International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards
Page 627
capitalised and presented within cash flows from investing activities.
13 Forestry assets
€ million
2017 2016
At 1 January
316
219
Capitalised expenditure
46
39
Acquisition of assets
3
6
Fair value gains
43
64
Impairment losses recognised
(3)
–
Disposal of assets
–
(1)
Felling costs
(73)
(57)
Currency movements
(7)
46
At 31 December
325
316
Comprising
Mature
190 193
Immature
135 123
Total forestry assets
325
316
Agriculture
3169
In total, the Group has 245,163 hectares (2016: 251,435 hectares) of owned and leased land available for forestry
activities, all of which is in South Africa. 79,159 hectares (2016: 81,017 hectares) are set aside for conservation
activities and infrastructure needs. In 2016, 11,784 hectares were managed but not controlled by the Group, none
in 2017. 1,664 hectares (2016: 3,097 hectares) relate to non-core activities. The balance of 164,340 hectares
(2016: 155,537 hectares) are under afforestation which forms the basis of the valuation set out above.
Mature forestry assets are those plantations that are harvestable, while immature forestry assets have not yet reached
that stage of growth. Timber is harvested according to a rotation plan, once trees reach maturity. This period ranges
from 6.5 to 14.5 years, depending on species, climate and location.
The fair value of forestry assets is a level 3 measure in terms of the fair value measurement hierarchy, consistent with prior years.
The following assumptions have a significant impact on the valuation of the Group’s forestry assets:
• The net selling price, which is defined as the selling price less the costs of transport, harvesting, extraction and loading.
The net selling price is based on third-party transactions and is influenced by the species, maturity profile and location of timber. In 2017, the net selling price used ranged from the South African rand equivalent of €17 per tonne to €47
per tonne (2016: €10 per tonne to €53 per tonne) with a weighted average of €29 per tonne (2016: €28 per tonne).
• The conversion factor used to convert hectares of land under afforestation to tonnes of standing timber, which is
dependent on the species, the maturity profile of the timber, the geographic location, climate and a variety of other
environmental factors. In 2017, the conversion factors ranged from 8.4 to 24.8 (2016: 8.6 to 25.0).
• The risk premium of 13.0% (2016: 14.0%) is based on an assessment of the risks associated with forestry assets
in South Africa.
The valuation of the Group’s forestry assets is determined in rand and converted to euro at the closing exchange rate
on 31 December of each year.
The reported value of owned forestry assets would change as follows should there be a change in these underlying
assumptions on the basis that all other factors remain unchanged:
€ million
2017
Effect of €1/tonne increase in net selling price
11
Effect of 1% increase in conversion factor (hectares to tonnes)
3
Effect of 1% increase in risk premium
(4)
Effect of 1% increase in EUR/ZAR exchange rate
(3)
IAS 41 is not clear about how gains should be presented in the income statement. IAS 1
prohibits offsetting of income and expenses in the income statement. [IAS 1.32].
Therefore, if the sale of biological assets or agricultural produce meets the definition of
revenue under IFRS 15 – Revenue from Contracts with Customers, i.e. ‘income arising
from the ordinary activities of the entity’, [IFRS 15 Appendix A], it should be presented on a
gross basis in the income statement. Furthermore, if the sale of biological assets results
from a contract with a customer and is within the scope of IFRS 15, it would be
presented as revenue from contracts with customers (see Chapter 28). However, if sales
of non-current biological assets are incidental to the main revenue-generating activities
of the entity they should be presented on a net basis. [IAS 1.34]. However, under IAS 41
the gross margin on agricultural produce sold shortly after harvest may be negligible, as
the produce may have been previously carried at a valuation near to its sales price.
5.1.3
Groups of biological assets
The standard requires an entity to provide a narrative or quantitative description of
each group of biological assets. [IAS 41.41, 42]. An entity is encouraged to provide ‘a
quantified description of each group of biological assets, distinguishing between
3170 Chapter 38
consumable and bearer biological assets or between mature and immature biological
assets, as appropriate’. [IAS 41.43]. The standard suggests that an entity may separately
disclose the carrying amounts of: [IAS 41.43, 44]
• consumable biological assets (i.e. assets that are to be harvested as agricultural
produce, sold as biological assets or produce growing on a bearer plant); and
• bearer biological assets (i.e. assets that are not consumable, but rather are
self-regenerating).
The standard continues by suggesting that an entity ‘may further divide those carrying
amounts between mature and immature assets. These distinctions provide information
that may be helpful in assessing the timing of future cash flows’. [IAS 41.43]. Mature
biological assets are defined by the standard as those assets ‘that have attained
harvestable specifications (for consumable biological assets) or are able to sustain
regular harvests (for bearer biological assets)’. [IAS 41.45]. If an entity makes such
distinctions, it should disclose the basis for making those distinctions. [IAS 41.43].
5.1.4 Other
disclosures
If not disclosed elsewhere in information published with the financial statements, an
entity is required to describe:
‘(a) the nature of its activities involving each group of biological assets; and
(b) non-financial measures or estimates of the physical quantities of:
(i) each group of the entity’s biological assets at the end of the period; and
(ii) output of agricultural produce during the period’. [IAS 41.46].
In addition, an entity shall disclose the following information:
(a) the existence and carrying amounts of biological assets whose title is restricted, and
the carrying amounts of biological assets pledged as security for liabilities; [IAS 41.49]
(b) the amount of commitments for the development or acquisition of biological
assets; [IAS 41.49]
(c) financial risk management strategies related to agricultural activity; [IAS 41.49]
(d) a reconciliation of changes in the carrying amount of biological assets between the
beginning and the end of the current period, which includes: [IAS 41.50]
(i) the gain or loss arising from changes in fair value less costs to sell;
(ii) increases due to pu
rchases;
(iii) decreases attributable to sales and biological assets classified as held for sale
(or included in a disposal group that is classified as held for sale) in accordance
with IFRS 5;
(iv) decreases due to harvest;
(v) increases resulting from business combinations;
(vi) net exchange differences arising on the translation of financial statements into
a different presentation currency, and on the translation of a foreign
operation into the presentation currency of the reporting entity; and
(vii) other changes.
Agriculture
3171
Fair value measurement disclosures are discussed at 5.2 below.
The standard also encourages, but does not require, an entity ‘to disclose, by group or
otherwise, the amount of change in fair value less costs to sell included in profit or loss due
to physical changes and due to price changes’, because this information is ‘useful in
appraising current period performance and future prospects, particularly when there is a
production cycle of more than one year’. [IAS 41.51, B74-B77]. IAS 41 notes that physical change
itself can be broken down further into growth, degeneration, production and procreation,
but the standard does not specifically encourage disclosure of this information. [IAS 41.52].
The following example, which is derived from the standard, explains how an entity should
go about separating the effect of physical changes from those of price changes. [IAS 41.IE2].
Example 38.4: Physical change and price change
A herd of ten 2-year-old animals was held at 1 January 2019. One animal aged 2½ years was purchased on
1 July 2019 for $108, and one animal was born on 1 July 2019. No animals were sold or disposed of during
the period. Per-unit fair values less costs to sell were as follows:
1/1/2019
1/7/2019 31/12/2019
Newborn animal
–
€70 €72
½ year old animal
–
– €80
2 year old animal
€100
– €105
2½ year old animal
–
€108 €111
3 year old animal
–
– €120
Fair value less costs to sell of herd at 1 January 2019:
(10
× €100) =
€1,000
Purchase on 1 July 2019:
(1
× €108) =
€108
Increase in fair value less costs to sell due to price change:
10
× (€105 – €100) =
€50
1
× (€111 – €108) =
€3
1
× (€72 – €70) =
€2
€55
Increase in fair value less costs to sell due to physical change:
10
× (€120 – €105) =
€150
1
× (€120 – €111) =
€9
1
× (€80 – €72) =
€8
1
× €70 =
€70
€237
Fair value less costs to sell of herd at 31 December 2019:
11
× €120 =
€1,320
1
× €80 =
€80
€1,400
In January 2012, the Interpretations Committee considered a request for clarification in
relation to paragraph 51 of IAS 41. The submitter was concerned that this paragraph may
be contributing to an unacceptable application of the market approach to valuing
biological assets. To remedy this, the submitter suggested that the disclosure be
amended as part of annual improvements so that it would only be encouraged when the
entity’s biological assets are at the same level of biological transformation as those
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quoted in an active market. However, the Committee did not believe an amendment
was needed, noting that paragraph 51 of IAS 41 addresses disclosures, not measurement.
The Committee also pointed out that the requirements for measuring fair value are set
out in IFRS 13, which is not affected by paragraph 51 of IAS 41.11
In addition to the above required and encouraged disclosures, the standard notes that
agricultural activity is ‘often exposed to climatic, disease and other natural risks. If an
event occurs that gives rise to a material item of income or expense, the nature and
amount of that item are disclosed in accordance with IAS 1’ (see Chapter 3). For
example, an entity may need to disclose events such as ‘an outbreak of a virulent disease,
a flood, a severe drought or frost, and a plague of insects’. [IAS 41.53].
Many of the uncertainties and judgements inherent in the valuations that have to be
made under IAS 41 are very clearly explained in the financial statements of Sappi
Limited, as shown in the following extract.
Extract 38.2: Sappi Limited (2017)
Notes to the Group Annual Financial Statements
for the year ended September 2017 [Extract]
2. Accounting
Policies [Extract]
2.3 Critical
accounting
policies
[Extract]
2.3.5 Plantations
Plantations are stated at fair value less estimated cost to sell at the harvesting stage and is a Level 3 measure in terms of the fair value measurement hierarchy as established by IFRS 13 Fair Value Measurement. The group uses the
income approach in determining fair value as it believes that this method yields the most appropriate valuation.
In arriving at plantation fair values, the key assumptions are estimated prices less cost of delivery, discount rates, and volume and growth estimations. All changes in fair value are recognised in the period in which they arise.
The impact of changes in estimated prices, discount rates, and volume and growth assumptions may have on the
calculated fair value and other key financial information on plantations is disclosed in note 11.
● Estimated prices less cost of delivery
The group uses a 12-quarter rolling historical average price to estimate the fair value of all immature timber and mature timber that is to be felled more than 12 months from the reporting date. Twelve quarters is considered a reasonable
period of time after taking the length of the growth cycle of the plantations into account. Expected future price trends
and recent market transactions involving comparable plantations are also considered in estimating fair value.
Mature timber that is expected to be felled within 12 months from the end of the reporting period is valued using
unadjusted current market prices. Such timber is expected to be used in the short term and consequently, current
market prices are considered an appropriate reflection of fair value.
The fair value is derived by using the prices as explained above and reduced by the estimated cost of delivery.
Cost of delivery includes all costs associated with getting the harvested agricultural produce to the market,
including harvesting, loading, transport and allocated fixed overheads.
● Discount rate
The discount rate used is the applicable pre-tax weighted average cost of capital of the business unit.
Agriculture
3173
● Volume and growth estimations and cost assumptions
The group focuses on g
ood husbandry techniques which include ensuring that the rotation of plantations is met
with adequate planting activities for future harvesting. The age threshold used for quantifying immature timber
is dependent on the rotation period of the specific timber genus which varies between five and 18 years. In the
Southern African region, softwood less than eight years and hardwood less than five years are classified as
immature timber.
Trees are generally felled at the optimum age when ready for intended use. At the time the tree is felled, it is
taken out of plantations and accounted for under inventory and reported as a depletion cost (fellings).
Depletion costs include the fair value of timber felled which is determined on the average method, plus amounts
written off against standing timber to cover loss or damage caused by fire, disease and stunted growth. These
costs are accounted for on a cost per metric ton allocation method multiplied by unadjusted current market prices.
Tons are calculated using the projected growth to rotation age and are extrapolated to current age on a straight-
line basis.
The group has projected growth estimation over a period of eight to 18 years per rotation. In deriving this estimate,
the group established a long-term sample plot network which is representative of the species and sites on which
trees are grown and the measured data from these permanent sample plots were used as input into the group’s
growth estimation. Periodic adjustments are made to existing models for new genetic material.
The group directly manages plantations established on land that is either owned or leased from third parties.
Indirectly managed plantations represent plantations established on land held by independent commercial farmers