1. Basis of presentation, consolidation and general 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 and Luxembourg.

The consolidated financial statements for the Precious Woods Group have been prepared on a historical cost basis, except for leasing, biological assets and land, that have been measured at fair value, and in accordance with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB).

The consolidated financial statements are presented in euros, as the Group’s revenues, profits and cash flows are principally denominated in euros. All values are rounded to the nearest thousand (in thousand EUR), except when otherwise indicated. The functional currency of the parent company Precious Woods Holding Ltd. is swiss francs.

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.

Change in scope of consolidation in 2022

There was no change in the scope of consolidation in 2022, but one implemented in 2021:

On 31 May 2021, MIL Madeiras Preciosas Ltda., already owning 40 % of BK Energia Itacoatiara Ltda., acquired the remaining 60 % of the ordinary shares outstanding, and with this transaction, obtained 100 % ownership of the renewable power plant. BK Energia Itacoatiara Ltda. was renamed MIL Energia Renovável Ltda. afterwards. The plant generates renewable energy from biomass and meets the requirements of the Kyoto Protocol and the UNFCCC, resulting in tradable certified emission reductions. As a result of the acquisition, the Group expects to improve its own knowledge about renewable power plant and to be prepared for the extension of the energy business in combination with additional forest activities. The details of this acquisition are further explained in Note 32.

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

Biological assets (see Note 11),
Leasing and right-of-use assets (see Note 21),
Deferred income tax assets (see Note 28),
Land titles in Brazil (see Note 10),
Provisions (see Note 26),
Contingencies (see Note 27),
Defined benefit obligations (see Note 29) and
Goodwill (see Note 12)

Impact of the Covid-19 pandemic

Fortunately, production was only slightly curtailed as a result of the impact of Covid-19. We recorded only few cases of illness. Work under stricter hygiene regulations was well received, and we did not have to order any plant shutdowns. We were also able to resume travel. In 2021, however, it was mainly the lack of resources in certain public offices that affected us and made operations more difficult. For example, in the issuing permits, handling customs formalities or other business. These challenges also existed at the beginning of 2022, then normalized during the year.

Going concern – Debt restructuring / refinancing

The company has significant financial liabilities that are due and payable within the next 12 months and there are no clear indications that the company will be able to meet these obligations without additional financing. Due to the circumstances, the liquidity of the group is currently under pressure.

Based on the liquidity plan prepared by the Board of Directors and Management, the company is expected to generate sufficient cash to be able to operate for the next twelve months until 31 December 2023. However, based on the liquidity plan, the company will face difficulties in fulfilling its obligations from financing activities. Therefore, the Board of Directors is closely monitoring the company’s solvency situation.

The company is taking steps to address the uncertainties and improve its liquidity position, including reviewing its cost structure, exploring additional sources of financing, and seeking to refinance its debt obligations. Measures that have been initiated but not yet completed include:

Discussion with current loan lenders to extend short term due loans for at least additional 12 months,
Increase capital-band at the next AGM to give future investors the possibility of equity investment,
Consider sale of assets (e.g. Land with concession leaseback),
Contact with potential new investors

The company’s ability to continue as a going concern is dependent on its ability to generate sufficient cash flows from operations and obtain additional financing to meet its obligations as they come due. The Board of Directors has not yet been able to raise sufficient additional financing to meet the financial obligations that will be due in 2023. Consequently, there is a material uncertainty that raises significant doubts about the company’s ability to continue as a going concern. If the company is unable to address these material uncertainties and to secure its liquidity position, it may be unable to continue as a going concern. If such a situation arises, the financial statements would need to be prepared based on liquidation values.

The Board of Directors and Management expects that the proposed measures will be successful, and their effects will be to strengthen the liquidity of the Group and assure its financial stability in the long term. Therefore, the Board of Directors and Management believe the going concern assumption of the Precious Woods Group is given. The company will continue to monitor and assess its liquidity position and take necessary actions to mitigate these risks and will provide updates to stakeholders as appropriate. The board of directors is committed to act with the required urgency.

New or revised IFRS standards, amendments and interpretations

Certain IFRS and interpretations were revised or introduced. The relevant ones for the Group are,

effective on or after 1 January 2022:

IAS 16 Property, plant and equipment – This amendment had no impact on the consolidated financial statements.
IAS 37 Provisions, contingent liabilities and contingent assets This amendment had no impact on the consolidated financial statements.
Annual IFRS improvements – These amendments had no impact on the consolidated financial statements.

effective on or after 1 January 2023:

IFRS 17 Insurance contracts (new standard) – effective on or after 1 January 2023.
IFRS 16 Lease (amendment) – effective on or after 1 January 2023.
IAS 1 Presentation of financial statements (narrow-scope amendments) – effective on or after 1 January 2023.
IAS 12 Income taxes (amendments) – effective on or after 1 January 2023.
IAS 1 Presentation of financial statements (narrow-scope amendments) – effective on or after 1 January 2024.

The material general accounting policies are as follows:

a. 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 presented in Note 30.

The financial statements of the subsidiaries have been translated from their functional currencies to the presentation currency (EUR). 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. Translation differences from changes in share capital of subsidiaries are recognized directly in equity. The statement of profit or loss is translated at the average rate for the year. Translation differences are recognized as currency translation effects in other comprehensive income.

b. 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 is recognized, if the carrying value exceeds the recoverable amount. The recoverable amount is the higher of value in use and fair value less costs of disposal. The impairment is recorded in the statement of profit or loss.

All specific accounting policies may be found adjacent to the corresponding note on the following pages.