Svenska Cellulosa Aktiebolaget SCA (publ) – Annual report – 31 December 2022
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 tangible fixed assets in accordance with IAS 16 Property, plant and equipment.
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 two market sources. SCA uses inputs to measure its forest assets. According to IFRS 13, the inputs refer to different levels in the fair value hierarchy (see Note E1). 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 ). In addition to this, an assessment is carried out of the transaction periods to be included in the calculation of an average price. 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 the valuation of total forest assets, 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 harvesting plans and assessments regarding growth, timber prices, harvesting and silviculture costs and selling expenses. Environmental restrictions and other limitations are taken into account 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 TD3:1 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. 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 of forest assets calculated based on market data and the value of the biological assets based on discounted cash flows. To confirm the land value, SCA has discounted cash flows linked to land 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.
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. Market statistics 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. SCA never adjusts the data. The regions where SCA owns forest are allocated in the data based on four different areas and the prices in these areas are used as a basis for the volume weighted price.
The calculated market price used by SCA is based on forest transactions over the last three years, therefore individual transactions will not have a major impact on the outcome. Since transactions often take longer than seven months there is no isolated market value given at December 31. To ensure that the volume of transactions offer an accurate picture of market development, given the aforementioned factors, SCA has chosen to use a three-year average.
The three-year average price in 2022 was SEK 366/m³fo (324) and is used to determine the total average value per m³fo of SCA’s forest assets in Sweden. The market in the Baltic region is considered comparable with SCA’s holdings in Sweden in terms of price, and is therefore measured at the same value per m³fo. The distribution of value between biological assets and land in the Baltic region takes place using SCA’s own discounted cash flow model since the production cycles differ. As of December 31, 2022, timber volume is estimated to amount to approximately 260 million m³fo in Sweden and 7 million m³fo in the Baltic region.
TD3:1 describes the sensitivity of the carrying amount with respect to key assumptions.
1) Combined volume-weighted average from Svefa and Ludvig & Co distributed geographically across the areas where SCA has its forest holdings. SCA’s forest holding is largely in the southern parts of northern Sweden, where prices are slightly above the average for northern Sweden as a whole.
1) The fair value of SCA’s forest assets in Sweden in 2022 was based on a timber volume of approximately 260 million m3fo multiplied by the market price of SEK 366/m3fo.
2) The fair value of SCA’s forest assets in the Baltic region in 2022 was based on a timber volume of approximately 7 million m3fo multiplied by the market price of SEK 366/m3fo.
1) Other changes are primarily recognized as the increase in value due to market prices and growth of the forest.
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 1,825m (1,753). SCA also capitalizes replanting costs. Total change in value of biological assets amounts to SEK 2,372m (2,033).
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 3.5% (3.5) after tax. SCA takes a long-term view of the yield requirement on investments in forest assets and is unaffected by short-term movements in market interest rates. Since the total value of forest assets is based on market statistics in areas where SCA owns forest, the discount rate only impacts the allocation between biological assets and land assets.
When cash flow was discounted, estimated income and expenses were adjusted by an annual inflation rate of 2%. 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 479 (457) per solid cubic meter under bark (m3sub). Annual harvesting in 2022 was 4.4 (4.3) million m³sub and is expected to rise over the future production cycle.
On average, 87% of harvesting is final harvesting 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 57,000 hectares of forest land and 12,000 hectares of other land that can potentially be converted to forest land or be sold in Estonia, Latvia and Lithuania. Growth amounts to approximately 10.5 million m³fo per year, gross, on productive forest area. Net growth, meaning growth after harvesting and natural losses, is estimated to average 3.6 million m³fo per year in Sweden and 0.3 million m³fo per year in the Baltic region.
1) The values are calculated based on productive forest area.
1) The sensitivity figures are based on the market price, which for 2022 has been set to SEK 366 (324) /m3fo. Sensitivity figures are based on the total value of forest assets.
2) Since valuation in the discounted cashflows model treats the distribution of the market value of the total asset, this sensitivity would not impact the total value of the forest assets but rather transfer the value between biological assets and land assets.
The following charts and tables illustrate some of the components used to determine the Group’s fair value for biological assets.
Market statistics of forest land prices are obtained from two parties that are independent in relation to SCA: Ludvig & Co and Svefa. The chart below shows forest land prices in Sweden, nominal value 2011–2022.
SCA bases its valuation of forest assets in Sweden on forest transactions in the areas where SCA owns forest assets, over the last three years. Data volume is then weighted based on SCA’s forest holding before application to the total forest valuation. The three-year average price in 2022 was SEK 366/m³fo (324) and is used to determine the total average value per m³fo of SCA’s forest assets in Sweden. The chart below shows historical market price 2017–2022 (based on three-year average).
The table below illustrates SCA’s purchases and divestments of forest land in Sweden over the past five years.