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

Svenska Cellulosa Aktiebolaget SCA (publ)  – Annual report – 31 December 2020

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. The method for valuing forest assets was changed in 2019. The impact and a detailed description are available on page 105, Note D3, of SCA’s 2019 Annual Report.

The total value of the forest assets is based on forest transactions in the areas where SCA owns forest assets. The market valuation is based on statistics of transactions, which are available from several market sources. SCA uses refined property data from external specialists for the valuation. The statistics can be viewed as market-corroborated inputs in accordance with measurement level 2. In the case of SCA, inputs to the valuation of forest assets that are used in accordance with IFRS 13 are recognized at various levels in the evaluation hierarchy. For a description of the different measurement levels, refer to Note E1. The valuation is recognized in its entirety as level 3. 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. 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 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 in the best possible manner. 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 established as the total market value and the value of the biological assets based on discounted cash flows. The value of land assets was further supported by discounting cash flow 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. The calculated market price is based on forest transactions over the last three years. The market price is a weighted three-year average that in 2020 was SEK 291 (276)/m3fo and is used to determine the total average value per m3fo of SCA’s forest assets in Sweden. The market in the Baltic states 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 states takes place using SCA’s own discounted cash flow model since the production cycles differ. A new sustainable harvesting calculation was drawn up in 2020 based on the forest survey from 2019 that indicated higher growth in the forest than earlier surveys. This resulted in a new harvesting plan that contains an increase in the harvesting level from SCA’s own forest, where SCA intend to increase harvesting to 5.4 million m3sub in 2025, which compares with the previous plan where the level was 4.0 million m3sub for the same period. As of December 31, 2020, timber volume is estimated to amount to approximately 252 million m3fo in Sweden. Added to this is approximately 5 million m3fo of timber volume in the Baltic states.

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

1) The fair value of SCA’s forest assets in Sweden in 2020 was based on a timber volume of approximately 252 million m3fo multiplied by the market price of SEK 291/m3fo.

2) The fair value of SCA’s forest assets in the Baltic states in 2020 was based on a timber volume of approximately 5 million m3fo multiplied by the market price of SEK 291/m3fo.

1) Following the acquisition of forest assets in Sweden, the fair value has been distributed such that 31% (31) of the value has been allocated to land assets and 69% (69) to biological assets. For the acquisitions made in Estonia and Latvia, 25% (25) of the acquisition price has been allocated to land assets and 75% (75) to biological assets.

1) Following the acquisition of forest assets in Sweden, the fair value has been distributed such that 31% (31) of the value has been allocated to land assets and 69% (69) to biological assets. For the acquisitions made in Estonia and Latvia, 25% (25) of the acquisition price has been allocated to land assets and 75% (75) to biological assets.

The change in the fair value of biological assets and the change due to harvesting are both recognized as a net value in the income statement on the line Change in value in biological assets and amount to SEK 1,262m (16,759). Additionally, SCA capitalized replanting costs.

The 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% (3.6) after tax.

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 450 (442) per solid cubic meter under bark (m3sub). Annual harvesting in 2020 was 4.8 million m3sub and is expected to rise over the expected future production cycle.

On average, 85% of harvesting is final harvesting and 15% thinning. Of this, 56% comprises sawlogs and 44% pulpwood.

SCA’s forest holdings 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 40,000 hectares of forest assets in Estonia and Latvia. 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 at 3.2 million m3fo per year in Sweden. Harvesting in 2020 amounted to approximately 4.8 million m3sub (4.4).

1) The values are calculated based on productive forest area.

1) The sensitivity figures are based on the market price, which for 2020 has been set to SEK 291/m3fo. Sensitivity figures are based on the total value of forest assets.