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28 Feb 2014 03:33pm

FRRP forces change in fair value of trees

Anglo-Eastern Plantations plc has been forced to change the way it estimates the fair value of palm oil trees and land in its financial statements after falling foul of the Financial Reporting Council’s Conduct Committee

The company had been using historical rather than current data to assess the fair value of palm oil trees which were recognised in the balance sheet as biological assets.

In the 2010 accounts, it valued its plantation estates using a discounted cash flow technique by estimating future sales proceeds of palm oil, which it then deducted estimated cash costs of production from and discounted the estimated net cash flows.

It also used historical percentages to allocate the plantation estate values between land, palm oil trees and equipment.

The Conduct Committee’s Financial Reporting Review Panel (FRRP) said that an allocation made on this basis was in breach of the requirements of IAS 41, Agriculture, because it did not achieve fair value for the biological asset.

While the FRRP investigations were ongoing, Anglo-Eastern decided to change the method it used to value land and biological assets in its 2012 accounts. It valued the two groups of assets separately and recorded a prior-year restatement.

It valued the land by reference to market prices, and the palm oil trees by using a discounted cash flow technique which was similar to the one it had used for the plantation estates in the 2010 accounts. But, as the FRRP points out, the estimated cash costs of production used historical, not current, data to estimate the cost of using the land on which the trees were planted, which resulted in an over-statement of the biological assets’ fair value.

The restatement of the comparative amounts increased biological assets to 31 December 2011 from $77m (£40.1m) to $235m (£140.6m) (at 31 December 2010, an increase from $69m to $187m).

It also reduced property, plant and equipment from $341m to $215m (at 31 December 2010 from $376m to $250m).

Profit after tax for the year ended 31 December 2011 increased by £11m and there was no impact on cash.

After further discussions with the FRRP, the group went back to the drawing board. This time it consulted an independent valuer who gave an opinion on the annual notional rent charge to be attributed to the company’s planted land. On the basis of his advice, Anglo-Eastern realised that the notional rent charge it had used in arriving at its 2012 valuation of biological assets did not approximate to market value.

As a result, it has had to issue another prior-year restatement – announced today – which reduces the value of its biological assets at December 2012 by $37m from $245m to $208m. The knock-on effect on profit after tax for the year was a reduction of $1.6m.

Anglo-Eastern's auditors BDO will now be able to sign off the 2012 accounts which they were unable to because of the ongoing discussions with the FRRP. As they said in their report last April, "As noted in note 11, the company’s directors are confident that the methodology which has been applied is in accordance with IAS 41, however, although the full facts are known, the existence of the ongoing FRC queries and their description of the potential impact provides differing opinions regarding the application of IAS 41.

"Until this matter is resolved between the FRC and the group, we are unable to obtain sufficient audit evidence regarding the appropriate application of IAS 41 to the carrying value of the group’s biological assets."

The FRRP regards the investigation is now closed.

Julia Irvine

 

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