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JULY 2012
IFRS (IAS 41), Plantation and

Sustainable Development
Tomo Suzuki
This Case was prepared by Tomo Suzuki, Professor of Accounting and Sustainability Management at the Sad Business School, Oxford
University. The Case was developed mainly based on interviews with a number of stakeholders and public sources such as Annual
Reports. It is intended to be used as a basis for class discussion rather than to illustrate either effective or ineffective handling of a
management situation. This case study was developed with support from the Pears Business School Partnership. The purpose of the
partnership is to inspire future leaders to make a positive difference to society.
University of Oxford 2012.
The University of Oxford makes no warranties or representations of any kind concerning the accuracy or suitability of the information
contained herein for any purpose. All such information is provided as is and with specific disclaimer of any warranties of merchantability,
fitness for purpose, title and/or non-infringement. The views expressed are those of the contributors and are not necessarily endorsed by
the University of Oxford.
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IFRS (IAS 41), Plantation and Sustainable Development
Tomo Suzuki; University of Oxford
I. Prologue
Jay Kumar from Mumbai dreams of becoming an academic accountant who specialises in
International Accounting Standards (IAS) and International Financial Reporting Standards (IFRS),
which have become internationally influential since the early 2000s. As IFRSs were developed by
the International Accounting Standards Board (IASB), a private sector regulator in London, Jay
decided to pursue his doctorate in the UK in 2008. While concerned with the details of IFRSs, Jay
was also interested in the sustainable development of Asian countries, where agricultural
businesses must be well-managed in order to feed ever-growing populations.
Jays supervisor, Professor Thomas Smith, was also interested in the impact of financial
accounting on sustainable development, an underexplored area of research. During their early
discussions, Thomas introduced Jay to the interesting case of International Accounting Standard
41 (i.e. IAS 41 - Agriculture), which he himself had been introduced to by a Malaysian
representative at the Symposium on International Convergence of Accounting in Emerging and
Transitional Economies in Beijing (1011 Jul. 2007).
Look at this graph (See Figure 11). Malaysia claims that under the Fair Value model of IAS 41,
the profit curve of a plantation company resembles the red line (the thick line). The black curve
(the thin line) is of course the profit curve under the traditional Historical Cost Accounting (HCA)
method, which is intuitive; but look, the red line is just extraordinary. I couldnt believe that this
was the case under IAS 41, the International Accounting Standard, but it really does appear to be
true. I think it will be an interesting case to investigate.
Figure 1 Palm Plantation Profit Model
Palm Oil is one of the most
important edible oils in the
world, (a necessary
ingredient of chocolate, for
example). Production and
consumption has grown by
nearly 10% per year in
recent years. Malaysia and
Indonesia are the worlds
leading producers,
accounting for 86% of global
production. Palm Oil
Plantations are the most
important industry to these
countries.
An electronic copy of the original model was given to Tomo Suzuki by an official from the Chinese Ministry of
Finance, who organised the Symposium. Later, through various meetings and interviews, we were informed that the
original model was developed by Ms. Tan Bee Leng (Technical Director of Malaysian Accounting Standards Board,
2010). We developed our current model based on the data from four companies, which we interviewed in Jakarta,
London, and Singapore. In this Figure, profits per hypothetical unit of plantation are shown, just to illustrate the
impact of IAS 41. For FVA-based profits, a discount rate of 5% is used.
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Why does this happen? Jay asked his supervisor.

Well, thats what I want you to find out, but basically, under the IFRS, in this case IAS 41 (Note:
IFRSs includes IASs), palm trees are defined as biological assets, and biological assets are
recorded at their fair value. Of course, this is correct, because nowadays we practice fair value
accounting (FVA). If there was a market for the palm trees, the planters (i.e. companies) would
use the market value as the trees fair value, but theres no market for trees that have been
planted and fixed on the ground! So, to satisfy IAS 41, they have to use a discounted cash flow
model (DCF model) to value the trees. When they carry out these valuations at the end of the
year in which the trees are planted, the value of the trees according to the DCF model is higher
than the original costs; they therefore record a profit in the first year. The Standard dictates that
the trees fair value must be checked annually, with a profit being recorded if the value goes up,
and a loss if the value goes down. If you project such profits and losses over the life of the
plantations then you get the red-line profit curve you are seeing here.
... but how many years of cash flows are discounted?
Well, thats what I want you to investigate, but palm trees can live for 25, 30, 35 years or so,
depending on the variety, the geographic conditions, companies policies, etc And if you are
valuing rubber trees in India, they can live for a hundred years, right? Its similar for coffee and
tea, slightly different for timber trees, and so on. Now, as to the other important determining
factors of the fair value, in my mind, there are two things. Firstly, the price of Crude Palm Oil
(CPO), and secondly, the discount rate. As you can imagine, the CPO price is beyond the control
of companies; its generally quite volatile. As for the discount rate, this is something the company
can control and which can have a significant effect on the profit figures. Ive shown you the model
using a 5% discount rate, but the appropriate rate could be 3%, 10% or 15%, who knows.
Surely it cant be 15%! And arent the planters happy with fair value accounting because they
can record a high profit in the first year and control the profit calculations? Jay asked.
well, I doubt it. I can think of several possible problems. But, lets not speculate, lets
investigate. First, you need to understand the Standard, IAS 41. Find it on the net, read it
carefully and if there are any guidelines available, study them. Then, give me the double-entry, as
usual, to make sure you really understand IAS 41! Lets say the original cost of the trees is $1
million and the company pays in cash. And then, at the end of the first year, they value the trees
at $5 million; $6 million in the second year; $6.9 million in the third; $7.5 million in the fourth; $7.8
million in the fifth; $8.0 million in the sixth and so on. Think about which items are cash inflows
and outflows. Try to draw the graph. Then you should understand accounting according to IAS
41.
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II. Numbers in London Stock Exchange

In 2009 and 2010, Jay investigated this interesting case as part of research towards his doctorate.
He started looking into some companies listed on the London Stock Exchange (LSE) which
operate plantation businesses, mainly in South East Asian countries - such as Anglo-Eastern
Plantations PLC (AEP:LSE) and M. P. Evans Group PLC (MPE: LSE). As the LSE requires its
member companies to comply with IFRS, Jay thought he could examine the impact of IAS 41 on
the companies financial statements and operations. He obtained the companies annual reports
and compared their accounting treatments.
II. 1. - R.E.A. Holdings PLC
R. E. A. Holdings PLC (originally, Rubber Estate Agency; http://www.rea.co.uk) is a UK company
listed on the main market of the LSE. The company cultivates oil palms in the province of East
Kalimantan in Indonesia and produces crude palm oil and by-products. The Figures below show
the companys consolidated income statement (Fig. 2), balance sheet (Fig. 3) and the notes to
the consolidated accounts (Fig. 4).
Figure 2 - R. E. A. Income Statement (source: Annual Report 2009)
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Figure 3 - R. E. A. Balance Sheet (source: Annual Report 2009)
From the Income Statement (Fig. 2), Jay could see that the largest factor driving profits in 2009
was the Net gain arising from the changes in fair value of biological assets ($9,765,000). The
increase in the value of biological assets was confirmed by the balance sheet (Fig. 3; from
$179,745,000 to $204,087,000), but the size of the increase on the income statement did not
match that on the balance sheet. Jay therefore looked to Note 13 for an explanation of the
discrepancy.
It was already clear to Jay that a change in fair value of biological assets could be the factor that
determined the companys financial position and therefore the potential impression that investors
form of its performance.
From Note 13 (Fig. 4), Jay realised that the figure relevant to his analysis was $9,765,000 and so
he ignored the rest of the increase in the value of biological assets. He also noticed that the
company used two different discount rates: 16% and 19% - both of which he thought to be too
high and for which no justification was given. However, since the same rates were used in 2008
and 2009 Jay knew they could not be a factor in any potential creative accounting. Finally, Jay
was not convinced that the price of CPO used to calculate the fair value of the trees - $446 per
tonne in 2009 and $431 in 2008 was correct. Note 13 explained that this was the 20 year
average, but Jay knew that the latest price was nearly $1000 and did not think that the use of this
average was appropriate to calculate the value of the future cash flows.
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Figure 4 - R. E. A. Note 13 (source: Annual Report 2009)
Figure 4 - Historical Price of CPO
Source:
IMF, Hardman &
Co., (2012)
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II. 2. - Financial Statements of M.P.Evans Group PLC.

M. P. Evans Group PLC. (http://www.mpevans.co.uk) is a UK-based plantation group, listed on
the Alternative Investment Market (i.e. AIM a market for smaller growing companies) of the LSE.
The Groups assets consist mainly of palm oil and rubber plantations in Indonesia and Malaysia.
The following Figures show the companys consolidated income statement (Fig. 6), balance sheet
(Fig. 7), its accounting policy (Fig. 8) and a note to the consolidated accounts (Fig. 9).
Figure 5 - M. P. Evans' Income Statement (Source: Company Annual Report 2009)
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Figure 7 - M. P. Evans' Balance Sheet (Source: Company Annual Report 2009)
Figure 7 - Notes to Financial Statements (Source: Company Annual Report 2010)
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Figure 8 - Note to Financial Statements (Source: Company Annual Report 2010)
From the income statement (Fig. 7) it is clear that the change in value of the biological assets has
an enormous impact; the same is true for the balance sheet (Fig. 8). Note 15 (Fig. 9) clarifies the
details of the biological assets: of the total gain in fair value ($23,518,000), $11,090,000 seems to
have been generated from planting new trees, with the rest coming from revaluation of existing
trees.
Jay was surprised it really is the case that the company can realise profit (i.e. a gain
recognised on the income statement, rather than in the revaluation reserve on the balance sheet)
as soon as they plant the new trees ... and they can recognise a profit if their calculations show
an increase in fair value of the existing trees, even though they havent sold any products! ... This
is insane ...
He also noticed that the 20-year average price used by M.P Evans for calculations was $502 per
tonne in 2009 (Fig. 8 and Fig. 9) more than 10% higher than the figure of $446 per tonne used
by R. E. A. Holdings in the same year, despite the fact that both were based on CIF Rotterdam.
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Both companies used a similar estimate for the life of the plantations - around 25 years - but M. P.
Evans discounted the cash flows at 14% (Fig. 9) whereas R. E. A. Holdings used discount rates
of 16% and 19%. Jay could not understand how these figures could be justified or verified; more
importantly, given such different assumptions, he did not see how the two sets of accounts could
be described as comparable - the main objective of IFRS.
Jay went on to check other London listed companies: Anglo-Eastern Plantations PLC., operating
plantations in Indonesia and Malaysia, used $500 (2008) and $550 (2009) for the average CPO
prices, and discount rates of 12% (2008) and 16.25% (2009). The life of plantations was
estimated at 20 years for the Indonesian estates and 30 years for Malaysian estates.
Now, you know the reality of Fair Values, Jay. Fair Value sounds fair, transparent and
comparable, doesnt it?! was the cynical comment from his supervisor. As to the last companys
calculations, between 2008 and 2009 the CPO price went up significantly and the discount rate
also went up from 12% to 16.25%. What do you think, Jay? Do you see what I am getting at?
When Jay tried to reply, the supervisor dissuaded him, No, no, lets not assume, a good
researcher will always try to check. Lets ask the companies and auditors.
Thomas and Jay asked to interview the companies and their auditors, who had signed off on the
companies financial statements. Two of the audit firms agreed. As the interview data contains
sensitive information about the companies and the audit firms, the identities of the audit firms are
anonymised. However they are all either members of the so-called Big 4 accounting firms or are
just outside this rank. Thomas and Jay believe that the auditors accepted the interview request
because they too were concerned about IAS 41 and wanted to share their information with the
researchers.
Auditors; 27th May 2010, London.
Two partners (initials NT and RM) in a large accounting firm responsible for auditing an LSE
listed plantation company kindly gave Thomas and Jay an hour and a half interview. The auditors
have substantial experience of auditing in general and in particular of auditing this plantation
company. They are fully aware of the challenges of IAS 41 for plantation businesses and had
therefore also examined the accounting practices of the other plantation companies. The
interview concentrated on the following areas: (1) the methods and data used in the revaluation
of biological assets, particularly the expected price of palm oil, the discount rate and the
components of cash outflows and (2) a general view on IAS 41 and the IASBs role in agriculture.
Below, in order to disguise and protect the identities of the auditors and auditees, names and
figures are modified. However, they are based on the information gleaned from the actual
interviews and the modification is minimal so that sense of reality is not significantly altered.
(1) Methods and Data of Revaluation of Biological Assets.
The auditors were asked how the companies determine their asset valuation methods and how
they choose which figures to use; whether or not the auditors found the figures reasonable and
whether they think IAS 41 is an appropriate accounting method for use by plantation industries.
The auditors said that since the CPO price went up significantly (See Fig. 5) over the last few
years (approx. 2007-2009), his clients assumption of about $500 per tonne was too conservative.
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But since it was conservative rather than aggressive, they felt it was acceptable. In addition they
could justify $500 as the average of past 20 years, which is consistent with reports in the past
and which guards against volatility. In response to this, Thomas and Jay made the point that
under IFRS, the concept of conservatism is minimised, and the notion of fair value based on
future cash inflows is promoted; therefore the use of 20 year historical average in order to avoid
volatility may contradict the spirit of IFRS. The auditors tended to agree, providing no substantial
counter argument. Furthermore, when Thomas asked about the changing of the discount rate
from 10% to 15%, the auditors replied:
RM
well, last year we told them we thought 10% was too low. The company did not like
our recommendation to use 15% or so, but fortunately for them the CPO price went up,
and the effect of the both changes cancelled out each other; so the company accepted
the recommendation.
NT
(across listed companies) values are calculated using cash flows over the next 20
years in Indonesian estates, 30 years in Malaysian estates and M. P. Evans uses 40
years, this practice is so inconsistent that there is no real point discussing small
variations to be honest. As you say, if you are talking about rubber trees 100 years could
even be reasonable
(2) Overall impact of IAS 41 on Plantation Industries, Investors and Auditors

Having sensed the auditors general scepticism and dissatisfaction with IAS 41, Jay asked how
the auditors evaluate the impact of IAS 41 on a wide range of stakeholders. The auditors
answers were clear in their facial expressions and body language, as well as in their words.
RM
There is no solution until the IASB agrees to do things differently. I think our position is
pretty similar to our clients (i.e. we need to change the Standard). If it wasnt, we wouldnt
support their accounting practices in which non-volatile figures are intentionally achieved
by creative calculations Im trying to put it politely, but the previous FD of this
company called it bloody nonsense, ha, ha, ha.... It does not help preparers, investors
or auditors.
Thomas showed the auditors a Fair Value model which he had obtained from a plantation
company in Indonesia (Fig. 10) and asked whether or not auditors usually look at the details of
these models. Fig. 10 shows only small part of the data necessary to calculate the changes in the
fair value of the plantation, but even a small change in this data set can lead to a significant
change in the resultant fair values.
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Figure 9 - FVA Model Data (Only one page out of 96 pages)
NT
(Talking about auditors and audit risks) We look at what professional valuers use in the
market place when they are valuing estates for sale and I guess if people buy on that
basis you know that there is some sense in the numbers. We also have an internal
valuations department here (at the audit firm) and we consult with them as to what they
think is appropriate, but they are all more comfortable with property valuation or share
valuation than biological asset valuation We do talk to our partners (accounting firms)
in the local areas and check professional valuers reports and they give us some comfort
- in terms of reducing the audit risk and risk of litigation I know the IASB wants to try
and achieve greater transparency and comparability but it seems to me that it is making
reports less comparable.
RM
as for Tax and Dividends, we only audit consolidated accounts, so they dont really
matter but in the local jurisdiction, this could be really important
After the interview, Jays supervisor explained that Tax and Dividends are usually calculated
based on the unconsolidated financial statements to which IAS 41 may or may not have been
applied, depending on the local jurisdictions accounting regulations.2
IFRS applies primarily to consolidated financial statements in many jurisdictions. This is because IFRS has been
developed mainly for investors, who tend to select their investments based on the consolidated performance and
financial positions of group companies. But tax and dividends are usually determined based on an unconsolidated
basis, i.e. legal entities rather than economic entities.
2
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so, are we going to go to South East Asia to continue the investigation .?! Jay was
sceptical due to the high costs of travelling there.
Of course. No one in the West really knows what impact IAS 41 has on plantation industries and
on the lives of people in those countries. Auditors also rely on local accounting firms and
independent valuers in the local areas to try and reduce their audit risks in London, so we have
to go there and see. Dont worry, Ive secured some funding for this.
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III. Realities in Asian Countries

In the latter half of 2010 and 2011, Thomas, Jay and a new research assistant from Malaysia
(Bee Chen) visited various places in India, Indonesia, Japan, Malaysia, and Singapore to
interview a variety of stakeholders. They managed to meet three Ministers and five Deputy
Ministers of relevant departments, three Chairmen of accounting standards boards, two top
executives of stock exchanges, seven heads of plantation boards and associations, ten auditors
from the Big 4 and medium sized accounting firms, twenty-four CEOs, CFOs, managers and
clerks from fourteen plantation and timber production companies and seven academics.
To get a general view of the situation in Asian countries, the research team started approaching
academics in each jurisdiction, assuming that academics would be well informed and give them
an overall picture. Unexpectedly, however, research on the impact of IAS 41 on plantation
industries was very limited. One academic commented that this is because in developing
countries IFRSs are assumed to be something good because they are developed in advanced
nations. But the research team sensed another reason - that capable academics tend to be
recruited by accounting standards boards and, once involved in the governments standard
setting process, academics tend to lose their academic freedom to voice their true opinion.
One exception, who was confident and outspoken, was a professor at a university in Malaysia,
which was originally established as an agricultural university. This professor was Project Manager
of the Malaysian Accounting Standards Board (MASB) when the IAS 41 equivalent was
developed in 2000 2006.
Professor
we actually published the Exposure Draft in 2006. We met with practitioners,

had a public forum with the major players from the industry as well as the
auditors and the CEOs and CFOs of most of the major plantation companies and,
basically, I think their concern is the practical difficulties of implementing the
standard. Like you said, if you are talking about palm oil, it is a very long cycle
but I dont actually think the estimation of fair value is difficult. I think it is very
simple: they (i.e. the growers) dont want to implement it. The area for research
is Why are they reluctant?. I think big companies dont want to publish price
forecasts because it will restrict them when negotiating contracts Its not that
its difficult, they just dont want to do it.
[Interview with a professor, KL, Malaysia, 23/06/2010]
Another professor at a prestigious university seemed to have reservations about IAS 41, but
confessed not being able to publish academic papers for political reasons - only publishing short
articles on IAS 41 under the name of an acquaintance in the accounting industry. In his / her view,
IAS 41 has already caused serious problems (those examined above), but Malaysias
commitment to the IFRS adoption and the dominance of certain accounting firms in the regulatory
arena made it difficult to speak out against IAS 41. [Interview with a senior lecturer with two other
interviewees, KL, Malaysia, 23/06/2010. Details are disguised here to protect interviewees
identity.]
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Contrary to Jays initial impression that companies would be happy with IAS 41 because it
provides opportunities for creative accounting, growers appeared to be strongly against IAS 41 in
general (except for a few small, growing plantation companies. See Epilogue). Many listed
plantation firms were so keen to talk to the research team that they often set up meetings jointly
with their competitors. They are all concerned that the estimates for the life of a plantation, the
price of CPO and the discount rate to be used in their DCF models mean that the resultant values
are meaningless. The degree of manipulation that IAS 41 would allow was so large as to make it
undesirable (as opposed to the subtle modification which can be achieved by other creative
accounting techniques, which is considered appealing).
In one meeting, a Senior Group Manager (GAC) and Senior Accountant (LSW) of two large
plantation companies in Malaysia provided their views as follows.
LSW:
I have the cost of capital data here (He shared detailed data of their Fair Value
model). I dont think you will get anything beyond 10 or 12%. (Commenting on a
discount rate of 16%) Its ridiculous - how do they justify using that rate?!
GAC:
I think that is another weakness with the Standard: leaving too much up to the
management its risky, leaving room for misjudgement and manipulation and
unfortunately the management tends not to be around for more than 10 years (implying
that CFOs can come up with convenient numbers to get their bonus and then leave the
company).
LSW:
CFOs get 2- or 3-year contracts, these days.

Also, in 2007 the auditor of a company called AAA [Disguised], said that the fair
value could not be determined and therefore published a qualified opinion report ...
The company actually printed two set of the accounts: one using the fair value and one
without, so that users could understand more fully. I think they have listed in Indonesia
but I think they are also listed in BBB [Disguised]?
the other issues - taxes and dividends. Of course, some ask why biological assets
are any different from plant and machinery? Its a manufacturing environment, right?
You depreciate your machinery, so you should also depreciate plantations based on
cost (i.e., HCA). Otherwise, dividends and tax get messed up. Its simple.
Nobody supports this kind of accounting, except for maybe valuers, they are only ones
who would accept this.
We arranged a talk that was given to the MPOA, in September last year. The MASB
chairman was there. Obviously, he has taken note of our concerns and is working with
the other countries where companies are impacted by the IASB ... collectively we have
more chance of our voice being heard.
[Interview with two plantation companies, KL, Malaysia, 24/06/2010]
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The CFO of one of the largest plantation companies in Indonesia was concerned about the use of
independent valuers and auditors. This CFO has also been involved in the setting of accounting
standards at the IAI, the Indonesian accounting standards setter.
CFO
we have been through the pain of audits of accounts that use IAS 41. the biggest
question here was how to choose the discount rate. For the audit, we had to use
independent valuations; otherwise, as you said, its too risky (i.e., the CFO could be later
accused of miscalculation/manipulation). But then the independent appraiser insisted that
we should use 16% discount rate! 16%! ...Even the bankers do not give us such high
interest rates. I did not understand their model; if we used a 16% discount rate then the
value will go down so quickly! I think I understand our business, but do they?!
[Interview with CFO, CPA and IAI member, Jakarta, Indonesia, 28/06/2010]
On the use of independent valuers, a Malaysian auditor (Initials YKF) from a large accounting
firm (a partner firm of a leading international accounting firm) commented:
YKF
(Given the huge size of plantations in Malaysia). you cant avoid using independent
valuers. But you can imagine how few valuers are available in Malaysia - it is simply
impossible for independent valuers to cover all the estates and come up with accurate
valuations.
[Interview with auditors, KL, Malaysia, 23/06/201]
Earlier in 2009, in India, Thomas and Jay had managed to interview two valuers from different
valuation firms, who expressed quite mixed views.
Valuer This is a major business opportunity for us, thats why we are here (at the IFRS Summit
conference). My job is to get as many clients as possible, but we dont have many
valuers. There are many things that we dont know how to value, we can show models,
and sort of guess, but who knows if we come up with reasonable figures. You are
asking about the implication of professional fees; we are all human beings, things are
negotiated, its inevitable!
However, having sensed the high risk of such practices, his firm was seeking Government
guidelines.
We are asking the Government to issue guidelines yes, we do have the usual
disclaimer at the bottom of our report (to avoid any liability which occurs in relation to
their valuation), but its still too risky. So many things are too subjective and it makes us
uncomfortable. We need some guidelines, so that we can say we were just following the
guidelines.
[Interview with a manager of a top valuation firm, Mumbai, India, 18/03/2009]
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On the other hand, in Singapore, the research team was rather worried about what one investor
told them about the investment environment in general. The interviewee was a senior manager at
a medium sized investment firm.
Investor
We can buy transparency now, you know! We used to do favours for analysts to
get them to write favourable reports (suggesting, by his hand gesture, the
existence of unlawful or at least unethical gifts), but we dont need to do that now.
Management pay high fees to valuers, the valuations are then included in
certified public accounts and we get our favourable analyst report. Its all very
transparent! Yes, IFRS is transparent, ha ha ha! I dont know about the UK, but
this is how it works here. Singapore got the IFRS from the West.
[Interview with senior manager of investment firm, Singapore, 01/08/2010]
In addition to the calculation of profits, the subsequent calculation of Dividends and Taxation had
also caused serious concerns. Some commented that Dividends are still an internal company
matter, but tax is almost uncontrollable. Mr. NZ (initials), a former member of MASB and now a
partner at a Big 4 accounting firm, commented that taxation based on IAS 39 profit (i.e.
unrealised profit from financial instruments) is already happening and therefore it would not be
surprising to see taxation of unrealised profits from plantations [Interview, Damansara Uptown,
Malaysia, 25/06/2010]. The governments policy on this is still unclear, but the fear is that such a
decision could be taken at any time, even overnight. In India, this fear was so strong that the
rubber plantation association in Cochin said if such accounting is introduced, were finished
[Interview with Rubber Grower, Cochin, India, 03/07/ 2009].
Throughout the research from 2009 to today (July 2012), the most active stakeholder fighting
against IAS 41 is Dato Mamat Salleh (Initials MS), the CEO of Malaysian Palm Oil Association
(MPOA). Having discussed all the aspects mentioned above, the research team asked why he
has been so keenly engaged in this matter.
MS
This accounting makes our industry unsustainable. I spent my whole life working for this
industry. We have overcome many difficulties, but if this accounting is introduced our
industry will not be sustainable. Thats why.
The consequences are like what happened to Enron.3 Sime Darby will go bust, that type
of thing. (Note: Sime Darby is one of the worlds largest listed palm oil companies,
producing about 2.4 million tonnes or 6% of the worlds crude palm oil (CPO) output
annually)
[Interview with Mr. Salleh, KL, Malaysia, 24/06/2010]
Enron Scandal: Revealed in October 2001. Enron Corporation, mainly in the energy wholesale business, was once
the 7th largest corporation in the US measured by Sales figures. Using (or abusing) fair value accounting (or mark-tomarket accounting, as was the US term at that time), Enron recorded future cash flows as profit on the first day of a
long-term contract, before providing any goods or services. The company soon went bankrupt, as did Arthur
Andersen, then one of the largest accounting firms, which had audited the Enron Corporation.
3
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As Mr. Salleh had been active in organising meetings, seminars and negotiations (Note: he later
arranged a meeting between the Agricultural Minister and the research team in Nov. 2010 in
London), the research team asked his view on the roles of stakeholders - particularly those of the
Malaysian Accounting Standards Board (MASB), the Indonesian Institute of Accountants (Ikatan
Akuntan Indonesia or IAI; Indonesian Accounting Standards Board comes under IAI), the
Agricultural Ministry and the Ministry of Finance, which is ultimately responsible for dealing with
IFRS. Mr. Sallehs view was that the Chairman of MASB, Mr. Mohammaed Faiz Azmi, was also
very critical of IAS 41. Although Malaysia has decided to fully adopt IFRS, the Board recognises
the significant shortcoming of IAS 41. The Board has been doing its best to negotiate with IASB
but so far the South Asian voices are not strong enough to change IAS 41. Both the Ministry of
Plantation Industries and Commodities and the Ministry of Finance are trying to help, but their
understanding is not deep enough to make them take more substantial political actions.
Once the research team had interviewed various stakeholders in Asian countries, it was clear that
no one supported the implementation of IAS 41. Why then couldnt the Government take any
effective action to prevent IAS 41 being implemented? The research team wanted to meet the top
officials of the Ministry of Plantation Industries and Commodities and the Ministry of Finance.
On the 21st June 2010, the research team managed to meet Hon. Tan Sri Bernard Giluk Dompok,
the Minister of Plantation Industries and Commodities, together with five other members of the
ministry. Unsurprisingly, the ministry was unaware of the IFRS issue, which is usually dealt with
by the Ministry of Finance. However, Mr. Dompok was originally a professional valuer and knew
all of the tricks that can be played with numbers, making it easy for the research team to make
their point. Mr. Dompok immediately grasped the overall picture, assessed the risks for the
industry, and commented:
Minister
So, they can come up with any numbers. This is Enron Accounting for
Agriculture. The only difference is that it was a scandal at that time; now, it is
mandatory!
The meeting lasted for nearly one hour, with many substantial discussions, including ways to
prevent IAS 41 being implemented. The principal secretary to the minister gave his card to the
research team, a sign of trust and the seriousness of the Ministers concern, and the research
team was directed to discuss the matter with the Ministry of Finance.
Later that day the Minister of Finance was unavailable but the Deputy Minister, Hon. Senator
Dato Dr. Awang Adek Hussin kindly made himself available. The meeting was also attended by
two other senior officials and by Mr. Ken Pushpanathan - a CPA at one of the Big 4 accounting
firms who represented the Malaysian Accounting Standards Board (MASB). Mr. Hussin was
unaware of the IAS 41 issue, and Mr. Pushpanathan spent most of the time explaining, with the
help of detailed PowerPoint slides, how the MASB has been dealing with the issue. The MASBs
position has been that Malaysia supports the full adoption of IFRS, but that this specific Standard,
IAS 41, has significant shortcomings and they are working with international stakeholders to
lobby the IASB to modify IAS 41.
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The change that MASB has been proposing is to treat plantation trees as Plant, Property and
Equipment (i.e., PPE or traditionally fixed assets) under IAS 16 rather than IAS 41. This way,
palm oil trees, rubber trees and the like can be treated as fixed assets to which traditional
Historical Cost Accounting can be applied.4 The research team was happy with the idea, which
they had also had in mind, but felt the real point was missed.
The point was whether or not the IASB would take the proposal seriously and make the change in
time. In replying to the research teams question on this point, Mr. Pushpanathan detailed
MASBs efforts to coordinate with the Asian-Oceanian Standard-Setters Group (AOSSG): We
have already put in the request to revisit IAS 41, it has been accepted for 2011 and things have
since gone quiet. It is with David Tweedy (then, the Chairman of IASB) now. Paul Pactor (IASB
Board member in charge of IAS 41) said Its all in the cups. In fact, it is up for discussion in
September this year - I have seen the discussion paper. Given some experience of the politics of
international standards setting, Thomas asked with a little sarcasm, Alright, sir, thank you. What
are the chances of winning that? The answer was Okay. Its pretty strong.
Perhaps it was a little unfair to ask Mr. Pushpanathan the question in front of the Deputy Minister.
The Deputy Minister seemed to sense some hesitation in Mr. Pushpanathans reply. The Deputy
Minister asked Thomas, Whats your recommendation? What you should do is just to carve-out
this particular standard, something a lot of countries are trying to do now, he replied. However,
Mr. Pushpanathan explained that this would not work due to complications with other
registrations and regulations. It may also be because the full adoption of IFRSs as a whole
(rather than with some cut out) is in the best interests of Malaysias main stakeholders. The
research team did not have any knowledge of this and therefore the conversation stopped there.
Later on, when the research team interviewed Mr. Mohammaed Faiz Azmi, the Chairman of
MASB, the same view was presented [PWC office, KL, Malaysia, 25/06/2010].
The research team felt that the MASB had worked hard to make Malaysian voices heard, but the
future was still uncertain regarding whether or not the IASB will take Asian concerns seriously
enough to change IAS 41 in time. One respected accountant who used to be closely involved in
Malaysian accounting standards setting and international negotiations commented:
The IASB is saying, We take note of your concern, but looking at IAS 41 again is not
really on our agenda. Australia has been saying that they are a small country.
Australia! Then, what are we? We are much smaller. We dont even have representation
on the board but Australia does. If they are small, what are we?
By carving-out a standard we will be punished for not using IFRS down to the letter. And
the world, every country in the world, is now being punished for not using IFRS.
[Interview with Partner of Big 4 firm, Petaling Jaya, Malaysia, 25/06/2010]
IAS 16 allows companies to mark PPE either to its historical cost or fair value. Therefore companies have more
choice. It is expected that most of companies would choose historical cost, and even when companies choose to
revalue plantation trees and record the appreciated value, under IAS 16 the profit has to be recorded as revaluation
reserve on the balance sheet rather than on the income statement.
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IV. Case of Equatorial Palm Oil plc.

Back in the UK, another interesting case was brought to Jays attention. Equatorial Palm Oil PLC
(EPO: LSE; http://www.epoil.co.uk/) was publicly listed early in 2010 on the AIM market of LSE.
The company was founded in 2005 and focused on creating a global, sustainable, low-cost
production model through the reactivation and development of its existing oil palm estates and
land bank in Liberia, West Africa.
The company was of interest to the research team for two reasons. Firstly, the Executive
Chairman is not a plantation expert, but a chartered accountant. Mr. Michael Frayne has a
Bachelor of Commerce Degree majoring in accounting and finance, and he is a Chartered
Accountant who was previously employed at Ernst & Young - one of Big 4 accounting firms.
Secondly, the company has yet to make any profit. The company secured a relatively large
amount of land in Liberia where old plantations had been abandoned. The companys strategy is
to replace the old, worthless plantation trees with new ones. During 2010, the company planted
240,000 seeds of oil palm trees. So the company could potentially revalue the trees and record
any profits.
Figure 10 - Annual Report 2010 (source: Company Annual Report)
Jay was excited because he thought he would see huge profits in the companys financial
statements essentially by them just planting seeds without selling anything. Jay bought a small
amount of shares of the company so that he could attend the Annual General Meeting in June
2011.
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On 30th June, 2011, Jay attended the companys Annual General Meeting in London, and was
disappointed. There was no profit on the Income Statement, nor Biological Assets on the Balance
Sheet, which were prepared as the draft financial statements for approval (Fig. 12)
Figure 11 - Financial Statements (IS and BS)
Why? Jay moved on to read the Notes to the Financial Statements (Fig. 13). The explanation
of Biological Assets was slightly confusing because one part (Basis of Preparation) suggested the
use of Fair Value, but the other part suggested the use of Historical Cost. In any case, it was
clear that the company did not want to revalue based on DCF model, as they thought there was
no reliable data. However, in the Question and Answer session of the meeting, Mr. Frayne
explained to shareholders that the company may revise its accounting policy in the future.
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Figure 12 - Notes to Financial Statements
Jay had mixed feelings. In a way, the company was being careful and conservative, which may
lead to sustainable development. On the other hand, as far as Jay knew, Equatorial Palm Oil is
the only listed company not to use the fair value model which could be interpreted as
uncertainty on their part regarding the future of their business. Jay heard the institutional investor
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who sat next to him at the AGM let out a big sigh. On his return home, Jay checked the
companys share price (Fig. 14) and in turn let out a sigh.
Figure 13 - Share Price after AGM; Source Google Finance
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VI. Epilogue
In 2009, when this research on IAS 41 started, the IASB announced that there would be around
150 jurisdictions in the world which mandate or allow IFRS to be their official financial reporting
standards. At that time, India, Indonesia, Japan, Malaysia and Singapore were all believed to
have fully converged to IFRS.
However, in 2011, India decided to carve out several specific Standards including IAS 41. Japan
and Singapore also announced delays in their convergence project. In the same year, Malaysia,
which has often been seen by IASB as the good citizen of the financial reporting world due to its
clear support for full adoption, delayed the adoption of IAS 41 until 2013; and then once again
until 2014 in July 2012. It is understood that such a delay became necessary because IASB
would not be able to change to IAS 41 in time.
The revision of IAS 41 is currently listed on the IASBs post June 2011 agenda. However one top
official revealed that his personal view was that changes would not be made in time and these
countries would have to use the current IAS 41 if they intend to fully adopt IFRS. In response to
the research teams question about whether or not Malaysia is having any influence on changing
IAS 41, this IASB members view was clear: Malaysia and other Asian countries are simply not
influential enough. The IASB has many more high priority projects to handle and the very fact that
they need to start applying the standards from 2011 means that they are not influential enough.5
[IASB (One of top personnel, <Disguised>)-A-London, Nov. 2010].
In the 1990s and 2000s, international organisations such as IASB, IMF, World Bank and Asian
Development Bank recommended that Asian countries implement IFRS in order to enhance the
transparency and comparability of financial statements, which it was believed would be good for
the development of the region. In fact, it was effectively a necessary condition for Asian
countries to implement IFRS if they were to secure support from such international organisations.
However, no one paid careful enough attention to the details of accounting methods which could
have the opposite effect to what they purport to achieve: the sustainable development of
developing countries. Members of accounting standards boards and senior government officials
confirmed this point in this series of interviews several times [e.g., Interview with ICAI Director,
London, 26/02/2010; Interview with CFO, CPA and IAI member, Jakarta, Indonesia, 28/06/2010].
An official at one of most powerful international organisations confesses these weaknesses.
well, we believed IFRS was good for the world, ha ha ha! We are not accounting
experts. I mean, we believed they were fair, independent standards, principles.
And, its, to us its just accounting. Whats the big deal?! Just standardize it! Even
accountants dont understand the profound impacts (on wider stakeholders). Or do
they?
5 The application of IAS 41 is necessary from 2011, because many Asian countries announced publicly that they
would adopt IFRS from 2012, but IFRS requires comparable figures from the previous year. While interviewing Asian
stakeholders, this fact was not accurately recognised.
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[Int. (A member staff of international organisation, <Disguised>)-A/B-New York, (phone),

Sept. 2010; also, Int.(Advisor to World Bank, <Disguised>)-A-Oxford, <Disguised>, 2010]
In their communication with the research team, Sri Mulyani Indrawati, the Managing Director of
World Bank and the former Minister of Finance of Indonesia and some directors of the Asain
Development Bank, recognise such features of international organisations. Still, Dr. Agus
Pakhpahan, the Deputy Minister of State Owned Enterprises in Indonesia, expressed his concern.
this graph (Fig. 1) Lets look at the main issue over a long period of time - take the
case of Indonesian development. In the 1800s our champion commodity was coffee, until
it declined in the early 1900s; it was replaced by sugar and the sugar era ended in the
1930s. And then sugar was replaced by rubber, which declined in the 60s. It was
replaced by oil and forestry, until they declined in the 80s. and now forestry and oil
have been replaced by palm oil ... Now, the question is to what extent the palm oil will be
sustainable. there are issues with exploitation the issue of the Post-Colonial
Economy - particularly if the profits are distributed to the Western investors in the first
year.
[Interview with Pakhpahan, Deputy Minister of State Owned Enterprises, Jakarta, Indonesia,
29/06/2010]
Thomas had received rather disturbing news from his previous MBA student which confirmed his
concerns. The former student, who is now an analyst and a consultant to a plantation firm in
Indonesia, started modelling the palm oil companys financial statements based on the DCF. He
was excited to have the opportunity to use his MBA knowledge and potentially make a lot of
money, without showing much concern for the impact of such accounting on the companys, the
markets or the industrys operation in the long term. [Interview with and email from Analyst,
London/Oxford, Jan. 2010].
Jay has not yet comprehended how, given the overall impact of IAS 41, such accounting came
into existence, nor why such accounting still exists, despite the fact that the current concerns
were expressed in comment letters to Exposure Draft of IAS 41 (then ED 65) as early as 2000. In
over a decade, South East Asian countries have failed to make even a small change to IAS 41
which negatively affects the sustainable development of the most important industry in the region.
25

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113-046-1

IFRS (IAS 41), Plantation and

Distributed by The Case Centre

Rest of the world

Why does this happen? Jay asked his supervisor.

II. Numbers in London Stock Exchange

Figure 2 - R. E. A. Income Statement (source: Annual Report 2009)

Figure 3 - R. E. A. Balance Sheet (source: Annual Report 2009)

Figure 4 - R. E. A. Note 13 (source: Annual Report 2009)

Figure 4 - Historical Price of CPO

II. 2. - Financial Statements of M.P.Evans Group PLC.

Figure 7 - M. P. Evans' Balance Sheet (Source: Company Annual Report 2009)

Figure 7 - Notes to Financial Statements (Source: Company Annual Report 2010)

Figure 8 - Note to Financial Statements (Source: Company Annual Report 2010)

(2) Overall impact of IAS 41 on Plantation Industries, Investors and Auditors

Figure 9 - FVA Model Data (Only one page out of 96 pages)

III. Realities in Asian Countries

we actually published the Exposure Draft in 2006. We met with practitioners,

CFOs get 2- or 3-year contracts, these days.

IV. Case of Equatorial Palm Oil plc.

Figure 12 - Notes to Financial Statements

[Int. (A member staff of international organisation, <Disguised>)-A/B-New York, (phone),

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