The International Financial Reporting Standards (IFRS) as implemented into the forestry accounting

Markku Penttinen & Walter Sekot

International IUFRO Symposium Advances and Challenges in Managerial Economics and Accounting, 9 May 2016 Vienna, Austria

Contents

• Forestry accounting traditions and theoretical bases

of IFRS

• Pros and cost of IAS41

• Stumpage prices

• Forest regeneration and other costs

• The discount rate

• The disclosure

• The Scandinavian forest industries

Forestry accounting traditions

& theoretical bases of IFRS •Traditionally: Historical cost accounting (HCA): planned cut vs. actual cut

Real business transaction based (Riahi-Belkaoui 2000) => “lazy capital” cf. StoraEnso • Chart of accounts

IUFRO (1966), Wentzer (1972), Deutscher Forstwirtschaftsrat (1980)

• Forestry accounting developments

Brabänder (1996), Jöbst & Hogg (1997), (2008), Jöbstl (2005), Hyder,

Lönnstedt, Penttinen (1994,1997, 1999), Sekot (1998, 2000, 2001)

• German/Austrian and Australian schools (Herbohn etc.)

• European Farm Accountancy Data Network (FADN) uses market valuation

(Argilés 2011, 108) is a quasi-standard (Poppe & Beers 1996) and

even measures profitability for the forest sector (Marongiu et al. 2012)

* Fair value accounting (FVA) US Financial Accounting Standards Board 1976)

• Financial statement users at the focus (Barlev & Haddad 2003, IASC 2000)

=> risks & lenders ignored

* IFRS property value calculations à la USA => optimal allocation of assets??

Pros and cons of IAS 41- a furious discussion

+ IAS 41 apropriate to assets with long production cycles e.g. forest (Herbohn &

Herbohn 2006)

+ Forest holders support the standard: eight of ten (Helborn 2006)

+ Fair value (FV) does not mean volatility or manipulation (Argilés et al. 2010)

- FV increases volatility of earnings (Dowling & Godfrey 2001)

the coefficient of variation of gain and loss 91% in four years (Herbohn 2006)

- Unrealistic expectations of distributable profits (Herbohn & Herbohn 2006)

- Large profit in the first period (Ettenauer et al. 2009)

- The costs outweigh the benefits (Elad & Herbohn 2011)

- FV vague and will not generate comparable valuations (Billingby&Billemse 2004)

- FV creates potential for manipulation and yields distorted results (Herbohn 2009)

- IAS 41 too academic and not focused on practicalities (Herbohn& Herbohn 2006)

- Ignores social and environmental relations underlying market exchanges (Elad 2007)

Stumpage prices

* Closing of the books: +1.5% annual nominell increase (Sveaskog)

2% (SCA), 2% Holmen, 2% Södra, after 10 y. 0% (Tornator)

• External experts: Indufor, Pöyrys indices and LRFKonsult (land)

NIPF prices from research institutes as a source

• Current prices adjusted by the management’s estimates up to 100 years (UPM)

• Price sensitivity: - price level change by 1 % unit: FV +1% (Bergvik skog)

+ 1,7% (Södra), +2.2 (Holmen)

- price forecast +10%: FV + 12% (Tornator)

- price increase from 1.5% to 2%: FV -8.8% (Sveaskog)

• NOT a price of some day e.g. December 31, but a long term price model (Tornator,

Bergvik skog, …)

• Prices of pine and spruce (Bergvik skog) and birch (Tornator): logs and pulpwood, final

felling and thinning – not first thinning (Bergvik skog)

** BUYER PICKS STANDS FOR FELLING WITH GIVEN CRITERIA (Bergvik skog)

Forest regeneration and other costs

• Silvicultural costs ~ 10-15% annually (Tornator etc.)

• Regeneration and other costs expensed (against IAS 41)

• The impact of cost development change from 2%

to 1.5% would increase the FV by 13% (Sveaskog)

• One per cent increase in cutting costs decrease FV 0.4%

Bergvik skog, 0.3% SCA

• Own cost accounting, statistics of reseach institutes

for comparison (Tornator)

** Young seedling stands are valued at cost (UPM)

The discount rate

• Rates 2015: 4% (after tax) Tornator, 5.5% Holmen, 5.95%

Sveaskog, 6.25% Bergvik Skog, SCA, 7% UPM, 10%Uruguay

•The discount rate includes typically inflation 2%

• Riskless interest rate: 50 years euroswap interest rate

• WACC: own capital e.g. 35% loans 65%

• Own capital: Capital asset pricing model & beta factor

• Debts: interest protected interest rate of long term loans

* One per cent unit increase causes FV value decrease:

11% UPM, 16% Tornator, 19% Sveaskog, Bergvik skog,

20% Holmen, 25% SCA, 26% Södra

SELECTION OF SCANDINAVIAN FOREST INDUSTRIES

COMPANY/Land # IN THE WORLD Hectar/M TURNOVER/MILLION

Svenska Cellulosa SCA 335 2.0 $ 13 460

StoraEnso / SE&FI 357 - $ 12 618

with affiliated (forests only) companies

- Bergvik Skog/SE 49% 1.9 $ 240

- Tornator/FI 41% 0.7 $ 130

UPM Kymmene / FI 376 1.1 $ 12 105

[Metsä (=forest) Group 651 $ 6 070 ]

cooperative => no IFRS

Södra SE ~ 2000 0.04 $ 2 133

Holmen / SE ~ 2500 1.3 $ 1 571

Sveaskog (forests only) 3.1 $ 710

Compare: The biggest in the world

International Paper / US 181 $ 23 617

http://www.industryweek.com/resources/iw1000/2015?page=6

The disclosure of the Scandinavian forest industries

• Bare land reported by Sveaskog €75/ha, Bergvik skog

€118/ha and Tornato €131/ha, mostly in a lump sum

• Biological asset €1300/ha Sveaskog, UPM, €1600/ha SCA,

Tornator, €1800/ha Holmen, Bergvik skog, but market

prices €6000/ha (SE) and €2400 (FI)

* Rotation: 70 y. FI, 80 ES, 100 SE,120 RO, 10 Uruguay

• Split: mature (allowable cut) and immature not disclosed

• Sensitivities reported with respect to changes in price,

discount rate, cost and even felling volumes

• Some open e.g. Tornator, some are closed e.g. UPM

Summarising comments

• Hardly any manipulation – as claimed by many papers

• Some companies reluctant to disclose their practices

• Scientific base: growth models, optimal rotation, forest

management planning, e.g. all are using MELA of the FFRI in FI

• Even WACC, CAPM etc. methods in use, up to date know how

• Risk inclusion limited but discounting rate slackens

• Biological asset €1300/ha Sveaskog, UPM, €1600/ha SCA, Tornator,

€1800/ha Holmen; markets €6000/ha (SE) and €2400 (FI)

* Calculations: 70 years FI, 80 ES, 100 SE,120 RO, 10 Uruguay

• Split: mature (allowable cut) and immature not disclosed

• Sensitivies with respect to changes in price, discount rate,

silvicultural and felling cost and even felling volumes

•

University of Gävle