Our performance in 2009 - Sappi

116
Notes to the group annual financial statements continued
A key assumption and estimation is the projected growth
estimation over a period of eight to 18 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.
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.
Ruling unadjusted current market prices and costs to sell 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 profit or loss 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 2009 2008 2007
Market price changes
1% increase in market prices 12 17 17
1% decrease in market prices (12) (17) (17)
Discount rate
(for immature timber)
1% increase in rate (3) (4) (4)
1% decrease in rate 3 4 4
Volume assumption
1% increase in estimate of volume 6 6 6
1% decrease in estimate of volume (6) (6) (6)
Costs to sell
1% increase in costs to sell (9) (10) (10)
1% decrease in costs to sell 9 10 10
Growth assumptions
1% increase in rate of growth 1 1 2
1% decrease in rate of growth (1) (1) (2)
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.
The principle underlying the required attribution approach is
that employees render service over their service lives on a
relatively consistent basis and, therefore, the profit or loss effects
of pension benefits or post retirement healthcare benefits are
earned in, and should be expensed in the same pattern.
Numerous estimates and assumptions are required, in the
actuarial models, to determine the proper amount of pension
and other post retirement liabilities to record in the group’s
consolidated financial statements and set the expense for the
next fiscal year. These include discount rate, return on assets,
salary increases, healthcare cost trends, longevity and service
lives of employees. Although there is authoritative guidance
on how to select these assumptions, our management and its
actuaries exercise some degree of judgement when selecting
these assumptions. Selecting different assumptions, as well as
actual versus expected results, would change the net periodic
benefit cost and funded status of the benefit plans recognised
in the financial statements.
Refer to notes 27 and 28 for the key assumptions, the benefit
obligations, plan assets, net periodic pension cost and the impact
on the future financial results of the group in relation to post
employment benefits that may arise due to changes in economic
conditions, employee demographics and investment performance
as at the end of September 2009 and September 2008.
Provisions
Provisions are recognised when a reliable estimate can be
made of the amount that the group would rationally pay to
settle the liability. Risks, uncertainties and future events, such
as changes in law and technology, are taken into account by
management in determining the best estimates.
The establishment and review of the provisions requires
significant judgement by management as to whether or not
there is a probable obligation and as to whether or not a
reliable estimate can be made of the amount of the obligation.
All provisions are reviewed at each balance sheet date. Various
uncertainties can result in obligations not being considered
probable or estimable for significant periods of time. As a
consequence, potentially material obligations may have no
provisions and a change in facts or circumstances that results
in an obligation becoming probable or estimable can lead to a
need for the establishment of material provisions. In addition,
where estimated amounts vary from initial estimates the provisions
may be revised materially, up or down, based on the facts.