Abstract]

Note 33 – Variable Interest Entities (VIEs)

As of December 31, 2012, the Company leased a drillship and two semi-submersible rigs from VIEs under finance leases. Each of the units had been sold by the Company to single purpose subsidiaries of Ship Finance Ltd and simultaneously leased back by the Company on bareboat charter contracts for a term of 15 years. The Company has several options to repurchase the units during the charter periods, and obligations to purchase the assets at the end of the 15 year lease period. The following table gives a summary of the sale and leaseback arrangements, as of December 31, 2012:

Unit

Effective

from

Sale value

(In US$ millions)

First

repurchase

option

(In US$ millions)

Month of first

repurchase

option

Last

repurchase

option *

(In US$ millions)

Month of last

repurchase

Option *

West Polaris

Jul 2008

850

548

September 2012

178

Jun 2023

West Taurus

Nov 2008

850

418

February 2015

149

Nov 2023

West Hercules

Oct 2008

850

580

August 2011

135

Aug 2023

* For the unit West Polaris, Ship Finance has a put option exercisable at the end of the lease terms by which the vessel may be sold to Seadrill for a fixed price of $75 million. For West Taurus and West Hercules repurchase obligations at the end of the lease terms have been agreed, at $149 million and $135 million, respectively.

The Company has determined that the Ship Finance subsidiaries, which own the units, are variable interest entities (VIEs), and that the Company is the primary beneficiary of the risks and rewards connected with the ownership of the units and the charter contracts. Accordingly, these VIEs are fully consolidated in the Company's consolidated accounts. The Company did not record any gains from the sale of the units, as they continued to be reported as assets at their original cost in the Company's balance sheet at the time of each transaction. The equity attributable to Ship Finance in the VIEs is included in non-controlling interests in the Company's consolidated accounts. At December 31, 2012 the units are reported under drilling units in the Company's balance sheet.

The bareboat charter rates are set on the basis of a Base LIBOR Interest Rate for each bareboat charter contract, and thereafter are adjusted for differences between the LIBOR fixing each month and the Base LIBOR Interest Rate for each contract. A summary of the bareboat charter rates per day for each unit is given below. The amounts shown are based on the Base LIBOR Interest Rate, and reflect average rates for the year.

				2013		2014		2015		2016		2017
	Base LIBOR Interest Rate			(In US$ thousands)		(In US$ thousands)		(In US$ thousands)		(In US$ thousands)		(In US$ thousands)
West Polaris		2.85	%		223.3		176.5		175.4		170.0		170.0
West Taurus		4.25	%		316.2*		320.7		165.0		158.8		157.5
West Hercules		4.25	%		250.0		238.5		180.0		172.5		170.0

* For a period the interest rates West Taurus have been fixed at 2.17% regardless of movements in LIBOR interest rates. The fixed charter rate is reflected in the above table.

The assets and liabilities in the statutory accounts of the VIEs as at December 31, 2012 and as at December 31, 2011 are as follows:

(In US$ millions)	December 31, 2012				December 31, 2011
	SFL		SFL		SFL		SFL
	West		Deepwater		West		Deepwater
	Polaris		Ltd.		Polaris		Ltd.
	Limited				Limited
Name of unit	West		West		West		West
	Polaris		Taurus		Polaris		Taurus
			and West				and West
			Hercules				Hercules

Investment in finance lease		534		1,120		611		1,240
Other assets		7		20		12		23
Total assets		541		1,140		623		1,263

Long term debt		360		-		398		822
Other liabilities		107		989		174		326
Total liabilities		467		989		572		1,148

Equity		74		151		51		115

Book value of units in the Company's consolidated accounts		594		1,035		614		1,021

- Definition

The entire disclosure of the significant judgments and assumptions made in determining whether a variable interest (as defined) held by the entity requires the variable interest entity (VIE) (as defined) to be consolidated and (or) disclose information about its involvement with the VIE, individually or in aggregate (as applicable); the nature of restrictions, if any, on the consolidated VIE's assets and on the settlement of its liabilities reported by an entity in its statement of financial position, including the carrying amounts of such assets and liabilities; the nature of, and changes in, the risks associated with involvement in the VIE; how involvement with the VIE affects the entity's financial position, financial performance, and cash flows; the lack of recourse if creditors (or beneficial interest holders) of the consolidated VIE have no recourse to the general credit of the primary beneficiary (if applicable); the terms of arrangements, giving consideration to both explicit arrangements and implicit variable interests, if any, that could require the entity to provide financial support to the VIE, including events or circumstances that could expose the entity to a loss; the methodology used by the entity for determining whether or not it is the primary beneficiary of the variable interest entity; the significant factors considered and judgments made in determining that the power to direct the activities of a VIE that most significantly impact the VIE's economic performance are shared (as defined); the carrying amounts and classification of assets and liabilities of the VIE included in the statement of financial position; the entity's maximum exposure to loss, if any, as a result of its involvement with the VIE, including how the maximum exposure is determined and significant sources of the entity's exposure to the VIE; a comparison of the carrying amounts of the assets and liabilities and the entity's maximum exposure to loss; information about any liquidity arrangements, guarantees, and (or) other commitments by third parties that may affect the fair value or risk of the entity's variable interest in the VIE; whether or not the entity has provided financial support or other support (explicitly or implicitly) to the VIE that it was not previously contractually required to provide or whether the entity intends to provide that support, including the type and amount of the support and the primary reasons for providing the support; and supplemental information the entity determines necessary to provide.

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