SecProbe.io

CORRESP
1
filename1.htm

    d839018_corresp.htm

    December
      14, 2007

    Mr.
      Michael Fay

    Division
      of Corporation Finance

    Securities
      and Exchange Commission

    Washington
      D.C. 20549

              Re:

              Ship
                Finance International Limited

              File
                No. 001-32199

              Form
                20-F: For the year ended December 31, 2006

    Dear
      Mr. Fay:

    By
      letter dated October 30, 2007, the Staff of the Securities and Exchange
      Commission (the “Staff”) presented further comments to the Annual Report on Form
      20-F (the “Form 20-F”) filed by Ship Finance International Limited (“SFIL” or
      the “Company”) with respect to the year ended December 31, 2006.  On
      behalf of the Company, we hereby submit the Company’s response to your
      letter.  For your convenience, the numbered paragraphs of this
      response letter correspond to the numbered paragraphs of your letter, which
      we
      have inserted in bold.

    Item
      5. Operating and Financial Review and prospects -
      Overview

    Revenues

              1.

              We
                have reviewed your response to our prior comment number 1. We note
                that
                you account for the provision of management services under your time
                charter agreements with Frontline Charterers as a separate unit of
                accounting for purposes of revenue recognition. However, we are unclear
                why you believe that the portion of time charter revenue that has
                been
                allocated as management service revenue should be recognized gross,
                rather
                than net of management service fees paid to Frontline Management
                (Bermuda)
                Ltd. (“Frontline Management”). In this regard, we note that i) you do not
                provide the actual management services to the Frontline Charterers,
                and
                ii) the daily amount of revenue that is recognized for the management
                services equals the amount of the service fees paid to Frontline
                Management, and (iii) both Frontline Charterers and Frontline Management
                appear to be subsidiaries of Frontline Ltd.  Based upon the
                aforementioned factors, it appears that, in substance, your company
                is
                merely a pass-through entity for the cash payment between Frontline
                Charterers and Frontline Management, and that you have not provided
                or
                contributed to the performance of the management services received
                by
                Frontline Charterers.

              As
                such, it appears you should revise your statement
                of operations to recognize management service revenues net of the
                associated expenses paid to Frontline Management. Alternatively please
                tell us why you believe that it is appropriate to recognize management
                service revenues on a gross basis as well as the business purpose
                of the
                structure of the transactions between your company and the two Frontline
                entities.

          Mr.
            Michael Fay

          Securities
            and Exchange Commission

          Page
            2

    The
      Company respectfully disagrees with the Staff’s characterization of the time
      charter agreements with Frontline Charterers and the management agreements
      with
      Frontline Management as mere pass-through arrangements. After taking into
      consideration the Staff’s observations, which we discuss in more detail below,
      the Company remains of the opinion that its gross presentation of management
      service revenues provides the most correct and meaningful financial information.
      The fact that the Company has subcontracted the provision of some of these
      services does not alter the underlying business purpose of the contracts, and
      thus should not impact the accounting treatment of the resulting
      cash-flows.

    Specifically,
      with reference to the Staff’s comments:

    (i)     Provision
      of
      management services.

    In
      the case of vessels chartered to Frontline Charterers, the Company remains
      directly responsible for all aspects of the operation and maintenance of its
      vessels, including crewing and supplying the vessels. The Company has these
      responsibilities to all of its time charterers, including the Frontline
      Charterers, whether or not any of the ship managers employed by the Company,
      including Frontline Management, adequately perform under the management
      agreements.  This is a standard industry allocation of
      responsibilities when vessels are time chartered or voyage chartered by their
      owners to third parties.

    It
      is also common industry practice for the vessel owner to outsource vessel
      management services to third parties. Subcontracting management services to
      third parties, however, does not change the legal allocation of
      responsibilities.  The owner remains liable for the technical
      operation of the vessel.  So long as the ultimate contractual
      responsibility for the provision of services remains with the Company, we do
      not
      believe that the use of a sub-contactor should, per se, affect the accounting
      treatment of the original business transaction.

    (ii)     Service
      revenue is equal to cost of the management fee to Frontline
      Management.

    In
      determining the amount of charter hire income to allocate to lease service
      revenue, we considered both

    the
      related party nature of the transaction and the fair value of the services
      provided. The fact that the Company and Frontline Ltd. (“Frontline”) were, at
      the time, under common control raised the question whether we should recognize
      a
      profit in respect of the provision of the ship management services. In addition,
      as described in Response No. 2 below, we concluded, and continue to be of the
      opinion, that the amount of $6,500 was the best estimate of the fair value
      of
      the services in question at the inception of the leases.

    (iii)     Both
      Frontline Shipping and Frontline Management are subsidiaries of Frontline
      Ltd.

    In
      determining how to treat the revenues received from Frontline Charterers and
      the
      management fees paid to Frontline Management, the Company considered the fact
      that both of these entities are wholly-owned subsidiaries of
      Frontline.  However, the Company believes that it correctly accounted
      for these amounts because its contractual relationships with the two companies
      are clearly separate.

    We
      also note the following points that we believe support our conclusion with
      respect to the accounting treatment of the service revenues and management
      fees:

    Frontline
      Management is a separate legal entity from the Frontline Charterers, and the
      charters are separate agreements from the management agreements.  The
      Company is contractually obligated to pay management fees to Frontline
      Management whether or not it receives charter hire from Frontline Charterers
      or
      one of its other time charterers, without any right of setoff.

          Mr.
            Michael Fay

          Securities
            and Exchange Commission

          Page
            3

    The
      distinct nature of the contracts is also illustrated by the fact that the
      charters with Frontline Charterers are noncancelable, while the Company is
      able
      to cancel the management agreements with Frontline Management on 90 days
      notice.  In such circumstances, the Company could either provide
      management services itself or outsource to a third party. Neither Frontline
      Management nor the Frontline Charterers can prevent the Company from cancelling
      the management agreements within their terms.  Similarly, if Frontline
      Management fails to perform, the Company cannot cancel the charters or otherwise
      assert claims against Frontline Charterers.

    In
      summary, the Company does not believe that the costs of  providing
      management services in connection with the time charters should be netted
      against the lease service revenue received under the charter
      agreements.  The Company believes that the gross presentation adopted
      provides the most appropriate and meaningful representation of the Company’s
      business transactions.

    2.  We
      note that you account for $6,500 of your daily time charter revenue as service
      revenues. You state that the amount allocated as service revenues is based
      upon
      the amount charged to you by Frontline Management, since Frontline Ltd. (parent
      of Frontline Management) and your company are under common control. As noted
      in
      your response, the recognition of service revenues based upon the amount charged
      to you is not consistent with paragraph 12 of EITF 00-21, which states that
      arrangement consideration should be allocated to the separate units of
      accounting in an arrangement based upon their relative fair values, if there
      is
      objective and reliable evidence of the fair value for all units of accounting
      in
      the arrangement. Given that in the shipping industry (i) vessels are chartered
      under both bareboat and time charters and ii) there are entities that
      specifically provide management services it appears there may be objective
      and
      reliable evidence of the fair values of the individual deliverables provided
      under your time charter contracts with Frontline. In this regard please tell
      us
      the amount of revenue that you would expect to allocate as service revenues
      using the relative fair value method. As a part of your response, please tell
      us
      the fair values ascribed to each of the units of accounting, any key assumptions
      used in determining the fair values, and the basis of any material
      assumption.

    We
      refer to our previous response in which we stated that the management service
      revenue was recognized based upon the management fee paid to Frontline
      Management. To expand, we advise that the rate of $6,500 per day was set by
      reference to actual historical costs of the relevant service to Frontline (as
      can be verified by reference to previous Form 20-F documents) with an adjustment
      to take account of future cost increases. The Company believed that such actual
      costs were the best indicator of the fair value of the service revenue. We
      attach appendix A in which this amount was compared to available industry data
      in order to satisfy all parties involved that the contracted amount reasonably
      approximated to fair value. Appendices B and C are extracts from a widely
      circulated independent report on operating costs upon which the calculations
      were based.

    Based
      on data available at the time and the attached analysis we believe that the
      contracted amount of $6,500 is the correct amount to allocate to service
      revenue, in respect of these services as it was calculated with reference to
      contemporaneous market costs.

    We
      have considered re-evaluating the allocation of the charter hire payments to
      the
      constituent deliverables and we determined that in these particular
      circumstances the amount of $6,500 per day remains valid as the best estimate
      of
      the fair value of the services in question. This is supported by the fact that
      should the Frontline charterers exercise their option under the charters to
      convert any of the charters to bareboat charters, the agreed reduction in the
      charter hire payable is $6,500 per day.

          Mr.
            Michael Fay

          Securities
            and Exchange Commission

          Page
            4

    Although
      current data indicates typical operating expenses for similar vessels is higher
      than $6,500 (see appendices D and E) the risk of cost escalations in excess
      of
      contractual prices is normally borne by the providers under long-term contracts
      and we do not consider these inflationary factors to constitute a change in
      the
      circumstances of the charter and management agreements.

    We
      also considered whether there was objective and reliable evidence available
      as
      to the value of the individual deliverables, as discussed in your
      comment.  While there are entities that do provide ship management
      services, they are usually on a cost-plus basis (meaning that actual costs
      incurred are passed on to the vessel operator plus a contractual profit
      component).  We believe that the agreements between Ship Finance and
      Frontline Management are dissimilar to any identifiable market vessel management
      agreements due to the length of contractual terms and the size of the fleet
      being serviced.

    We
      believe that the actual cost to the Company of providing the management services
      remains the appropriate amount to allocate as lease service revenue as the
      Company does not have an alternative, more appropriate measure of the fair
      value
      of the contracts.

    Consolidated
      Statements of Cash Flows

    3.
      We have reviewed your response to our prior comment number 7. It appears that
      you have presented the net amount of i)  the revenues received from
      third party charterers and paid to Frontline during the “cross-over” voyage
      period and ii) Frontline’s base charter rates payable to you during the
“cross-over” voyage period as “deemed dividends paid”, which are reflected in
      the financing activities section of your consolidated cash flow statement.
      However we believe that presenting the aforementioned amounts on a gross basis
      would enhance the transparency of your consolidated cash flow
      statement.

    Please
      revise your presentation in future filing accordingly. Refer to paragraph 11
      of
      SFAS No 95 for further guidance.

    We
      note your comments and we will amend our presentation in future filings
      accordingly.

    2.
      Accounting Policies

    Leases

              4

              We
                have reviewed your response to our prior comment number 9. However
                we do
                not concur that the guidance provided in paragraph 34 of SFAS No
                13 is
                inconsistent with the guidance in paragraph 6(b)(i) of SFAS No 13.
                As your
                purchase and lease transactions with Frontline Ltd (and its subsidiaries)
                appear to qualify as sale-leaseback transactions, it appears that
                your
                accounting treatment should follow the guidance provided in paragraphs
                32
                and 34 of SFAS No 13; whereas the guidance provided in paragraph
                6(b)(i)
                of SFAS No 13 would be reserved for a traditional lease only
                transaction.

              In
                this regard it appears that all of your leases to Frontline Ltd.
                that have
                resulted from transactions which qualify as sale-leaseback transactions
                should be accounted for as operating or direct financing leases in
                accordance with paragraph