2008 Annual report - Sappi

Notes to the group annual financial statements // continued
for the year ended September 2008
2. Accounting policies (continued)
Refer to note 30.6 of the Group Annual Financial Statements
contained elsewhere in this Annual Report for details of the fair
value hedging relationships as well as the impact of the hedge
on the pre-tax profit or loss for the period.
Plantations
The fair value of immature timber is the present value of the
expected future cashflows taking into account, unadjusted
current market prices in available markets, estimated projected
growth over the rotation period for the existing immature
timber volumes in metric ton, cost of delivery and estimated
maintenance costs up to the timber becoming usable. The
discount rate used is the applicable pre-tax weighted average
cost of capital of the business unit. Determining the appropriate
discount rate requires significant assumption and judgement
and changes in these assumptions could change the outcomes
of the plantation valuations. The standing value of mature timber
is based on unadjusted current market prices in available
markets and estimated timber volumes in metric tons less cost
of delivery at current market prices.
Management focuses their attention on good husbandry
techniques which include ensuring that the rotation of
plantations is met with adequate planting activities for future
harvesting. The rotation periods vary from eight to eighteen
years in Southern Africa.
Assumptions and estimates are used in the recording of
plantation volumes, maintenance cost per metric ton, and
depletion. Changes in the assumptions or estimates used in
these calculations may affect the group’s results, in particular,
our plantation valuation and depletion costs.
A key assumption and estimation is the projected growth
estimation over a period of eight to eighteen years per rotation.
The inputs to our immature timber growth model are complex
and involve estimations and judgements, all of which are
regularly updated. Sappi established a long term sample plot
network which is representative of the species and sites on
which we grow trees and the measured data from these
permanent sample plots are used as input into our growth
estimation. Periodic adjustments are made to existing models
for new genetic material.
Sappi manages its plantations on a rotational basis and by
implication, the respective increases by means of growth
are,over the rotation period, negated by depletions for the
group’s own production or sales. Estimated volume changes,
on a rotational basis, amount to approximately five million tons
per annum.
Ruling unadjusted current market prices applied at the reporting
date, as well as the assumptions that are used in determining
the extent of biological transformation (growth) can have a
significant effect on the valuation of the plantations, and as a
result, the amount recorded in the income statement arising
from fair value changes and growth. In addition, the discount
rate applied in the valuation of immature timber has an impact
as tabled below.
US$ million 2008 2007 2006
Fair value changes
1% increase in market prices 17 17 14
1% decrease in market prices (17) (17) (14)
Discount rate
(for immature timber)
1% increase in rate (4) (4) (3)
1% decrease in rate 4 4 4
Volume assumption
1% increase in estimate of volume 6 6 5
1% decrease in estimate of volume (6) (6) (5)
Growth assumptions
1% increase in rate of growth 1 2 1
1% decrease in rate of growth (1) (2) (1)
The group is exposed to financial risks arising from climatic
changes, disease and other natural risks such as fire, flooding
and storms and human-induced losses arising from strikes,
civil commotion and malicious damage. These risks are covered
by an appropriate level of insurance as determined by
management. The plantations have an integrated management
system that is certified to ISO 9001, ISO 14001, OHSAS 18001
and FSC standards.
For further information see note 10 of our group annual financial
statements.
Post-employment benefits
The group accounts for its pension benefits and its other post
retirement benefits using actuarial models. These models use
an attribution approach that generally spreads individual events
over the service lives of the employees in the plan. Examples of
‘events’ are changes in actuarial assumptions such as discount
rate, expected long-term rate of return on plan assets, and rate
of compensation increases.
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