Tasmanian Times


Accounting for Dummies … A look at Forestry Tasmania


Mr Gordon is right when he says FT doesn’t lose money from operations. How could one? Under prevailing accounting standards no value is attributed to the costs of any forest products sold, so provided one sells a tree for $1 more than the harvest costs, one has made a profit. There wasn’t even enough cash from operations to cover replanting costs.

The figures don’t support Mr Gordon’s claim that FT doesn’t rely on handouts and that CFA funds are compensation payments for the locking up of forests.

Media releases which accompany reports such as FT’s 2008/09 annual financial statements usually attempt to mislead rather than inform. The reliance on PR people who are obviously quite limited when it comes to interpreting economic and financial statements isn’t exactly designed to logically and coherently explain FT’s current situation to stakeholders.

Consider the following.

“About 92 per cent of the $170 million dollars spent by Forestry Tasmania last year was returned to the Tasmanian economy via local suppliers.

That equates to around $344 for every man, woman and child in the state”.

Most people are able to work out that 92% of $170 million spread across our population that has just nudged past 500,000 is equal to $313 not $344.

But what’s the point of such a statistic anyway? If more trees are sold and more payments made, will we be better off? Or is there another side to the equation?

Ignoring the silly spin and the bad arithmetic, maybe a closer look at the financials might be interesting.

The financials are just another set prepared using prevailing accounting standards. Nothing sinister or underhand. Some of the comments on TT have been a little mischievous, some ill informed and a lot just plain dumb. There is no signed audit report from Mike Blake at this stage but I don’t think that’s significant. There are some bits missing but they might appear with the full Annual Report (at this stage only the financials and notes have been released). And there are other bits of physical data (tonnes, hectares etc) which appear annually in a later report Sustainable Forest Management.

Let’s start by looking at the Balance Sheet. FT’s is fairly straightforward. The major difference with most other businesses is the presence of standing timber, a biological asset in accounting terms.

The net assets of FT at 30th June 2009 were $581 million. Some salient items are as follows.

• There is $37 million cash in the bank. This has been brought about mainly by the receipt during the year of $42 million of CFA grants. CFA grants when received are obviously banked, but initially not recorded as current year revenue but rather as ‘revenue in advance’, a holding account on the Balance Sheet. When FT spends the money for which the grant has been provided, the ‘revenue in advance’ becomes current year revenue (it is transferred to the profit and loss statement). As at 30th June 2009 there was a total of $44 million of CFA grants included as ‘revenue in advance’ under current liabilities. When it is included as a current liability rather than a non-current liability it means that the grant money will be spent in the next 12 months (i.e. during 2009/10). It is not evident from the statements how the $44 million will be spent. Hopefully there will still be enough cash in the bank at the time.

• FT was owed $31 million by customers including $3 million in respect of softwood sales and $27 million from other trade customers. Judging by the size of the annual turnover, this suggests debtors might have stretched out to 60 days. Maybe CFA money is being used to finance customers? Maybe cash flow is becoming a problem in the forest industry?

• Inventories of $10 million include mainly gravel and seedlings. Timber is regarded as inventory only when it is felled.

• Standing timber is valued at $385 million. Plantations are worth $209 million (50:50 between softwood and hardwood) and native forests $176 million. Approximately $24 million of standing timber is included as a current asset which means it is due to be harvested during 2009/10; the rest is a non current asset.

• There is $277 million worth of land, and $115 million worth of roads etc at written down value.

• Property and plant of $58 million consists mainly of buildings ($20 m), a transmission line ($13 m) and plant ($12m).

• Trade creditors payable amount to $17 million.

• Revenue in advance totalled $56 million (including $44 million of CFA grants mentioned above). These are amounts paid to FT in expectation of future goods/services to be provided by FT. Of this amount $47 million has to be provided in the next 12 months.

• Employee benefits owing of $116 million consist mainly of an unfunded superannuation liability of $109 million. There is an amount of $12 million in an asset account which presumably is being set aside to help meet the future liability.

• Borrowings were $41 million, owing to Tascorp.

In summary, a fairly tidy Balance Sheet with $581 million of net assets including only $41 million of debt. By comparison say FEA, at 31st December 2008 had net assets of about $300 million, but with debt of $200 million.

The treatment of standing timber requires further explanation. As mentioned above if it is to be chopped down in the next 12 months, it is listed as a current asset, otherwise it’s non-current. When new plantings occur the plantation expenses are not written off via the P&L. Nor are costs of plantations reallocated to the P&L when trees are felled and proceeds received. Costs are not matched with income. Instead, at the end of each year any standing timber is revalued and any increase in the value of the asset is included in the P&L, not in the calculation of operating profit but below the line in the further calculation of overall net profit.

To reiterate, timber is not expensed when sold, nor are plantation expenses claimed when incurred, but rather movements in the value of timber over the year are recorded, not in the calculation of operating profit but in the further calculation of net profit, which also includes non operating expenses like movements in unfunded superannuation liabilities.

The operating profit statement therefore does not contain a value for the costs of any timber felled and sold. Only the receipts are included. Plus any harvest costs. This is not a devious strategy employed by FT but merely an application of accounting standards which applies to the treatment of biological assets.

In 2007/08 FT made an operating profit before tax of $8.6 million, but an overall loss before tax of $55 million when non operating items such as a $74 million fall in the value of standing timber was included.

This year 2008/09 the operating profit before tax was $9.3 million, roughly the same as the previous year, but non operating items such as the increase in timber value of $43 million meant the overall net profit before tax was $44 million.

Last year in Estimates hearings Mr. Kloeden from FT said, referring to the 2007/08 results

” Much has been made of the …. loss recorded by Forestry Tasmania, and it is worth explaining in layman’s terms how that figure came about when the operational profit was $8.5 million. In any business accounting, accountants calculate the value of the physical assets held in that business……. it is my view that this valuation number is a somewhat theoretical number. In financial terms, a better measure of how we are travelling is the operating profit or loss”

I wonder what Mr. Kloeden’s current view is, given the increase in the value of timber in 2008/09. Value is not a theoretical concept. A bit subjective maybe.

Nevertheless FT saw fit to alter the pricing used to value standing timber. Previously, the price was based on an average of the prior three year actuals. Note 1(j) contains an explanation of the new method.

“For this year’s valuation, an average of the prior year (2008), current year (2009) and next year’s (2010) budget has been used and resulted in an increase in the valuation. The impact of this change to the estimated value is in the order of $61.3 million.”

The stumpage price of standing timber in the 2007/08 accounts standing timber was based on an average of the actual figures for the previous 3 years. The revised average price is weighted to include a future price and has resulted in an increase in the value of standing timber of $61.3 million compared to the old method.

It’s a little unusual to value current stock using a price one hopes to achieve in the future. But the accounts are audited so Mike Blake must have OK’d the deal.

As well as determining a price for standing timber, yields, management and harvesting costs are also factored in to calculate the overall value of standing timber.

Put simply, the value of standing timber is calculated using expected volumes multiplied by price which is then discounted back to present value using a real discount rate of 9%, before subtracting any harvest costs.

If Mr Kloeden believed that valuing standing timber on the basis of past actual figures was a little theoretical, how does he view a valuation based on future prices?

Now for a look at the P &L statement.

On second thoughts let’s look at the cash flow statement instead.

As we have seen some items are included in operating profit, but some like movements in tree value and the amount of unfunded super liability are included below the line in the further calculation of overall net profit. Some CFA grants are included as operating income, whilst some CFA capital grants are regarded as non operating income. And some items such as expenditure on new plantations and roads etc are capital items and don’t appear in the P&L at all.

Sometimes a P&L doesn’t tell the full story. Revenue is not necessarily the same as cash in the door. FT’s ‘revenue in advance’ has increased by $25 million to $56 million .When FT has to provide those services, some of the cash will have already been spent on other items. This situation is similar to MIS companies who received cash for new plantations but when it came time to plant the trees much of the cash had gone and so they had to wait for next years sales to fund last year’s trees. In the end the funds dried up and the undertakers were summoned.

The cash flow statement gives the best overall view of the ins and outs. And if a business is struggling, the reasons are more likely to be found in a cash flow statement than a P&L.

The business operations only produced a net cash inflow of $3.3 million. It’s not immediately obvious that FT has produced a strong profit as alleged by Mr Gordon. There wasn’t even enough cash to pay for replacement plantations ($12 million) and logging roads to assist in tree extraction ($12 million). As an absolute minimum, without trying to maximise profits, one would expect enough cash from operations to pay for replacement plantations ($12 million) plus new capital (this includes roads) equal to the amount of depreciation claimed ($14 million). The latter assertion is based on one of the Government fiscal strategies which is to require capital expenditure each year at least equal to the annual impairment of existing assets. This modest objective is to ensure that overall capital stock is increasing over time.

Whilst the CFA grants have been a welcome cash injection, in this year 2009/10 FT has to spend $44 million and there’s only $35 million in the bank and they’re not making much from operations.

Mr Gordon is right when he says FT doesn’t lose money from operations. How could one? Under prevailing accounting standards no value is attributed to the costs of any forest products sold, so provided one sells a tree for $1 more than the harvest costs, one has made a profit.

The figures don’t support Mr Gordon’s claim that FT doesn’t rely on handouts and that CFA funds are compensation payments for the locking up of forests. There wasn’t even enough cash from operations to cover replanting costs.

Consider softwoods for instance, in particular the 50% joint venture with GMO. Last year in 2007/08, FT’s gross profit from its 50% interest was less than $1 million on turnover of $18 million, hardly enough to pay for a few beers in celebration after 25 years. These were mature pine trees from about 1,700 hectares.

In 2008/09 softwood operations yielded a gross profit of almost $3 million but it seems nearly $6 million was spent on replanting.

Sustainable is not a word that beckons.

So where are we? The operating cash flow is fairly limited, increasingly dependent on CFA funds. Adding the accruals and allowing for depreciation etc the operating profit before tax is $9 million, and then by including the change in the value of standing timber and the increased superannuation liability, the overall net profit before tax becomes $44 million.

The change in the value of standing timber is simply the value at the end less the value at the beginning. But some was felled and sold whilst the remaining timber increased to give a net increase of $43 million. The best estimate of the amount of timber sold during 2008/09 is the value of standing timber listed as a current asset at 1st July 2008. That amount was $14 million and is the value of timber earmarked for sale for that year. If this were included in the calculation of operating profit, the result would have an operating loss before tax of $5 million. The overall profit before tax remains at $44 million.

The level of revenue from forest sales hasn’t changed much, $151 million in 2007, $156 million in 2008 and $155 million in 2009.

When one reads FT’s financials there’s always a nagging suggestion that it isn’t really a business. Only $41 million in debt yet unable to fund replacement trees and logging roads with the proceeds of trees that were entrusted to their care at no cost. The balance sheet is lazy. Plenty of cash but it’s all come from CFA grants which will have to be spent as agreed provided. FT has a turnover similar to FEA, but FEA has less than 200 employees. FT has over 500. FT still reads like a Government department. Or have they just become too distracted with the pulp mill?

FT control just over 100,000 hectares of plantations, not much different to FEA. The native forest wood production area is almost 600,000 hectares but the value of standing timber is only $176 million. That’s all that’s listed on FT’s Balance Sheet.

Like Gunns with their wine business and heritage buildings, FT has made forays into tourism. Both are trying to use the new businesses as Trojan horses to pursue their other agendas. It’s a toss up whether it’s comedy, farce or tragedy. I just wish they’d stop their silly games. FT is struggling to run their core business let alone tourism ventures.

On the question of community service obligations (CSOs), they do result in a lot of hidden costs for GBEs. My view is that GBEs should be reimbursed directly out of the State Budget so that the true cost of CSOs appears as a line item in the budget. They are then fully transparent and can be scrutinised. If this were to occur the community might realise the full costs of CSOs that are continually foisted upon GBEs.

And on the subject of transparency, missing from this year’s financials is segment information. If FT were an ASX listed company the listing rules would require FT to show “the results of segments that are significant to an understanding of the business as a whole”. Last year FT provided details of the profit contributions and cash flow information for hardwood, softwood and infrastructure segments. The latter segment was insignificant and the softwood information was visible in the financials anyway, because they came from the joint venture with GMO which was separately recorded. So the segment report last year contributed little. This year it was absent.

The segment of FT’s business that is significant to an understanding of the business as a whole is clearly the native forest segment but in 2007/08 it was hidden amongst hardwood. Mr Gordon also suggested in his recent media release that CSO’s were a significant part of FT because of their alleged drain on FT’s profits. A more detailed segment report would be welcome, one which detailed the figures for native forests, hardwood and softwood plantations and tourism/ CSO obligations , not only revenue and gross profit but cash flow information, assets employed, employment and physical data such as hectares logged and planted and tonnes harvested.

It’s easy for Mr Gordon to imply profit would be 2 or 3 times greater (up to $19 million more) if it wasn’t for CSO obligations. Why not produce the figures. They’re readily available, why not disclose them?

Contentious issues aren’t going to disappear with silly spin. Additional info is more likely to help. Let’s hope the full Annual Report supplies a little more detail, perhaps even a Plan B should its major customer have a change of plan. But so far the score is 3 out of 10 for performance and 8 out of 10 for the cover up.

Author Credits: [show_post_categories parent="no" parentcategory="writers" show = "category" hyperlink="yes"]


  1. Mark

    September 1, 2009 at 11:14 pm

    #8 This has been the case for all our states’ Forestry Commissions for 20-30 years. Royalties are minimised and profits reduced to less than 5% relativity. Examine the books of Victoria, WA or NSW and you will find the same trends. These are the backroom deals between government (political parties), multinationals, forestry associations and unions. Regulations and RFAs are only there to quell public disquiet and voting choice. The only science in operation is political science.

  2. Gerry Mander

    September 1, 2009 at 4:17 pm

    The stock market is already advertising ‘get in early’ on the carbon trading — it’s worth a trillion dollars in futures!!

    Tasmania’s share?

    ZERO !!!!

    Kind of clever and disconnected.

  3. William Boeder

    September 1, 2009 at 3:18 pm

    The rather comprehensive explanations given by John Lawrence, (thankfully so,) enable us to understand the confusing presentation of figures as given in the F/T report.
    Taken as a whole their is nothing here that commends the management team at F/T.

    My most immediate reaction to the stealthy jiggery-pokery of this entire operation is:

    Shut down the entire operation, terminate the inept wobbling heads and executives of this going nowhere operation, then commence an in-depth investigation by an independant open ‘reputable’ accountancy firm to reveal just what the actualities are.
    The more that I read into F/T and its entire operation, the more it appears that this entity exists only to fund a lot of executive type salaries?
    As to what is of true benefit to the State, this can only be the minimal down-the-line industries and the bit players on the fringe.

    I wonder if there are any substantive persons in this State with enough testosterone to put a halt to this ongoing out of control executive gravy-train?
    If F/T is allowed to continue its wayward wobbling journey to cutting great swathes of our native forests, a new slogan is essential.

    How about:
    Removing Trees For Our Fat-Cat Salaries.

    Jobs For The Boys Using State Funded Toys.

    Our Business Is A Taxpayer Funded Obliquity.

    We Are A Chemically Enhanced Charity.

  4. Dismord

    September 1, 2009 at 2:05 pm

    Such a shame Ben Quin isn’t in State Parliament to ask those questions.

  5. Gerry Mander

    September 1, 2009 at 12:30 pm

    Correct me if I am wrong, but didn’t the FT wood supply contract have a deadline in it somewhere that said if the mill had not been started before a certain date, the contract would lapse?

    Isn’t this why Gunns was doing a bit of gardening on the varioue sites?

  6. phill Parsons

    September 1, 2009 at 10:59 am

    What of the heralded Wood Supply Agreement if Gunns goes 100% plantation based.

    The woodchip export market remains depressed. Will buyers purchase chips at the WSA price?.

    FT’s strategy to become more profitable through a pulpmill appears to be threatened by a community campaign as the potential JVP, Sodra, wants modern practices and no environmental baggage in making hardwood pulp.

    It’s beyonfd time to get Tasmania’s forest recognized as carbon sinks and take in the growing income from emissions trading.

  7. max

    September 1, 2009 at 1:25 am

    China is growing genetically modified trees for pulp production that mature in 6 years and the best that we can do is 16 years. Their labour costs are a fraction of our costs and the shipping distances are almost non existent.
    If Forestry Tasmania are going to increase profits by selling chips to a pulp mill and at the same time Gunns are going to compete on the open market FT’s accounting will be out of this World next time.

  8. john lawrence

    August 31, 2009 at 11:58 pm

    Ben (#7) you’re absolutely right.

    They’re the points I was trying to make. The physical data (sawlog categories, tonnes, hectares etc) appear in a later report but they need to be reconciled with the $ amounts in a segment report so we can easily see what’s what.

    It’s not difficult.

    We can then start to make decisions based on the evidence.

    It’s interesting as I said to Gerry (#4), Gunns’ net cash from operations was $58 million yet FT’s was only $3.3 million. It’s essentially the same timber being processed thru’ the system, yet it is surprising that a monopoly supplier like FT is unable to extract a slightly better return for you and I, the shareholders. Only 5 cents cash return to us and 95 cents to Gunns.

    And we then have to rely on CFA funds to replant the mess left behind.


  9. Ben Quin

    August 31, 2009 at 4:26 pm


    Thank you once again for the time you have taken to complete this analysis. You raise the question of the missing “results by segment” information towards the end of your article.

    As a shareholder in this enterprise, I would be most interested to know the revenue results by log category – softwood, category 1 hardwood (prime sawlogs), category 2 hardwood, category 8 hardwood, pulp logs, speciality timbers.

    Further transparency in the report could be provided through an analysis of harvesting costs and cost of sales by category. Where does the risk lie? Is it with the public? The forest contractors? The customer? If so, why?

    A review of these actual results, and detailed analysis of the information, could do much to either dispel or confirm the public suspicion that FT is a wood-chip driven enterprise. The public would then be in a position to make more informed decisions about the policy parameters within which FT should operate.

    As it stands, it does seem that we urgently need to find a way to improve the return to the public from the public forest resource. Given Gunns’ recent announcements that:
    a. they want the mill to be 100% plantation based, hence their bid for more plantation assets, and
    b. their flat profit result last year was due to depressed demand for wood chips in Japan, the argument that the FT-Gunns’ wood-supply agreement will improve the FT bottom-line appears increasingly spurious. If that is true, I would be most interested in hearing more about the revised FT strategy for FY09-10 and beyond.

    Ben Quin

  10. William Boeder

    August 31, 2009 at 3:49 am

    We constant read of the pillages and plunderings, the phantom promises, these and the many other shortcomings of Gunns Ltd .

    I wonder at the enormity of the ravaging of this our Tasmania, the greed-feeding devastations, the deforestations, even the plundering of our parliamentary principles, these and those other foul deeds done by this raping company.

  11. salamander

    August 31, 2009 at 2:42 am

    So to put it simply, creative accounting has made the balance sheet look good. Most people would have guessed that.

    But why? Why put the report out early, and why all the jiggery pokery? I know FT must have trouble seeing straight, and think that all the public are too stupid to see past their smoke and mirrors, but I just wonder at the timing.

    They don’t do something for nothing.

  12. john lawrence

    August 31, 2009 at 12:27 am

    No, Gerry(#2)their sales were $150 million odd, not $3.3 million. The latter figure was all that was left after paying operating expenses out of operating receipts. Not enough to replant or pay for the logging roads.

    If you look at Gunns’ operating cash flow out today, it was $58 million (coincidentally similar to their net profit). Gunns’ ended up with $58 million of the cash and we,the stoic shareholders,only received a net $3.3 million.

  13. john hayward

    August 30, 2009 at 10:06 pm

    John has found FT’s operations to be financially unsupportable even under the teased rules of Tasmanian accounting.

    Imagine if they were assessed under an all-in cost/benefit analysis.
    Nothing in conventional accountancy allows for costing the economic values destroyed by wholesale forest clearance, such as damage to water catchments and tourism. Life and death issues like greenhouse emissions don’t rate a mention either.

    We are also expected to presume that this GBE is earnestly trying to return a profit to the public, rather than, say, maximising profits to its biggest customer and closest business associate.

    An assessment of FT’s performance will never be complete without a thorough corruption commission review of its seemingly superhuman ineptitude.

    John Hayward

  14. Gerry Mander

    August 30, 2009 at 7:51 pm

    The business operations only produced a net cash inflow of $3.3 million. It’s not immediately obvious that FT has produced a strong profit as alleged by Mr Gordon. There wasn’t even enough cash to pay for replacement plantations ($12 million) and logging roads to assist in tree extraction ($12 million).

    Basically, what John is saying is that Forestry are outright liars and are fully dependent upon the public purse for their existence. They are trying every trick in the book to swell their profits on paper to hide the fact that they are operating as an insolvent business.

    As he says, it shouild be easy to show a profit where your assets come free of charge and you only have to find one dollar above your harvesting costs to show a profit.

    Despite this, if I read the figures corretly, the sales amounted to a measely $3.3 Million but they publicly claim a profit of $9 million, mostly because they counted in the grants they received and then gazed into a rather dubious crystal ball and revalued their future sales which they then included in their current statement as a cash flow.

    Talk about creative accounting! They can be very lucky they are not quoted on the stock exchange with these shonky figures, otherwise this might be considered a ‘criminal’ activity.

  15. Dave Groves

    August 30, 2009 at 1:25 pm

    Thanks for cutting through the smoke and mirrors John.

    Wouldn’t it be fantastic if those running FT were proud of their achievements and had the full courage of their convictions to give full disclosure?

    Wouldn’t it be awesome if those running FT were doing what they do for the best interests of the community and the environment?

    I find the whole sorry shebang very very sad for our people and our environment.

    Perhaps one day men will be men?

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