The forest has been called “the green gold of Sweden” and is an important source of income for many private land owners and corporations. However, Swedish forestry requires a very long term perspective. Due to the climate on the northern hemisphere, the person who plants a tree rarely gets to harvest it during his own lifetime. How should an asset like this be accounted for? The International Financial Reporting Standards (IFRS), implemented in Sweden in 2005, requires that growing forest is valued at fair value, first and foremost using prices set by the market in real market transactions. The four largest owners of forest in Sweden are Sveaskog, SCA, Bergvik Skog and Holmen. Each of these companies has forest holdings larger than one million hectares, which is roughly as large as the Swedish province of Skåne. All four of them have made the assessment that no relevant market is available that can be used to value holdings of this size. Instead, when they implemented IAS 41 in 2005, they all decided to determine fair value through the use of a discounted cash flow model. The idea is to discount all net cash flows that will result from forestry for the next 100 years to a present value. Comparing the book values of growing forest for these companies with the market transaction prices of smaller forest real estates, the gap is striking. According to LRF Konsult, the largest estate agent of agricultural and forest properties in Sweden, the price per cubic meter (price/m3) of forest properties that were exchanged during 2007 is about three times higher!
During the period 2004-2007 the market price for forest real estate properties in Sweden, increased with 57% (218-343 SEK per m3).4 During the same period, the balance sheet values on average increased with 17%, for the forest industry (94-110 SEK per m3).5
Admittedly, a forest property consists not only of standing timber, but also of land. Still, given this gap, is it really possible that the current book values are the fair values of the growing forest according to IAS 41? Does the current accounting fail to fulfill its main objective; to communicate relevant information to investors? Or is it actually the case that the “size discount” for a large forest holding is this substantial? These are the kind of issues this
The forest has been called “the green gold of Sweden” and is an important source of income for many private land owners and corporations. However, Swedish forestry requires a very long term perspective. Due to the climate on the northern hemisphere, the person who plants a tree rarely gets to harvest it during his own lifetime. How should an asset like this be accounted for? The International Financial Reporting Standards (IFRS), implemented in Sweden in 2005, requires that growing forest is valued at fair value, first and foremost using prices set by the market in real market transactions. The four largest owners of forest in Sweden are Sveaskog, SCA, Bergvik Skog and Holmen. Each of these companies has forest holdings larger than one million hectares, which is roughly as large as the Swedish province of Skåne. All four of them have made the assessment that no relevant market is available that can be used to value holdings of this size. Instead, when they implemented IAS 41 in 2005, they all decided to determine fair value through the use of a discounted cash flow model. The idea is to discount all net cash flows that will result from forestry for the next 100 years to a present value. Comparing the book values of growing forest for these companies with the market transaction prices of smaller forest real estates, the gap is striking. According to LRF Konsult, the largest estate agent of agricultural and forest properties in Sweden, the price per cubic meter (price/m3) of forest properties that were exchanged during 2007 is about three times higher!
During the period 2004-2007 the market price for forest real estate properties in Sweden, increased with 57% (218-343 SEK per m3).4 During the same period, the balance sheet values on average increased with 17%, for the forest industry (94-110 SEK per m3).5
Admittedly, a forest property consists not only of standing timber, but also of land. Still, given this gap, is it really possible that the current book values are the fair values of the growing forest according to IAS 41? Does the current accounting fail to fulfill its main objective; to communicate relevant information to investors? Or is it actually the case that the “size discount” for a large forest holding is this substantial? These are the kind of issues this
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