1. Basis of presentation and accounting policies

Basis of presentation

Precious Woods Group (hereinafter referred to as “Precious Woods” or “the Group”) is one of the leading companies in sustainable management of tropical forests globally. The parent company, Precious Woods Holding Ltd., has its registered office in Zug. The Group’s subsidiaries are organized and operate under the laws of Brazil, Gabon, Netherlands, British Virgin Islands and Luxembourg.

The activities of the Group are primarily organized and presented in four operating segments supported by a central corporate office.

• Sustainable Forest Management Brazil: operations active in the sustainable management of tropical forests and the processing of tropical timber in Brazil
• Sustainable Forest Management Gabon: operations active in the sustainable management of tropical forests and the processing of tropical timber in Gabon
• Trading: trading of timber from external sources in Switzerland
• Carbon & Energy: trading of Certified Emission Reductions (CERs)

The consolidated financial statements for the Precious Woods Group have been prepared in accordance with International Financial Reporting Standards (IFRS).

Due to rounding, numbers presented throughout this report may not add up precisely to the totals provided. All ratios and variances are calculated using the underlying amount rather than the presented rounded amount.

Significant accounting judgments, estimates and assumptions

The preparation of the consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the reported amounts of revenues and expenses during the reporting period. The resulting accounting estimates will, by definition, rarely equal the related actual results.

The estimates and assumptions, which may have a significant risk of causing a material impact on the consolidated financial statements, relate primarily to

• Deferred income tax assets (see Note 31),
• Provisions (see Note 13) and
• Land titles in Brazil (see Note 6)

New or revised IFRS standards, amendments and interpretations

Certain IFRS and interpretations were revised or introduced,

effective on or after 1 January 2017:

• IAS 7 Cash Flow Statement (amendments): Disclosure initiative – These amendments introduce an additional disclosure that will enable users of financial statements to evaluate changes in liabilities arising from financing activities. The additional disclosure on changes in liabilities arising from financing activities is presented in Note 12.
• IAS 12 Income Taxes (amendments): Recognition of deferred tax assets for unrealized losses – These amendments clarify how to account for deferred tax assets related to debt instruments measured at fair value. These amendments had no impact on the consolidated financial statements.

The Annual Improvements to IFRS Standards 2014 – 2016 cycle contain the following relevant amendment:

• IFRS 12 Disclosure of interests in other entities: Scope – The amendment clarifies that the disclosures requirement of IFRS 12 are applicable to interest in entities classified as held for sale except for summarized financial information. This amendment had no impact on the consolidated financial statements.

effective for annual periods beginning on or after 1 January 2018:

• IFRS 2 Share based payments (amendments): Clarification on how to account for certain types of share-based payment transactions – effective on or after 1 January 2018
• IFRS 9 Financial Instruments: Classification and Measurement, Impairment and Hedge Accounting – effective on or after 1 January 2018: The new standard replaces IAS 39 and changes the classification and measurement requirements of financial assets, financial liabilities and the rules for hedge accounting. In addition, it extends the disclosure requirements. The Group has analyzed the impact of the new standard and has not identified any material change as it will continue measuring at fair value all financial assets currently held at fair value and apply the simplified approach and record lifetime expected losses on all trade receivables. Hedge accounting is not applied within the Group.
• IFRS 15 Revenue from Contracts with Customers – effective on or after 1 January 2018: The standard replaces IAS 18 Revenue and IAS 11 Construction contracts and related interpretations. It establishes a five-step model to account for revenue arising from contract with customers. The Group has analyzed the impact of the new standard and has not identified any material change in revenue recognition, except for the more detailed disclosure requirements. The new standard will be adopted using the modified retrospective approach.
• IFRIC 22 Foreign currency transactions and advance consideration – effective on or after 1 January 2018
• IAS 28 Investments in associates and joint ventures (amendments) – effective on or after 1 January 2019
• IFRS 16 Leases – effective on or after 1 January 2019: The new standard will require lessees to recognize a lease liability reflecting future lease payments and a right-of-use asset for the right to use the underlying asset for the lease term. The new standard will affect the financial reporting of the Group. In 2018, the impact on the consolidated financial statements will be assessed and the required changes implemented to comply with the new standard.
• IFRIC 23 Uncertainty over income tax treatments – effective on or after 1 January 2019

The significant accounting policies are as follows:

a. Basis of consolidation

The consolidated financial statements include the balances and transactions of Precious Woods Holding Ltd and its subsidiaries. Subsidiaries are entities over which the Group has the power to govern the financial and operating policies. Subsidiaries are consolidated from the date on which control is transferred to the Group and cease to be consolidated from the date on which control is lost.

The following subsidiaries are included in the consolidated financial statements:

The acquisition method is used to account for the acquisition of subsidiaries by the Group. On the acquisition date all identifiable assets and liabilities of the subsidiary are measured at fair value. Goodwill is initially measured at cost being the excess of the aggregate of the consideration transferred and the amount recognized for non-controlling interests over the net identifiable assets acquired and liabilities assumed.

For purchases of non-controlling interests, the difference between any consideration paid and the relevant share of non-controlling interest acquired is deducted from equity. Gains or losses on disposals of non-controlling interests are also recorded in equity.

Associates are all entities over which the Group has significant influence but not control, generally accompanying a shareholding of between 20 % and 50 % of the voting rights. Investments in associates are accounted for using the equity method of accoun­ting and are initially recognized at cost. Unrealized gains on transactions between the Group and its associates are eliminated to the extent of the Group’s interest in the associates. Unrealized losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred.

b. Cash and cash equivalents

Cash and cash equivalents comprise cash at bank and in hand and short-term deposits with an original maturity of three months or less. They are stated at nominal value. Bank overdrafts are shown within borrowings in current liabilities.

c. Trade receivables

Trade accounts receivable are recognized initially at fair value and subsequently measured at amortized cost less allowances. Doubtful accounts are individually measured and impaired. Indications for such impairments are substantial financial problems on the part of the customer, a declaration of bankruptcy or a financial re­organization being likely, or a delay in payment occurring. A general allowance based on past experiences is made in addition to these individual measurements.

d. Inventories

Inventories are valued at the lower of cost or net realizable value. Logs and finished products are recorded at the average cost of production, less provision for losses, when applicable. Net realizable value is the estimated selling price in the ordinary course of business, less estimated costs of completion and the estimated costs to make the sale. The cost of semi-finished and finished goods contains direct production costs including materials and production costs, as well as production overhead costs.

e. Property, plant and equipment

Property, plant and equipment are recorded at cost less accumulated depreciation and any impairment in value. Depreciation is applied using the straight-line method over the estimated useful life of the assets as follows:

• Land: not depreciated
• Permanent forest roads: 25 years
• Buildings and improvements: 3 to 25 years
• Machinery and vehicles: 4 to 10 years
• Furniture and fixtures: 5 to 10 years

The assets’ residual values and useful lives are reviewed, and adjusted if appropriate, at each reporting date. The effect of such change is recognized immediately in the statement of profit or loss. The forests in Brazil are valued at cost as fair values cannot be reliably measured in sustainable management of existing tropical forest. Gains and losses on disposals are determined by com­paring proceeds with carrying amounts. These are included in the statement of profit or loss.

f. Intangible assets

Acquired trademarks and licenses have a finite useful life and are carried at historical cost less accumulated amortization. Amortization is calculated using the straight-line method to allocate the cost of trademarks and licenses over their estimated useful lives (12 to 24 years).

Other intangible assets have a finite useful life and are carried at cost less accumulated amortization. Amortization is calculated using the straight-line method to allocate the costs of intangible assets over their estimated useful lives (12 to 50 years).

g. Impairment of non-financial assets

The Group assesses at each reporting date whether there is an indication that an asset may be impaired. Such assessment occurs on the basis of events or changes in circumstances, which indicate that the value of an asset may be impaired. If such indications exist, the recoverable amount will be determined for the respective asset. If the asset does not generate cash inflows that are largely independent from other assets, the recoverable amount is determined on the lowest group of assets for which cash inflows are separable. An impairment loss results, if the carrying value exceeds the reco­verable amount. The recoverable amount is the higher of value in use or fair value less costs of disposal. The impairment is recorded in the statement of profit or loss.

h. Leases

Leasing of assets, in which substantially all the risks and rewards incidental to ownership are transferred to the lessee, are classified as finance leases. Finance leases are initially recognized in the statement of financial position at the lower of the fair value of the leased assets, or the present value of the minimal lease payments. The leased asset is depreciated over the shorter of the useful life or the lease term. The corresponding financial obligations are recorded as liabilities. Leased assets, in which substantially all risks and rewards incidental to ownership are effectively held and used by the lessor, are classified as operating leases. Lease payments under an operating lease are recorded in the statement of profit or loss on a straight-line basis over the lease term.

i. Financial instruments

Financial assets are categorized as current assets if they are expected to be realized within 12 months from the reporting date otherwise they are included in non-current assets. Trade accounts receivables and other current assets are measured at amortized cost less allowances for credit losses. Financial assets at fair value through profit or loss are subsequently measured at fair value, with changes in fair value recorded in the statement of profit or loss.

Trade accounts payables and current liabilities are categorized as current liabilities if they are expected to be realized within 12 months from the reporting date otherwise they are included in non-current liabilities. They are measured at amortized cost. Borrowings are classified as current liabilities unless Precious Woods has an unconditional right to defer settlement of the liability for at least 12 months after the reporting date. They are initially recorded at fair value, net of transaction costs, and subsequently measured at amortized cost according to the effective interest rate method.

j. Derivative financial instruments

Derivatives are initially recognized at fair value on the date a derivative contract is concluded and are subsequently measured at fair value. Where the fair value of derivative financial instruments recorded in the statement of financial position cannot be derived from active markets, their fair value is determined using valuation techniques including the discounted cash flow model. The inputs to these models are taken from observable markets where possible, but where this is not feasible, a degree of management judgment is required in establishing fair values. The judgments include considerations of inputs such as liquidity risk, credit risk and volatility. Changes in assumptions about these factors could affect the reported fair value of financial instruments (see Note 14).

k. Convertible loans

Convertible loans represent compound financial instruments consisting of a liability as well as an equity component or a derivative financial instrument. The fair value of the liability com­ponent is determined by discounting the future cash flows with an equivalent market interest rate for non-­convertible instruments. The difference between cash received before the allocation of the transaction costs at the date of inception and the fair value of the liability component represents the fair value of the embedded equity conversion option or the fair value of the derivative financial liability. The value included in shareholders’ equity, net of tax, is not re-measured subsequently. The costs of issuing convertible loans are allocated to the liability and equity component at the date of inception. The part of the costs that is allocated to the equity component will be netted. The interest expense of the liability component equals a market interest rate for comparable non-convertible loans.

l. Provisions

Provisions are recognized when the Group has a present obligation as a result of a past event, it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate can be made of the amount of the obligation. When the Group expects some or all of a provision to be reimbursed, for example under an insurance contract, the reimbursement is recognized as a separate asset, but only when the reimbursement is virtually certain. The expense relating to a provision is presented in the income statement net of any reimbursement.

m. Revenue recognition

Net sales are determined by deducting transportation costs, value added taxes, discounts and returns from gross sales. Revenue trading activities are recognized when the entity has transferred the significant risks and rewards of ownership of the goods to the buyer, when the entity retains neither continuing managerial involvement to the degree usually associated with ownership nor effective control over the goods sold, when the amount of revenue can be measured reliably, and when it is probable that the economic benefits associated with the transaction will flow to the entity and the costs incurred or to be incurred in respect of the trans­action can be measured reliably. For information on revenue from emission reduction activities, please refer to chapter s on certified emission reductions.

n. Currency

The subsidiaries’ accounting records are maintained in the legal currency of the country in which they operate and which is their functional currency. Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the transaction dates. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognized through profit or loss. The currency translations rates are shown in Note 32.

The financial statements of the subsidiaries have been translated from their functional currencies to the presentation currency (EUR). Therefore, all assets and liabilities are translated by using the rate of exchange prevailing at the reporting date. Shareholders’ equity accounts are translated at historical exchange rates. The statement of profit or loss is translated at the average rate for the year. Translation differences are recognized as foreign currency translation in other comprehensive income.

o. Taxation

The charge for current income tax is based on the results for the year as adjusted for items which are non-assessable or disallowed. It is calculated using tax rates for the countries where the Group has operations. Deferred income taxes are accounted for using the balance sheet liability method in respect of temporary differences arising from differences between the carrying amount of assets and liabilities in the financial statements, and the corresponding tax basis used in the computation of taxable profit. Deferred income tax liabilities are generally recognized for all taxable temporary differences, and deferred income tax assets are recognized to the extent that it is probable that taxable profits will be available against which deductible temporary differences can be utilized. Such assets and liabilities are not recognized if the temporary diffe­rence arises from the initial recognition of goodwill or from the initial recognition (other than in a business combination) of other assets and liabilities in a transaction, which affects neither the taxable profit nor the accounting profit.

p. Pension plans

The Group has both defined benefit plans and defined contribution plans.

In a defined benefit plan the amount of pension benefit that an employee will receive on retirement, usually dependent on one or more factors, such as age, years of service and compensation is defined. Professionally qualified independent actuaries value the defined benefit obligations on a regular basis. The obligation and costs of pension benefits are determined using the projected unit credit method. The projected unit credit method considers each period of service as giving rise to an additional unit of benefit entitlement and measures each unit separately to build up the final obligation. Past service costs, which comprise plan amendments and curtailments, as well as gains or losses on the settlement of pension benefits are recognized immediately when they occur. Remeasurements, which comprise actuarial gains and losses on the pension obligation, the return on plan assets and changes in the effect of the asset ceiling excluding amounts included in net interest, are recognized directly in other comprehensive income and are not reclassified to profit or loss in a subsequent period. The pension obligation is measured at the present value of estimated future cash flows using a discount rate that is determined by reference to the interest rate on government bonds where the currency and terms of the government bonds are consistent with the currency and estimated terms of the defined benefit obligation. A net pension asset is recorded only to the extent that it does not exceed the present value of any economic benefits available in the form of refunds from the plan or reductions in future contributions to the plan.

Payments to defined contribution pension plans are charged as an expense to the statement of comprehensive income as they fall due.

q. Employee share purchase plan

Precious Woods launched for 2016 an Employee Share Purchase Plan for the employees of the Swiss entity and some executives from Group companies. This plan entitled employees to buy a certain number of shares with a discount of 25 % to the market value, subject to a three-year lock-up period. The necessary quantity of new shares from this plan was issued through that portion of the conditional share capital which is intended to cover options of employees and board members (see also Note 16).

r. Segment reporting

Operating segments are reported in the manner consistent with the internal reporting to the chief operating decision maker, which is the Group Management of Precious Woods. Group Management is responsible for allocating resources and assessing the performance of the operating segments.

s. Certified Emission Reductions (CERs)

Certified Emission Reductions (CERs) are granted by the United Nations Framework Convention on Climate Change (UNFCCC) for Greenhouse Gas Reduction of one metric ton of CO₂ equivalent.