STT admits accounting errors

 

This note is an addendum to the blog STT's forest valuation charade following the release of STT’s Annual Report for 2022/23 on 31^st October 2023.

STT has admitted making errors with its financial statement since 2010. It has restated prior year financials and provided an extensive note.

STT’s net equity essentially comprises the value of its forest estate. There aren’t many other assets or liabilities. How forests are valued is therefore very significant. The 2022/23 Annual Report acknowledged the error of its past ways and changed the valuation methodology.

Although STT’s forest estate is now worth more with the 2022 forest value restated by approximately $24 million, the change in accounting methods confirms STT’s pragmatic approach to accounts preparation.

Since 2010 STT has valued the forest estate as one cash generating unit before splitting the value between the three components: land, roads and trees. From 2016 onward a fourth was added, a make good asset being the cost of replanting/regenerating felled forests.

The latest Annual Report shows STT valuing the forest estate in the same way, by discounting future expected net harvest proceeds, but then allocating all the value to trees.

How then are the other three components treated?

Land

Between 2010 and 2022 STT gave forest land a zero value. Most of STT’s forest estate is on Crown land but there is some in STT’s name, which now appears in STT’s financials at historical cost, $ 11 million at 30^th June 2023. Land previously written off has made a return to the balance sheet. This has meant retained earnings are also increased. The bulk of forest land which STT manages is Crown land which is given a zero value, ostensibly because STT doesn’t own it. That didn’t prevent Crown land having a value in STT’s books before 2010.

Roads

STT has now reverted to its pre 2016 practice of valuing roads as a separate item of property, plant and equipment, on an historical cost basis, but with a much higher rate of depreciation. The written down value of roads at 30^th June 2023 was $13 million. This also increased STT’s retained earnings and hence its net equity.

Make good asset

This has been removed from the financials. By not allocating a portion of the forest estate to the make good asset has meant the value of trees increases. But there hasn’t been a corresponding increase in retained earnings/ equity because prior years’ earnings have been adjusted. by immediately expensing the make good amounts in those years, rather than capitalising them. This has meant retained earnings have been adjusted downwards. Tree values increased on one hand, increasing retained earnings, which were then offset by a similar amount representing the immediate expensing of make good amounts. The balance of yet to be spent amounts is still recorded as a liability, as a reestablishment provision. The peculiar concept of treating unspent regeneration expenses as an asset has thankfully been banished from STT’s books.  It is now being expensed when incurred as one would expect a mandated expense be treated. No different to a leave provision, say.

Effects of the accounting changes

Attributing a value for land and roads as described, rather than allocating a portion of the forest estate has meant the value of trees is $24 million higher than it was previously. STT’s retained earnings and hence its equity position is accordingly $24 million higher.

Expensing the costs of regeneration is a meaningful change. The next logical step is to include these costs (and the costs of roads) when valuing future net market proceeds and hence the value of STT forest estate, which accounts for almost all STT’s equity at any point in time.  

How can it be that a cost of maintaining a perpetual asset isn’t included in the calculation of net harvest proceeds needed to value a forest?? If done so there is little doubt the timber value of forest would be negative.

A glimmer of hope for a revised balance sheet for STT was the inclusion for the first time of $299k worth of ACCUs as an asset, additional income earned during the 2022/23 year.

But who owns the underlying land that makes STT able to earn ACCUs from the Clean Energy Regulator for undertaking greenhouse gas abatement measures? Is it STT’s land or Crown land which STT considers has nil value.

STT used to justify the non-inclusion of notional rents for forested land when calculating future net harvest proceeds by saying it wasn’t necessary because land would be allocated a portion of the forest estate once valued. But then it allocated a nil value to that land, not only to land it owned but to Crown land growing STT’s forests.

Reality has intervened and STT now records a value for the land it owns. What then for all the other land? Does it not have a value? How much longer is STT going to persist with the notion that as far as possible land will be recorded as having no value so that when harvesting occurs any non-timber losses attributable to the land and its associated values can be ignored.