Timberlands: Generally Accepted Accounting Principles and Fair Value

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IFRS for U.S. Timber Industry

INTRODUCTION
This memorandum will address issues raised by the transformation from U.S. Generally Accepted Accounting Principles (US GAAP) to International Financial Reporting Standards (IFRS) in the timber industry. I will cover the following topics: different accounting treatment under U.S. GAAP and IFRS, the influence on investment decisions, Plum Creek’s reason for the opposition against transformation, and conclude with my preferred accounting treatment under different roles. ACCOUNTING TREATMENT

The concern is mainly on recognition of the value of standing timberlands. Under US GAAP, standing timber is accounted for on a historical cost basis. On the other hand, the relevant accounting guidance under IFRS specified that agricultural crops (including standing timber) be valued at their fair market value less estimated harvesting costs at the end of each quarter.

If the fair value of standing timber changed during the accounting period, several differences will incur between the treatment under US GAAP and IFRS. If the fair value increases, no accounts are affected under US GAAP. If the fair value decreases, impairment will show on the income statement. Accordingly, the asset accounts (e.g. inventory account) and equity accounts (mainly retained earnings account) are affected but remain relatively stable on US GAAP’s balance sheet if the fair value decreases. In contrast, for IFRS, the income statement and balance sheet are more volatile with changes in the market fair value. There will be gains or impairments on the income statement as well as raise or drop in the value of asset and equity, with accordance to increase or decrease in the fair value. INFLUENCE ON INVESTMENT DECISIONS

As a senior manager at a timber company, different accounting treatment of standing timber might affect my decisions about investing in additional forestland to a large extent. In general, under IFRS, the timber market seems riskier to...
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