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

Holmen AB – Annual report – 31 December 2018

Industry: agriculture

Notes to the financial statements (extracts)

Amounts in SEKm, unless otherwise stated.

Note 1. Accounting policies (extract)

Biological assets

The Group divides all its forest assets for accounting purposes into growing forests, which are recognised as biological assets at fair value, and land, which is stated at cost. Any changes in the fair value of the growing forests are recognised in the income statement. Holmen’s assessment is that there are no relevant market prices available that can be used to value forest holdings as extensive as Holmen’s. Valuation is therefore carried out by estimating the present value of expected future cash flows (after deduction of selling costs) from the growing forests. See Note 11.

In the parent company, biological assets are valued in accordance with RFR 2. This means that biological assets classified as non-current assets are recognised at cost adjusted for revaluations taking into account the need, if any, for impairment in value.

Felling rights are stated as inventories. They are acquired with a view to securing Holmen’s raw material requirements through harvesting. No measurable biological change occurs between the acquisition date and harvesting.

Note 26. Critical accounting estimates and judgements (extract)

Biological assets

Holmen’s assessment is that no relevant market prices are available that can be used to value forest holdings as extensive as Holmen’s. The valuation is therefore made by calculating the present value of future expected cash flows from the growing forests. The most material estimates made relate to how much harvesting can be increased in the future, what changes there will be in pulpwood and log prices, how high inflation will be, and what discount rate is used. Note 11 provides a sensitivity analysis for the valuation of changes in these estimates. The book value of biological assets at 31 December 2018 was SEK 18 400 million and the attributable deferred tax liability was SEK 3 811 million, giving a net value of SEK 14 589 million.

Note 11. Biological assets

Forest assets are recognised in the consolidated accounts as growing forest, which is stated as a biological asset at fair value, and land, which is stated at cost. Holmen’s assessment is that no relevant market prices are available that can be used to value forest holdings as extensive as Holmen’s. The valuation is therefore made by calculating the present value of future expected cash flows from the growing forests. Fair value measurement is based on measurement level 3. This calculation of cash flows is made for the coming 100 years, which is regarded as the forests’ harvesting cycle. The cash flows are calculated on the basis of harvesting volumes according to Holmen’s current plan and assessments of future price and cost changes. The cash flows are discounted using an interest rate of 5.5 (5.5) per cent.

Holmen owns a total of 1 042 000 hectares of productive forest land, 960 000 hectares of which are actively managed. The productive forest land contains 122 million m3 growing stock, solid over bark. According to the applicable plan from 2011, the harvest will amount to 3.0 million m3sub per year until 2030. It is then calculated that it may gradually increase to just over 4 million m3sub in 2110. 50 per cent of the harvest consists of logs that are sold to sawmills, 45 per cent consists of pulpwood that is sold to the pulp and paper industry, and the remainder consists of forest fuel.

The valuation is based on a long-term trend price that is adjusted upwards annually by 2 per cent inflation. The trend price for 2019 is 445 SEK/m3sub, which is slightly lower than applicable market prices. The cost forecast is based on present-day levels and is adjusted upwardly by just over 2 per cent per year.

Holmen’s forest holdings are reported at SEK 18 400 million (17 831) before tax. A deferred tax liability of SEK 3 811 million (3 943) is stated in relation to that figure. This represents the tax that is expected to be charged against earnings from future harvests. On that basis, the growing forest, net after tax, is stated at SEK 14 589 million (13 888).

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The net effect of the change in fair value and the change as a result of harvesting is stated in the income statement as a change in value of biological assets. In 2018, this amounted to SEK 425 million (415).

The table below shows how the value of forest assets would be affected by changes in the most significant valuation assumptions.

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Annual change refers to the annual rate of change used in the valuation of each parameter. For example, an increase of 0.1 per cent means that the annual price inflation will be increased from 2.0 per cent to 2.1 per cent in the calculations. Change in level means that the level for each parameter and year changes. For example, a 1 per cent price increase means that the wood prices in the calculations are raised by 1 per cent for all years (change in level).

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The Nominal price series shows the average selling price for Holmen. The Real series shows nominal prices recalculated at 2018 monetary value using historical Swedish CPI.

Risk management (extract)

Operational risks (extract)

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