Our performance in 2009 - Sappi

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Notes to the group annual financial statements continued
In terms of the agreement, both Sappi and the empowerment
partner have issued preference shares, for the purchase of
an undivided share of land and the continued right of use of
the land respectively, the terms of which require payment of
dividends on an annual basis. Sappi’s liability for dividends will
vary in relation to the value of 25% of the undivided share of
the land not paid for by redemption of the preference shares
issued to the empowerment partner.
The group has recognised a financial derivative liability in terms
of IAS 39: Financial Instruments Recognition and Measurement.
The liability is initially recognised at fair value. Subsequently,
the liability will continue to be measured at fair value with changes
in fair value recognised in profit or loss in each financial reporting
period.
2.2.24 Alternative fuel mixture credits
The US Internal Revenue Code allows an excise tax credit for
alternative fuel mixtures produced by a taxpayer for sale, or for
use as a fuel in a taxpayer’s trade or business. The credit is
scheduled to expire on 31 December 2009. During fiscal 2009,
the company was notified that its registration as an alternative
fuel mixer was approved by the Internal Revenue Service.
The group, through its North American operations qualifies for
the alternative fuel mixtures tax credit because it uses a biofuel
known as black liquor, which is a by-product of its wood
pulping process, to power its mills.
The group recognises income for the alternative fuel mixture
credits when its right to receive the credit is established. This
occurs when the group has complied with the requirements
of the Internal Revenue Code and has submitted a claim
for the credits due. This is recorded in profit and loss under
other operating income.
2.3 Critical accounting policies and estimates
The preparation of financial statements requires management
to make estimates and assumptions about future events that
affect the reported amounts of assets and liabilities and disclosure
of contingent assets and liabilities.
Future events and their effects cannot be determined with
absolute certainty. Therefore, the determination of estimates
requires the exercise of judgement based on various assumptions
and other factors such as historical experience, current and
expected economic conditions, and in some cases, actuarial
techniques. The group constantly re-evaluates these significant
factors and makes adjustments where facts and circumstances
dictate. The group believes that the following accounting policies
are critical due to the degree of estimation required and/or the
potential material impact they may have on the group’s financial
position and performance.
Asset impairments
The group evaluates its long-lived assets for impairment,
including identifiable intangibles and goodwill, whenever events,
such as losses being incurred, or changes in circumstances,
such as changes in the pulp and paper market, indicate that
the carrying amount of the asset may not be recoverable.
Judgements regarding the existence of impairment indicators
are based on market conditions and the operational performance
of the business. Future events could cause management to
conclude that impairment indicators exist.
In order to assess if there is any impairment, the group estimates
the future cash flows expected to result from the use of the
asset(s) and its eventual disposition. The group takes into
account its ability to carousel products across different operating
units within a region when it performs an asset impairment test.
Considerable management judgement is necessary to estimate
discounted future cash flows, including appropriate bases for
making judgements and estimates as to future product pricing in
the appropriate markets, raw material and energy costs, volumes
of product sold, the planned use of machinery or equipment
or closing of facilities. The calculation of appropriate pre-tax
discount rates (impairment discount factor) is another sensitive
input to the valuation. While every effort is made to make use
of independent information and apply consistent methodology,
actual circumstances or outcomes could vary significantly from
such estimates, including as a result of changes in the economic
and business environment. These variances could result in
changes in useful lives or impairment. These changes can have
either a positive or negative impact on our estimates of impairment
and can result in additional charges.
Business combinations and goodwill impairments
The group uses judgement, estimates and involves external
specialists in determining the fair value of identifiable assets
and liabilities acquired in a business combination, as well as
calculating the fair value of the purchase consideration on
acquisition. The highest and best use of the acquired assets
by market participants (as opposed to Sappi’s business
intentions) is taken into account in determining the fair value of
assets acquired in a business combination.
Goodwill is tested for impairment based on an allocation to one
or more cash-generating units (CGUs) in which the synergies
from the business combinations are expected. The group takes
into account its ability to carousel products across different
operating units in allocating goodwill to CGUs. Goodwill
impairment testing is conducted at reporting unit levels of our
business and is based on a cash flow valuation model to
determine the fair value of the CGU.
The assumptions used in estimating future cash flows are
based on business forecasts and incorporated external
information from industry sources, where applicable. Actual
outcomes could vary significantly from business forecasts.
Changes in certain estimates could have a material effect on
the estimated fair value of the reporting unit. In addition to the
judgments described above, significant judgements in estimating
discounted cash flows also include the selection of the pre-tax
discount rate (impairment discount factor) and the terminal
value (net present value at end of period where there is a willing