12. Intangible assets and goodwill

Other intangible assets mainly include forest concessions and software.

Accounting policies

Acquired goodwill and acquired intangible assets with indefinite useful lives are recognized as assets at the date of the acquisition. After initial recognition, these positions are measured at cost less any accumulated impairment losses. They are not amortized, but annually tested for impairment – or when the circumstances indicate that the carrying value may be impaired.

Forest concessions are classified as intangible assets, as the right to direct the use of the concession is not with the Group, but with the government or the land owner. Other intangible assets have a finite useful life and are carried at cost less accumulated amortization and impairment loss. Amortization is calculated using the straight-line method to allocate the cost over their estimated useful lives of 12 to 50 years.

Valuation process for goodwill

The Group’s impairment test for goodwill and intangible assets with indefinite lives is based on value-in-use calculations. The key assumptions used to determine the recoverable amount for the different cash generating units are disclosed in below. The projections are based on knowledge and experience and also on judgements made by management as to the probable economic development of the relevant markets.

Carbon & Energy

In 2021, as a result of the purchase accounting from the acquisition of remaining 60 % interest in MIL Energia Renovável Ltda. (see Note 32), a goodwill of EUR 0.3 million was recognized and allocated to the cash generating unit “Carbon & Energy”. The value-in-use calculation was done by an independent external valuation firm in Brazil. As a result of the analysis, management did not identify an impairment for this cash-generating unit to which goodwill of EUR 0.3 million was allocated.

None of the goodwill recognized was expected to be deductible for income tax purposes.

In 2022, the gross margin had to be adjusted downward due to the update of the projections, as there are uncertainties regarding the upcoming entry of MIL Energia Renovável Ltda. into the Brazilian free energy market. As a result, the goodwill of EUR 0.3 million was fully impaired.

Key assumption used in value-in-use calculations and sensitivity to changes in assumptions

The calculation of value in use for Carbon & Energy CGU is most sensitive to the following assumptions:

• Discount rate
• Gross margin

Discount rate

Discount rate represent the current market assessment of the risks specific to Carbon & Energy CGU, taking into consideration the time value of money and individual risks of the underlying assets that have not been incorporated in the cash flow estimates. The discount rate calculation is based on the specific circumstances of the Group and its operating segments and is derived from its weighted average cost of capital (WACC). The WACC takes into account both debt and equity. The cost of equity is derived from the expected return on investment by the Group’s investors. The cost of debt is based on the interest-bearing borrowings the Group is obliged to service. Segment-specific risk is incorporated by applying individual beta factors. The beta factors are evaluated annually based on publicly available market data.

In 2022, in determining the pre-tax weighted average cost of capital (WACC) a discount rate of 16.74 % (2021: 15.13 %) has been applied considering the following inputs:

Gross margin

Gross margins are based on average values achieved in years preceding the beginning of the budget period. In 2021, the gross margins for the Carbon & Energy CGU used for 2022 and 2023 corresponded to 10.3 %, and from 2024 to 2027 to 30.0 %. These were increased over the budget period for anticipated efficiency improvements. Decreased demand can lead to a decline in the gross margin.

In 2022, as described above, uncertainties regarding the upcoming entry of MIL Energia Renovável Ltda. into the Brazilian free energy market as of March 2023 led to a downward adjustment of gross margin expectations from 2023 onwards to a break-even result as to the actual energy prices. Future price increases cannot be taken into account as the predictability is limited.

13. Investment in associates

Movements in investments in associates

There are no unrecognized share of losses relating to the above associates.

Proportion of ownership in investment in associates

Compagnie des Placages de la Lowé S.A.

Precious Woods Tropical Gabon Industrie S.A., owned 100 % by Precious Woods Group, entered on 1^st October 2020 into an arrangement with Compagnie des Placages de la Lowé S.A., (formerly called Placage Déroule du Gabon S.A.), also a veneer producing company in Gabon, owned 100% by Arbor Group, France. Precious Woods Tropical Gabon Industrie S.A. acquired 49 % shares and voting rights in Placage Déroule du Gabon S.A. by contribution of net assets.

Precious Woods Group has no control or joint control over the investment but exercises significant influence.

Set out below is the summarized financial information for Compagnie des Placages de la Lowé S.A.:

The associate had no contingent liabilities or capital commitments as at 31 December 2022 or 2021.

MIL Energia Renovável Ltda. (former BK Energia Itacoatiara Ltda.)

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 details of this acquisition are further explained in Note 32.

Set out below is the summarized financial information for BK Energia Itacoatiara Ltda.:

The associate had no contingent liabilities or capital commitments as at 31 May 2021.

Accounting policies

Associates are entities, over which the Group holds 20 to 50 percent of the voting rights and exercises significant influence. The Group does not exercise control over their financial and operational policy decisions. These associates are accounted for using the equity method. The Group’s share of profit of associate is classified within operating profit as these businesses form an integral part of the Group’s financial performance, reflecting its core business activities. Goodwill arising from an acquisition is included in the carrying amount of the investments in associated companies. Equity accounting is discontinued when the carrying amount of the investment together with any long-term interest in an associate reaches zero, unless the Group has either incurred or guaranteed additional obligations in respect of the associate.

The Group tests associates for impairment only when there is objective evidence of impairment as a result of one or more events that occurred after the initial recognition of the investment. Objective evidence of impairment includes events such as significant financial difficulties of the associate or information about significant changes with an adverse effect that have taken place in the economic environment in which the associate operates, and indicates that the carrying amount of the associate may not be recovered.

An impairment loss is only recognized when the carrying amount of the associate exceeds its recoverable amount, being the higher of value in use and fair value less costs of disposal. The recoverable amount of an investment in an associate is assessed for each associate, unless the associate does not generate cash inflows from continuing use that are largely independent of those from other assets of the Group.

The financial statements of the associate are prepared for the same reporting period as the Group. When necessary, adjustments are made to bring the accounting policies in line with those of the Group.

21. Leasing

The Group has entered into several leases for vehicles and machinery as well as office spaces. The leases have lease terms of three to five years.

The development of the lease liabilities is as follows:

Right-of-use assets

As of 31 December, other operating expenses contain the following expenses in connection with leases:

Accounting policies

Each contract is assessed at inception, whether it constitutes or contains a lease. This is given, when the contract conveys the right to control the use of the identified asset for the period of use in exchange for substantially all of the economic benefits. Precious Woods elected to apply the recognition exemptions to short-term leases and low value leases. For such leases no right-of-use asset and no lease liability are recorded, instead the lease payments are recognized as operating expenses.

At the commencement date, the lease liability is measured at the present value of future lease payments to be made over the lease term. Incremental borrowing rates are used for the discount rates. The right-of-use asset corresponds initially to the lease liability, plus any initial direct costs, advance payments and dismantling or removing costs. The right-of-use asset is depreciated on a straight-line basis over the shorter of the lease term or the useful life. If at the end of the lease term the ownership of the leased asset is transferred to the lessee or the lessee is reasonably certain to exercise the purchase option, then the right-of-use asset has to be depreciated according to the useful life defined for property, plant and equipment.

22. Share capital

The functional currency of Precious Woods Holding is Swiss francs. In the financial statements it is translated into the Group’s presentation currency (EUR) using historical exchange rates.

Share capital overview

The shares rank equally with regard to voting rights and dividends, and the Articles of Association include no restrictions on transfer of the Group’s shares. Precious Woods’ registered shares are not subject to any restriction on voting, distribution, transfer or other rights that exceed regulations which are unalienable under Swiss law. The authorized share capital and the conditional share capital are intended to be utilized for acquisitions, the purchase of forests or for reforestations, investments, convertible loans, expansions of shareholder base or any other important reason. The share­holders’ subscription rights can be excluded in these cases, as well as for firm underwriting agreements.

Ordinary share capital

On 31 December 2022, the issued and fully paid-in share capital amounted to CHF 7 052 745 (2021: CHF 7 052 745).

Authorized share capital

On 27 May 2021, authorized capital in the amount of CHF 1 000 000 was adopted by the general meeting. It will expire in May 2023.

Conditional share capital

On 31 December 2022, the portion of the conditional share capital which is intended to cover options of employees and board members amounted to CHF 46 638, and the total conditional share capital amounted to CHF 1 396 638.

Treasury shares

During the course of 2022, Precious Woods Holding purchased 1 632 treasury shares in the total amount of EUR 20 687. The Group held 1 632 treasury shares as of 31 December 2022 (2021: 0).

23. Major shareholders

On 31 December 2022, the major shareholders holding 3 % (rounded) or more of Precious Woods Holding outstanding shares were as follows:

The financial liabilities on loans from related parties are presented in Note 19.

24. Earnings per share

Calculation of the basic and diluted earnings per share is based on the following data:

Basic earnings per share (EPS) are calculated by dividing the net income attributable to shareholders of Precious Woods Holding by the weighted average number of shares outstanding during the year. For diluted EPS, the weighted average number of shares outstanding is adjusted to assume conversion of all potentially dilutive shares arising from options on Precious Woods shares.

25. Related party balances and transactions

An overview of the subsidiaries of Precious Woods is presented in Note 31. Details of transactions between the Group and other related parties are disclosed below.

Major shareholders holding 3 % or more of Precious Woods Holding are disclosed in Note 23.

a. Balances and transactions

The balances with related parties, as of 31 December 2022 and 2021, are detailed below:

The current loans from related parties bear interest at 6.0 % for EUR 1.5 million – maturing up to and including December 2023. The non-current loans from related parties bear interest at 6.0 % for EUR 1.0 million, maturing in December 2024.

b. Compensation

During the ordinary course of business in 2022 and 2021, the Group granted remunerations to related parties as follows:

There was no compensation paid related to long-term benefits, termination benefits or share-based payments.

26. Provisions

Legal claims

The amount of EUR 0.3 million represents a provision for certain legal claims brought against the Group by different stakeholders. In the directors’ opinion, after taking appropriate legal advice, the outcome of these legal claims will not give rise to any significant losses beyond the amounts provided for as on 31 December 2022 (2021: EUR 0.3 million).

Others

The total amount of EUR 0.6 million for other current and non-current provisions includes amounts for tax fees of EUR 0.1 million (2021: EUR 0.2 million) and for other provisions of EUR 0.3 million (2021: EUR 0.2 million). In December 2022, a restructuring provision was recognized in the amount of EUR 0.1 million for the restructuring measures of Precious Woods Compagnie Equatoriale des Bois S.A. in Gabon.

Accounting policies

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 profit or loss net of any reimbursement.

27. Contingencies

The Group has contingent liabilities in respect of legal claims arising in the ordinary course of business. It is not anticipated that any material payouts other than those for which a provision has been made will arise from contingent liabilities (see Note 10).

Assessment by Brazilian authorities

In 2002, a Brazilian subsidiary was assessed by IBAMA, the Brazilian Institute of Environment and Renewable Natural Resources, in relation to certain log-transporting procedures, which had been in place and approved informally by government agencies for many years. In July 2010, an important administrative case was won against IBAMA. The fines imposed on the Group, which are not yet settled, amount to approximately EUR 4.3 million. The Group’s Management and its attorneys believe that the remaining fines are arbitrary in nature, unjustified, and will also be eventually cancelled, and therefore consider that no material payouts will occur as a result of the final decision on this process; consequently, no accrual was recorded in the Group’s consolidated financial statements as of 31 December 2022 (31 December 2021: EUR 0.0 million). In 2011, the subsidiary was notified by the Federal Justice to offer assets to pledge or to prepay the penalty. The subsidiary offered 61 907 hectares to pledge. The counterparty has not accepted the pledge and has instead blocked an amount of EUR 0.1 million in cash on Group accounts.

28. Income taxes

Major components of tax expenses/(income)

Reconciliation of tax expenses/(income)

The weighted average applicable tax rate, considering all profit- and loss-making entities, was 44 % (2021: 28 %).

Deferred income tax

Deferred income tax assets and liabilities are offset when there is a legally enforceable right to offset them and when the deferred income taxes relate to the same tax authority.

Deferred income tax assets

Deferred income tax liabilities

Net movement of the deferred income tax account is as follows:

The Group did not recognize deferred income tax assets on deductible temporary differences of EUR 4.9 million (2021: EUR 5.7 million) and on unused tax losses of EUR 30.0 million (2021: EUR 40.5 million).

These unrecognized tax loss carry-forwards expire as presented in the table below:

EUR 4.4 million of these tax loss carry-forwards belong to the Dutch operations of Precious Woods with an applicable tax rate of 15 % (2021: EUR 5.4 million with an applicable tax rate of 15 %), EUR 3.7 million belong to the Brazilian operations with an applicable tax rate of 34 % (2021: EUR 3.3 million with an applicable tax rate of 34 %), EUR 0.3 million belong to the Gabonese operations with an applicable tax rate of 30 % (2021: EUR 0.0 million)and EUR 21.6 million belong to the Swiss operation with an applicable tax rate of 11.85 % (2021: EUR 31.8 million with an applicable tax rate of 11.85 %).

Accounting policies

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 generally recognized for all deductible temporary differences 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, at the time of the transaction, affects neither the taxable profit nor the accounting profit.

29. Employee benefits

The employee benefit plans of the Group are based on legal requirements in the respective countries. Beyond these regulatory requirements, the Group provides meals, housing, education and access to medical care according to the local operating group’s policy.

Provisions for employee benefit plans

The pension plan for employees in Switzerland is a defined benefit plan and covers the risks of age, death and disability. Financing occurs by means of employer and employee contributions, defined in the pension fund rules in terms of an age-related sliding scale of percentages of salary, as well as returns from the investments made by the pension fund. The pension fund guarantees the vested benefit amount as confirmed annually to members, as regulated by Swiss law. Interests may be added to member balances at the discretion of the Board of Trustees. At retirement date, members have the right to take their retirement benefit as a lump sum or as an annuity. No curtailment or settlement has occurred during the year.

Changes in the present value of the defined benefit obligation

The discount rate used for the valuation of the obligations increased from 0.35 % in 2021 to 2.25 % in 2022.

Movement in the fair value of the plan assets

Changes in net liability

Amounts recognized in profit or loss in respect of the defined benefit plan are as follows:

Amounts recognized in other comprehensive income in respect of the defined benefit plan are as follows:

Principal actuarial assumptions used

Sensitivity to changes in the principal assumptions

Plan asset allocation

Accounting policies

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

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 subsequent periods. 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.