Accounting Policies

STATEMENT OF ACCOUNTING POLICIES

REPORTING ENTITY:

Timberlands West Coast Limited is a State Owned Enterprise registered under the Companies Act 1993. The Group consists of Timberlands West Coast Limited and its subsidiary New Zealand Sphagnum Exports Limited. Timberlands West Coast Limited is a reporting entity for the purposes of the Financial Reporting Act 1993. The financial statements and group financial statements of Timberlands West Coast Limited have been prepared in accordance with the Financial Reporting Act 1993 and the State Owned Enterprises Act 1986.

MEASUREMENT BASE:

The accounting principles recognised as appropriate for the measurement and reporting of financial performance and financial position on an historical cost basis are followed by the Group, with the exception that certain long term assets have been revalued.

SPECIFIC ACCOUNTING POLICIES:

The specific accounting policies which materially affect the measurement of financial performance and financial position are consistently applied:

A. VALUATION OF FIXED ASSETS

Forest Land

Forest land is valued at acquisition cost and revalued at least once every three years to current market value based on independent valuation. Any changes in forest land valuation are accounted for in the forest land revaluation reserve.

Exotic Forests

All forest assets, including both production and development forests but excluding land, are revalued annually to values determined by discounting the future post-tax cash flows at an appropriate rate using current standard costs and conservative realisation values.

For the purpose of the annual revaluation the amount capitalised in any year is calculated as follows:

Development Forests

Direct costs including land preparation, planting, weed control, fertilising, thinning, pruning and disease control plus a share of forest maintenance, administration charges, holding costs and other overheads are capitalised to the forest assets.

Production Forests

All direct costs, including fertilising, disease control, restocking, weed control, thinning of second crop and pruning of second crop are expensed to the statement of financial performance.

Where the annual harvest of the total production forest is less than the estimated sustainable yield of those production forests, a share of the above direct costs and overheads is capitalised to recognise the increased value of the forest asset due to the undercut.

The amount capitalised is that proportion of the direct costs and overheads that the volume undercut bears to the volume of the sustained yield of the production forest. In the event that an overcut occurs, the forest asset is reduced and the resultant depletion is expensed through the statement of financial performance.

If the valuation is higher than the amount capitalised the revaluation reserve is credited with the difference. If the valuation is lower, the difference is first debited to the revaluation reserve until prior years’ revaluations are extinguished, and the balance is debited against the year’s surplus.

Indigenous Forests

Pursuant to a Deed of Appointment entered into with the Crown, the company has been granted the management and harvesting rights to specified indigenous forests.

The exclusive rights to manage and harvest the Crown’s West Coast indigenous production forests have a minimum term of 35 years from 1 October in any given year in accord with the terms of the company’s crown forestry licences.

The Deed of Appointment and the rights contained therein are valued periodically to a value determined by discounting at an appropriate rate the cashflows derived there from over a period of time specified in the Deed of Appointment. Such dates terminate any unsustainable harvesting of indigenous forest in the year 2006.

Where the Deed of Appointment relates to a fixed period the value is amortised over that period. Such amortisation is charged initially to the revaluation reserve until prior years revaluations are extinguished and the balance is accounted for in the statement of financial performance. All income and expenditure relating to the indigenous forest is accounted for directly through the statement of financial performance in the year it is incurred.

Other Fixed Assets

Land and buildings are initially recorded at cost and are subsequently revalued at least once every three years to current market values based on independent valuations. All other fixed assets are recorded at cost.

Depreciation

For accounting purposes depreciation is calculated on a straight line basis which will write-off the cost of the asset, plus revaluation increments, evenly over its expected useful life. For major classes of fixed assets the expected useful lives are:

Buildings                 50 years
Motor vehicles        5 years
Plant                      10 years
Fixtures & fittings    5 years

Leased assets are depreciated over the shorter of the unexpired period of the lease and the estimated useful life of the assets.

B. INVENTORY

Log inventories are valued at the lower of cost, determined on a first in, first out basis, or net realisable value.

Other stock is valued at the lower of cost (on a weighted average basis) or net realisable value.

C. DEFERRED EXPENDITURE

Expenditure incurred in the provision of temporary roads for future harvesting access of the exotic forest is amortised over the length of the harvesting cycle or 24 months, whichever is the shorter.

D. LEASES

The annual expenditure associated with operating leases is charged against the surplus for the period in which it occurs.

E. RESEARCH AND DEVELOPMENT

The annual expenditure on research and development is charged against the surplus for the period in which it occurs.

F. ACCOUNTS RECEIVABLE

Accounts receivable are valued at estimated net realisable value.

G. FOREIGN CURRENCY

Transactions in foreign currencies are converted at the New Zealand rate of exchange ruling at the date of those transactions. Short term transactions covered by forward exchange contracts are measured and reported at the forward rates specified in those contracts. At balance date foreign currency assets and liabilities are translated at the closing rate, and exchange variations arising from these transactions are included in the statement of financial performance.

The exchange differences on hedging transactions undertaken to establish the price of particular sales or purchases together with any costs associated with the hedge transaction are deferred and included in the measurement of the purchase and sales transaction.

H. TAXATION

The income tax expense charged to the statement of financial performance includes both the current year’s provision and the income tax effects of timing differences calculated using the liability method.

Tax effect accounting is applied on a partial basis to timing differences which are expected to reverse.

I. INVESTMENTS

Investments are stated at the lower of cost or expected net realisable value.

J. BUSINESS COMBINATIONS

The consolidated financial statements include the accounts of Timberlands West Coast Limited and its subsidiary company, New Zealand Sphagnum Exports Limited, and are prepared using the purchase method. All significant inter-company items and transactions have been eliminated in preparing the consolidated accounts.

K. ACCOUNTING FOR GOVERNMENT GRANTS

The company has received a suspensory loan for Special Purpose Species Planting. This converts to a grant on the basis of areas planted to the total planting requirement.

The grant is taken to income when the planting costs for designated areas have been incurred and completed, and the requirements under the suspensory loan agreement have been met. As these funds are allocated to the designated forestry development, they are used to offset any amounts capitalised in accordance with the accounting policy for Development Forests.

L. FINANCIAL INSTRUMENTS

The group is party to financial instruments with off balance sheet risk to reduce exposure to fluctuations in foreign currency rates. These financial instruments include foreign exchange contracts.

The group enters into foreign currency forward exchange contracts to hedge foreign currency transactions. Any exposure to gains or losses on those forward contracts is generally offset by a related loss or gain on the item being hedged. Gains or losses on contracts which hedge specific short term currency denominated commitments are recognised as a component of the related transaction in the period in which the transaction is completed. The group is not involved in foreign currency speculation.

CHANGES IN ACCOUNTING POLICY:

There have been no changes in accounting policies. All policies have been applied on bases consistent with those used in the previous year.