ASEAN Plantations - Impact of revised FRS 41 & FRS 16 on planters

Singapore-listed plantation companies are required to adopt the revised accounting requirements for biological assets starting 1 Jan 2016. Our initial assessment of these changes revealed that the companies’ total shareholders’ equity could be reduced as they will need to write-down the value of their estates to costs from the current biological assets value, and raise future depreciation charges. Golden Agri and Indofood Agri could be most impacted by these changes, followed by First Resources and Wilmar. However, we believe the market has priced in these concerns, judging from the sharp decline in the planters’ share prices over the past week. We maintain our Neutral sector rating and First Resources as our top pick.

What Happened 
Starting 1 Jan 2016, Singapore-listed plantation companies are required to adopt the revised accounting requirements for biological assets. The amendments to IAS 16 (or FRS 16, Property, Plant and Equipment) and IAS 41 (or FRS 41, Agriculture) require biological assets that meet the definition of a bearer plant to be accounted for as property, plant and equipment in accordance with IAS 16. Companies will have to choose between the cost model (before maturity) and cost or revaluation model (after maturity) for subsequent measurement of their estates. The amendments apply retrospectively to annual periods beginning on or after 1 Jan 2016, with earlier application permitted.

What We Think
Our conversations with the plantation companies revealed that the adoption of these revised standards will most likely result in:

(1) a one-off write down in the value of their estates, which are currently reflected under biological assets and carried at fair value based on the DCF of the underlying plantations, to costs; and

(2) higher depreciation charges as the group will be require to depreciate the mature estates over the remaining productive lives of the estates, under FRS 16.

Among the companies under our coverage, only Golden Agri revealed the potential impact of these accounting changes on its shareholders equity in its latest annual report. The rest indicated that they are still assessing the potential financial impact of these amendments on their financials. Our initial calculation, based on several assumptions and past financial records of the companies, shows that among the four planters under our coverage, Golden Agri will see the biggest write-down in its shareholders equity (-60%) and highest bump-up in gearing ratio due to the revised accounting standards, followed by IFAR and First Resources. In terms of potential earnings impact to our current FY16 earnings forecasts, IFAR will be most impacted (-20%), followed by Golden Agri (-13%) and First Resources (-7%). Wilmar is the least impacted as its biological assets value is a small part of its overall equity. (Fig 1)

What You Should Do
The recent sell-down in Singapore planters could be partly attributed to the concerns over the impact of these accounting changes, apart from the weak CPO prices. Our initial analysis suggests that the market has priced in the potential impact from the adoption of these standards into the planters’ share prices. We maintain our Neutral rating. First Resources remains an Add. We have Hold ratings for Wilmar and Indofood Agri, and a Reduce rating for Golden Agri. (Read Report)

Source : CIMB Research

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