Stora Enso Oyj – Annual report – 31 December 2022
Note 1 Accounting principles (extract)
Changes in accounting principles
Valuation of Finnish forest assets
Stora Enso changed the valuation method for its forest assets in Finland at the end of 2022 to correspond to the valuation method applied with Swedish forest assets. Forest assets in Finland are owned through Group’s 41% shareholding in equity accounted investment Tornator. Forest assets are defined as biological assets (standing growing trees) and the related forest land. As a result of the valuation method change, the forest assets in Finland are valued using a market approach.
Forest assets in Finland are valued by using a market approach method based on the forest market transactions in those areas where Stora Enso’s forests are located. In Finland reliable market transaction data is considered to be available and also considered to provide a more transparent and observable valuation basis. The total forest assets net cash flows consist of cash flows related to standing trees (biological assets) and separate cash flows regarding forest land. The standing trees valuation is computed based on a discounted cash flow (DCF) method and using a discount rate implied by the market transactions in accordance with the IAS 41 Agriculture standard. The discount rate is determined as the rate at which the market transaction prices match the total forest assets cash flows. The discount rate is the same for biological assets and forest land.
Previously, the discounted cash flow method was used for valuation of biological assets and forest land, where the discount rate applied was determined using the weighted average cost of capital method. There are no changes in applied accounting principles and the change in the valuation method concerns only forest assets in Finland, while there are no changes in the valuation method with Tornator’s minor forest holdings in Estonia and Romania.
Changes in the valuation method with Finnish forest assets increased Stora Enso’s share of the carrying amount of forest assets by approximately EUR 240 million, divided between an increase in biological assets of EUR 170 million and an increase in forest land of EUR 70 million. Net of taxes, the change resulted in about EUR 190 million increase in investments in equity accounted investments.
The increase in forest land assets is recognised in the OCI net of deferred taxes and does not have an impact on the income statement. The fair value changes in biological assets is recognised in the income statement. The comparative periods have not been restated. See Note 12 Forest assets for more details.
Note 2 Critical accounting estimates and judgements
The Group has biological assets in subsidiaries, joint operations and associated company. Biological assets, in the form of standing trees, are accounted in accordance with the IAS 41 Agriculture standard, which requires that the assets are measured at fair value less the costs to sell. Fair value is determined by using discounted cash flows from continuous operations based on sustainable forest management plans taking into account the growth potential of one cycle. These discounted cash flows require estimates of growth, harvesting, sales price, costs and discount rate. In determining the value of biological assets, the management needs to make estimates of future price levels and trends for sales and costs, and to undertake regular surveys of the forest to establish the volumes of wood available for harvesting and their current growth rates.
See next chapter for estimates and judgement applied in valuation of Nordic forest assets and Note 12 Forest assets for more detailed information about Nordic and plantation forest assets.
Nordic forest assets
The fair value of forest assets in the Nordics is determined using a market approach method, which is based on the forest market transactions in the areas where Stora Enso’s forests are located. Market prices between areas vary significantly and judgement is applied to define relevant areas for market transactions used in valuation. The valuation of the forest assets is based on detailed transaction data and price statistics as provided by market data suppliers. Market transaction data is adjusted to consider characteristics and nature of Stora Enso’s forest assets and to exclude certain non-forest assets and transactions considered as outliers compared to other transactions. The valuation takes into account where the forest land is located, price levels and volume of standing stock. The value of the forest assets will be affected by changes in transaction prices and by how the volume of standing stock develops. Stora Enso is applying weighted three-year average market transaction prices and this is considered to include a sufficient amount of transactions and estimated to represent market conditions at the reporting date.
The value of the forest assets is allocated to biological assets and forest land. Allocation of the combined fair value of forest assets is based on the income approach where separate present values of expected net cash flows are calculated for both biological assets and forest land. The discount rate is determined as the rate at which the valuation based on market transaction prices matches the total forest assets combined cash flows for biological assets and forest land. The total net cash flows for each of the components include estimates in respect of future harvesting volumes, sales price levels, and cost development. See Note 12 Forest assets for more information.
Note 12 Forest assets
The forest assets of Stora Enso are defined as standing growing trees, classified as biological assets, and related forest land. The biological assets of Stora Enso consist of standing trees to be used as raw material in pulp and mechanical wood production and as biofuels.
Forest asset valuation is based on continuous operations and sustainable forest management, also taking into consideration environmental restrictions and other reservations. Biological assets are recognised and valued in accordance with the IAS 41 Agriculture standard at fair value and forest land assets are recognised in accordance with the IAS 16 Property, plant and equipment standard. Leased forest land assets are presented as part of right-of-use assets in Note 11 Intangible assets, property, plant and equipment, and right-of-use assets. The Group changed its valuation method related to Finnish forest asset valuation at the end of 2022 to correspond to the valuation method applied with Swedish forest assets, as explained in Note 1 Accounting principles.
Nordic and plantation forest assets are classified as different classes of assets due to different nature, usage and characteristics of the assets. The main difference is the short-term growing cycle of 6–12 years in plantations versus the long-term growing cycle of 60-100 years in Nordic forests. There are also differences in regeneration methods, forest management, and the use of the assets for other purposes.
Nordic forest assets include holdings in Sweden and Finland and plantation forest assets include holdings in China, Brazil and Uruguay. Accounting policies for the different class of forest assets are presented separately below. In addition the Group has minor forest asset holdings in Estonia and Romania through associate company Tornator. The Group has forest assets in its own subsidiaries in Sweden and China as well as in joint operations in Brazil and Uruguay, and in equity accounted investment in Finland. Stora Enso also ensures that the Group’s share of the valuation of forest holdings in equity accounted investments and joint operations are consistent with Group accounting policies. At harvesting, biological assets are transferred to the inventory.
Nordic forest assets
Forest assets in Sweden and Finland are recognised at fair value and valued by using a market approach method on the basis of the forest market transactions in the areas where Stora Enso’s forests are located. Stora Enso’s forest assets create value by securing wood supply, increasing long-term yield, optimising land use and securing financial flexibility. They play an important role in mitigating climate change impacts, as growing trees absorb CO2. The forests also offer opportunities for future value streams, such as wind power.
The total forest assets value is calculated with verified inventory data and regional standing stock prices, considering among others:
- regional market transaction data based on the forest assets’ geographical locations,
- standing stock prices by forest cubic meter (m3 fo) combined from traded forest estates and
- regional standing stock inventory.
Information relating to forest asset transactions are available from market data suppliers. The market transaction information can be viewed as market-corroborated inputs. Certain adjustments are made to refine the market-corroborated inputs using unobservable inputs, therefore inputs are categorised to fair value hierarchy measurement level 3. The judgements are further explained in Note 2 Critical accounting estimates and judgements.
The total value of the forest assets in Nordics is allocated across biological assets and forest land. Allocation of the combined fair value of forest assets is based on the income approach where separate present values of expected net cash flows are calculated for both biological assets and forest land. The discount rate is determined as the rate at which the valuation based on market transaction prices matches the total forest assets combined cash flows for biological assets and forest land. The discount rate is estimated to be the same for biological assets and forest land as the nature and timing of the cash flows are similar.
Biological assets are measured at fair value in accordance IAS 41. The fair value is based on the income approach and the discounted cash flow method whereby the fair value of the biological assets is calculated using cash flows from continuous operations, taking into account the growth potential of one cycle. Forest land is measured at fair value using the revaluation method as defined in the IAS 16 standard. Fair value of forest land is measured based on income approach, including net cash flows related to trees to-be-planted in the future as well as other land related income, such as hunting rights, wind power leases and soil material sales.
Changes in the fair value of biological assets are recognised in the income statement.
Changes in the fair value of forest land, net of deferred taxes, are recognised in other comprehensive income (OCI) and accumulated in a revaluation reserve in equity. Revaluation reserve is not recycled to the income statement upon disposal. If the fair value of forest land were to be less than cost, the difference would be recognised in the income statement as an impairment loss.
Plantation forest assets
In plantation forest areas, biological assets are recognised at fair value in accordance with the IAS 41 standard and based on the income approach in those areas where the Group has forest land. Fair value measurement is based on fair value hierarchy measurement level 3. Forest land is measured initially and subsequently at cost, using the cost model as defined in IAS 16 standard.
The valuation of biological assets is based on the discounted cash flow method calculated using cash flows from continuous operations and based on sustainable forest management, taking into account growth potential of one cycle. The fair value of the biological assets is based on the productive forest land. The yearly harvest from the forecasted tree growth is multiplied by wood prices and the cost of silviculture and harvesting is deducted. The fair value of the biological assets is measured as the present value of the harvest from one growth cycle, taking into consideration environmental restrictions and other reservations. The discount rate applied is determined using the weighted average cost of capital method.
Young standing timber less than two years old (less than three years in Montes del Plata) is considered to be an immature asset and accounted at cost. Fair value is deemed to approximate the cost when little biological transformation has taken place or the impact of the transformation on the price is not expected to be significant, which varies according to the location and species of the assets.
Changes in the fair value of biological assets are recognised in the income statement. The forest land is measured at cost and not depreciated.
The value of forest assets disclosed in the consolidated statement of financial position from subsidiary companies and joint operations amounts to EUR 6,846 (EUR 6,747) million as shown below. The Group’s indirect share of forest assets held by associated company amounts to EUR 1,271 (EUR 985) million. The total forest asset value, excluding leased forest land, amounts to EUR 8,117 (EUR 7,732) million.
1 For biological assets, changes are presented in the profit and loss. For forest land, changes in fair value are recognised directly in equity.
2 Not including leased forest land.
Valuation and standing stock of forest assets
1Forest cubic meters
2Solid under bark (sub) cubic meters
1Forest cubic meters
2Solid under bark (sub) cubic meters
Subsidiaries and joint operations
At the end of 2022, forest assets (excluding leases) were located by value, in Sweden 89% (89%), China 3% (3%), Brazil 2% (2%) and Uruguay 6% (6%). The total area amounts to 1,713 (1,715) thousand hectares of which 7% (7%) is leased and under 1% (1%) is restricted. From Stora Enso’s total forest holdings 1,345 (1,346) thousand hectares is productive forest area. The Montes del Plata and Veracel amounts take into account the ownership share.
At the end of 2022, the value of the biological assets in Swedish forests amounted to EUR 3,963 (EUR 4,005) million, related forest land amounted to EUR 2,113 (EUR 2,012) million and the total forest assets amounted to EUR 6,076 (EUR 6,017) million. The value increase in the forest assets value is mainly driven by higher market prices, whereas foreign exchange impact netted the impact of price increases and decreased the value with approximately EUR 485 million. Deferred tax liabilities related to forest assets amounted to EUR 1,250 (EUR 1,237) million. The discount rate of 3.6% (3.5%) was applied in the valuation.
The productive area in Swedish forests amounted to 1,142 (1,141) thousand hectares with a standing stock of 150.5 (150.5) million forest m3. The weighted three-year average market transaction price applied in the valuation for Swedish forests assets in 2022 is EUR 40 (EUR 40) per forest m3. The forest asset value corresponds to an average of EUR 5,320 (EUR 5,270) per ha of productive forest area.
The valuation of the forest assets is based on detailed transaction data and price statistics as provided by different market data suppliers. Market transaction data is adjusted to consider the characteristics and nature of Stora Enso’s forest assets and to exclude certain non-forest assets and outliers. The valuation takes into account where the forest land is located, price levels and volume of standing stock. Market prices between areas varies significantly. Future changes in value of Swedish forest assets are impacted by changes in market transaction prices and changes in volume of standing stock, considering growth and other changes. See also Note 2 for information related estimates and judgment applied in the valuation.
Forest asset location and volume
At the end of 2022, the value of the biological assets in Guangxi, China, amounted to EUR 196 (EUR 200) million. All the forest land in China is leased. The value decrease is mainly driven by foreign exchange impact and increased discount rate, whereas higher prices increased the value. The biological assets included young standing timber with a value of EUR 27 (EUR 33) million. The discount rate of 10.2% (8.6%) used in the discounted cash flows (DCF) increased in 2022. The productive forest area in Guangxi totals to 64 (68) thousand hectares with a standing stock of 4.1 (4.9) million forest m3.
Veracel is a 50% joint operation in Brazil. Stora Enso’s share of the biological assets was EUR 103 (EUR 81) million. The increase is mainly driven by increased prices and foreign exchange impact, whereas increased discount rate and higher costs decreased the value. The biological assets included young standing timber with a value of EUR 31 (EUR 21) million. The discount rate of 7.9% (6.9%) used in the DCF increased in 2022. The related forest land is measured at cost. Stora Enso’s share of the productive forest area totals to 47 (47) thousand hectares with a standing stock of 5.2 (5.0) million forest m3.
Montes del Plata
Montes del Plata (MdP) is a 50% joint operation in Uruguay. Stora Enso’s share of the biological assets was EUR 269 (EUR 260) million. The movement is mainly driven by foreign exchange impact and discount rate change. The biological assets included young standing timber with a value of EUR 50 (EUR 46) million. The discount rate of 9.0% (6.5%) used in the DCF increased in 2022. The related forest land is measured at cost. Stora Enso’s share of the productive forest area totals to 92 (90) thousand hectares with a standing stock of 15.5 (13.9) million forest m3.
Tornator Oyj is a 41% owned Finnish associate company. Stora Enso’s share of the biological assets was EUR 1,122 (EUR 906) million, related forest land amounted to EUR 149 (EUR 78) million, and total forest assets equalled to EUR 1,271 (EUR 985) million. The increase in the value of forest assets is mainly driven by moving to market transaction based valuation method from discounted cash flow based method concerning forest assets in Finland. Acquisitions also increased the forest asset value. See Note 1 for more details related to changes in the valuation method.
Stora Enso’s share of the productive forest area totals to 277 (271) thousand hectares with a standing stock of 32.8 (32.7) million forest m3. The weighted three-year average market transaction price applied in the valuation for forest assets located in Finland in 2022 is EUR 42 per forest m3. The forest asset value in Finland corresponds to an average of EUR 4,750 per ha of productive forest area.
Valuation sensitivities of significant assumptions of a +/- 10% movement
Swedish forest asset valuation is sensitive for changes in market transaction prices and volume of standing stock. A change in the average market price of forest assets of EUR 1 per forest m3 would impact the value of forest assets by EUR 151 (EUR 150) million. A change in the volume of standing stock of 1 million forest m3 would impact the value of forest assets by EUR 40 (EUR 40) million.
Risks and risk management (extracts)
Climate change – physical impacts
Long-term (25–30 years) changes in precipitation patterns, periods of drought, frequent extreme weather events and higher average temperatures that increase the risk of forest fires and insect outbreaks, could cause damage to operations, forests and tree plantations, affecting forests asset values and regional wood prices. Milder winters could also have an impact on the harvesting and transport of wood and related costs in northern regions. More frequent extreme weather events also increase the risk of disruptions in the production, logistics and supply of raw materials and energy.
During 2022, a quantitative analysis regarding climate resilience was conducted in the South American plantations based on three scenarios: SSP1-1.9 (~1.5⁰C and net-zero CO₂ emissions), SSP2-4.5 (~2.7⁰C and CO₂ emissions are similar to current) and SSP5-8.5 (~4.4⁰C and CO₂ emissions are double that of the current). Results show a relative resilience of the plantations. Financial consequences are not expected to be material in SSP1-1.9 and SSP2-4.5 scenarios, but could be material in SSP5-8.5. Read more in the following chapter TCFD, and in an index table available at storaenso.com.
Mitigation measures and opportunities
Physical risks are to a great extent subject to risk transfer and thereby within the cover of Stora Enso’s property and business interruption insurance programs. With regards to forest and plantation assets, Stora Enso benefits from strategic resilience through geographical diversification within the asset portfolio. Diligent plantation planning is ensured to avoid frost sensitive areas and R&D programmes are applied to increase tolerance to extreme temperatures. Stora Enso maintains a diversity of forest types and structures and enforces diversification in wood sourcing. Wood harvesting in soft soils involves the implementation of best practices guidelines.
Nordic forests in Finland and Sweden could also benefit from increased heat summation and longer growing seasons, leading to acceleration in forest growth with direct positive impact on the value of own forest assets and an indirect impact related to market wood availability and costs.
Stora Enso’s businesses may be affected by political or regulatory developments in any of the countries and jurisdictions where it operates, including changes to forest, biodiversity, environmental, fiscal, tax or other regulatory regimes. Potential impacts include higher costs and capital expenditure to meet new requirements, the expropriation of assets, imposition of royalties or other taxes targeted at the industry, and requirements for local ownership or beneficiation.
The EU Green Deal and its climate targets for 2030 and 2050 have resulted in a proliferation of future legislation which have been further advanced in 2022 and may impact Stora Enso’s future operations. The policy initiatives from the European Commission will include policies and legislation on areas such as EU Forest and Biodiversity strategies, the Renewable Energy Directive, EU Emission Trading System (ETS), Sustainable products initiative, Packaging and Packaging waste revision as well as EU taxonomy.
Political decisions on forest resources, could limit the availability of wood, increase costs and reduce investment opportunities.
Stora Enso has been granted various investment subsidies and has given certain investment commitments in different countries e.g. Finland, China and Sweden. If committed planning conditions are not met, local officials may pursue administrative measures to reclaim some of the formerly granted investment subsidies or to impose penalties on Stora Enso, and the outcome of such a process could result in a negative financial impact on Stora Enso.
Mitigation measures and opportunities
Active monitoring of regulatory and political developments in the countries where Stora Enso operates as well as participation in policy development mainly through industry associations and other partnership programmes are important risk mitigation regarding regulatory changes. Regulatory changes can also bring significant opportunities by driving market growth for sustainable products and create competitive advantage through resource efficiency and renewability.
Competition and market demand
The packaging, pulp, paper and wood products industries are mature, capital intensive and highly competitive. Stora Enso’s principal competitors include several large international forest products companies and numerous regional and more specialised competitors. Customer demand is influenced by the general economic conditions and inventory levels and affects product price levels. Product prices, which tend to be cyclical, are affected by capacity utilisation, which decreases in times of economic slowdowns. Changes in prices differ between products and geographic regions.
The following table shows the operating profit sensitivity to a +/- 10% change in either price or volume for different segments based on figures for 2022.
Operating profit: Impact of changes +/- 10%, EUR million
Mitigation measures and opportunities
The ability to respond to changes in product demand and consumer preferences and to develop new products on a competitive and economic basis calls for innovation, continuous capacity management and structural development. The risks related to factors such as demand, price, competition and customers are regularly monitored by each division and unit as a routine part of business management. These risks are also continuously monitored and evaluated on a Group level to gain a perspective of the Group’s total asset portfolio and overall long-term profitability potential.
Stora Enso, as one of the biggest private forest owners in the world, also benefits from a strategic renewable resource base. The Group’s expertise in wood and wood based renewable materials is focused on responding to changing customer and consumer preferences, driven by climate change. Products based on renewable materials with a low carbon footprint help customers and society at large to reduce CO2 emissions by providing an alternative to solutions based on fossil fuels or other non-renewable materials.