IAS/IFRS Accounting and Forest Valuation on Farm Forestry

Transcription

1 IAS/IFRS Accounting and Forest Valuation on Farm Forestry FIGURES FOR FORESTS International Workshop Freiburg, Germany, Markku Penttinen 1), Arto Latukka 2) & Olli Rantala 2) 1) Finnish Forest Research Insitute (METLA) 2) Agrifood Research Finland / Economic Research Contents: * The profitability bookkeeping network of the FADN of the EU and the Finnish Ministry of Agriculture and Forestry * EconomyDoctor service of the MTT Agrifood Finland * Forestry accounting state of the art in the service * Forest management plans of the forest holdings and Forest management planning service of the FFRI (MELA) * Accounting developments * Extranet EconomyDoctor service covering even forestry * Summary and conclusions 1

2 The profitability book-keeping network * Agriculture, horticulture, reindeer husbandry, forestry and the diversification of business * A book-keeping farm can be disaggregated into different production lines (business areas) * Based on the accounting data collected annually from the approximately 1050 bookkeeping * The monitoring is based on the profitability book-keeping application, MARTTI * Since 1995, the Farm Accountancy Data Network (FADN) of the member states of the European union (EU) has also been taken care by MTT Economic Research. * Recently, EconomyDoctor service supplier results and even Extranet service to the book-keeping entities The accounting information system MARTTI and the forest management planning system MELA have been integrated via the Internet using the XML protocol and service procedures established for book-keeping farms Use of FMP-data in Forest Profitability Accounting Annual reports Book-keeping farm FMP with the stand and tree stratum information Other forest accounting data: - receipts - expenditures - assets, debts - labour input - own/farm use -etc. Profit and loss Balance sheet account Closing of accounts Summary variables: - value/change of growing stock and bare land Stand treatments (management events) Stumpage price information Updated data by stand and tree stratum as input data for Martti-system Forest Research Institute Output-data (xml-format) MELA -system Input-data for MELA (xml-format) 2

3 NettiMELA and profitability bookkeeping Bookkeeping farm Forest management plan with the forest stand information to Excelfile Stand treatments to xml-file Stand treatments Data tables (input) Feedback Other forest variables Summary (t-1) Price information xml-input for NettiMELA MTT Economic Research Income statement Balance sheet Financial statements Data tables Results Summary Forest Research Institute NettiMELA FTP -server ACCOUNTING SOLUTIONS FOR THE PROFITABILITY BOOK-KEEPING OF FORESTRY Applied IAS/IFRS: IAS 41 Agriculture for the growing stock with fair value: moreover even all optional reporting mentioned in IAS 41 implemented IAS 16 Property, Plant and Equipment for the bare land with revaluation option NOT IAS 40 Investment property IAS 2 Inventories for harvested biological assets, fair value used IAS applied even for government grants NOT IAS 20 Accounting for Government Grants No intangible assets such as production quotas exist, and therewith IAS 38, Intangible Assets NOT needed No asset impairment found, IAS 36 Impairment of assets ignored POINTS OF INTEREST: Right interest rate: Swedish industry 6.25%, JOF Forestia in Finland 7%, our analysis suggests 4% in Southern Finland Fair valuation of the growing stock = NPV with stumpage prices Fair valuation of the bare land=npv with 150 years calculation Reforestation: decommissioning costs NOT investments 3

4 PROFITABILITY BOOKKEEPING OF THE AGRIFOOD RESEARCH From cash based taxation bookkeeping to accrual based accounts Forest valuation based on the taxation value for the time being Closing of books Cash basis (Agricultural taxation law) CASH- REVENUES Corrections Correction of revenues: Accounts receivables other accrued incomes (-/+) (receivables) Prepaid earnings: Advances reveived (+/-) (debts) Accrual basis REVENUES/ TURNOVER (-/+) Change in stocks of products & animals + prod. for own use TOTAL RETURNS CASH- EXPENDITURES Correction of expenditures: Trade payables other accrued expences (-/+) (debts) Advance payments: Advance payments (+/-) (receivables) EXPENDITURES (+/-) Change in inventories +cost of own resources (labour and capital) TOTAL COSTS (+/-) beginnig/end of accounting period Information systems solutions CHOICES: - Target variable in the value of the growing stock definitions when applying the simulation and optimisation - Target variable and constraints in allowable cut definitions - What result variables of MELA (MELA = MEtsäLAskelma = FOrestCAlculation) should be used - How could the forest inventory of the forest management plan of a forest holding be obtained in a machine readable form - What organisations and who is in charge of different phases of the production process EMPIRICAL EVIDENCE - Quite recent forest inventory of the forest management plan - Updates after the plan such as fellings and silvicultural activities - After thinning: measurements such as basal area in some cases but simulated volumes by roundwood assortment in most cases 4

5 Closing of the books of forestry accounting Assets NON-CURRENT ASSETS Intangible assets Tangible assets Land and water areas Bare land value Biological assets Non-merchantible growing stock Investments CURRENT ASSETS Stocks Work in progress Receivables Allowable cut Financial assets Cash in hand and at bank Total assets BALANCE SHEET Equity and Liabilities EQUITY Capital Reserves LIABILITIES Long-term liabilities Short-term liabilities Forest land -bare land value Fair value of growing stock -young and middle aged stands -allowable cut Total equity and liabilities PROFIT AND LOSS ACCOUNT Sales proceeds Subsidies Turnover Change in stocks (+/-) Other operating income Variable costs Fixed costs (incl. own work) Depreciations Change in the fair value of biological assets Change in the growing stock Change in allowble cut Operating result Financial income and expenses Net result Changes in stumpage prices Realised profit (loss) Interest claim for equity Entrepreneur s profit The impact of changes in stumpage prices on the fair value of growing stock during the accounting period. removes of price changes from the fair value of the growing stock, which is calculated at current stumpage prices. Closing of the books BALANCE SHEET - Bare land to Land and waters, revaluation each year - Allowable cut to Work in progress of Stocks - Non-merchantable growing stock to Biological (tangible) assets - Reforestation costs expensed at once, neither reservations after felling nor depreciations after reforestation PROFIT AND LOSS ACCOUNT - Change in the fair value of biological assets as late as possible, i.e. befofe Operating profit - Profit (loss) of the financial year subtracted by the stumpage price impact on the change in the fair value => Realised profit (loss) - Realised profit subtracted by the interest claim for the equity => Entrepreneur s profit (Economic Value Added = EVA) MAXIMUM REPORTING - Split between the impacts of the price and physical changes - Split between allowable cut and non-allowable cut 5

6 The constructive appoach applied Practical relevance Practical functioning CONSTRUCTION, problem solving Theory connection Theoretical contribution Figure. Elements of constructive research Kasanen, E., Lukka, K. & Siitonen, A The constructive approach in management accounting research. Journal of Management Accounting Research 5(1): Solutions for profitability book-keeping and EconomyDoctor - The Economic Research of the MTT Agrifood Finland has a nearly 100 years tradition in profitability book-keeping - The existing book-keeping very detailed and consists even work hours of the owner family disaggregated to activities - Present forestry accounting based on taxation values = unsatisfied - Forest management plan and its update enable IAS/IFRS - The constructive approach has been applied - Fair value of the growing stock requires simulation and an optimisation with objective variable such as NPV - Allowable cut requires as above but also a set of constraints - Fair value of the bare land requires as above, but start with scratch - Reforestation cost simply expensed immediately - Subsidies recognised already after turnover - Stumpage prices those at the end of the fiscal year - All solutions have been programmed and implemented 6

7 Ratio analysis for foresty 7,0 % 6,0 % A: Change of growing stock in current prices (fair value) B: Change of growing stock in fixed prices (volume change) 5,0 % 4,0 % 3,0 % 2,0 % 1,0 % 0,0 % A: Current prices B: Fixed prices The return on assets (ROA) and the return on equity (ROE) for 2004 and 2005 recognising (A) and ignoring (B) the price change Summary and conclusions - Service improvement of the book-keeping is the focus - Inclusion to EconomyDoctor and Extranet service targeted - Availability of machine readable forest inventories the problem - Updates of the inventories a challenge - Organisational challenges from farms to Economic Research of the MTT Agrifood Finland and the FFRI and back - ICT technology using XML, firewalls etc in order to enable the discussion between the book-keeping system (MARTTI) and the forest management planning system (MELA) tested and working - The development of forestry book-keeping and forest valuation have been performed and results implemented - Forest valuation a very sensitive question especially in case of dispute between owners - The ambiguity of fair values, claimed by many authors, not a serious problem in case interest rate is supported by the market prices of the holdings (the industry does not report used rate) - Systems and products developed under 100 years made this accounting research and development possible 7

8 Thank you for your attention Markku Penttinen Arto Latukka Jussi Leppänen Olli Rantala Reference: Penttinen, M. & Rantala, O The International Financial Reporting Standards (IFRS) accounting system as applied to forestry. Working Papers of the Finnish Forest Research Institute pp. Available at: /mwp093.htm. 8