Journey to Wealth
Plantation Sector - Proposed accounting standard scrapped OVERWEIGHT
- The Edge Financial Daily quoted KPMG as saying that two accounting rules which would have an effect on Malaysian companies have been scrapped.
- One of the accounting standards, which would have forced Malaysian plantation companies to value living things such as oil palm trees, will no longer be implemented. The accounting standard was supposed to be implemented from 2014F onwards.
- This is positive for the plantation companies.
- Implementing the accounting standard would have increased the accounting cost and be a hassle for the plantation companies as they would have to hire independent consultants to value the oil palm estates.
- The accounting standard would have also increased the volatility of earnings in the profit and loss statement as fair value changes in respect of biological assets would fluctuate according to the prices of commodities.
- Plantation companies listed in Singapore follow this accounting standard.
- Every year, the plantation companies would look at the valuation of their oil palm estates and record the fair value changes accordingly.
- The companies use discounted cash flow to value the oil palm estates and some of the main assumptions used in the DCF method are CPO prices, discount rate and FFB yield.
- During periods of high CPO prices, fair value changes in biological assets would increase. When CPO prices are in the doldrums, fair value changes in biological assets would fall.
- The fair value change in biological assets is a non-cash flow item. It does not reflect the core profit of the plantation companies.
- Last year, Muddy Waters LLC said that Olam International was "aggressive" in reporting gains on biological assets. Subsequently, Carson Block of Muddy Waters betted against the stock.
Source: AmeSecurities
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