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IFRSinFPP*ApplyingInternationalFinancialReportingStandardsintheforest,paperandpackaging(FPP)industry

IndustriesForest,paper&packaging

*connectedthinking pwc

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Contents

Welcome 1

FavourableregulationsandthemarketdrivingtheuseofIFRSintheindustry 2

TwoyearswithIFRS–Beyond“numbercrunching” 3

Non-IFRSpreparers–EmbeddingIFRSinyourorganisation:people,processesandsystems 5

Aboutwww.pwc.com/fpp/ifrs 7

IntroductiontothefirstsetofIFRSsolutionsforforest,paperandpackagingindustry 8

PricewaterhouseCoopersIFRSexpertiseandresources 23

Dedicatedtotheindustry 24

Welcome

Wearecurrentlywitnessingamajorstepforwardinthedrivetowardsasinglefinancialreportinglanguageintheindustry.Listedforest,paperandpackagingcompaniesintheEuropeanUnionarenowrequiredtocomplywithInternationalFinancialReportingStandards(“IFRS”)fortheirgroupfinancialstatements.Manyforest,paperandpackagingcompaniesaroundtheworld,particularlythoseinemergingmarkets,arejoiningthisprocess–becausetheyarerequiredtodosobycurrentorpendinglegislation,asaresultoftherequirementsoftheinternationalcapitalmarkets,orsimplybecauseoftheirneedtobetransparentintheircommercialandtradingactivities.

AdoptingIFRSisacomplexchallenge.OurglobalsurveyInternational Financial Reporting Standards. Ready for take-off?indicatedgenerallythattheextentofeffortrequiredtoimplementIFRStendedtobesignificantlyunderestimatedandthatmanycompaniesdidnotimplementIFRSinaholisticmanner.Withtoday’sincreasingfocusonrobustfinancialreportingbybothregulatorsandthemarkets–Section404oftheSarbanes-OxleyActintheUSisanexcellentexampleofthis–managementofforest,paperandpackagingcompaniesseekingtoimplementIFRSmustdosoinathoroughway,payingfullattentiontothecontrolenvironmentsurroundingthepreparationoftheIFRSfinancialstatements.Particularfocusshouldbepaidtoindustryspecificissuesandindeedindustryuniqueissuessuchasfairvalueaccountingofgrowingtrees,long-termsupplyarrangements,bartertransactions,etc.

Thispublicationandtherelatedwebsitewww.pwc.com/fpp/ifrsarepartofoureffortstohelptheforest,paperandpackagingindustryimplement,embedorinterpretIFRS–bybridgingthegapbetweenthesignificantnumberofpublicationsandarrayofinformation,whichreadilyexistsregardingtheimplementationofIFRS,andthespecificissuesaffectingplayersintheforest,paperandpackagingindustry.ThispublicationandrelatedwebsitearedesignedtocomplementApplyingIFRS,PwC’sinteractiveguidanceontheinterpretationandapplicationofIFRS(availableatwww.pwc.com/ifrs),whichcontainsmanysolutionsrelevanttocompaniesseekingtoapplyIFRS,aswellasanumberofotherPwCIFRStoolsavailabletoourclients.

Atthetimeoftherelease,21specificforest,paperandpackagingsolutionsareincludedinthispublicationandavailableonline.ThisisonlythebeginningoftheprocessandourwebsitewillbeexpandedasnewIFRSsolutionsaredeveloped.Oursolutionswillbeextendedbasedonourownresearchandexperienceandinresponsetoyourquestions.Aspartofthisprocess,wewouldverymuchliketohearfromyoueitherbycontactingoneofthenameslistedintheIFRS expertisesectionatthebackofthispublicationorbyprovidingusyourthoughtsviaourwebsitewww.pwc.com/fpp/ifrs.

WebelieveyouwillfindthispublicationhelpfulinunderstandingtheimplicationsofIFRSontheforest,paperandpackagingindustry.

Robert BarndenGlobalForest,Paper&PackagingLeaderPricewaterhouseCoopers

Bo LagerströmGlobalForest,Paper&PackagingAccountingGroupLeaderPricewaterhouseCoopers

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OurexperienceshowsthatIFRSisbecomingincreasinglymoreimportantintheforest,paperandpackagingindustry.Otherthantocomplywithin-forceorexpectedregulatorychanges,thisisdrivenbytwokeyfactors:

Theriseofkeyindustryplayersinemergingmarketswherelocalaccountingstandardsarenotgenerallyacceptedininternationalmarkets.Thisisthecase,forexample,inRussia,ChinaandSouthAmericawherethereareanumberofforest,paperandpackagingcompaniesoperatingglobally.ManyhavechosenIFRSastheirexternalreportingframework.

ThebroadacceptanceofIFRSininternationalcapitalmarkets,asindicatedinthefollowingsummarytable:

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FavourableregulationsandthemarketdrivingtheuseofIFRSintheindustry

MarketAcceptabilityofIFRS Comments

NYSE Yes ReconciliationofthenetprofitandtotalequityfromIFRStoUSGAAPisrequired.AdditionaldisclosuresunderUSGAAP(e.g.pensions,acquisitions).

LSE Yes NoneedtorestateorreconciletoUK,USGAAPorotherstandard.

Frankfurt Yes NoneedtorestateorreconciletoGermanGAAPorotherstandard.

HongKong Yes ForprimarylistingsonlyIFRSregistrantsarerequired:aTodiscloseandexplaindifferencesofaccountingpracticebetweenIFRSandHKFRS(HongKongFinancialReportingStandards),whichhaveasignificanteffectontheirfinancialstatements;andaTocompileastatementofthefinancialeffectofanysuchmaterialdifferences.Abovedisclosuresarenotrequiredforsecondarylistings.

Luxembourg Yes NoneedtorestateorreconciletoLuxembourgGAAPorotherstandard.

Stockholm Yes NoneedtorestateorreconciletoSwedishGAAPorotherstandard,exceptfortheparentcompanystandalonefinancialstatements.

Tokyo Possible ThepossibilityofIFRSreportingisdecidedindividuallyforeachforeignapplicant.TheapplicantisrecommendedtocontacttheFinancialServiceAgency(FSA).

Toronto Yes NoneedtorestateorreconciletoCanadianorUSGAAPorotherreportingframework.

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Two years with IFRS…

BeforethetransitiontoIFRSin2005,PwCconductedaglobalsurvey:International Financial Reporting Standards. Ready for take-off? ThesurveyshowedthatfewcompanieshadputnewprocessesandappropriateinternalcontrolsinplacetoensurethattheirIFRSdatawasrobust.Today,twoyearsafterthetransitionandwiththesecondyearfinancialstatementspreparedinaccordancewithIFRSsoontobepublished,wehavebeenabletoconcludethattheprocessesappeartohaveworkedquitewell.

The numbers are important…

Asexpected,thefundamentaldriveroftheindustriesprocesstoadoptIFRSwaschangingthefinancialdata.Thisprocessgenerallyrequiredlittlealterationoftheunderlyingdatasystems.However,significanteffortwasneededwithregardto,forexamplei)valuationoftimberlandwithgrowingtrees,ii)identificationofcomponentswithinproperty,plantandequipment,iii)financialinstrumentswithissuesrelatingtoembeddedderivativesandhedgingstrategies.

…but so are disclosures

Afollow-upoftheindustry’scompliancewiththedisclosurerequirementsinIFRSindicatesthattheindustryisnotbetterorworsethanotherindustries.Specificdisclosurerequirementswithpossibilitiesforimprovementrefertoareassuchasi)impairmenttestofgoodwillandintangibleswithindefiniteusefullifesuchascertaintrademarks,ii)businesscombinations,andiii)discussionsonkeysourcesofestimationuncertaintyandjudgementsthatmanagementhasmadeintheprocessofapplyingtheentity’saccountingpolicies.

Previously,itwasnotuncommonforcompaniestoproduceIFRS“offline”byaddingIFRSreportingfunctionsattheendofthefinancialreportingvaluechain.Suchanapproachisnotonlyinefficientbutcanalsoleadtosurpriseswhentheaccountingeffectsofmanagement’sdecisionswerenotunderstoodatthetimeofmakingthedecision.Intheworstcasethiscanleadtoanunfavourablereactionfromthecapitalmarketsormanagementhavingtogotogreatlengthtoexplainwhyaparticulartransactionwasundertakenthewayitwas.Inourexperience,itisalsolengtheningthefinancialreportingcycle.

Webelievethattheindustryhascomealongwayintheprocessofembeddingchangeinthenumbers.Theindustryseemstohaveacquiredagoodunderstandingofthestandards,andtheimpacttheyhaveontheaccountingandmanagementofthebusiness.However,management’sfocusonthefinancialreportingprocessdoesnotendwiththesuccessful

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TwoyearswithIFRS–Beyond“numbercrunching”

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transitiontoIFRS.NewstandardsandadditionalinterpretationskeepcomingfromtheIASBasaresultofthecontinuingharmonisationproject.Hence,managementneedtostayalerttobeabletoresolveanyproblems–andcementingthenewaccountingapproachwithinallreportinglevelsoftheorganisation.Arecentexampleofthedevelopment’sfundamentalconsequencesisthepublicationofIFRS8OperatingSegments–astandardthatmayforcepartsoftheindustrytoreconsideritsinternalreportingstructure.

OurexperiencehasshownusthatcompaniesthathaveadoptedIFRSdidgetthemostvaluefromdoingsoinaholisticway,embeddingIFRSintheorganisationastheprimarymeansofinternalandexternalreportingandsupportingdecisionmaking.

IFRSneedstobeadoptedinaholisticmanner.Thismaybeintuitivelyobviousbutmanycompaniesarenotdoingsotoday…

…but why?

Inourexperiencethereareanumberofcontributingfactors:

Treatedsimplyasanaccountingissue–thetransitiontoIFRSistreatedsimplyasanaccountingissue:thebroaderanalysisofitsimpactonmarketinformationandnecessarymodificationstomatchinternalperformancemetricstoexternalreportingareoftennotcarriedout.

UnderestimatingthecomplexityofIFRS–companiesthatarealreadypreparingfinancialstatementsonarobustbasisofaccountingsuchasUSGAAPtendtounderestimatetheextentofdifferenceswithIFRS,particularlygiventhesignificantprogressmadethelastthreeyearsinthedevelopmentofIFRS.Forexample,in2004therewere22neworsignificantlyrevisedstandardstoconsider,includingverycomplexstandards,suchasIAS39onfinancialinstruments,IAS41onagricultureandIFRS3onbusinesscombinations.In2005,thereweretwonewstandardsandsevennewinterpretations.ApplyingIFRSrequiressignificanttechnicalskillstobeabletoapplythestandardsinawaywhichisappropriateandsustainable.

Resourceconstraints–insufficientresources(qualifiedpersonnelandfundsfortraining)havebeendevotedtothisissueparticularlywhenthechangetoIFRScomesatatimewhenmanycompaniesareveryfocusedondrivingcostsoutortheirbusinesses.Managementisfacingotherexpensiveactivities,financially,butalso,moreimportantly,intermsofresources,suchascompliancewiththeSarbanes-OxleyactforUSregistrants.

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Non-IFRSpreparers–EmbeddingIFRSinyourorganisation:people,processesandsystems

ThechallengeistoensurethateveryoneaffectedbythechangesunderstandstheconsequencesofconvertingtoIFRSandthetechnicalaccountingimplicationsofthenewstandards.Recognisingthosewhowillbeaffectedatanearlystageintheprocesshelpstomakesuretheyarecommittedtotheproject.Itisalsoimportanttoadoptaprogressiveapproachinwhichinformationisdeliveredontimeandinawaythatmakesitaseasyaspossibletoabsorbandtoexplainthecontextforthechanges.Itisfareasiertowinstaffoverwhentheyunderstandhowtheycancontribute,aswellastheoverallgoals.Ourexperienceshowsthatthemosteffectiveformofcommunicationisamixtureofworkshops,trainingeventsandmorestructuredformsoflearning.

Are you thinking about a transition to IFRS - what does it take to embed IFRS?

Ourexperiencetellsusthatforest,paperandpackagingcompaniesneedtoaddressthisissuefromanumberofangles–people,processesandsystems.

Embedding change in people

TheaccountingchangesthatconversiontoIFRSproduceswillaffectmanymorepeoplethanmightatfirstseemthecase,andtheyarelikelytobelocatedatalllevelsoftheorganisation.

ExecutivemanagementneedstounderstandtheimplicationsofIFRSinordertoexplainthecompany’sperformanceandlong-termstrategy.Initially,itmayalsohavetoexplaintheimpactoftheconversiononthecompany’sresults.Moreover,IFRSaccountingmayhavestrategicimplicationsforthewayinwhichthecompanystructurespartnershipsandotherformsofcollaborativeworking–bothcurrentandfuturearrangements,suchaslong-termsupplyagreementsandbusinesscombinations,maybeaffected.

Thecentralfinanceteam–whichisattheveryheartofmanagingthebusinessonanIFRSbasis–needstorespondonallmattersrelatingtotheapplicationofIFRSandoffersupportasrequiredthroughoutthebusiness.Inourexperience,itisnotunusualthatthecentralfinanceteamwillberequiredtodevelopandcarryouttrainingprogrammesandperformfieldvisitstohelpfinancestaffattheoperationalleveltobeabletoperformatanacceptablelevel.

Financestaffattheoperationallevel–thosewhoprovidetheinterfacebetweentheaccountingpoliciescreatedbycentralfinanceandtheoperationalemployees–needtounderstandtheimpactofIFRSontheaccountingtreatmentappliedatoperationalunits.

ManagementthroughouttheorganisationneedstounderstandthechangesinthekeyperformanceindicatorsandthemanagementinformationthatwillresultfromconvertingtheaccountstoIFRS.ItwillalsoneedtopreparebudgetsandfinancialplansonanIFRSbasis.

Managementcompensationarrangementsbaseduponexternally-reportedfinancialresultswillneedtobeadjustedtoensuretheycontinuetoprovidetheintendedincentiveandremunerationobjectives.

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Embedding change in processes and systems

ThechangesmostoftenassociatedwithconvertingtoIFRSarethosethatmustbeincorporatedinacompany’scorecomputersystems.Manyorganisations,indeed,perceivethesechangestobebackboneoftheproject.However,thedangeroffocusingtooheavilyontheimplicationsforacompany’sITsystemsisthatitcandistractattentionfromtheunderlyingtechnicalaccountingfactors.OurexperienceshowsthattechnicalaspectsofconversionmustcomebeforethedetailofthechangestothesupportingITsystems,althoughtheremaybesomescopefordevelopingtheseelementsinparallel.

Thekeytosystemchanges

ReviewtheexistingsystemsforbothIFRScapability/capacityandotherrequirementsthatmaybeinthepipeline.

Developtacticalsolutionstoachievethefirstyear’sreportingobligations.Thesewillbeacombinationoftemporarymanualsolutionsandsimplesystemchangesthatmayrepresentaprototypeofthefinalsolution.

DevelopthefinalstrategicsystemsolutionthatwillincorporatethechangestosupporttheadoptionofIFRSacrossthebusiness.

Ensurethatprocessessupportingsystemchangedonotcreateinformationbottlenecks.

Infact,theprocessofgoingthroughthetechnicalconversionoftenresultsinthedevelopmentofatacticalsystemssolutionevolvingintoalong-term,strategicsolution,whichthecompanycanimplementafteritsinitialassessmentoftheimpactofapplyingIFRS.Somecompaniesmightevenwanttomakeotherimprovements–theultimatechangebeingtheintroductionofanentirelynewfinancialsystem.

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Noconversationcanberegardedasconcludeduntilbothprocessandresultshavebeenacceptedbyacompany’sfinancialauditors.Itmakessensetoinvolvethematanearlystageintheproject,bothtoensurethattheyarecomfortablewiththeresultsandtolearnfromtheirexperienceofsupportingotherorganisationsthroughtheprocess.

Figure: IFRS embedding process – the seven key steps

Source:PricewaterhouseCoopers.International Financial Reporting Standards. Ready for take-off?

1 2 3 4 5 6 7Assessthehigh-levelbusinessimpact

Decideonaccountingpolicies

Identifynewdata

Adaptsystems

Putprocessesinplace

Enhanceinternalcontrols

ImplementIFRSforinternalmanagementreporting

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Aboutwww.pwc.com/fpp/ifrs

OurcurrentviewsontypicalIFRSissuesintheforest,paperandpackagingsector,whichrequireanIFRSsolution,arepostedonourwebsitewww.pwc.com/fpp/ifrs

Atthetimeofrelease,21specificforest,paperandpackagingIFRSsolutionsareincludedinthispublicationandavailableonthewebsite.

What is www.pwc.com/fpp/ifrs

aninteractiveelectronicpublication

developedbyPricewaterhouseCoopers’IFRSandforest,paperandpackagingexperts

updatedonanongoingbasis

guidanceontheapplicationofIFRSforforest,paperandpackagingcompanies

Easy to use

basedoncomponentsofIFRSfinancialstatements

solutionstakenfromreallifesituationstoillustratebestpractice

writteninclear,easytounderstandEnglish

Future development of www.pwc.com/fpp/ifrs

PwC’sIFRSsolutionsforforest,paperandpackagingwillberegularlyupdatedandimprovedwithadditionalsolutionsandguidanceasweencounternewaccountingissuesinthesector,asnewIFRSstandardsandinterpretationsdevelopand,justasimportantly,asweaddresstheissueswhichyouraise.

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Setting the scene

Theforest,paperandpackagingindustryspansplayersfromsmallandmid-sizedfamilyownedbusinesses,operatinglocallyandsupplyinglocalorregionalcustomers,towhollyintegratedmultinationalbusinesses,operatinggloballysupplyingalltypesofcustomers.Playersintheindustryoperatebasedonavarietyofstrategiesspanningfromniche-producttobroadandglobalcross-segmentproductandcustomerstrategies.

Theindustry,especiallyattheupstreamendofthepapervalue-chain,ishighlycapital-intensiveandtypicallyinvestswithinthefollowingsegmentsandinrelatedtypesofassets:

ownedorleasedforestlandwithgrowingtrees,togetherwithharvest-machines,loadersandlogtransporters

sawmills,engineeredwood,planingandjoinerymanufacturingfacilities

pulpandpapermills,includingenergygeneratingequipment,rangingfromhydroelectricaltoCHPtoevennuclearplants

wastehandling,processingandrecoveryfacilities

paperandboardmaking,coating,convertingandprintingmachines

landandseatransportationfleets,harbours,logisticscentresetc

Theindustryisalsocharacterisedashighlyfragmented.Forexample,onagloballevelthetoptenforestandpapercompaniescurrentlyrepresentonlyabout25%oftotalprimarypaperoutput,buttheprofileoftheindustryischangingtowardbothconsolidationoftheindustryandfurtherspecialisation.1

Key factors challenging the industry’s accounting and financial reporting champions

Theindustryisfacingmanyothersignificantaccountingandfinancialreportingissues,whicharecoveredinthisfirstsetofsolutionsfortheforest,paperandpackagingindustry.Otherkeyfactorsrepresentingindustrychallengesfrombothanaccountingandfinancialreportingperspective,aswellasanauditperspective,includeforexample:

Theindustryisbothcapital-intensiveandfragmented;somethingthatimpliesthatgrowththroughacquisitioncouldbeontheagendaofmanyplayersintheindustry.2

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IntroductiontothefirstsetofIFRSsolutionsforforest,paperandpackagingindustry

1.PricewaterhouseCoopersGlobalForest&PaperIndustrySurvey,2006Edition–Surveyof2005Results2.Branchingout–Globaldealactivityintheforest,paper&packagingindustry.

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Capital-intensiveproductionandcomplexlogisticprocessesusuallycomprisesignificantleasetransactionsandlong-termsupplyagreements.

Verticalintegrationcanmakeitdifficulttodefinecashgeneratingunits.

Regionalisationandglobalisationhaveintroducedtheneedformoreadvancedapproachestofinancing,includingcentralisedtreasuryfunctionswithresponsibilityfortheapplicationofcomplexfinancialriskmanagementstrategies.

Thecapital-intensivenatureoftheindustrygeneratesspecificaccountingissuesrelatedtomaintenanceandmajoroverhaulsandimpairmentofassets.

Capital-intensiveprocesseswhichmayincludeinvestmentsinmachinecomponentswithsignificantlydifferentusefullives.

Theindustryisamajorconsumerofenergyandavastvarietyofrawmaterials,whichcallsforcostefficientsupplyofenergyandabalancedflowofinputmaterials.Thisimpliestake-or-payagreementswithenergycompaniesandutilisationoffinancialinstruments,suchasenergy,rawmaterial,andpulp/paperderivatives.Frequentlypapermillsarethesoleconsumersofparticularpowerplants.

EmissionrightsrepresentaquiterecentlyimplementedregulatorysysteminEuropewithseveraleffectsonthebusiness.Ittypicallyinvolvescooperationbetweenthecentralfinanceteam,thetreasuryfunction,andindividualreporting/productionunits.

Specialpurposeentitiesarenotanuncommonissueintheindustry.Typicalareasincludeassetleasing,andsupplyarrangements.

Biologicalassets,i.e.growingtrees,sometimesrepresentverysignificantbalancesheetitemswithcomplexissuesrelatedtofairvalueaccountingincludingre-plantationcostsandtreatmentofbiologicalgrowth.

Swapsbetweenproducersarecommonwithregardtoboth(produced)rawmaterialsandfinishedgoodsandalsoforestland–withresultingdifficultiesdistinguishingbetweensalesandbartertransactions.

Attheconsumerendtheindustryisoftenreliantonbrands.Consequentlythisincludesissuesonimpairmentofbrandsandfairvaluesinbusinesscombinations.

Volatilityofpriceandmarketcouldleadtodiscussionsonimpairmentofassetsandrelateddiscussionsonthedefinitionofcashgenerating.

Theindustryfrequentlyusesvariousformsofrebatesystemsforlargecustomers.

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Summary of the first set of IFRS solutions for forest, paper and packaging

Component

Sol

utio

n

Issu

e

Leas

ing

Rev

enue

re

cogn

ition

PP

&E

Imp

airm

ent

of

ass

ets

Com

mitm

ents

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co

ntin

genc

ies

Rep

ortin

gse

gmen

ts

Inve

ntor

y

1 Recognitionofrevenuefromexcessenergyproducedbyownpowerstations •

2 Segmentreportingandrecognitionofrevenuefromexcessenergyproducedbyownpowerstations •

3 LeasingofdistributionterminalsunderSIC-12 •4 EconomicdependenceandconsolidationaccordingtoSIC-12 •5 ImpairmentofCash-GeneratingUnits-Verticalintegration •6 TestofimpairmentduetoaplantoabandonPP&E •7 Estimateoftherecoverableamountinanimpairmenttestduetoa

plantoabandonPP&E •8 Accountingforassetretirementobligations •9 Contaminatedsoilatasawmill •10 Accountingformaintenanceactivitiesandtheconceptofcomponents •11 Dismantlingandsiterestoration •12 Treatmentofsitepreparationcosts •13 Accountingforloggingroads •14 Incidentaloperationsinconstructionofloggingroads • •15 Loggingroad–costcomponentincludesobligationtorestoreland •16 AccountingforPP&Emaintenancecostsininterimfinancial

statements •17 DeliveryandAcceptance •18 Shouldby-productsbetreatedasrevenuegeneratingactivity? •18 Exchangeofforestassetsofsimilarnature •20 Exchangeofforestassetsofdissimilarnature •21 Shouldexchangeofinventoriesbetreatedasrevenues? •

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Solution 1 Component: Recognition of revenue from excess energy produced by own power stationsRevenuearisesinthecourseoftheordinaryactivitiesofanentity[IAS18.7]andincomeshouldberecognisedintheincomestatementwhenanincreaseinanassetoradecreaseofaliabilitythatcanbemeasuredreliablyhasarisen[IAS18.14,20and29].

Howshouldmanagementclassifyrevenuefromsalesofexcessenergyfromtheirproductionrelatedpowerstation?

Background

PaperproducerAownsapowerstationthatproduceselectricityfortheirproductionfacility.Theexcesspowerthatthestationproducesissoldtothelocalpowerdistributorintheregion.Thesalesofpoweramountstoabout15%ofthetotalexternalrevenueofentityA.Managementandtheboardofdirectorsmonitorandcontroltheenergyproductionoperationasaseparatelineofbusiness.

Solution

Thecompanyshouldrecognizethesalesofexcesspowerasrevenueandpresentenergyasaseparatesegment.Asthecompanysellsaproductthatispartofthetotalproductionprocesstheincomeshouldbepresentedasrevenue.Theenergyrevenuecouldbereportedseparatelyonthefaceoftheincomestatementorinthefootnotestotheincomestatement.

Solution 2 Component: Segment reporting and recognition of revenue from excess energy produced by own power stationsRevenuearisesinthecourseoftheordinaryactivitiesofanentity[IAS18.7]andincomeshouldberecognisedintheincomestatementwhenanincreaseinanassetoradecreaseofaliabilitythatcanbemeasuredreliablyhasarisen[IAS18.14,20and29].

Shouldmanagementtreattheenergyoperationasaseparatereportablesegmentinthefinancialstatements?

Background

PaperproducerAownsapowerstationthatproduceselectricityfortheirproductionfacility.Theexcesspowerthatthestationproducesissoldtothelocalpowerdistributorintheregion.Thesalesofpoweramountstoabout15%ofthetotalexternalrevenueofentityA.Managementandtheboardofdirectorsmonitorandcontroltheenergyproductionoperationasaseparatelineofbusiness.

Solution

Thesaleofenergyamountsto15%oftheentity’stotalrevenue,whichindicatesthatitqualifiesasareportablesegmentaccordingtoIAS14.35.Theentity’sinternalmanagementandorganisationalstructureanditsinternalfinancialreportingtomanagementandboardofdirectorsalsoindicatethattheenergyoperationshouldbetreatedasareportablesegment.

Solution 3 Component: Leasing Leasing of distribution terminals under SIC-12AnentityshouldconsolidateanSPEwhen,insubstance,theactivitiesoftheSPEareconductedonbehalfoftheentityaccordingtoitsspecificbusinessneeds,sothattheentityobtainsbenefitsfromtheSPE’soperations[SIC-12.10(a)].

ShouldanentityconsolidateanSPEthatisestablishedtoallowaccesstobenefitsthatarenotfinancial?

Background

CompanySisatransportandlogisticscompanyandisawhollyownedsubsidiaryofGroupX.CompanyShasterminalsatstrategiclocationsinEurope,wheretheycanofferstevedoring,warehousing,shippingagencyandotherrelatedservices.CompanyShasenteredintoasaleandleasebackarrangementforoneterminalwithapropertycompanytobeabletokeepthepropertyoffbalancesheet.

ShouldGroupXconsolidatethepropertycompanyinaccordancewithSIC-12?

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Themostimportanttermsofthearrangementsinsummary:

1.CompanySistheoriginaltenantunderaprincipalleasegrantedfromaleasingcompanyexpiringin2030(25years,equaltoamajorpartofitseconomiclifetime).

2.CompanySgrantsaleasebacktotheleasingcompanyforarentequaltotheprincipallease.

3.ThebankprovidesaloantothePropertyCompanytofinancethepropertypurchasefromCompanyS.Theloanisforamaximumof25yearswithoptionstoterminateat5-yearintervals.Thebank’sloanisguaranteedbyawhollyownedsubsidiaryofGroupX,whoseobligationsareinturnguaranteedbyGroupX’sParentcompany.

4.AmortgageoftheleasedpropertyhasbeengrantedbythePropertyCompanytothebank.

5.CompanySassignsitsprincipaltenancytothePropertyCompanywhograntsanover-ridingleasebacktoCompanySforatermof25years(remainingperioduntil2030).

6.ThePropertyCompany’ssharesare90%ownedbyawhollyownedsubsidiaryofGroupXand100%controlledbyaTrustatJersey,ChannelIslands.

Solution

Yes.GroupXretainsallthesignificantrisksandrewardsinthistransaction.TheTrustinJerseycontrols100%ofthevotesbutretainsonly10%oftherisksandrewards,whichindicatesthattheownersofthetrustwillreceivealendersreturnonly.TheParentCompany’sonlypurposeistoobtainaloanfromthebanktopurchasethepropertyandtoleaseitbacktoGroupX.GroupXisalsoguaranteeingtheloan.

Solution 4 Component: Leasing Economic dependence and consolidation according to SIC-12AnentitymaycontrolanSPEandshouldconsolidateitwheninsubstancetheSPE’sactivitiesarebeingconductedonbehalfoftheentityaccordingtoitsspecificbusinessneeds,sothattheenterpriseobtainsbenefitsfromtheSPE’soperations[SIC-12.10(a)]

ShouldanentityconsolidateanSPEbasedonapositionofsignificantdependence,suchasvitalandlong-termfinancialandoperationalarrangementswiththereportingentity?

Background

EntityA(thereportingentity)istheownerofallforestassetsthataresituatedinaparticularregionofthecountry.EntityBisasmallforestharvestingcompanythatisestablishedtoconductitsbusinessinthatregion.EntityAentersintoanagreementwithEntityBtoletEntityBharvestportionsoftheirforestassets.ThearrangementmeansthatEntityBwillbeallowedtoharvestonbehalfofEntityAontermsstipulatedinsuchawaythatEntityB,forpracticalreasons,cannotharvestforanyonebutEntityA.

Solution

No,EntityAshouldnotconsolidateEntityB.EntityAdoesnotcontrolEntityBaccordingtoSIC-12.Economicdependencycannotbyitselfleadtocontrol.AlthoughEntityAreceivesmostofthephysicalbenefitsofthearrangements(alltheservicesproducedbyEntityBaretakenbyEntityA),EntityAisnotabletodirectlycontroltheoperationsasithasnodecisionmakingpowerinEntityB.EntityAhasnorightstogainanybenefitsfromthefinancialperformanceofEntityB,suchasdistributions,futurenetcashflows,earnings,netassetsoranyresidualinterests.Norisitexposedtoriskasitisnotaninvestoranditsdebtissecured.

Solution 5 Component: Impairment of Assets Impairment of Cash-Generating Units - Vertical integration Acash-generatingunitisdefinedasthesmallestidentifiablegroupofassetsthatgeneratescashinflowsfromcontinuingusethatarelargelyindependentofthecashinflowsfromotherassetsorgroupsofassets[IAS36.6].Ifanactivemarketexistsfortheoutputproducedbyanassetorgroupofassets,thatassetorgroupofassetsshallbeidentifiedasacash-generatingunit,evenifsomeoralloftheoutputisusedinternally[IAS36.70].

Howshouldcash-generatingunitsbeidentifiedwithinentitiesthatoperateverticallyintegratedpulpandpapermills?

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Background

CompanyAoperatesseveralpapermillsacrossEurope.Thesemillsareproducingpulpandpapermaterialssuchaspublicationpaperandrawmaterialsforcorrugatedpaperandcontainerboard.CompanyAhasidentifiedanimpairmentindicatorrelatedtooneofitsintegratedmillsproducingpulpandpublicationpaper.Thepulpproducedis100%consumedinternallybythepaperproductionlineandtheproducedvolumeofpulpisdeterminedbytheestimatedproductionofpublicationpaper.Thereisanactivemarketforpulpwithreadilyavailablemarketpricesateachbalancesheetdate.

Managementisoperatingthemillasoneintegratedproductionunitanditintendstoperformtheimpairmenttestasifthemillwasonesingleproductionunit.

Solution

ManagementshouldtreatthemillastwoseparateCGUsforimpairmenttestingpurposes.

Thereisanactivemarketwithavailableandrelevantpricesfortheoutputcomingfromthefirststep(pulp)intheentireproductionprocess.ManagementshouldusethisexternalmarketdatawhenestablishingtheforecastedcashflowsforthepulpCGUforimpairmenttestingpurposes.

AccordingtoIAS36.70,themarketbasedprice,usedtocalculatethediscountedforecastedcashinflowsforthefirstproductionphase(pulp’svalueinuse),shouldbeusedasthepricefortheinputinthesecondproductionphase(publicationpaper’svalueinuse).Thismeansthatmanagement,whenestimatingthevalueinuseforthepaperproductionphase,shouldusethesamemarketbasedpriceonpulpthatwhereusedinestimatingthevalueinuseforthepulpproductionphase.Inestimatingthediscountedcashinflowsforthepaperproductionphase,managementshouldusetheexpectedmarketbasedpricesfortheproducedpublicationpaper.

Solution 6 Component: Test of impairment due to a plan to abandon PP&EInassessingwhetherthereisanyindicationthatanassetmaybeimpaired,anentityshallconsiderbothexternalandinternalsourcesofinformation[IAS36.12].Internalinformationmayoriginatefromknownsignificantchangeswithadverseeffectsontheentityin

thefuture,intheextenttowhichanassetisexpectedtobeused[IAS36.12(f)-(g)andIAS36.13].

Couldaplantorestructure,whichdoesnotqualifyforrecognitionasarestructuringliabilityinthebalancesheetaccordingtotherequirementsinIAS37orIAS19,triggeranimpairmenttestaccordingtoIAS36?

Background

CompanyAisexperiencinglong-termdecreasingprofitmarginsinoneofitssegmentsandisnowpreparingitsthirdquarterinterimfinancialstatementasatSeptember30,2006.Thedecreasehascontinuedforthreequartersandmanagementisnotexpectingaturnaroundoveraforeseeableperiodoftime.Asaconsequencemanagementhasdecidedtolaunchasignificantrestructuringprogramnextyearinanefforttodecreasetheovercapacityinthissegment.Therestructuringprogramwillnotbecommunicatedtotheemployeesandthemarketuntilafterthepublicationofthethirdquarterfinancialstatements.

TherestructuringprogramincludestheclosureofoneofitspapermillsinEurope.ManagementexpectstheclosuretostartnolaterthanbytheendofJune2007.TheoperationswillbecompletelyshutdownbytheendofJune2011whenthedemolitionworkbegins.Thefacilityconsistsofbothlandandotherdepreciabletangibleassets.

Shouldmanagementperformanimpairmenttestforthemillthatwillbeclosedover4yearsbeforepublishingitsinterimfinancialstatementsasatSeptember30,2006?

Solution

Yes,management’splantoclosedownandabandonthemillinEuropeisanimpairmentindicatoraccordingtoIAS36paragraphs12-13,althoughtheplanhasnotbeencommunicatedtoanyoneoutsidetheBoardofDirectors.AccordingtoIAS3612impairmenttestsshouldbeperformedwheneveranindicatorofimpairmenthasbeenidentified.Bothexternalandinternalindicatorsshouldbeconsidered.Aninternalindicatorofimpairmentisplansthatmighthaveanegativeeffectonthebusiness.Aplantoclosedownandabandonamilldoesqualifyassuchanimpairmentindicator.

Ifthemillrepresentsaverticallyintegratedproductionunit,theimpairmenttestshouldbeperformedforeachcash-generatingunitwhoseoutputshavedeterminablemarketprices.SeeIAS36.70.

13

Solution 7 Component: Estimate of the recoverable amount in an impairment test due to a plan to abandon PP&EInassessingwhetherthereisanyindicationthatanassetmaybeimpaired,anentityshallconsiderbothexternalandinternalsourcesofinformation[IAS36.12].Internalinformationmayoriginatefromknownsignificantchangeswithadverseeffectsontheentityinthefuture,intheextenttowhichanassetisexpectedtobeused[IAS36.12(f)-(g)andIAS36.13].

Couldaplantorestructure,whichdoesnotqualifyforrecognitionasarestructuringliabilityinthebalancesheetaccordingtotherequirementsinIAS37orIAS19,triggeranimpairmenttestaccordingtoIAS36?

Background

CompanyAisexperiencinglong-termdecreasingprofitmarginsinoneofitssegmentsandisnowpreparingitsthirdquarterinterimfinancialstatementasatSeptember30,2006.Thedecreasehascontinuedforthreequartersandmanagementisnotexpectingaturnaroundoveraforeseeableperiodoftime.Asaconsequencemanagementhasdecidedtolaunchasignificantrestructuringprogramnextyearinanefforttodecreasetheovercapacityinthissegment.Therestructuringprogramwillnotbecommunicatedtotheemployeesandthemarketuntilafterthepublicationofthethirdquarterfinancialstatements.

TherestructuringprogramincludestheclosureofoneofitspapermillsinEurope.ManagementexpectstheclosuretostartnolaterthanbytheendofJune2007.TheoperationswillbecompletelyshutdownbytheendofJune2011whenthedemolitionworkbegins.Thefacilityconsistsofbothlandandotherdepreciabletangibleassets.

Shouldmanagementperformanimpairmenttestforthemillthatwillbeclosedover4yearsbeforepublishingitsinterimfinancialstatementsasatSeptember30,2006,and,iftheanswerisyes,howshouldtherecoverableamountbeestimated?

Solution

Yes,management’splantoclosedownandabandonthemillinEuropeisanimpairmentindicatoraccording

toIAS36paragraphs12-13,althoughtheplanhasnotbeencommunicatedtoanyoneoutsidetheBoardofDirectors.AccordingtoIAS36.12impairmenttestsshouldbeperformedwheneveranindicatorofimpairmenthasbeenidentified.Bothexternalandinternalindicatorsshouldbeconsidered.Aninternalindicatorofimpairmentisplansthatmighthaveanegativeeffectonthebusiness.Aplantoclosedownandabandonamilldoesqualifyassuchanimpairmentindicator.

Ifthemillrepresentsaverticallyintegratedproductionunit,theimpairmenttestshouldbeperformedforeachcash-generatingunitwhoseoutputshavedeterminablemarketprices.SeeIAS36.70.

Insituationsliketheseitisunlikelythatmanagementwillbeabletoestablishareliableestimateofthefairvaluelesscosttosellforanythingexcepttheland(IAS36.20).ItcouldinfactbearguedthatsincethePP&Ewillbeabandonedwiththepurposeofeliminatingovercapacityitisnotrelevanttolookforafairvaluelesscosttosell.ManagementshouldthereforeperformavalueinusecalculationforthosepartsofPP&Eforwhichnoreliablefairvaluelesscosttosellcanbeestablished.Thevalueinusecalculationshouldbebasedonthediscountedforecastedcashflowsexpectedtobereceivedduringtheexpectedremainingusefullifeofthemill,i.e.4yearsandthreequartersascalculatedfromOctober1,2006untilJune30,2011,includingcashflowsfromtheclosingsuchasscrapingetc.Forlanditislikelythatfairvaluelesscosttosellmightbepossibletoestablish,e.g.bytheassistanceofathirdpartyvaluationexpert.

Solution 8 Component: Commitments and Contingencies Accounting for asset retirement obligationsThecostofanitemofproperty,plantandequipmentshouldincludetheinitialestimateofthecostsofdismantlingandremovingtheassetandrestoringthesiteonwhichitislocated[IAS16.16(c)].

Aprovisionshouldberecognisedwhen:

a. anentityhasapresentobligationasaresultofapastevent;

14

b. itisprobablethatanoutflowofresourcesembodyingeconomicbenefitswillberequiredtosettletheobligation;and

c. areliableestimatecanbemadeoftheamountoftheobligation.IAS37.14

Shouldwastesitecleanupcostsberecognisedifpermissionforasitecanberefusedatlandowners’orlocalauthority’snotice?

Background

Wastesitesmaybeusedforproductionwastesuchasinkfromde-inkingplants,excesscoatings,barksetc.Useofwastesitesareoftensubjecttolandowners/localauthoritypermissionandusagerightsmayceasetobegranted.EntityWhasreceivedpermissionbythelocalauthoritytouseaspecifiedpieceoflandduringalimitedperiodoftimetoconstructandoperateapapermillandawastesite.AttheendofthelimitedperiodEntityWhastoremediatethesite.Thepermissionperiodmaybeextended.

HowshouldthewastesitecleanupcostsberecognisedbytheEntityWifpermissionforasitecanberefusedatlandowners’orlocalauthority’snotice?

Solution

Theassetretirementobligationarisesduetothesigningoftheagreementtousethesiteandbyconstructingtheplantandequipment.EntityWshouldincludeinthecostoftheplantandequipmentanestimateofthecoststoremoveitattheendofthepermissionperiod(presentvalueofobligationshouldbedebitedtotheassetandcredittotheprovisiontoremediatetheland).IfEntityWintendstoapplyadepreciationperiodthatexceedstheinitiallyagreedperiodoftimeEntityWmustbereasonablycertainthatthepermissionperiodwillbeextended(thisisalsoimportantwithregardstothecalculationoftheprovision).

Thecostsforhandlingink,excesscoatings,barketcarisefromtheproductionprocess.FortheobligationtotakecareofthesewasteproductsthecompanyshouldaccruealiabilityduringtheproductionoftheF&Pproductsoverthepermissionperiod.

Solution 9 Component: Commitments and Contingencies Contaminated soil at a saw millAprovisionshouldberecognisedwhen:

a. anentityhasapresentobligationasaresultofapastevent;

b. itisprobablethatanoutflowofresourcesembodyingeconomicbenefitswillberequiredtosettletheobligation;and

c. areliableestimatecanbemadeoftheamountoftheobligation.IAS37.14

Atwhatstageshouldremediationcostsberecognised?

Background

Groundcontaminationatsawmillsitesisacommonissueduetocertainchemicalsusedforwoodimpregnation.Thereportingentityhasoperatedanimpregnationplantforsometimeandlocallegislationwillforcetheentitytoremediateandcleanupthesitewhentheoperationsareclosed.Atwhatstageshouldmanagementrecognisethecostofremediation?

Solution

Theentityhasanobligationtocleanupandtorestore.Theobligatingeventwillbetheconstructionofthesawmillsite.Theobligationtotakecareofthecontaminatedsitecanbeseparatedintotwoparts:Part1.Theportionofremediationcoststhatrelatetotheestablishmentofaproductionunitwithproductionusingcertainchemicalsforwoodimpregnation;andPart2.Theportionofremediationcoststhatrelatethevolumeoftheproductionduringtheestimatedproductionperiod.ForPart1theentityshouldrecogniseaprovisionatthetimetheproductionunit(sawmillsite)isconstructedwithacorrespondingentrytotheacquisitionvalueofthemill.ForPart2thecompanyshouldaccruealiabilityduringtheestimatedproductionperiodtakingintoconsiderationtheproducedvolumeineachperiod.Subsequentchangestotheestimate(Part1)shouldbetreatedinaccordancewithIFRIC1ChangesinExistingDecommissioning,RestorationandSimilarLiabilities.

15

Solution 10 Component: Property, Plant & Equipment Accounting for maintenance activities and the concept of componentsPartsofsomeitemsofproperty,plantandequipmentmayrequirereplacementatregularintervals.ThecostofreplacingpartofsuchanitemshouldberecognisedinthecarryingamountofPPEwhenthatcostisincurrediftherecognitioncriteriaaremet.Anyremainingcarryingamountofthereplaceditemisderecognised[IAS16.13].

Howshouldareportingentitytreatownlabourcostsrelatedtoamajormaintenanceandoverhaulproject?

Background

AcompanyundertakesmajormaintenanceonapapermachineThemaintenanceinvolvesthereplacementofcertainmajorcomponentsinthepapermachineanddoesnotrepresentgeneralday-to-dayservicingprocedures.

Theworktakesaconsiderableamountoftimeandskilledresources.Accordinglyownlabourcostsrepresentasignificantelementofthemajormaintenancecosts.Thecompanyintendstocapitalisethecostsaspartofthecarryingvalueofthepapermachine.

Solution

Theownlabourcostsaredirectlyattributabletothebringingthepapermachinebacktoaconditioninwhichitiscapableofcontinuingtooperate.Providedthatthemajormaintenanceworkmeetstherecognitioncriteriasetoutinthestandard(IAS16.7),thedirectlabourhoursrelatedtotheinstallationofmajornewcomponentsshouldbeallocatedtothecarryingvaluesofthosemajorcomponents(IAS16.13and14).

Internalcostscapitalisedshouldincludedirectlyattributableoverheadcostswhereapplicable[IAS16.22][IAS2.12].Overheadcostsrelatingtounproductiveorinefficientuseofresourcesshouldbeexpensedasincurred[IAS16.22].

Capitalisedcostsshouldberecognisedasaseparatecomponentanddepreciatedovertheperiodtothenextmajormaintenanceprogramme.

Solution 11 Component: Property, Plant & Equipment Dismantling and site restorationThecostofanitemofproperty,plantandequipmentshouldincludetheinitialestimateofthecostsofdismantlingandremovingtheassetandrestoringthesiteonwhichitislocated[IAS16.16(c)].

Shouldmanagementrecognisetheestimatedcostofdismantlingandremovingtheassetandrestoringthesite?

Background

ACompanyhasconstructedapaperfactoryonleasedland.Attheendoftheleaseitisrequiredtodismantlethepaperfactoryandreturnthesitetoitsoriginalstate.Theleasetermisfor25yearsandexpiresin2030.Managementbelievethattheywillcontinuetooperateonthesiteforaperiodinexcessof25years,althoughtheCompanyhasnolegalrighttoextendtheleaseterm.

Thepresentvalueoftheestimatedcostofdismantlingthepaperfactoryandrestoringthesiteusingarelevantpre-taxdiscountrateamountsto€30million.Thesecostsincludeestimatedcostsofrelocatingassetsandbusinessinterruptioncostsof€20million.

Solution

TheCompanyshouldrecognise€10millionasanelementofcostofthepaperfactory,beingtheinitialestimateofthecostsofdismantling,removingassetsfromthesiteandrestoringthesiteonwhichthepaperfactoryislocated.

Recognitionofcostsinthecarryingamountofanitemofproperty,plantandequipmentceaseswhentheitemisinthelocationandconditionnecessaryforittobecapableofoperatinginthemannerintendedbymanagement(IAS16.20).Anyassociatedbusinessinterruptioncostsaretobeexpensedasincurred.

Land and residential buildings acquired

Residentialbuildings

let

Site reclassified

as commercial

Old buildings

demolished

Land prepared

for construction

Construction of plant

commenced

TIME

16

Solution 12 Component: Property, Plant & Equipment Treatment of site preparation costs Thecostofanitemofproperty,plantandequipmentshallberecognisedasanassetif,andonlyifitisprobablethatfutureeconomicbenefitsassociatedwiththeitemwillflowtotheentity;andthecostofthetemcanbemeasuredreliably[IAS16.7].Elementsofcostmayincludecostofsitepreparationnecessarytobringtheassettothelocationandconditionnecessaryforittobecapableofoperatinginthemannerintendedbymanagement[IAS16.16-17].

Howshouldthepresentbuildingsbeaccountedforbeforesitepreparationactivitiesbegin?Howshouldthesubsequentremovalofthebuildingsonasitesubjecttopreparationactivitiesbeaccountedfor?

Background

ACompanyacquiredlandonwhichitintendstobuildapaperfactory.TheCompanyisexpectedtocarryoutsignificantsitepreparationincludingtheremovalofpresentbuildingsonthesite.TheCompanyintendstoincludethecostsrelatedtositepreparationasacomponentofthecostofthepaperfactoryasset.

Theacquiredlandwashistoricallyinpartialresidentialuse.Anumberofresidentialpropertiesarestilllocatedonpartofthesite,however,theCompanysuccessfullyappliedtothelocalgovernmentagencyandthesiteisnowfullyavailableforcommercialuse.

Intheinterveningperiodbetweenwhentheresidentiallandandbuildingswereacquiredandwhenthesitewasreclassifiedforcommercialuse,thebuildingswerelettothirdpartiesundershorttermleasecontracts.Allresidentialhouseshavebeenvacatedandaretobedemolished.Thewholesitepreparedreadyfortheconstructionofthepaperfactory.

Solution

Theresidentiallandandpropertyshouldberecognisedasassetsatthedateofcompletionofthetransactionandmeasuredattheiracquisitioncost.Sincethelandandbuildingsarenotowneroccupied,butinsteadleasedtothirdparties,theyshouldbeaccountedforasinvestmentpropertiesinaccordancewithIAS40usingeitherthefairvalueorcostmodel.

Oncessationoftheshort-termleasecontractsthelandandbuildingstheinvestmentpropertyisnotimmediatelytransferredtoowner-occupiedproperty.Thetransferoccursonlyonceachangeofuseoccurs.Thisoccurswhenthesiteisreclassifiedforcommercialuseandthemanagementareabletocommencedemolitionaction.IntheeventthattheCompanyappliedthefairvaluemodeltheproperties’deemedcostforsubsequentaccountingisitsfairvalueatthedateofchangeofuse(IAS40.60).IntheeventthattheCompanyappliedthecostmodeltherewillbenochangeinthecarryingvaluearisingfromthechangeinuse(IAS40.59).

Thechangeofusefromresidentialtocommercialis,however,consideredanindicationofimpairment(IAS36.12(f)).Whenmanagementreceivednotificationthatthelocalgovernmentagencyhadapprovedthechangeofuserightsfromresidentialtocommercial,theCompanyshouldhaveundertakenanimpairmenttestontheaffectedlandandproperties.

Landandbuildingsareseparableassetsandareaccountedforseparately.Sincetheresidentialhousesareexpectedtobedemolishedtheyhavenovalueandtheircarryingamountshouldbereducedtozero.Sincethevalueofthelandmayalsobeimpairedduetothechangeofusefromresidentialtocommercial,asecondimpairmentcalculationshouldconsiderthevalueofthewholecommerciallandcomparedtothesumoftheacquisitioncostsoftheresidentialandcommercialland.

Theplanneddemolitionofpropertiesonthelandinconnectionwiththeconstructionofthepaperfactoryisnecessarytobringthefactoryintouseandoperatinginamannerintendedbymanagement.Suchcostsrepresentsitepreparationcostsandshouldbeincludedasacomponentofthefactorycost(IAS16.16(b).

Land and residential buildings acquired

Residentialbuildings

let

Site reclassified

as commercial

Old buildings

demolished

Land prepared

for construction

Construction of plant

commenced

TIME

17

Solution 13 Component: Property, Plant & Equipment Accounting for logging roadsExpenditureforproperty,plantandequipmentisrecordedasanassetwhen[IAS16.7]:

a. itisprobablethatfutureeconomicbenefitswillflowtotheentity;and

b. costcanbereliablymeasured.

Majorsparepartsandstand-byequipmentqualifyasPPEwhenanentityexpectstousethemduringmorethanoneperiod[IAS16.8].

PPEmaybeacquiredforsafetyorenvironmentalreasons.SuchPPEmaynotincreasethefutureeconomicbenefitsofexistingitemsofPPE.However,itmaybenecessaryforanentitytoobtainthefutureeconomicbenefitsfromitsotherassets.ThistypeofPPEcanberecognisedasanassetbecausetheentitycanderiveeconomicbenefitsfromrelatedassets[IAS16.11].

Canmanagementcapitaliseexpenditureonconstructionofloggingroadstoaccessforestareastobeharvested?

Background

ACompanyisconstructingtwologgingroads.Oneisfortemporaryuseandoneisexpectedtobeusedforalongerperiod.TheCompanyintendstocapitalisethecostofbothroadsinaccordancewithIAS16.

LoggingRoad1isbeingconstructedfortemporaryuseonlyandwillbediscardedoncetheforestareatowhichitwillprovideaccessisclearcut.

LoggingRoad2isexpectedtoprovidefutureaccesstotheCompany’sforestholdings.Itisexpectedthattheroadwillbeusedforatleastthenexttenyears.

Solution

ThecostsincurredinconstructingLoggingRoad1shouldbeexpensedasincurredastheCompanydoesnotexpecttousetheassetduringmorethanoneperiod(IAS16.7-8).

LoggingRoad2shouldberecognisedasanassetandinitiallymeasuredatthecostsincurredbytheCompanytoconstructtheroad.Theassetshouldbedepreciatedoveratenyearperiod.

Solution 14 Component: Property, Plant & Equipment Incidental operations in construction of logging roadsAgriculturalproduceistheharvestedproductoftheentity’sbiologicalassets[IAS41.5].

Agriculturalproduceharvestedfromanentity’sbiologicalassetsshallbemeasuredatfairvaluelessestimatedpoint-of-salecostsatthepointofharvest.SuchmeasurementisthecostatthatdatewhenapplyingIAS2oranotherapplicablestandard.

Howareharvestedtreesaccountedforwhenconstructingloggingroads?

Background

ACompanyisconstructingtwologgingroads.InconstructingtheroadstheCompanyisrequiredtocarryoutincidentaloperations.Theseincidentaloperationsrelatetothefellingoftreesinthepathoftheproposedroadandtomakewayforconstructionmachineryaccess.

Solution

Theincidentaloperationsresultinaharvestingeventoftreeswhichreducesthecarryingvalueofbiologicalassetsandincreasestheinventoriesofagriculturalproductsbythetrees’fairvaluelessestimatedpoint-of-salecostsatthedateofharvesting[IAS2.20].

Solution 15 Component: Property, Plant & Equipment Logging road – cost component includes obligation to restore landThecostofanitemofproperty,plantandequipmentshouldincludetheinitialestimateofthecostsofdismantlingandremovingtheassetandrestoringthesiteonwhichitislocated[IAS16.16(c)].

Shouldmanagementrecognisetheestimatedcostofdismantlingandremovingtheassetandrestoringthesitewhenconstructingloggingroadsonleaseholdlandareas?

Background

ACompanyisconstructingloggingroadsonleasehold

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land.Itintendstocapitalisetheinitialcostofbuildingtheroadanddepreciatethecostoverthetermofthelease.

Underthetermsoftheleasethelandshouldbereturnedtoitsoriginalconditionasatthecommencementoftheleaseterm.AccordinglytheCompanyhasacontractualobligationtoremovetheloggingroadandrestorethelandtoitsoriginalconditionattheendoftheleaseterm.

Solution

TheCompanyhasalegalobligationderivedfromtheleasecontract.AprovisionforthedismantlingandremovaloftheroadshouldbemadeinaccordancewithIAS37.14.Theprovisionshouldbemeasuredatthepresentvalueoftheestimatedcostofremovingtheroadandrestoringthesiteattheendoftheleaseterm,usingapre-taxdiscountrate(IAS37.45-47).

Simultaneously,inaccordancewithIAS16.16(c)theCompanyshouldincludeaninitialestimateofthecostsofdismantlingandremovingtheroadandrestoringthesiteonwhichitislocated.Thisshouldequatetothesameamountastherelatedprovisionreferredtoabove.

Eachyeartheprovisionshouldbereassessed.Increasesintheprovisioneachyearreflectingthepassageoftimearerecognisedasborrowingcosts.Increasesordecreasesintheprovisionthatresultfromchangesintheestimatedtimingoramountoftheoutflowofresourcesembodyingeconomicbenefitsrequiredtosettletheobligation,orachangeinthediscountrate,areadjustedagainstthecarryingvalueoftheassetinaccordancewithIFRIC1.5.

Solution 16 Component: Property, Plant & Equipment Accounting for PP&E maintenance costs in interim financial statementsSparepartsandservicingequipmentareusuallycarriedasinventoryandrecognisedinprofitandlossasconsumed[IAS16.8]

Whenshouldthefullcostofthesparepartsandservicingequipmentconsumedinoneisolatedinterimaccountingperiodberecognisedinprofitandloss?

Background

TheCompanyisrequiredtocarryoutscheduledmajormaintenanceonitspapermachineseveryfiveyearsandthenextmaintenanceworkisscheduledtobecarriedoutinthefirstquarterofFY07.TheCompanyexpectstorecognisethefullcostofthemaintenanceinprofitandlossforFY07butintendstospreadoutthecostoveritsfourinterimaccountingperiodsforthepurposeofreportingitsinterimresultstothemarket.

Solution

ThemaintenanceworkwillresultintheconsumptionofsparepartsandservicingequipmentwhichinaccordancewithIAS16.8shouldberecognisedinprofitandlossasconsumed.

Coststhatareincurredunevenlyduringanentity’sfinancialyearshallbeanticipatedordeferredforinterimreportingpurposesif,andonlyif,itisalsoappropriatetoanticipateordeferthattypeofcostattheendofthefinancialyear.

HadtheCompanycarriedoutthemaintenancecostsinthelastquarterofFY07itwouldnothavebeenacceptabletodeferpartofthosecoststoFY08sinceIAS16.8recognisesthatsuchmaintenancecostsshouldberecognisedintheprofitandlossasconsumed.

TheCompanymustrecognisethefullcostofthemajormaintenanceworkinitsprofitandlossforthefirstquarterofFY07.

Solution 17 Component: Revenue Recognition Delivery and AcceptanceAconditiontobesatisfiedbeforerevenuecanberecognisedfromthesaleofgoodsisthatthesellerhastransferredthesignificantrisksandrewardsofownershipofthegoodstothebuyer[IAS18.14(a)].Thetransferofsignificantrisksandrewardsofownershiprequiresanexaminationofthecircumstancesofthetransaction[IAS18.15].

Shouldthepapercompanyrecognisetherevenueevenlyovertheperiodoftheagreement?

19

Background

APaperCompanyhasasaleagreementwithabuyertosupplyXtonnesofacertaingradeovera6-monthperiod.Thepaperisdeliveredevery2monthsatthebeginningofthemonth.InvoicingoccurswhenthepaperisshippedandtheIncotermsareDDP(DeliveryDutyPaid).Thesaleagreementprovidesforqualitycontrolbeforethebuyeracceptsthegoods.TheIncotermsarestatedontheinvoicehowevertheyarenotincorporatedintothecontractofsale.

Solution

No.Therevenueshouldnotberecognisedevenlyovertheperiodofthesaleagreement.RevenueshouldonlyberecognisedwhenalloftheconditionsassetoutinIAS18.14havebeensatisfied.AlthoughtheIncoterms(DDP)statethattheriskistransferredfromthesellertothebuyerwhenthegoodsareplacedatthedisposalofthebuyer,thesalescontractprovidesforaqualitycontrolbeforethegoodsareaccepted.

Therevenueshouldberecognisedonlywhenthebuyerhascompleteditsqualitycontrolandhasofficiallyacceptedthegoods.

Solution 18 Component: Revenue Recognition Should by-products be treated as revenue generating activity?Aproductionprocessmayresultinmorethanoneproductbeingproducedsimultaneously,forexamplewhenjointproductsareproducedorwhenthereisamainproductandaby-product[IAS2.14].

Sawmilling,pulp,paper&packagingproductionresultsinnumerousby-products.Shouldthesaleofby-productsbetreatedasrevenue?

Background

Theproductionofsawntimberandproductionofwoodpulpresultsinbarkandsawdustetc.,whichisoftensoldtopowerstations,gardencentresandstables.

Shouldentitiesrecognisethesaleofby-productsasrevenue?

Solution

By-productsusuallyarejointproductsofrelativelyinsignificantvalue.Accountingforthemasjointproductsisnotappropriate.Thesaleofby-productsshouldthereforenotbetreatedasrevenue.

Costsshouldbeassignedtotheby-productsequaltotheirnetsalesvalueandbydeductingtheirnetsalesvaluefromthemainproduct,i.e.deductfromcostofsales(IAS2.14).Asaresult,thecarryingamountofthemainproductisnotmateriallydifferentfromitscost.

However,ifby-productsareofrelativelysignificantvalueitisnotappropriatetoapplythisaccountingtreatment.Insteadanallocationofcostsofconversionbetweentheproductsshouldbemadeonarationalandconsistentbasis.

Solution 19 Component: Revenue Recognition Exchange of forest assets of similar nature Papercompanieswithlargeforestholdingsregularlyexchangelandandbiologicalassetstoensurethattheyhavethecorrecttreespeciesatappropriatematurityintherightlocation.

Howshouldexchangeofassetsbetreatedwhenthegoodsexchangedaresimilarinnatureandvalue?

Background

ForestrycompanyAexchanges1000hectaresofforestlandwithstandingtreesofspeciesAwithanotherforestrycompanyinadifferentlocationfor1100hectaresofforestlandofsimilarspecies.Thereisnoothercompensationsincebothcompanieshaveagreedthattheassetsareofasimilarvalue.

Solution

ThetransactionneedstobesplitbetweentheforestlandandthestandingtreessincetheforestlandisaccountedforinaccordancewithIAS16andthestandingtreesinaccordancewithIAS41.

CarryingValue FairValue

ForestLandA 100 120

BiologicalAssets 1000 1000

20

ThecarryingvalueofthenewforestlandinForestryCompany(A)’sfinancialstatementsismeasuredatthecarryingamountoftheassetgivenup(ForestLandA)i.e.100.Theexchangetransactiondoesnothavecommercialsubstancesincethefuturecashflowsarenotexpectedtochangeasaresultofthetransactioni.e.thetwoforestlandswouldhaveproducedthesamecashflows.

Theentriesrecordedwouldbeasfollows

DrForestlands(new) 100

CrForestlands(A) 100

IAS41doesnotprescribetheaccountingfortheexchangeofbiologicalassets;howevertheaccountingwillbethesameasthatforlandabove,sincethenatureandvalueofthegoodsexchangedaresimilar.Thecarryingvalueofthetreesshouldbetheirfairvalue.

Theentriesrecordedwouldbeasfollows

DrBiologicalAssets(new) 1000CrBiologicalAssets(A) 1000

Solution 20 Component: Revenue Recognition Exchange of forest assets of dissimilar naturePapercompanieswithlargeforestholdingsregularlyswaplandandbiologicalassetstoensurethattheyhavethecorrecttreespeciesatappropriatematurityintherightlocation.

Howshouldexchangeofassetsbetreatedwhenthegoodsswappedaredissimilarinnatureandvalue?

Background

ForestrycompanyAtransfers1000hectaresofforestlandwithstandingtreestoanotherforestrycompany,B,inexchangeforharvestedtreesandcashconsiderationof300.Thetreeswillbedeliveredovera3-yearperiod.

HowshouldforestrycompanyAaccountforthetransaction?

Solution

CarryingValue FairValue

ForestLandA 100 120

BiologicalAssets 1000 1000

HarvestedTrees 900

ThetransactionneedstobesplitbetweentheforestlandandthestandingtreessincetheforestlandisaccountedforinaccordancewithIAS16andthestandingtreesinaccordancewithIAS41.Theassetsexchangedaredissimilarandthefuturecashflowsareexpectedtochangeasaresultofthisexchangetransaction,thereforethetransactionhascommercialsubstanceandshouldbeaccountedforatfairvalue.

DrReceivables 900DrCash 300 CrForestland 100 CrBiologicalAssets 1000 CrGainondisposalofproperty, plantandequipment 20 CrFairvaluegainonre-measurement ofBiologicalAssets 80

Solution 21 Component: Revenue Recognition Should exchange of inventories be treated as revenues?Transactionsinvolvinggoodsexchangedforgoodswhichareofadissimilarnatureandvalueareregardedastransactionswhichgeneraterevenueandtherevenueshouldbemeasuredatthefairvalueofthegoodsreceived,adjustedbytheamountofanycashtransferred(IAS18.12).

Shouldexchangeofinventoriesbetreatedasarevenuegeneratingtransaction?

Background

CompanyAexchanges10000tonnesofshort-fibrebirchhardwoodkraftpulp(BHKP)withanothercompanyforsametonnageoflong-fibrenorthernbleachedsoftwoodkraftpulp(NBSK)andcashconsiderationof€50000.

HowshouldCompanyAaccountforthetransaction?

21

Solution

Thepulpexchangedisdissimilarinnatureandvaluesotheexchangeisregardedasatransactionwhichgeneratesrevenue.Therevenueismeasuredatthefairvalueofthepulpreceivedadjustedbytheamountofcashtransferred.AccordingtoaleadingindexBHKPisquotedat€470/tandNBSKat€465/tatthedateofexchange.ThecarryingvalueoftheBHKPonthebooksofCompanyAis€410/t.

TheentriesrecordedinCompanyAareasfollows:

DrInventory(NBSK) 4650000DrCash 50000DrCostofSales 4100000

CrInventory(BHKP) 4100000CrRevenue 4700000

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Forhardcopiesandfurtherinformation,pleasecontact:sarah.grey@uk.pwc.com

IFRSinforest,paper&packaging,whotocontact:

BoLagerström(Global&Sweden)Phone:+46(8)55533041Email:bo.lagerstroem@se.pwc.com

AlexeiIvanov(Russia)Phone:+7(812)3266969Email:alexei.ivanov@ru.pwc.com

AndrewMcPherson(Australia)Phone:+61(2)62719350Email:andrew.mcpherson@au.pwc.com

DickQuimby(US)Phone:+1(513)7684518Email:dick.quimby@us.pwc.com

KevinBromley(Canada)Phone:+1(604)4843484Email:kevin.bromley@ca.pwc.com

MarceloOrlando(Brazil)Phone:+55(11)36743875Email:marcelo.orlando@br.pwc.com

TomiSeppälä(Finland)Phone:+358(9)22801365Email:tomi.seppala@fi.pwc.com

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Dedicatedtotheindustry

PricewaterhouseCoopersGlobalForest,Paper&Packagingpracticeiscomprisedofanetworkofindustryprofessionalslocatedinover30countriesaroundtheworld.

Branchingout-Globaldealsactivityintheforest,paper&packagingindustryThispublicationreviewstherecentdealsactivityintheforestry,paperandfibrepackagingsectors,examinesthelasttwelvemonths’activityindetail.Itexploresthekeydriversbehindtransactionsintheindustry,includingthekeyroleofnon-traditionalinvestors,inparticular,privateequity.Thepublicationalsofocusesondealactivitybykeyregions,thesuccessofdealsandconsidersthefuturetransactionsoutlook.

CEOPerspectives-ViewpointsofCEOsinForest,Paper&PackagingCompaniesWorldwideThepublicationsummarisesthethoughtsof17leadingCEOsintheforest,paper&paper-basedpackagingsectorsaroundtheglobalonkeyissuesfacingtheindustry.ThethoughtsoftheCEOs,fromNorthAmerica,SouthAmerica,Europe,Russia,China,IndiaandSouthAfrica,aredrawnfromface-to-faceandtelephoneinterviews.

GlobalForest,Paper&PackagingIndustrySurveyComprisesananalysisofthefinancialresultsofthePwCTop100–the100largestforest,paperandpaper-basedpackagingcompaniesintheworld,rankedbysalesrevenue.

ChinaRisks&Rewards–Paper&PackagingIndustryPresentsanoverviewoftheimpactofChinaonthepaperandpackagingsectorsincludinganin-depthlookatsomekeyissuesofparticularimportancetocompaniesoperating–orlookingtoinvest-intheChinesemarketplace.

Risks&Rewards-Forest,Paper&PackaginginRussiaAddressesthestateoftheindustryinRussiaandreflectsonthekeyconsiderationsanyonethinkingofinvestinginthesectorthereshouldmake.SetsthesceneonthebackgroundoftheRussianmarketplace,theregulatoryenvironmentandits“forestwars”;providesanalysissectorbysector(forestryandlogging;processedwoodproducts;pulp,paper,andpaperboard;paper/non-paperpackaging);andexplorestherisksandrewardsofdoingbusinessinRussia.

Publicationsfortheforest,paperandpackagingindustry

Downloadourpublicationsfreeofchargeorjoinourmailinglistatwww.pwc.com/fpp

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ARGENTINAMarianoTomatisPhone:+54(11)48504716

AUSTRALIAAndrewMcPhersonPhone:+61(2)62719350

AUSTRIAIanMurdochPhone:+43(1)501881420

BRAzILMarceloOrlandoPhone:+55(11)36743875

CANADABruceMcIntyrePhone:+1(604)8067595

CHILERicardoArranoPhone:+56(2)9400000

CHINAKennyCHYeungPhone:+86(20)38192033

COLOMBIAGustavoDreispielPhone:+57(1)6354802

ECUADORRobertoTugendhatlPhone:+593(04)2288199

FINLANDJohanWeckmanPhone:+358(0)922801353

FRANCEBenoîtPinochePhone:+33(0)251843636

GERMANYManfredKrawietzPhone:+49(0)8957905823

INDIAAshwaniPuriPhone:+91(11)41250513

INDONESIAJusufWibisanaPhone:+62(21)5212901

IRELANDNeilMurphyPhone:+353(1)7048556

ITALYMariaTeresaBernelliPhone:+39(461)237004

MALAYSIADarylSimPhone:+60(82)413957

MEXICOJavierMonroyPhone:+52(55)52636000

NETHERLANDSFransVestergaardPhone:+31(10)4076458

NEWzEALANDDavidRandellPhone:+64(9)3558042

NORWAYErlingElsrudPhone:+4795260005

POLANDAntoniTyminskiPhone:+48(061)8505103

PORTUGALAntónioCorreiaPhone:+351225433114

RUSSIAAlexeiIvanovPhone:+7(812)3266969

SINGAPORETeckSoonChewPhone:+6562363328

SLOVAKIAMariaFruhwaldovaPhone:+421259350400

SOUTHAFRICAHeinzzastrauPhone:+27(11)7974431

SOUTHKOREAKwang-OhKimPhone:+82(0)27090690

SPAINMarGallardoPhone:+34(91)5684456

SWEDENRobertBarndenPhone:+46(8)55533016

BoLagerströmPhone:+46(8)55533041

SWITzERLANDArnoFrieserPhone:+41(58)7922656

UKCliveSucklingPhone:+44(20)72134887

USMarcSilvermanPhone:+1(203)5395604

URUGUAYDanielGarciaPhone:+598(2)9160463

VENEzUELAVictorNietoPhone:+58(281)4187935

GLOBALLEADERRobertBarndenPhone:+46(8)55533016

GLOBALDIRECTORCliveSucklingPhone:+44(20)72134887

Keycontactsaroundtheworld

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