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In Australia the situation was no different. In addition to detailed analysis of company accounts there were three principal studies into prevailing accounting practice for agricultural entities. The first is a general overview across a significant sample of SGARA-listed entities whilst the other two relate to surveys and analyses by Herbohn et al. (1998) of reported accounting practices and policies in listed- and private-forestry entities and for the State Government Forestry agencies.

3.6.1 Analysis of Top-500 ASX-Listed SGARA Companies

Dowling and Godfrey (2001) recorded a broad overview of accounting policies adopted by agricultural entities in the Top-500 ASX-listed companies prior to formal adoption of the new SGARA AASB 1037 standard. Their study was based upon the 1999 annual reports for 31 companies. One objective was to determine whether the requested deferral in implementing the new standard was warranted because of the stated need for significant changes to internal measurement, reporting and accounting systems. They concluded the claim was valid since only a few entities were using the proposed ‘market value’ approach contained in AASB 1037.

The list of Australasian agricultural reporting entities is recorded in Appendix 3 with companies shown in bold that were identified in the ASX-industrial classification by Dowling and Godfrey (2001, Table 1). Since the ASX broad classification system was not helpful for identifying SGARA-type, Dowling and Godfrey recast and summarised the SGARA-types represented amongst the 31 listed reporting entities.

Table 6. SGARA Types within ASX Top-500 Entities in 1999

SGARA Types Number of Firms %

Crops 3 10

Grapevines 12 40

Livestock 8 27

Standing Timber 11 37

Two companies reported three types of SGARAs – these were unidentified, but might have comprised Tandou Ltd., which carried cereal crops/cotton and grapevine assets, and Newhaven Park Stud Ltd., which carried two separate types of livestock assets, i.e. non-thoroughbred horse trading inventories and stud mare/stallion interests.

Dowling and Godfrey described the diversity of measurement methods disclosed, including 14 companies using more than one valuation method. One entity declined to disclose its measurement method.

Table 7. Disclosed SGARA Measurement Methods in ASX Top-500 Entities

SGARA Valuation method Number of

Firms

% Historical cost (HC) 18 60.0 Net present value (NPV) 4 13.3 Net market value (NMV) 4 13.3

Independent/directors’ valuation 11 36.7

Lower of HC or net realisable value 6 20.0

Source: Dowling and Godfrey (2001), Table 3.

Table 7 indicates that, in the 1999 reference period, the least-used valuation methods were NMV, which was the required reporting basis under AASB 1037, and NPV, which was a permitted surrogate if NMV could not be determined. Thus many firms would require changes to their accounting reporting policies even if internal management practice remained unchanged. ‘The limited use of NMV implied that active and liquid markets do not exist for some SGARAs, or that firms preferred not to measure SGARAs at NMV’ (ibid., p. 48). It was evident that for three early-adopter entities multiple valuations pertained. One forestry company used HC for the forest asset and NMV to measure timber. For the other two, one used a combination of HC, for its juvenile trees, crops and livestock, and then NPV as a surrogate for NMV thereafter; whilst the other company used NPV and independent valuations to measure grape-vines.

Dowling and Godfrey noted an early-indicated consequence of multiple valuation methods was that a stated objective underpinning the new AASB 1037 standard would not be achieved; that is, to obtain consistent inter-company valuations related to external market values.

Dowling and Godfrey further analysed the two previous Tables to determine whether particular measurement methods were preferred or deemed more relevant for particular SGARA-types. The 30 companies used a total of 51 measurement methods because of multiple valuation methods adopted under their pre-SGARA accounting policies in the absence of an approved accounting standard.

Table 8. Disclosed Measurement Methods by SGARA Types SGARA Types Historic

Cost - HC NPV NMV =<HC or NRV Ind/Dir Valns. Timber [n=11] 7 63.6% 2 18.1% 2 18.1% 2 18.1% 2 18.1% Grapevines [n=12] 9 75.0% 1 8.3% 2 16.7% 0 - 8 66.7% Livestock [n=8] 3 37.5% 0 - 2 25.0% 4 50.0% 1 12.5% Crops [n=3] 3 100.0% 1 33.3% 2 66.7% 0 - 0 - Source: Dowling and Godfrey (2001), Table 4.

These findings are broadly equivalent to the various pre-IFRS valuation guidelines recommended in New Zealand. Typically, horticultural assets were maintained at historic cost until ‘commercial’ maturity, usually three to four years after planting. The assets were then either revalued, representing modified-historic cost; or, an independent valuer provided market valuations for the established orchard/vineyard and associated long-life improvements to land. Rarely were the SGARAs themselves disaggregated from the integrated horticultural orchard or vineyard assets.

Livestock valuation methods appear to indicate reporting entities might be operating with two separate classifications. Bloodstock ‘fixed’ assets were carried at modified- historic cost adopting directors’ valuations, and ‘trading’ livestock as inventory at the lower of historic cost and net realisable value, reflecting current accounting practice.

Short term crops were typically valued at net market value. However each of the three reporting entities also valued crops at historic cost. The reason was not given. Possibly ‘cost’ reflected use of forward sale contracts, e.g. for cotton or sows. In the pre-IFRS era this would differ from NMV at harvest, as prescribed by the SGARA standard. Dowling and Godfrey concluded by predicting that SGARA-entities would face major changes to their financial reporting policies and practice on adoption of NMV under

AASB 1037 (2001, p. 50). This justified deferred implementation of the new standard but with a resultant likelihood of continuing controversy over the treatment of measurement gains and losses and consequent greater volatility in earnings. Their predictions proved to be correct.

3.6.2 Pre-AASB 1037 Forestry Valuation and Accounting Practice

Although prepared in 1997/98, the original Herbohn and Herbohn (1999) feature article on Accounting for Forests in Social, Economic and Political Contexts discussed implications of the proposed AASB 1037 SGARA standard.

The article reported a postal survey of forest managers. Reasons were discussed for removal of mandated non-financial environmental disclosures from the original DP 23 proposal (Roberts, Staunton and Hagan, 1995). Survey participants were opposed to mandated regulation. They appeared to dislike introduction of volatility in ‘bottom- line’ reporting from current value market valuations and recognition of changes in values of forest assets.

The conclusion was that an in-depth examination of existing practice was required from a larger survey sample across the private and public sectors. This occurred in the second article (Herbohn, Peterson and Herbohn, 1998). Both articles indicate lack of common forestry accounting policies and wide disparity in forestry valuation techniques and reporting practice prior to the AASB 1037 standard.

The Herbohn et al. survey was conducted in the context of the release the SGARA Discussion Paper No. 23 (Roberts et al., 1995) and Exposure Draft ED 83 (AARF, 1997). They repeated the forestry accountants’ accounting ‘problem’ (pp. 54-5):

biological growth and a long productive cycle make these assets difficult to deal with conceptually and practically. Biological growth results in increases in both timber volume and quality which creates problems for asset measurement and revenue recognition [with] elapse of long periods between establishment costs and generating revenue through harvest. Major questions include whether value changes associated with growth and market conditions should be recognised as they occur or when they are realised. If [the former] should they be treated as capital or income adjustments, or some combination of the two?

Herbohn et al. (1998) found actual practice varied considerably. This was attributed to existing GPFR-standards specifically excluding agricultural regenerative activities. As in New Zealand, reporting entities therefore devised their own policies.

The sample included seven ASX-listed forestry companies and an additional private- sector company, North Limited, and five state-forestry authorities. Each provided financial statements for the 1990-95 periods. All eight private-sector entities responded but only six of the seven State authorities co-operated. The Northern Territory Authority was excluded because it did not disclose any significant forestry investments (ibid., p. 59).

These results pre-date the Dowling and Godfrey (2001) analysis but complement it by identifying more comprehensively the variety of existing practice adopted by individual forestry reporting entities listed in the ASX Top-500 shown in Table 8.

Herbohn et al. sought to determine current forestry accounting practice for: • valuation methods for forestry assets;

• recognition and measurement of value changes; • balance sheet classification of forestry assets; and • disclosure of non-financial environmental information.

The variety of valuation methods, timing and bases for recognition of value changes, and balance sheet treatment for individual companies is contained in Tables 3-5 in Herbohn et al. (ibid.,1988, pp. 59-63). These are reproduced in full in Appendix 4.

Three of the State Forestry Authorities prepared their financial statements only on a cash basis. These were not suitable for analysis against each of the first three practice criteria. They were the Department of Conservation and Land Management (WA), the Department of Conservation & Natural Resources (Vic.) and Queensland Department of Primary Industries (QDPI).

In summary the Herbohn et al. survey results showed:

• most State Authorities prepared only cash-based financial statements, recording forestry assets without valuations, with only slow progress to accrual accounting; • private-sector entities were evenly divided between those adopting historic cost variants and those providing some alternative form of current valuation. The latter used NPV as a valuation surrogate for recoverable amount. Typically there was no supplementary current market value information in Note disclosures; • this indicated lack of any active secondary markets to value forestry assets;

• disclosures tended to be minimal especially for discount rates and assumptions used. Any valuation change was booked as a capital maintenance adjustment to reserves, which would reverse to income when the forest was harvested or sold; and

• none of the recognition measures fully conformed to proposals in DP 23 or, subsequently, in the AASB 1037 SGARA standard (ibid., p. 61).

The final Herbohn et al. conclusion was that ‘until the issue of measurement…and how asset value changes should be reported’ and a theoretical reporting framework were developed for SGARAs, it was premature to be devising an accounting standard for them (ibid., p. 65).