Svenska Cellulosa Aktiebolaget SCA (publ) – Annual report – 31 December 2023
Industry: agriculture
D3 Forest assets
ACCOUNTING PRINCIPLES
The total value of the forest assets is based on transactions in the areas where SCA owns forest assets. To support this valuation, SCA retrieves statistics of transactions, which are available from a number of market sources. Price statistics from transactions are multiplied by SCA’s standing volume; the level of the standing volume is based on an inventory and simulated growth. A large number of forest transactions are conducted in areas where SCA owns forest assets, and the value of larger forest holdings is generally at the same level or higher compared with smaller and mid-sized forest assets per m3fo.
SCA uses inputs, which under IFRS 13 are recognized at various levels in the evaluation hierarchy, to measure its forest assets. The statistics obtained can be viewed as market-corroborated inputs in accordance with measurement level 2. However, the valuation of forest assets is entirely allocated to level 3, as the estimated forest volume contains assessments and the suppliers of the transaction data make certain adjustments using unobservable inputs (see KAA). No transfers have taken place between the measurement levels during the year.
The total value of SCA’s forest assets is distributed between biological assets and land. To establish the value of biological assets a DCF-model (discounted cash flow) is used. When cash flow was discounted, a rate of return was used that reflects the yield requirement necessary so the discounted cash flows correspond to the total fair value according to the current market statistics. SCA also capitalizes replanting costs. The change in value is recognized in the income statement on the line for change in value in biological assets. Land assets relating to forest assets are recognized at fair value in accordance with IAS 16.31, and are recognized on a separate line in the balance sheet under forest assets. The change in value pertaining to land is recognized as other comprehensive income and does not impact profit for the year.
Climate-related risks are taken into account, for example, by considering environmental restrictions and other limitations which mean that the assets cannot be fully utilized. The effects of regulations as a result of known political decisions are taken into consideration. Demand for renewable raw materials and renewable energy is expected to increase and may have a positive impact on wood prices in the future. Changed climate conditions may lead to higher growth and in parallel increase the risk of infestation and extreme weather conditions. The impact of climate-related changes is difficult to assess since the cycles are long and entail both opportunities and risks. SCA manages this by conducting a sensitivity analysis (table D3:1) in the form of changed wood price, felling costs and volumes. The calculation is performed for a production cycle for biological assets that SCA estimated to average 100 years.
KEY ASSESSMENTS AND ASSUMPTIONS
The market statistics that form the basis for the valuation of forest assets relating to the Swedish forest holding are obtained from the providers Ludvig & Co and Svefa, which are two independent parties in relation to SCA. The providers process the data by adjusting market transactions that include other significant components in addition to forest land. Svefa also makes adjustments for forest land transactions under ten hectares. SCA makes no adjustments to data from Ludvig & Co and Svefa. On average, the suppliers completed 186 transactions in 2023 and SCA was a party in approximately 2% of the transactions. SCA uses the data to calculate a volume-weighted price on the basis of how the forest assets are distributed geographically.
SCA’s timber stand in Sweden is inventoried at regular intervals (most recently in 2019). Between the inventories of the entire forest holding, forest growth is simulated each year based on the inventory. The simulation of SCA’s growth is conducted by an external party. It is then fixed until the next inventory. In the Baltic region, SCA receives an estimate of growth from Norskog, which is an independent source in relation to SCA.
The calculated market price used by SCA is based on forest transactions over the last three years to obtain an accurate overall view as individual transactions will not have a major impact on the outcome. Since transactions may take several months to complete, there is no isolated market value given at December 31.
The Baltic holdings were previously measured at the same price per m3fo as the Swedish holdings. In 2023, SCA changed this assumption and used a three-year average market price based on completed forest transactions in the Baltic region. Market statistics of forest land prices in the Baltic region are mainly obtained from Norskog. Since available data for forest transactions in the Baltic region are less comprehensive than Swedish data, SCA uses another three data sources to determine the price used for measurement. These data sources are a DCF model from Norskog, SCA’s own transactions in the Baltic region and data from transactions in northern Sweden.
The cash flow statements for 2023 took no account of climate change since its impact is considered to lie further in the future and will not impact the current model to any significant extent. SCA indicates possible effects of climate change by presenting a sensitivity analysis, which shows the effects of an increased timber inventory and harvesting volume. When cash flow was discounted, estimated income and expenses were adjusted by an annual inflation rate of 2%. The calculation to establish the value of biological assets is based on existing, sustainable harvesting plans and assessments regarding growth, timber prices, harvesting and silviculture costs, and selling expenses.
The three-year average price in 2023 was SEK 395/m3fo (366) and is used to determine the total average value per m3fo of SCA’s forest assets in Sweden. The corresponding price for the Baltic region is EUR 40.5/m3fo (SEK 366). The distribution of forest assets is carried out according to the same principles in Sweden and the Baltic region and is based on the Swedish model. As of December 31, 2023, timber volume is estimated to amount to approximately 263 million m3fo in Sweden and approximately 8 million m3fo in the Baltic region.
The table (D3:1) describes the sensitivity of the carrying amount with respect to key assumptions.
The change in the fair value of biological assets and change due to felling are recognized as a net value in the income statement on the line change in value in biological assets. The change amounts to (IS) SEK 2,198m (1,825). Total change in value of biological assets amounts to SEK 2,533m (2,372).
The current year’s valuation of biological assets and land assets was based on market statistics and discounted cash flows. For the current year’s valuation of biological assets, the same valuation model was used as in the previous year using a yield requirement of 3.6% (3.5) after tax. The yield requirement for investments in forest assets reflects the forest’s long cycles, and it is not affected by short-term variations in market rates.
Assumptions regarding future price and cost levels are based on the outcome for prior years adjusted for inflation. The valuation assumes an average wood price of SEK 528 (479) per solid cubic meter under bark (m3sub). Annual harvesting in 2023 was 5.0 (4.4) million m3sub and is expected to rise over the future production cycle. On average, 87% of harvesting is final felling and 13% thinning. Of this, 48% is expected on average over the years to comprise sawlogs and 52% pulpwood.
SCA’s forest holdings in Sweden are made up of approximately 2.6 million hectares of forest assets primarily in northern Sweden, of which approximately 2.0 million is productive forest land. SCA also owns just over 62,000 hectares of forest land and 11,000 hectares of other land that can potentially be converted to forest land or be sold in Estonia, Latvia and Lithuania. Growth amounts to approximately 10.9 million m3fo per year, gross, on productive forest area. Net growth, meaning growth after harvesting and natural losses, is estimated to have averaged 3.5 million m3fo per year in Sweden and 0.3 million m3fo per year in the Baltic region.
The following charts and tables illustrate some of the components used to determine the Group’s fair value for forest assets and their distribution.
Accounts examples 