The Financial Reporting Council’s (FRC’s) Conduct Committee has reviewed the annual report and accounts of Anglo-Eastern Plantations Plc (the company) for the year ended 31 December 2010.
The Conduct Committee’s Financial Reporting Review Panel (FRRP) considered the company's use of historical rather than current data to estimate the fair value of palm oil trees, recognised in the balance sheet as biological assets. In its 2010 accounts the company valued its plantation estates using a discounted cash flow technique by estimating future sales proceeds of palm oil, deducting from this the estimated cash costs of production and discounting these estimated net cash flows. The company used historical percentages to allocate the plantation estate values between land, palm oil trees and equipment. However, an allocation on this basis does not achieve fair value for the biological asset, as required by IAS 41 ‘Agriculture’.
In its 2012 accounts, whilst the FRRP’s enquiries were on-going, the company changed its valuation method to value land and biological assets separately and recorded its first prior year restatement. Land was valued by reference to market prices. The fair value of palm oil trees was valued using a similar discounted cash flow technique to the plantation estate method. However, the estimated cash costs of production used historical, rather than current data, to estimate the cost of using the land on which the palm oil trees are planted. As a consequence, the fair value of biological assets was over-stated.
Following further discussion with the FRRP, the company has used current market data to estimate the cost for the use of land in its discounted cash flow. This has given rise to a second prior period restatement, announced by the company today, that reduced the value of its biological assets at December 2012 by $37 million from $245 million to $208 million. Profit after tax for the year ended 31 December 2012 was reduced by $1.6 million. There was no impact on cash.
Following the above mentioned action taken by the company, the Conduct Committee regards the enquiries arising from its review of the company’s annual report and accounts for the year ended 31 December 2010, initiated on 14 November 2011, as concluded.
Notes to editors:
- The FRC is responsible for promoting high quality corporate governance and reporting to foster investment. We set the UK Corporate Governance and Stewardship Codes as well as UK standards for accounting, auditing and actuarial work. We represent UK interests in international standard-setting. We also monitor and take action to promote the quality of corporate reporting and auditing. We operate independent disciplinary arrangements for accountants and actuaries; and oversee the regulatory activities of the accountancy and actuarial professional bodies.
- The Conduct Committee is a body authorised under the Companies Act 2006 (‘the Act’) to review and investigate the annual accounts and directors’ reports of public and large private companies to see whether they comply with the requirements of the Act, including applicable accounting standards. Following implementation of the Accounting Regulation (EC) No. 1606/2002, this may mean compliance with UK or International Financial Reporting Standards.
- Where breaches of the Act are discovered the Conduct Committee seeks to take corrective action that is proportionate to the nature and effect of the defects, taking account of market and user needs. Where a company’s accounts or directors’ report are defective in a material respect the Conduct Committee will, wherever possible, try to secure their revision by voluntary means, but if this approach fails the Conduct Committee is empowered to make an application to the court under section 456 of the Act for an order for revision. To date no court applications have been made.
- Paragraph 12 of IAS 41 ‘Agriculture’ requires a biological asset to be measured on initial recognition and at the end of each reporting period at its fair value less costs to sell, except where the fair value cannot be measured reliably. For accounting periods before 1 January 2013, where market-determined prices are not available, paragraph 20 requires fair value to be determined using the present value of expected net cash flows discounted at a market rate. Thereafter, IFRS 13 ‘Fair Value Measurement’ applies to the measurement of the fair value of biological assets. Additionally, paragraph 25 of IAS 41 permits the use of an allocation of the fair value of the combined biological asset and land to determine fair value for the biological assets, for example when the biological assets, land and related improvements as a package have an active market.
- Irrespective of whether an entity performs separate valuations of biological assets and the land to which it is physically attached or carries land at cost, it is necessary to avoid over-stating the fair value of biological assets by including a hypothetical charge in the discounted cash flow as if a third party owned the land and rented it to the owner of the biological assets. This notional rent, also known as a contributory asset charge, should be determined from current market data.
- As a result of correspondence with the FRRP regarding the supporting data for allocation, the company changed its accounting policy and methodology for its plantation estate assets, in its 2012 accounts, such that the fair value of biological assets and land were separately determined. In addition, the company decided that it was not possible to measure reliably the fair value of plant, machinery and estate infrastructure and changed to a policy of carrying these assets at cost less depreciation. Land continued to be carried at fair value.
- This gave rise to the first restatement of the comparative amounts reported in the company’s interim accounts for the period ended 30 June 2012 and in its 2012 annual report and accounts. The effect of the restatement was to increase biological assets at 31 December 2011 from $77 million to $235 million (at 31 December 2010, an increase from $69 million to $187 million) and to reduce property, plant and equipment from $341 million to $215 million (at 31 December 2010, from $376 million to $250 million). Profit after tax for the year ended 31 December 2011 was increased by $11 million. There was no impact on cash.
- As disclosed in the company’s 2012 annual report and accounts, from 19 October 2012 the FRRP continued its correspondence with the company in respect of the restatement of biological assets and land at 31 December 2010 and 2011, including the measurement of the charge for the use of land. That correspondence continued until February 2014. Specifically, the FRRP was concerned that the biological asset valuation might not reflect a market rate for the use of land.
- In October 2013 the company took professional advice from an independent valuer who gave an opinion on the annual notional rent charge to be attributed to the company’s planted land. As a result, the company concluded that the notional rent charge included in arriving at its 2012 valuation of biological assets did not approximate to market value.
- The Conduct Committee maintains a Financial Reporting Review Panel (FRRP). The Chairman is Richard Fleck and the Deputy Chairs are Joanna Osborne and Ian Wright. There are currently 24 other members drawn from a broad spectrum of commerce and the professions. Individual cases may be dealt with by a specially constituted Review Group of the FRRP.