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11. Biological assets
|in thousand EUR||2020||2019|
|At 1 January||13 158||–|
|Change in fair value less cost to sell||927||13 455|
|Currency effects||–3 923||–297|
|At 31 December||10 162||13 158|
The forests of Precious Woods in Brazil are organized as one single forest management and are managed in a sustainable manner, which means that no more than the incremental growth will be harvested and the substance of the forest will be preserved. The forests were not recorded at fair value in the past since fair value measurement was not possible due to a not adapted management system in place. In 2019, independent experts of BDO Brazil did the first appraisal of the Group’s naturally grown forests according to IAS 41 Agriculture and IFRS 13 Fair Value Measurement. The implementation of the new management system allowed to collect sufficient data to measure the fair value of the forests reliably. For 2020, the valuation was updated internally. No material changes were identified as a result of the valuation.
Biological assets are measured at their fair value less costs to sell, with any resultant gain or loss recognized in the consolidated statement of profit or loss. The fair value of biological assets was estimated by applying the income approach, considering the discounted cash flow method. The income approach reflects current market expectations in relation to future values. The costs to sell are made up of harvesting, transporting and processing costs.
The Group has a team within the Internal Reporting department that performs the valuation of biological assets. The valuation is updated internally at the end of each reporting period. If indicators of major changes are noted, a new external independent appraiser is engaged to recalculate the fair value of the assets. When considering the appropriate input data, the team reviews available information such as quantity of tree harvest: expected yield, current market prices, expected harvest costs through to harvest and the expected timing of harvest.
The valuation policies and procedures, as well as changes in the fair value measurements are reviewed by the chief financial officer (CFO) annually. The CFO is responsible for the Group’s internal valuation team. The Group’s internal valuation team comprises two employees, both of whom hold relevant internationally recognized professional qualifications and are experienced in valuations in the forest industry.
Methodology and assumptions used in determining fair value
Since management was able to provide reliable cash flow estimates, the group utilized the Income Approach, specifically the Discounted Cash Flow (DCF) Method for determine the fair value of the biological assets. The DCF Method is a commonly used method for valuing biological assets based on its expected future cash flows.
The following significant assumption were adopted by the group to determine the fair value of the forest:
Volumes: The biological assets consist of a variety of naturally grown trees native to the region, which are cut from 50 cm in diameter and have a natural renewal cycle of 35 years. For value estimation and still considering the characteristics of the evaluated assets and the sustainable management, an annual exploration area of 11 000 to 13 000 hectares was considered. The exploration area of effective forest management area is calculated from the total area of forests owned by Precious Woods (in order to obtain the exploration approval) excluding 20 % of the permanent preservation area.
For the estimation of the fair value of the forest, a certain volume of exploration area was considered, according to the evolution through years and the Group’s management expectation of exploration for the coming years. Based on historical data, a weighted average productivity was applied to get an average projected volume per year. The harvesting volume is calculated on effective quantities achieved in the last 20 years of activity in this area with 16 m3/ha/year (2019: 16 m3/ha/year). The total harvesting volume is expected to be 186 000 m3 (2019: 180 000 m3). The actual harvesting volume for 2020 was 188 500 m3 (2019: 156 100 m3).
Volume adjustment factor: The logs will be transformed to sawn timber in various dimensions. An average yield factor was applied.
Prices: The average price applied on the volume to generate revenues were derived from the segregation between export or domestic market, type of product (commercial / non-commercial) and the corresponding prices. Generally, the costs contain cutting, transportation and processing as well as the depreciation expenses of the related fixed assets. For the export market, additional costs for drying and packaging are added. The majority of timber is for the export market and related to market prices.
Operating costs: The costs include all cost related to the sustainable forest management and the production cost in the industry.
Cost to sell: On top of operating cost there are cost for packaging, administration, sales activities and transportation respected, but no financial costs or income taxes.
Level 3 fair value
The valuation model considers the present value of the net cash flows expected to be generated from the natural forest management activities in the next 4 years. The forest for the 31 years remaining part of the cycle is regarded as non-productive forest, even if a harvesting will follow, as the forest is naturally re-generated during the cycle of 35 years. Therefore, the values remain +/- the same if there are no major market price differences than the ones applied.
Key assumption used in the determination of the discount rate
In determining the after tax weighted average cost of capital (WACC) a group rate of 14.1 % (2019: 7.1 %) has been applied considering the following inputs:
|Unlevered beta factor||1.46||1.19|
|Risk free rate||0.6%||2.4%|
|Equity risk premium||9.6%||5.2%|
Assuming all other unobservable inputs are held constant, the following changes in these above assumptions will cause a change in the fair value of the forest:
|in thousand EUR||FV||Effect|
|Assumption 31 December 2020||10 162|
|Sales prices -5.0%||8 237||–18.9%|
|Costs +5.0%||8 779||–13.6%|
|Volumes -10.0%||9 241||–9.1%|
|Discount rate +50.0%||9 334||–8.1%|
|in thousand EUR||FV||Effect|
|Assumption 31 December 2019||13 158|
|Sales prices -5.0%||9 855||–25.1%|
|Costs +5.0%||10 585||–19.6%|
|Volumes -10.0%||7 505||–43.0%|
|Discount rate +50.0%||12 368||–6.0%|
The above sensitivity analysis shows how the present value of the discounted cash flows would be affected if the key valuation parameters were attributed other values than those that form the basis of the current valuation of the discounted cash flows. An increase by the same percentage would have the opposite effect on the valuation.
The Group is exposed to a number of risks relevant to its natural forest management activities, namely:
Regulatory and environmental risk: The Group has established environmental policies and procedures aimed at compliance with environmental legislation. Management performs regular reviews to identify environmental risks and to ensure that the management systems in place are adequate. The Group manages its natural forest in compliance with FSC and PEFC standards since 1994 and 2017 respectively.
Supply and demand risk: The Group is exposed to risks arising from fluctuations in the price and demand for log products. When possible, the Group manages these risks by aligning its harvest volumes to market demand. Management performs regular industry trend analyses to ensure that the Group’s pricing structure is in line with the market and to ensure that projected harvest volumes are consistent with expected demand on a sustainable basis.
Climate and other risk: The Group’s forests are exposed to the risk of damage from climatic changes, diseases and other natural forces.