Our performance in 2009 - Sappi

uyer and seller) multiple used in our valuation model. The
discount rate used in our valuation model generally considers
the debt and equity mix, a market risk premium, and other
factors consistent with valuation methodologies. The terminal
value multiple used in our valuation model generally also
considers the valuations for comparable companies.
Small changes in our valuation model would generally not have
a significant impact on the results of our valuation; however, if
future cash flows were materially different than our forecasts,
then the assessment of the potential impairment of the carrying
value may be impacted.
Property, plant and equipment
Where significant parts of an item of property, plant and
equipment have different useful lives to the item itself, these
parts are depreciated over their estimated useful lives. The
methods of depreciation, useful lives and residual values are
reviewed on an annual basis and are revised when the current
estimate is different from the existing estimate. Depreciation
rates for similar items of plant or equipment could vary significantly
based on the location and use of the asset.
The residual value for the majority of items of plant and
equipment has been deemed to be zero by management due
to the underlying nature of the equipment.
The following methods and rates were used during the year to
depreciate property, plant and equipment to estimated residual
values:
Land No depreciation
Buildings straight-line 40 years
Plant straight-line 5 to 20 years
Vehicles straight-line 5 to 10 years
Furniture and equipment straight-line 3 to 6 years
For material items of property, plant and equipment an internal
engineer is used to assist in determining the remaining useful
lives and residual values.
Taxation
The group estimates its income taxes in each of the jurisdictions
in which it operates. This process involves estimating its current
tax liability together with assessing temporary differences resulting
from differing treatment of items for tax and accounting purposes.
These differences result in deferred tax assets and liabilities,
which are included within the consolidated balance sheet.
The group then assesses the likelihood that the deferred tax
assets will be recovered from future taxable income and, to
the extent recovery is not likely, a deferred tax asset is not
recognised. In recognising deferred tax assets, the group
considers profit forecasts, including the effect of exchange rate
fluctuations on sales and external market conditions. Where it
is probable that a position may be successfully challenged by
revenue authorities, a tax provision is raised for the tax on the
probable adjustment. Management’s judgement is required in
2009 annual report
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determining the provision for income taxes, deferred tax assets
and liabilities.
Deferred tax assets have been recognised where management
believes there are sufficient taxable temporary differences or
convincing other evidence that sufficient taxable profits will be
available in future to realise deferred tax assets. Although the
deferred tax assets which have been recognised are considered
realisable, actual amounts could be reduced if future taxable
income is not achieved. This can materially affect our reported
results and financial position.
Hedge accounting for financial instruments
The financial instruments that are used in hedging transactions
are assessed both at inception and quarterly thereafter to
ensure they are effective in offsetting changes in either the fair
value or cash flows of the related underlying exposures. Hedge
accounting is mainly used for debt instruments to hedge interest
rate and foreign currency risk exposures and for firm commitments
to hedge foreign currency risk exposures. We do not currently use
hedge accounting for trading transactions.
External market data is applied in measuring the hedge effectiveness
of financial instruments. Hedge ineffectiveness is recognised
immediately against income.
Refer to note 30 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 cash flows 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 18 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.
financials