IAS 41 disclosures, forestry, discounted cash flow valuation, IFRS 13 level 3 hierarchy

Svenska Cellulosa Aktiebolaget SCA (publ)  – Annual report – 31 December 2019

Industry: agriculture

D3. FOREST ASSETS
AP ACCOUNTING PRINCIPLES
Forest assets are divided into standing timber and land assets. Standing timber is recognized as a biological asset in accordance with IAS 41 Agriculture. Land assets are recognized as property, plant and equipment in accordance with IAS 16 Property, plant and equipment.

In light of the price level of forest assets in a number of large and recently completed forest land transactions, SCA has reviewed the method and assumptions for valuation of the company’s forest assets in its balance sheet. The review has shown that a large number of forest transactions are taking place in areas where SCA owns forest assets, and the value of larger forest holdings is generally at the same level per m3fo as smaller and mid-sized forest assets. In previous years, the market price or other comparable price was not used as there was some uncertainty surrounding the market price for assets the size of SCA’s, as no larger transactions had taken place in the market. The review resulted in a new method and new assumptions for determining the fair value of the assets. The total value of the forest assets is based on forest transactions in the areas where SCA owns forest assets. The new method also entails that the land assets are now measured at fair value, which has led to a change in accounting principles. Land assets linked to the standing forest were previously recognized at cost. There has
been no change in accounting principles for biological assets. The new method has only resulted in changed assumptions under the same accounting principles. The change to the new accounting method for the valuation of the forest assets therefore gives rise to a change in accounting principle in respect of land assets, but only a change in assumptions in respect of biological assets.

Statistics relating to forest transactions are available from several market sources. The statistics can be viewed as market- corroborated inputs in accordance with measurement level 2. In certain cases, inputs used for the valuation of an asset or liability at fair value are recognized at various levels in the evaluation hierarchy according to IFRS 13. For a description of the different measurement levels, refer to Note E1. In these cases, the valuation of overall fair value is recognized at the lowest of the levels. Certain adjustments are made to refine the market- corroborated inputs using unobservable inputs. In addition to this, an assessment is carried out of the transaction periods to be included in the calculation of an average price. SCA has chosen to base the market price on a weighted three-year average. The new method thus contains more observable inputs but is nevertheless assigned to measurement level 3 taking into account the adjustment of inputs at measurement level 2. No transfers have taken place between the measurement levels during the year. If a transfer had taken place between the measurement levels, this would be undertaken at year-end.

In combination with market transactions, and to determine the fair value of the Group’s biological assets, expected future cash flows from the assets were discounted. The calculation to establish the value of biological assets is based on existing, sustainable felling plans and assessments regarding growth, timber prices, felling and silviculture costs and selling expenses. Environmental restrictions and other limitations are taken into account which means that the assets cannot be fully utilized in the best possible manner. The calculation is performed for a production cycle that SCA estimates for biological assets to average 100 years. The change in value is recognized in the income statement on the line item for change in value in biological assets.

The value of land assets constitutes the residual amount between the total value in accordance with the new method to establish total market value and the value of the biological assets based on discounted cash flows. Land assets were also verified by discounting the cash flow linked to land assets to obtain the total land value. The change in value pertaining to land is recognized as other comprehensive income and does not impact profit for the year.

Land assets linked to standing forest were previously classified as buildings, land, machinery and equipment in the balance sheet. The effect of the change of accounting principle to the revaluation method in accordance with IAS 16 p.31 means land assets are now recognized at fair value and have, therefore, as of December 31, 2019, been recognized on a separate line in the balance sheet under forest assets. A corresponding reclassification has taken place for the comparative year. The comparative year was not translated to fair value but reported at cost.

In the balance sheet, the change of accounting principle to the revaluation method resulted in an increase in the value of the land assets by SEK 18,893m and the recognition of a deferred tax liability on the difference between the asset’s taxable cost and carrying amount. The deferred tax liability amounts to SEK 3,892m. The increase in the value of the assets and the tax effect resulting from the revaluation is recognized in other comprehensive income and accumulates in equity on the lines for change in value in land assets and income tax attributable to components of other comprehensive income. Refer to Note E8.

KAA KEY ASSESSMENTS AND ASSUMPTIONS
SCA has based its valuation of forest assets in Sweden on forest transactions in the areas where SCA owns forest assets. The calculated market prices are based on forest transactions over the latest three years. The market price is a weighted three-year average that in 2019 was SEK 276/m3fo and is used to determine the total average value per m3fo of SCA’s forest assets in Sweden.

A new forest survey was carried out in 2019. As part of the new survey, a new estimate was drawn up and established for the forest portfolio’s timber volume. As of December 31, 2019, timber volume is estimated to approximately 249 million m3fo in Sweden. This compares with the survey from 2014 where the timber volume was estimated to amount to 238 million m3fo on December 31, 2019. The new survey has thus led to an increase in standing volume of about 11 million m3fo. Added to this is approximately 3 million m3fo of timber volume in the Baltic states.

TD3:1 describes the sensitivity of the carrying amount with respect to key assumptions.

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1) The fair value of SCA’s forest assets in Sweden in 2019 was based on a timber volume of approximately 249 million m3fo multiplied by the market price of SEK 276/m3fo.
2) The fair value of forest assets acquired during the year in the Baltic states is deemed to correspond to the acquisition price.
3) Land value is recognized at cost in 2018.

Biological assets

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Land assets

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1) The land assets are measured at fair value in 2019. Land assets are recognized at cost in 2018.
2) Following the acquisition of forest assets in Sweden, the fair value has been distributed such that 31 (5)% of the value has been allocated to land assets. For the acquisitions made in Estonia and Latvia in 2019, 25% of the acquisition price has been allocated to land assets.

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 SEK 16,759m (679), of which SEK 16,042m is a non-recurring effect due to renewed assumptions and assessments. The remeasurement effect arising from the changed accounting principle pertaining to the reporting of land assets at fair value is recognized as Other comprehensive income and does not impact profit.

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 past using a return requirement of 3.6% after tax. In 2018, a discount rate of 5.9% before tax was used.

When cash flow was discounted, assessed income and expenses were adjusted upward by an annual inflation rate of 2%. Assumptions regarding future price and cost levels have, as in the valuation in 2018, been based on the outcome for the five preceding years. The 2019 valuation used an average wood price of SEK 442 (449) per solid cubic meter under bark (m3sub). Annual harvesting is expected to rise over the calculated future production cycle and amount to 4.3 million m3sub for 2019, ending at 5.9 million m3sub by 2114.

On average, 85% of felling comprises final harvesting and 15% thinning. 56% is expected to comprise sawlogs and 44% pulpwood.

SCA’s forest holdings comprise approximately 2.6 million hectares of forest land primarily in northern Sweden, of which approximately 2.0 million is productive forest land. SCA also owns 30,000 hectares of forest assets in Estonia and Latvia, of which about 24,000 hectares is productive forest assets. The forest portfolio’s timber volume amounts to approximately 249 million m3fo in Sweden and approximately 3.2 million m3fo in the Baltic states. Growth amounts to approximately 10.5 million m3fo per year, gross, on productive forest assets. Net growth, meaning growth after felling and natural losses, is estimated at 4.0 million m3fo per year in Sweden. Growth in the Baltic states amounts to approximately 170,000 m3fo and net growth to about 30,000 m3fo. Felling in 2019 amounted to approximately 4.4 million m3sub (4.3).

Forest assets

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1) The values are calculated based on productive area.
2) The land value is based on acquisition cost.

TD3:1 Sensitivity analysis

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1) The sensitivity figures are based on the market price, which for 2019 has been set to SEK 276/m3fo. Sensitivity figures are based on the total value of forest assets.

Harvest

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Market price

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A1. GENERAL ACCOUNTING PRINCIPLES AND NEW ACCOUNTING RULES (extract)
Valuation of forest assets
In advance of the annual accounts for 2019, SCA has carried out a review of its measurement of forest assets, which resulted in a new method and new assumptions for determining the fair value of the assets. The new method means the total value of the forest is based on forest transactions in the areas where SCA owns forest assets. This change also entailed that land assets are now measured at fair value, which has led to a change in accounting principles. Land assets were previously recognized at cost, but are recognized from December 31, 2019 at fair value using the revaluation method, IAS 16 p. 31.

In combination with market transactions, and to determine the fair value of the Group’s biological assets, expected future cash flows from the assets were also discounted. The calculation to establish the value of biological assets is based on existing, sustainable felling plans and assessments regarding growth, timber prices, felling costs and silviculture costs. The calculation is performed for a production cycle that SCA estimates for biological assets to average 100 years. The change in value is recognized in the income statement on the line item for change in value in biological assets.

The value of land assets constitutes the residual amount between the total value in accordance with the new method to establish total market value and the value of the biological assets based on discounted cash flows. Land assets were also verified by discounting the cash flow linked to land assets to obtain the total land value. The change in value pertaining to land is recognized as other comprehensive income and does not impact profit for the period. For further information concerning the recognition of forest assets, refer to Note D3.