INTERNATIONAL VALUATION STANDARDS COUNCIL

The Valuation of Forests

EXPOSURE DRAFT

Comments on this Exposure Draft are invited before 15 February 2013. All replies may be put on
public record unless confidentiality is requested by the respondent. Comments may be sent as email
attachments to:

CommentLetters@ivsc.org

or by post to IVSC, 41 Moorgate, LONDON EC2R 6PP, United Kingdom.

Copyright © 2012 International Valuation Standards Council. All rights reserved. Copies of this Exposure Draft
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Email: ivsc@ivsc.org
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Introduction to Exposure Draft
Forestry enterprises are increasingly attracting interest both due to the increasing demand for forest
products as well as from investors looking for long term stable investments. However, all market
participants require transparency and consistency in the way in which valuations of forestry assets are
prepared and presented. The IVSC Standards Board was made aware of differences in the valuation
approach being adopted in different countries including practices inconsistent with the requirements of the
International Valuation Standards (IVSs) and agreed a project to address this.

Another consideration indicating the need for international valuation guidance has been the adoption of the
International Financial Reporting Standards (IFRSs) around the world. An ever increasing number of
entities involved in forestry are required to account for their interest under IAS 41 Agriculture, which
requires the “fair value” of the “biological asset”, represented by the tree crop, to be estimated. Because
the trees cannot exist without the land on which they are growing this can create some conceptual
difficulties in allocating the value of the complete forest to its different components.

Finally the Board was also alerted to some practices used to estimate the market value of forests that were
inconsistent with the requirements of the International Valuation Standards (IVSs).

A Working Group of forestry experts was appointed in 2011 to advise the Board on this project. After
consideration of the group’s initial comments the Board considered that the principles that should be
mandatory to protect the interests of users of valuations of forestry were already adequately covered in the
existing IVSs. There was nevertheless a need for technical guidance to assist both professional valuers
and users in understanding the application of those principles to the valuation of interests in forests and
forestry operations.

The IVSC issues technical guidance in the form of Technical Information Papers (TIPs). This Exposure
Draft sets out the Board’s proposals for a future TIP on this topic.

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Questions for Respondents
The IVSC Standards Board invites responses to the following questions. Not all questions need to be
answered but to assist analysis of responses received please use the question numbers in this paper to
indicate to which question your comments relate. Further comments on any aspect of the Exposure Draft
are also welcome.

Notes for respondents:

In order for us to analyse and give due weight to your comments please observe the following:
1. Responses should be made in letter format, where appropriate on the organisation’s letter heading.
2. Comments should not be submitted on an edited version of the Exposure Draft.
3. Unless anonymity is requested, all comments received may be displayed on the IVSC website.
4. Comment letters should be sent as an e mail attachment in either MS Word or an unlocked PDF
format and no larger than 1mb. All documents will be converted to secured PDF files before being
placed on the web site.
5. The e mail should be sent to commentletters@ivsc.org

Questions

1. The scope of this TIP is confined to the valuation forests held for the commercial production of timber
and other forest products. It is intended to be applicable to valuations for a range of commercial and
regulatory purposes but excludes valuations that are subject to national laws (eg taxation) or private
contract (eg insurance).

Do you consider that the principles discussed in this TIP could have wider application beyond
the indicated scope? If so, please indicate the additional purposes to which the TIP could be
applied.

2. In para 15 it is indicated that discussion of techniques for the measurement and sampling of the tree
crop (forest inventory) are outside the scope of this TIP but that there may be standards or guidance
applicable in specific markets. The Board wishes to know if there is a predominant measurement
and sampling approach that IVSC could reference as an example in this TIP, while recognising that
variations may be applicable in certain jurisdictions or for certain species.

i) Please indicate your experience of different standards or techniques that are applied in
preparing forest inventory, and the markets in which these are applied.

ii) Do you believe that it would reduce diversity of valuation practice if the IVSC gave more
information on common sampling and measurement techniques?

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3. The proposed guidance indicates at para 28 that all three approaches described in the IVS
Framework are applicable to the valuation of forests. The discussion that follows indicates some of
the strengths and weaknesses of methods under each approach in the context of valuing forestry
interests.

Please indicate which of the methods discussed you most commonly encounter in the
valuation of forestry interests. If you encounter more than one on a regular basis please
indicate whether there is clear tendency to use different methods under different
circumstances, eg:

i) the stage of maturity of the tree crop

ii) whether the valuation is of a single stand or multiple stands

4. The draft discusses the use of the market approach, income approach, and cost approach.

Are there any other valuation approaches or methods used for valuing interests in forestry
with which you are familiar? If so, please describe the method and the circumstances under
which it is applied.

5. The Board is aware of some significant diversity in the length of the explicit forecast period that is
used when using a discounted cash flow model to value a forestry interest. The proposed guidance
has avoided giving specific guidance on the length of the period.

i) In your experience what is a typical range of forecast period for valuing forestry
interests, and what criteria are used to determine how long this should be on a case by
case basis?

ii) Do you consider that it would be helpful for the IVSC to provide specific guidance on the
length of the forecast period?

6. The discount rate to be used in a discounted cash flow is discussed in paras 45-49. This
supplements the more detailed discussion of the DCF method in TIP 1. The Board has received
evidence that in some parts of the world inappropriate reliance is being based on models such as the
Capital Asset Pricing Model or the Weighted Average Cost of Capital where there is insufficient data
to provide reliable evidence of either the risk premium or cost of equity that would be typical for a
market participant. In order to address this issue the proposed guidance emphasises the need to
give greatest weight to market based inputs.

Do you agree with this guidance? If you have experience of how appropriate discount rates
can be derived for use in a DCF of a forestry interest please indicate if this differs from the
proposed guidance.

7. The proposed guidance in para 52 is that the cost approach is mostly applicable to recently planted
forests because the physical and possible economic changes that occur as a forest matures mean
that other methods become more reliable. The Board is aware that some argue that the cost
approach cannot be applied to commercial forests under any circumstances and others argue that it
can be reliably applied to mature forests.

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 Please indicate if you agree with the proposed guidance on the applicability of the cost
approach. If not please explain why by reference to practice in the markets with which you
are familiar.

8. It has been reported to the Board that some valuations of forestry are being presented in financial
statements prepared for statutory purposes that show significant changes from those previously
submitted solely due to the adopted valuation method changing. The Board considers that this is
contrary to the IVSs, in particular the definition and conceptual framework for market value, or where
prepared under IAS 41, the requirements of IFRS 13 Fair Value Measurements. The method
adopted should be that appropriate to achieve the required basis of value, it should not dictate or
change the basis of value. The draft ED recommends in paras 55 – 58 the need to consider the use
of more than one approach and the reconciliation of the results as means of avoiding a
misrepresentation of the value by over reliance on a single approach, and the appearance that value
can change simply because a different method is used.

i) Please indicate if you have encountered a similar problem to that described and, if so,
any reason or justification given for the change in value?

ii) Do you consider that the guidance provided on the need to consider an alternative
method in the Exposure Draft addresses this issue?

9. An interest in a forest can consist of the rights to the land, the tree crop and all other improvements
to the land or it can be in only some of these components, eg the land only or the tree crop only. For
most valuation purposes the benefits attaching to the subject interest, eg the right to receive certain
cash flows can be readily identified. For valuations for financial reporting under the IFRSs a value
has to be attributed to the “biological asset”, ie the tree crop, regardless of whether the crop and the
land are held in the same ownership. This can create difficulties where there is no direct evidence of
the value of the tree crop only. The proposed guidance in para 71 refers to the suggested approach
in IAS 41 which is that the value of the “raw land” be deducted from the value of the combined asset,
with the residual representing the value of the biological asset. However, it is argued by some that
this is over simplistic as the value of “raw land” is not the same as the value of land supporting a
mature forest and the evidence the price of bare land ready for planting is of limited relevance.
Proponents of this view argue that the interdependence of the tree crop and the land mean that the
land makes a significant contribution to the value of the tree crop, and therefore deducting only the
value of the bare land from the value of the whole forest overstates the value of the biological asset.

Please indicate if you have experience of a separate value being ascribed to the “biological
asset” in a forest for financial reporting purposes and, if so, the method or methods that you
are most familiar with to arrive at this value.

10. Para 71 refers to the guidance in IAS 41 that the value of the biological asset, in the case of forests
the living trees, may be derived at by deducting the value of the land from the value of the value of
the combined asset. It also points out the difficulty that arises if the land were worth more for an
alternative use. The proposed TIP indicates that while this might suggest that the biological asset
has a negative or zero value, if the trees will generate income to the entity when it is harvested then

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 the biological asset will have a positive value and should be recognised as an asset regardless of the
value of the land. Some disagree and argue that if the trees are preventing a more valuable
alternative use then they can have no value.

In the context of the requirement to ascribe a fair value to the biological asset as required by
IAS 41, which of these views do you support?

11. The Illustrative Examples included with this draft are intended to illustrate the application of some of
the principles discussed in this draft and in other IVSC pronouncements. They are deliberately
simplified and are not designed to be applied to real life situations without modification to reflect the
facts and circumstances.

i) Do you consider that these examples will be helpful in reducing diversity in practice?

ii) Are there any other subjects that you consider would benefit from an illustrative
example?

12. The objectives of the TIP are set out at the beginning of the Exposure Draft.

i) Please indicate whether you believe that the draft meets these objectives. If you
disagree please indicate why and how the guidance could be improved.

ii) Are there any additional matters that you believe should be addressed? If so please
indicate what these are.

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Exposure Draft
The Valuation of Forests

Technical Information Papers

The principal objective of an IVSC Technical Information Paper (TIP) is to reduce diversity of
practice by identifying commonly accepted processes and procedures and discussing their use.
A TIP is designed to be of assistance to professional valuers and informed users of valuations
alike. A TIP will do one or more of the following:

• Provide information on the characteristics of different types of assets that are relevant to
their value.

• Provide information on appropriate valuation methods and their application.

• Assist the consistent application of an International Valuation Standard (IVS) by dealing

with matters identified in the Standard in greater detail.

• Provide information that is helpful to valuation professionals in exercising the

judgements they are required to make during the valuation process in specific
situations.

A TIP does not:

• Provide valuation training or instruction.

• Direct that a particular approach or method should or should not be used in any specific
situation.

The contents of a TIP are not intended to be mandatory. Responsibility for choosing the most
appropriate valuation methods is the responsibility of the valuer based on the facts of each
valuation task.

The guidance in this paper presumes that the reader is familiar with the International Valuation
Standards (IVSs). Of particular relevance to the application of this TIP are the concepts and
principles discussed the IVS Framework and the provisions of IVS 230 Real Property Interests.

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Contents

Paragraphs Page

Introduction 1-4 3

Definitions 5 4

Identifying the Asset 6-9 5

Valuation Considerations 10-12 5

Site and Location 13 6

Forest Inventory 14-18 6

Time to Maturity 19 7

Estimating Wood Flows 20-24 7

Other uses 25-27 8

Valuation Approaches and Methods 28-30 8

The Market Approach 31-33 8

The Income Approach 34-50 9

The Cost Approach 51-56 12

Use of Multiple Approaches 57-60 13

Unit of Valuation 61-63 14

Value of Land 64-66 15

Valuation for Financial Reporting 67-76 15

Scope of Work and Reporting 77 17

Illustrative Examples A1 –A-5

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 Introduction and Scope

1. The objective of this TIP is to provide guidance on the main recognised approaches and
methods that are used for valuing forests. In the context of this TIP forests consist of land
and trees held for the growing and harvesting of forest products for commercial purposes.
Forests that have no commercial value and that are held purely for social, amenity or
private enjoyment are outside the scope of this paper.

2. Valuations of forests are required for different purposes including:

acquisitions, mergers and sales of businesses or parts of businesses;

purchases, sales and leases of forest assets;

reporting to tax authorities;

litigation and insolvency proceedings and;

financial reporting

3. This TIP provides guidance on appropriate valuation procedures, approaches and

methods for the valuation of forest assets. It does not examine any specific statutory or
regulatory requirements that may apply to the valuation of forests for particular purposes
in different jurisdictions, eg for taxation. Neither does it address valuations of forests
under the terms of a private contract, eg a lease of rights or an insurance policy.
Although some of the guidance may be applicable to such situations, it will be subject to
any stipulations as to how value is defined or calculated in the relevant statute or
contract.

4. Where a valuation is required for inclusion in a financial statement the provisions of IVS
300 Valuations for Financial Reporting apply. IVS 300 also contains guidance on the
principal valuation requirements under the International Financial Reporting Standards
(IFRS), and this TIP includes some additional guidance that is specific to the valuation of
forests under IAS 41 Agriculture.

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 Definitions

5. The following definitions apply in the context of this TIP. Similar words and terms may
have alternative meanings in a different context. The IVSC’s International Glossary of
Valuation Terms provides a comprehensive list of defined words and terms commonly
used in valuation, together with any alternative meanings.

Cash Flow Cash that is generated over a period of time by an asset, group of
assets, or business enterprise.

Commercial Stock A tree crop that is currently capable of harvesting to produce

income.

Cost Approach A valuation approach based on the economic principle that a

buyer will pay no more for an asset than the cost to obtain an
asset of equal utility, whether by purchase or by construction.

Discounted Cash Flow A method within the income approach in which a discount rate is
applied to future expected income streams to estimate the present
value.

Forest Trees and land used for growing and harvesting of trees for
commercial purposes

Forestry The practice of growing and harvesting of timber for commercial

purposes

Forest Inventory A statistical sampling of the timber volume and grade of each
species in a particular stand of timber.

Income Approach A valuation approach that provides an indication of value by

converting future cash flows to a single current capital value.

Market Approach A valuation approach which provides an indication of value by

comparing the subject asset with identical or similar assets for
which price information is available.

Silviculture The care and cultivation of the tree crop in a forest.

Pre Commercial Stock A tree crop that requires time to mature before it becomes
Commercial Stock.

Stand A contiguous area of trees with trees of a similar species,

silviculture and other characteristics.

Terminal Value The value at the end of an explicit forecast period of all remaining
projected cash flows.

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 Identifying the Asset

6. From planting until harvesting the land and the tree crop that comprise a forest are
physically a single, indivisible item. However, for valuation purposes the asset is the
interest, or rights, which a party holds in the forest. There are different types of interest
and there may also be more than one interest in the same area of forest. The first step of
any valuation is to identify the interest to be valued and the assets or activities within that
interest that are to be included in the valuation, and clearly record this in the scope of
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work.

7. IVS 230 Real Property Interests describes the principal different types of real property
interest. An entity operating a forest may own the land and the tree crop in perpetuity or
under a lease for a fixed period, and therefore will have a real property interest as defined
in IVS 230. Alternatively the entity may have no interest in the real property at all, simply
a right to cultivate and harvest the trees within a defined area.

8. The relevant interest may be subject to contractual or statutory restrictions, eg obligations

to replant or restore the land after the trees are harvested. There may also be conditions
imposed that limit the operations or require the operator to provide access to third parties
or the general public.

9. This TIP is concerned with the valuation of the rights to the land and trees that make up a
forest. A business operating the forest may have other assets, eg plant and equipment,
intangible assets, working capital etc that are used in conjunction with the land and tree
crops. Although the valuation of these assets is outside the scope of this TIP, they may
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need to be separately valued depending on the purpose of the valuation. Another
factor is whether there are any activities other than forestry that may need to be
considered in the valuation.

Valuation Considerations

10. A valuation may be of a single stand or of an estate consisting of multiple stands. While
the underlying principles are similar, the practical application may differ. These are
discussed later in this paper.

11. The following factors and their impact on value typically need consideration:
• Site, size and location,
• Details and history of standing timber,
• Potential silviculture strategies and projected growth rates,
• Production risks
• Rotation length
• Supply and demand for products.
• Other uses of the land.

1
See IVS Framework, paras 24 – 25 and IVS 101 Scope of Work
2
See: IVS 200 Businesses and Business Interests, IVS 210 Intangible Assets and IVS 220 Plant and Equipment

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12. Especially in relation to the details and history of the standing timber the valuer may need
to rely on data and information provided by either the party commissioning the valuation
or a third party expert. The valuer should have sufficient knowledge of the forestry
industry and its economics to be able to satisfy themselves that the information provided
has been produced competently and objectively, and that it is appropriate to rely upon it
in preparing the valuation.

Site and location

13. The proximity and means of access to the market for the timber that can be produced
need to be considered. The location can also have a bearing on the suitability of the
climate. The nature of the terrain can also have an impact on the micro climate of the
site and its suitability for the crop, as well as affecting the cost of cultivation and
harvesting. Soil quality is a further factor that impacts on value.

Forest Inventory

14. Estimating the production potential of the site and the quantity, quality and growth rate of
standing timber in a given area is a specialised task. For large stands of timber use is
often made of aerial photography and remote sensing to determine the area and density
for stands of different maturity, supported by statistically valid sampling strategies on the
ground.

15. Detailed discussion of different sampling or measurement techniques is beyond the

scope of the TIP. The techniques used can vary between different countries and species.
In the established forestry markets there are often published standards or recommended
practice for measuring standing timber.

16. Other factors that typically need to be investigated or considered include:

• species,
• seed/genetic source,
• year of establishment or regeneration treatment,
• initial stocking,
• fertiliser and weedicide treatments,
• history of pruning or thinning,
• insect and disease attacks and treatments,
• effect of previous fires, flooding and storms.
• growth, mortality and removals,
• planned or potential future silviculture,
• wildlife management.

17. Some of these apply only to planted forests, others to both natural and planted forests.

18. Differences in silviculture or felling practices can lead to differences in the log yields or
qualities of particular sizes from otherwise identical stands. Previous silviculture practice
will be reflected in the current inventory but the potential for alternative future silviculture
regimes in the future and their impact on yield should be considered. Variations in the

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 tree form caused by genetic or environmental differences may mean that trees of the
same dimensions at the base yield different volumes of particular log sizes or qualities.

Time to maturity

19. The date on which a crop of trees reaches maturity and is ready for harvesting is less
likely to reflect the anticipated biological maturity than the date of optimum financial
maturity. Many species of tree can grow to a very old age, but due to the increasing risks
and diminishing returns, financial maturity is most always reached considerably earlier.
Financial maturity is a dynamic concept because it depends on shifting market demand,
and needs to be determined as of the effective valuation date.

Estimating Wood Flows

20. To forecast future wood flows from the current inventory of living trees account needs to
be taken of expected silviculture, growth rates and mortality. For common species
biometricians have developed growth models. Professional judgement is needed in order
to apply these models to a specific forest or stand.

21. An understanding and investigation of the demand patterns for the timber products that
will be produced is crucial for both the analysis of data used in the valuation and in
developing the valuation opinion. Forecasting wood flows for medium and large forests
involves matching timber production to the likely market demand. The latter may be
estimated using either contracts for the supply of timber or an assessment of trends in
demand.

22. A commercial forest may have a number of different potential product lines from the same
species. The market and market dynamics for these needs to be investigated in order to
determine the product, or combination of products that would provide the optimal financial
return. This TIP is concerned with the valuation of forests, not with the value of
processed products, eg sawn or pulped timber. However, the demand for, and price of,
these products will significantly impact on the value of forests, and a forest specific
product price analysis is an important input to the valuation process.

23. Common bases for making price comparisons are either the “stumpage price” or the “mill
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door” price, which are often expressed as a price per m , per cubic foot or in “board
feet.” Stumpage is the price that a buyer would be prepared to pay for the standing
timber, on the understanding that the buyer was responsible for felling and transportation.
Mill door is the price that a processor of timber products will pay for logs delivered to the
mill. To value standing timber using mill door data the estimated costs of harvesting and
transportation from the forest to the mill have to be deducted.

24. For large stands , the rate of market absorption also needs careful consideration, eg if the
crop in the anticipated year of maturity is significant in relation to demand there could be
an adverse impact on the price unless the release of the crop can be phased to match
demand.

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 Other Uses

25. Market value reflects the highest and best use of an asset. Land within a forest may have
a higher value for an alternative use, meaning that to realise that value the forest use
would have to be discontinued, or the highest value may come from a combination of
complementary uses that can coexist with the forestry activity.

26. An alternative use would preclude the use of the whole or part of the land for forestry.
Typical examples include mining, agriculture or building development. For the highest
and best use of land to be for an activity other than forestry that use has to be physically
possible, legally permissible and financially feasible. For example, it may be known that
there are potentially valuable minerals in the land beneath a forest, but their presence
would only affect the market value if there were no undue technical restraints on
extraction, if there was a realistic prospect of obtaining the necessary legal permissions
for extraction and if the net return would be greater than continuing the forestry use.

27. Examples of complementary uses that may provide additional economic benefits to the
owner of an interest in a forest include rights to harvest berries or fungi, to hunt wild
animals or other sporting or recreational activities. Some types of complementary use
may have an impact on the silviculture and therefore the timber yield, and this needs to
be taken into account when determining which use, or combination of uses will generate
the highest return.

Valuation Approaches and Methods

28. The three principal valuation approaches identified in the IVS Framework can all be
applied to the valuation of forests. The IVS Framework also explains that the choice of
the most appropriate approach, or approaches, will depend on the purpose for which the
valuation is required, which in turn determines the required basis of value. The required
basis of value will determine the inputs that are relevant, which in turn will influence the
choice of approach or method.

29. The main methods within each approach that are applied to the valuation of forests are
discussed in this TIP. However, the fact that a method is not mentioned does not mean
that its use may not be appropriate for the valuation of forests under certain
circumstances.

30. A common factor to all approaches and methods used to value forests is the need to
reflect the fact that trees mature over time and that the effect of different states of maturity
will need to be reflected in whatever method is selected.

Market Approach

31. Due the heterogeneous nature of forests, direct comparison with sales of other forests
interests is rarely possible. However sales analysis and adjustments can be an important
valuation tool. Sales adjustments based on ratio analysis can frequently be applied for
indirect sales comparison purposes. Market analysis can often help isolate relevant
elements of value, or determine a useful unit of comparison. However, the usefulness of

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 any analysis will depend upon the extent of the information that can be obtained about
the factors that influenced the price paid, such as the relative maturity of the tree crop and
all the other factors discussed in paras 10-24 of this TIP.

32. A previous transaction involving the subject forest may also provide useful information if
the circumstances of the transaction were similar to those to be assumed in the current
valuation and that adjustments can be made to reflect price changes for timber products
and changes to the stand over the intervening period.

33. The market approach is generally most applicable to the valuation of an absolute
ownership interest in the land and the tree crop combined. Although it can be used to
value partial interests in a forest, eg the ownership interest in the land and or the rights to
the tree crop, its reliability in these circumstances will depend upon the extent of the
information that is available about rights and obligations of the interest involved in the
potentially comparable transactions.

Income Approach

34. Because the timing of income from forests is usually different from the timing of costs
incurred in the cultivation, maintenance and protection of the crop, a discounted cash flow
3
method (DCF) is frequently used. TIP 1 Discounted Cash Flow describes the application
of the DCF method to businesses and investment property, but the same principles can
also be applied to forests, including those that should be applied when forecasting cash
flows and selecting an appropriate discount rate.

35. Both the projected cash flows and the discount rate adopted should reflect the required
valuation basis. Where market value, or a similar basis such as IFRS Fair Value, is
required, the inputs should be based on those of a typical market participant.
Consequently any costs or revenues predicted by the current owner should be checked to
see if these are consistent with market expectations, and the discount rate used should
reflect a market rate, not the owner’s expectations. Conversely if the purpose of the
valuation is to determine the value of an asset to a specific entity, it would be appropriate
to use inputs such as the entity’s target rate of return.

36. The DCF method requires a period for which future cash flows are explicitly forecast (the
explicit forecast period) and an estimated terminal value. The length of the explicit
forecast period will depend on the extent of the fluctuations in the expected cash flows
and the certainty with which their timing can be predicted. The effect of an explicit
forecast on the present value diminishes over time due to the effect of discounting. The
value of cash flows beyond the end of the explicit forecast period is reflected in the
terminal value.

37. Because the principal income from forests arises at the maturity of the crop which may be
many years in the future the explicit forecast period is often longer for forests than for
other types of asset. When used to indicate market value, the length of the forecast
period used should reflect that typically used by market participants.

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ISBN 978-0-9569313-4-4 published by IVSC July 2012

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38. Cash outflows might typically include the costs of establishment, cultivation, protection
and maintenance over the period until each stand is harvested. Some forests and
plantations, especially publicly owned native forests, where there are complementary
activities, the cost of infrastructure such as fire protection and roads may be apportioned
among the different activities.

39. The cash inflows might typically involve calculation of the stumpage price for either the
whole forest or for each individual stand, together with estimation of the date on which
harvesting is expected. If the price of timber products, eg sawn logs delivered to the
customer, is used as a basis for revenue forecasts rather than the stumpage price then
care must be taken to ensure that the associated costs of harvest, overhead, delivery,
administration and time are also reflected in the cash out flows.

40. Large forests and plantations are typically managed to sustain timber flows over time, and
therefore the cash flows should take into account not only the tree crop at the valuation
date but also replanting (rotations) scheduled within the forecast period.

41. If a DCF method is being used to value only the tree crop, the cash flows will need to
include an appropriate outflow for the contribution of the land and other assets.
Depending on the interest being valued and what is to be included, adjustments may
need to be made to projected cash flows to represent the contribution of infrastructure
improvements to the land, for example access roads and irrigation systems.

42. In cases where the land is leased to the forestry operator the amount or basis of
computation of the rent will normally be in the lease contract. However, in other cases it
may be necessary to estimate a rental value for the land by using the market approach to
analyse rents agreed for other land used for comparable forestry activities or by the return
that a market participant would require on the capital cost of acquiring such land. Where
there is market data for land that has comparable infrastructure in place then it may be
possible to calculate a notional rent for the improved land, but where the evidence is of
bare land a further allowance will need to be made for the contribution of infrastructure.
One approach is to measure the value of infrastructure by reference to the cost savings it
provides for future forestry operations.

43. The contribution towards the cash flows from other assets, eg the plant and equipment
used in the felling, sawing and transportation should also be considered and adjustments
made as necessary to exclude this contribution if those assets are not to be included in
the valuation. Depending on the interest being valued and what is to be included,
adjustments may need to be made to projected cash flows to represent the contribution of
infrastructure improvements to the land, for example access roads and irrigation systems.
Sometimes it is possible to measure the value of these by reference to the cost savings
they provide for future operations.

44. The terminal value will need to reflect the value of the pre commercial and commercial
stock estimated as at the end of the forecast period, as well as the residual value in the
land. The value of stands that will have been harvested at the end of the forecast period

10
 may reflect the potential for replanting, or for an alternative use. Adjustments may also
be required to the terminal value to reflect any restoration obligations.

45. TIP 1 indicates that for business valuation the convention is to use a discount rate based
on either the cost of equity calculated using one of the variations of the capital asset
pricing model (CAPM) or the weighted average cost of capital (WACC). Both are
intended to reflect the return that would be required by a market participant. These
techniques can be applied to the estimate the market value of forests if there is sufficient
market data on the cost of equity for a typical buyer of the type of forestry under
consideration. Note that this is not necessarily the same as the cost of equity for the
current or any specific prospective owner.

46. TIP 1 indicates that for investment property it is the convention to use a rate derived from
analysis of market transactions, or when there is insufficient market data to reliably
determine a discount rate, a rate may be estimated using a “build up” method. These
techniques can also be used to determine a discount rate for forests.

47. Because the market for forests is not as deep or as liquid as for some other asset
classes there will typically be fewer sources of information on transactions or investor
expectations. However, market transactions may be analysed in order to derive the
discount rate implied by the price paid. A cash flow is estimated for each of the
comparable transactions that are being considered. The implied discount rate is the rate
at which the transaction price matches the attributed cash flows.

48. If an appropriate discount rate cannot be directly observed in the market, a build-up
method may be used. However, where the required basis is market value caution is
required to ensure that the different components of risk associated with the forest
investment are identified so that valid comparisons can be made with the market pricing
of equivalent risks for which information is available. The risks should also be relevant to
the forecasted cash flows. Whenever a build-up approach is used, care should be taken
to ensure that the discount rate derived from the various risk components is credible in
comparison with rates that are observable in the market for investments having a similar
or equivalent risk profile, or by cross checking the valuation result by using a different
valuation approach.

49. Risks to be associated with forests include environmental, biological and economic risks.
Some risks associated with forests will fluctuate depending on the stage of the rotation on
the valuation date. The risk associated with a newly planted forest is often highest in the
early years up until the first commercial thinning. Each subsequent thinning ameliorates
the risk as the number of trees per hectare reduces over the rotation and as the tree size
increases.

50. Although the DCF method allows for future cash flows to be modelled to reflect expected
maturity dates and rotations within a forest, the results are sensitive to the key input
assumptions made. It is prudent to check the effect on the present value of different input
assumptions such as the project quantity of timber that might be produced and sold in a

11
 given period, the assumed length of rotation and the discount rate adopted, and if
necessary undertake a sensitivity analysis before reaching the valuation conclusion.

Cost approach

51. TIP 2 The Cost Approach for Tangible Assets gives guidance on the application of cost
approach to real property and these principles can be applied to forests. The cost
approach provides an indication of value by calculating the current replacement cost of
an asset and making deductions for physical deterioration and all other relevant forms of
obsolescence. It is based on the principle of substitution, ie that unless undue time,
inconvenience, risk or other factors are involved, the price that a buyer in the market
would pay for the asset being valued would not be more than the cost to assemble or
construct an equivalent asset.

52. The cost approach is most applicable to recently planted forests, where the cost of
creating an equivalent asset may be able to be judged with a reasonable degree of
certainty. In the case of young trees, buyers and sellers are likely to give more weight to
the current cost of planting on the valuation date and the opportunity cost of the time
required for a new plant to grow to the age of plants under consideration than to the
expected cash flow on harvest. Typical costs that would be considered include:
• the cost of acquiring suitable land for planting (assuming the interest being valued
includes land),

• the cost of infrastructure,

• the cost of cultivation and preparation,

• the cost of buying and planting and establishing the young trees,

• any unrecoverable taxes that would be incurred in creating the above.

53. The cost approach is generally less applicable to established forests because not only is
it more difficult to establish the cost of an equivalent but it may not even be possible to
create an equivalent because of the time required for the tree crop to reach the same
stage of maturity.

54. When applying the cost approach, the value attributable to the land can be a significant
component of the overall value of the forest, especially where the plants or trees are
young. If the planting is recent there may be other recent transactions involving bare land
that is comparable to the subject land before it was planted to provide good evidence of
what equivalent land suitable for planting would cost to acquire at the valuation date.
However, for more mature forests neither land available for first time planting nor land
available for replanting after harvesting would provide a direct equivalent. While
adjustments may be made to transaction evidence of bare or cleared land to reflect the
utility of the subject land, these are not likely to be supportable by observable evidence in
the market and will involve greater subjectivity

12
55. When applying the cost approach the actual costs incurred by the owner of the forest in
its development, planting and silviculture may be a useful indication of the cost of an
asset offering equivalent utility on the valuation date, especially where these have been
recently incurred. However, any actual costs incurred will still need to be carefully
considered to determine whether a market participant would still purchase an identical
asset at the valuation date or whether economic or technological changes mean that
either an alternative would be purchased or the investment not made at all. Any historic
cost that is considered to be a relevant indicator of current value will also need adjusting
to reflect price changes between the date on which was incurred and the valuation date.

56. Notwithstanding the fact that the trees will normally be expect to grow and therefore
appreciate in value, it is still necessary to consider whether obsolescence adjustments
may be appropriate. Physical obsolescence may occur if disease has affected the tree
crop and the anticipated yield. Economic obsolescence can arise where there has been
a change in the original target market for the timber that has permanently diminished
demand or where costs were incurred that were only justified by tax incentives available
on initial planting that would not be available to a subsequent purchaser. Obsolescence
adjustments will also need to be considered for infrastructure such as roads, buildings
and fencing. TIP 2 gives further guidance on identifying and measuring different types of
obsolescence.

Use of Multiple Approaches

57. Given the heterogeneous nature of forests and the fact that all three principal valuation
approaches have shortcomings in different situations as discussed in the preceding
sections of this paper, wherever the data is available it is prudent to use more than one
approach so that the results can be compared and any major differences considered and
reconciled. IVS 102 Implementation provides that more than one valuation approach or
method may be used to arrive at an indication of value, especially where there are
insufficient factual or observable inputs for a single method to produce a reliable
conclusion. When this is done the resulting indications of value should be analysed and
reconciled to reach the valuation conclusion. Reconciliation of differing results from
different approaches enables the valuer to better understand the critical inputs of different
methods and ensure that these are as realistic as possible.

58. All the main valuation approaches may be used to determine different bases of value. As
explained in the IVS Framework4 the inputs should be adjusted to be consistent with the
required basis, eg where the required basis is market value or another market based
definition such as IFRS Fair Value, the inputs under any approach adopted should be
based on market evidence or the expectations of market participants.

59. For example, the cost approach may be considered the most appropriate approach to
value young, newly planted trees for the reasons explained in para 52. However, a
buyer would only incur these costs in expectation of future returns and even though the
cash inflows from the crop may be relatively distant and therefore the present value highly
sensitive to small changes in the discount rate, it is often prudent to undertake a

4
IVS Framework para 72

13
 simplified DCF analysis to check that the conclusion under the cost approach falls within
a range that would give a return that would be regarded as reasonable by both buyers
and sellers in the market place. Likewise, because of the sensitivity of the DCF method
to different assumptions about periods to maturity, future sales volumes and the way in
which the discount rate is derived, a cross check of the net present value produced with
an analysis of any available transaction evidence, even if this is deemed insufficiently
relevant or reliable to rely on as the primary approach, will help ensure that the valuation
conclusion is more robust.

60. It is common practice for the preferred valuation approach to change as a forest matures
due to physical and economic changes. However, a change in the approach or method
used is not of itself justification for a change in value. Using different approaches as a
cross check to help validate the result of the preferred approach will help avoid errors of
this nature. Careful cross checking and reconciliation will help ensure that the method
given most weight is the one that market participants would use in order to price the
forest in an exchange.

Unit of Valuation

61. As has been discussed forests and interests in forests can consist of just the land, just
the tree crop, both land and trees and may or may not include the rights to
complementary or alternative uses. A forest can also consist of a single stand or multiple
stands. The “unit of valuation” is the level at which the individual assets or components
of an asset are aggregated for the purpose of the valuation. The unit of valuation will be
dependent upon the purpose for which the valuation is required, and the unit of valuation
will affect the decision as to the most appropriate valuation approach.

62. For example the cost approach might be deemed the most appropriate to estimate the
value of a single stand of young trees, where the stand is the unit of valuation. A single
stand of trees approaching maturity might be most appropriately valued using the market
approach. However, the value of a single stand valued as such and the value of the
same or a similar stand as part of a larger forest containing many stands of different
species, ages, terrain and silviculture managed will not necessarily be the same. Where
the unit of valuation is a forest with multiple stands managed as a single estate the yield
of individual stands might be regulated in order to produce a better balanced long term
cash flow for the whole estate. The most appropriate method for the entire estate may
well be different from that for individual stands.

63. It also follows that the value of a forest containing multiple stands is unlikely to be the
aggregate of the value of the individual stands. The unit of valuation is also relevant in
determining the highest and best use of a forest. For example, an individual stand may
have a highest and best use other than forestry, but if it is being valued as part of a larger
forest, its contribution to maximising the returns from the entire forest may outweigh the
additional value of the alternative use.

14
 Value of Land

64. The interest in the land element of a forest may be in different ownership to the rights to
the tree crop (see para 6). Where the owner of land has granted rights to a counter party
to plant and harvest trees this will normally be by way of a lease or similar instrument for
a fixed period. The rental payments under the lease may be for a fixed amount or
variable. If the latter it is necessary to consider the criteria for variation, how these would
be viewed by a market participant at the valuation date and the impact on the value. It is
also necessary to consider whether the lease length aligns with the expected rotation of
the tree crop, and the implications of any mismatch. The present value of the land and
any improvements that will remain at the end of the lease should also be considered.
(see also paras 25-27 on alternative uses.

65. Where the land and the tree crop are in the same ownership, it may still be necessary to
consider the value of the trees separately, for example if valuing for financial reporting
purposes under IAS 41, see below. As discussed in paras 41-42 the contributory value of
the land may be based on the evidence of actual rents paid for land leased for forestry or
a return on the price of buying land suitable for forestry adjusted as appropriate to reflect
location and physical characteristics.

66. Where value is being placed on the land and any improvements or complementary uses
solely for the purpose of establishing an allocation of the overall value of the forest
attributable to the tree crop, the assumptions made in valuing each component should be
consistent with one another. For example, if the highest and best use of the whole
interest being valued was for forestry, it would be inappropriate to value the land or
improvements on the assumption of an alternative use.

Valuation for Financial Reporting

67. IVS 300 Valuations for Financial Reporting is applicable to all valuations for this purpose
regardless of the applicable accounting standards. The guidance section of IVS 300
discusses some specific valuation applications required under International Financial
Reporting Standards (IFRS). This TIP provides guidance only on the specific valuation
requirements for forest assets under IFRS. Other provisions may apply under different
accounting standards

68. Tree crops are accounted for under IAS 41 Agriculture which provides that “biological
assets” shall be measured on initial recognition and at the end of each reporting period at
fair value less costs to sell. Fair value under IFRS has to be determined in accordance
with the provisions of IFRS 13 Fair Value Measurements. As explained in the Application
Guidance to IVS 300, IFRS Fair Value is for most practical purposes the same as market
value as defined and discussed in the IVS Framework.

69. The biological asset is defined in IAS 41 as the living plant or animal. In the case of
forests, a value therefore needs to be ascribed to the tree crop. This requirement can
create difficulties in practice because of the need to exclude any element of value
attributable to the land.

15
70. In some markets there may be sufficient grants and transactions of rights to plant, grow
and harvest timber that are separate from the land in order to value the tree crop directly.
However, in others there can be little evidence other than the sale of land and trees
together.

71. One approach suggested by IAS 41 is to take the value of the entire forest and deduct
from this the value of bare land suitable for planting and any other improvements, such as
road, structures, irrigation systems etc, in order to arrive at a residual value for the tree
crop. Difficulties can arise with this approach if the land in question has a value for an
alternative use that is higher than that for forestry, which could, in some cases, result in
the biological asset appearing to have a negative value. Providing the trees could still be
harvested and provide a cash return to the operator then the biological asset has value
and should not be measured at zero or a negative amount for accounting purposes. A
more valuable alternative use might shorten the time horizon for harvesting the tree crop
but the biological asset could still be valued based on the net present value of the
expected income from that crop whenever it is harvested.

72. The land element of a forest is accounted for under IAS 16 Property Plant and
Equipment. An entity initially accounts for land at its cost but after initial recognition may
use either the cost model or the revaluation model.

• Under the cost model land is carried at its cost less any accumulated
depreciation and any accumulated impairment losses. (but see para 73 below)

• Under the revaluation model land is carried at a revalued amount, being its fair
value at the date of the revaluation less any subsequent accumulated
depreciation and subsequent accumulated impairment losses. Revaluations shall
be made with sufficient regularity to ensure that the carrying amount does not
differ materially from that which would be determined using fair value at the end
of the reporting period

73. Under IAS 16 land is only depreciated if it has a limited useful life to the entity. In the
case of forestry this might arise if there is no right to replant following the harvesting of
the current tree crop and the owning entity has an obligation to restore the land to an
alternative less valuable use.

74. The “cost model” in IAS 16 should not be confused with the “cost approach” discussed in
this TIP. The latter is a technique that may be applicable to estimate the fair value under
the revaluation model. It should also be noted that while the biological asset, ie the tree
crop is required to be revalued under IAS 41, the land on which that asset lies may be
carried at historic cost less impairment or at fair value. Therefore there is not necessarily
any correlation between the carrying amount of the tree crop and the land on which it is
growing.

75. The Application Guidance in IVS 300 discusses the valuation requirements for measuring
depreciation and impairment

16
76. References to accounting requirements in this paper are subject to the provisions of the
relevant IFRS and in the event of a conflict between this guidance and the IFRS, the
IFRS prevails. Although similar requirements may exist in other Financial Reporting
Standards, IVSC makes no assertion as to the relevance of this guidance to such
standards.

Scope of Work and Reporting

77. IVS 101 Scope of Work and IVS 103 Reporting set forth matters to be addressed in
preparing and reporting any valuation under the IVSs. IVS 230 Real Property Interests
provides specific examples of maters that should be included when preparing the scope
of work or a report on the value of real property. These provisions are applicable to the
valuation of forestry. This TIP includes supplementary guidance to illustrate matters that
might typically be address when undertaking a valuation of forestry.

78. The extent of investigations (IVS 101 2(g) and IVS 103 5(g)), and

The nature and source of information relied upon (IVS 101 2(h) and IVS103 5(h))

In order to comply with the above, the inspections and investigations to be

undertaken, or that have been undertaken, in order to verify facts relied on in the
valuation or steps that will be, or have been taken, in order to test the
reasonableness of any assumptions made in the valuation have to be recorded in
the scope of work and the report. For forest valuation matter that will typically need
referencing include the source and other information on the forest inventory, any
data used in yield forecasting and information of future cash flows if an income
approach is being used. Where information provided by either the client or a third
party expert is to be relied upon, the extent of the due diligence required of the
5
valuer should also be recorded.

79. Valuation approach and reasoning (IVS 103 5(l))

If a DCF method is used, readers are referred to the guidance in TIP 1 Discounted
Cash Flow paras 41-43 for appropriate disclosures under this heading.

5
The IVSC has commenced a project on the Valuers Reliance on Information that will consider the when it is
appropriate to rely on information that has been provided without further investigation or consideration and when such
reliance may be potentially misleading.

17
Illustrative Examples
The Illustrative Examples included in this TIP are for demonstration purposes only and are not
intended as the only form of model or calculation that is acceptable. The facts used in the
examples are simplified and may include facts chosen to illustrate a point that would not be
expected in practice. The values and other numerical inputs are also illustrative and not
representative of figures that would be encountered in practice. The values are expressed in
Currency Units (CU).

IE 1 Discounted Cash Flow

Scenario
The forest to be valued extends to 500 hectares. The owner holds the land and all usage rights
on the land in perpetuity. It is required to provide a separate valuation for the tree crop.

The rotation for the species is 30 years and the trees are harvested at that age. Thinning takes
place at 23 -24 years. A recent inventory indicates that 150 hectares are trees ready for
harvesting, 150 hectares are trees between 16-20 years old and 200 hectares trees between
3
11-15 years old. The inventory estimates that there are 1,000m of timber in the 150 hectares
ready for harvesting

3
The current stumpage price for the timber is CU1,500 per m . The cost of replanting is CU2,000
per hectare.

There have been two recent sales of other forests in the same locality. These forests also grew
the same species as the subject. In both cases the land and the tree crop were in the same
ownership and were managed in a similar way. The first is a total of 300 hectares with about
one third ready for harvesting, one third at 15 years old and one third newly planted. The sale
price was CU2,000,000. The second is 800 hectares and has trees in four age groups, 0-5
years, 6-10 years, 11-15years and 16-20years. The sale price was CU3,500,000.

Land for forestry use and ready for planting is available for lease in the area at a rent of CU250
per hectare per annum lot sizes of between 300 and 800 hectares.

Method
In order to analyse the two recent sales a spread sheet similar to the one below is created with
realistic estimates inputted of the size, yield and timing of each rotation together with a terminal
value. Once a series of net cash flows is established, the Internal Rate of Return (IRR)
represented by the sale price can be calculated. The IRR is the discount rate at which the
present value of the future cash flows of the investment equals the acquisition cost of the
investment. A formula for calculating the IRR is embedded in most commercially available
spread sheet software.

A notional rent is charged for the land based on the observed market rate of CU250 per
hectare.

A1
Terminal values based on the present value of the anticipated cash flows from future rotations,
and the notional outflow for land rental and other expenses are included at year thirty.

Note that in this example the value of the tree crop is calculated in perpetuity. If the purpose of
a valuation is to estimate the “Fair Value” of the “Biological Asset” under IAS 41 Agriculture, any
value attributable to future rotations does not form part of the Biological Asset. If the reporting
entity has the right to replant after the current crop is harvested, the value of that right is
reflected in the entity’s interest in the land.

In this example, the cash flows are expressed in current values that exclude any effect of future
inflation, ie they are “real cash flows”. It is therefore important that the real cash flows are used
in analysis of the sales transactions, and that a discount rate is based on real returns. The cash
flows in this example are also pre-tax. In practice, cash flows may be pre-tax or post-tax, real or
nominal. However, it is critical that the discount rate used is consistent with the cash flows. As
explained in TIP1 the choice of which to use will depend on market practice and the nature of
the available data.

Using the analysis technique described above the first sale has been analysed to show a real
IRR of 7.3%. The second sale has been analysed to show a real IRR of 8.4%.

After giving due weight to differences in the physical nature of the two sales comparables, and
to trends in the market since these transactions were agreed a decision is made that a realistic
nominal rate to apply to the subject forest is 7.5% . These are applied to the forecasted cash
flows based on the scenario described above.

The value of the tree crop is indicated as CU 1,180,000 (rounded). Since is this example it is
the whole interest in the forest being valued, the value of the land deducted as notional rent can
be added back to indicate the value of the owner’s interest in the forest as CU 2,845,000
(rounded).

This is a simplified example. In practice consideration may need to be given to the contribution
towards the cash flows from harvesting of site infrastructure, plant and equipment. In the
example these are deemed to be included in the notional rent.

As a cross check on the valuation indicated by using a discounted cash flow, other direct
comparisons may be drawn from the evidence of the two transactions, or from other
transactions for which there is insufficient information to undertake an analysis to calculate the
IRR implied by the price.

A2
Subject: Valuation of forest of 500 hectares as described in Scenario.

Age Group (years) 30 16-20 11-15 6-10

Hectares per Age Class 150 150 200 0
Years Activity Land Expenses Cash Flow

0 -

1 Harvest 1,500,000 (125,000) (22,500) 1,352,500

2 Planting (300,000) (125,000) (22,500) (447,500)

3 (125,000) (22,500) (147,500)

4 Thinning 400,000 (125,000) (22,500) 252,500

5 (125,000) (22,500) (147,500)

6 (125,000) (22,500) (147,500)

7 (125,000) (22,500) (147,500)

8 (125,000) (22,500) (147,500)

9 Thinning 532,000 (125,000) (22,500) 384,500

10 (125,000) (22,500) (147,500)

11 (125,000) (22,500) (147,500)

12 (125,000) (22,500) (147,500)

13 Harvest 1,500,000 (125,000) (22,500) 1,352,500

14 Plant/Thinn. 232,000 (125,000) (22,500) 84,500

15 (125,000) (22,500) (147,500)

16 (125,000) (22,500) (147,500)

17 (125,000) (22,500) (147,500)

18 Harvest 2,000,000 (125,000) (22,500) 1,852,500

19 Plant (400,000) (125,000) (22,500) (547,500)

20 (125,000) (22,500) (147,500)

21 (125,000) (22,500) (147,500)

22 (125,000) (22,500) (147,500)

23 Harvest (125,000) (22,500) (147,500)

24 Plant/Thinn. 232,000 (125,000) (22,500) 84,500

25 (125,000) (22,500) (147,500)

26 (125,000) (22,500) (147,500)

27 (125,000) (22,500) (147,500)

28 (125,000) (22,500) (147,500)

29 (125,000) (22,500) (147,500)

30 Terminal Value 1,298,000 545,000 506,000 (1,665,000) (306,360) 377,640

Age in Year 30 for Reversion 28 16 11 0

NPV of tree crop based on discount rate derived by analsis of sales evidence at 7.5% 1,184,601

Market Value of tree crop, say 1,180,000

Market Value of land, say 1,665,000
Market Value of Forest say 2,845,000

A3
IE 2: Application of Cost Approach to Forests

Scenario 1
A valuation is required of a young stand of trees. The interest being valued includes the land
and the newly planted tree crop and all other rights over the land.

The stand extends to 50 hectares. It is established that new plants of the same maturity can be
purchased for replanting at a cost equivalent to CU40,000 per hectare. The owners records
show that site preparation, infrastructure and planting would cost a further CU25,000 per
hectare at current prices. Land suitable for cultivation and conversion to commercial forestry
use has been recently sold in a similar location to the subject site at a price equivalent to CU
15,000 per hectare.

Method
The cost approach is based on the hypothesis that a buyer of the subject asset would not pay
more than the cost of buying or creating an equivalent asset on the date of valuation. In TIP 2
The Cost Approach for Tangible Assets this is referred to as the modern equivalent asset.
When applied to forests the modern equivalent asset is a hypothetical replacement forest that
would offer the buyer the same economic benefit as the subject forest.

The cost of acquiring an equivalent site will be the price at which it could be acquired in the
market on the valuation date. The market data suggests that this is CU15,000 per hectare
although on further enquiry it is established that that price was for smaller plots than the subject,
with none exceeding 20 hectares. Having established that the quality of the land sold was
comparable to the subject, an adjustment is made for the difference in the plot size as there is
evidence that larger parcels normally sell for a lower per acre price. A rate of CU12,500 per
hectare is applied to 50 hectares to give a value for the land of CU625,000.

The figure of CU25,000 per hectare for site preparation and infrastructure is based on the
historic costs incurred in the development of the subject forest updated to prices at the valuation
date . However, cost does not necessarily equal value and before this figure is accepted as
indicative of the value care must be taken to ensure that a prospective buyer of the subject
forest would incur these costs if they pursued the alternative of buying bare land and creating a
new plantation. The costs of developing the subject forest may have been higher or lower than
normal because of features particular to that site. Where this is the case the costs may need to
be adjusted. In this example no adjustment is made.

The cost of purchasing new trees of the same age and stage of development as the actual tree
crop has been ascertained from current market prices for replacing the trees in the subject
forest. However, adjustments may still be required if, say, there was a significant difference in
the cost of delivery to the subject forest and those to the site of the hypothetical. No
adjustments are made in this example.

A4
The total cost of the improvements, ie the planting, infrastructure and cost of young plants is
therefore:

Site preparation, infrastructure and planting: 50 x 25,000 1,250,000

Tree crop delivered for planting: 50 x 40,000 2,000,000
Gross replacement cost: 3,250,000

It is also necessary to consider whether this gross replacement cost should be depreciated to
reflect any physical, functional or economic obsolescence that would reduce the value of the
subject forest below that of the hypothetical replacement. The types of obsolescence and the
way it can be measured are discussed in TIP 2. In this example the subject forest consists of
young trees and therefore it is assumed that since planting there has been no significant decline
in demand for the eventual product that might indicate the economic depreciation, or that there
has been no physical deterioration in the trees that would warrant a deduction.

The indicative value of the land has already been calculated as 625,000. Given that this value
is based on the cost of acquiring equivalent land and already adjusted for any differences in
location or quality compared with the transaction evidence, the land element is not adjusted for
obsolescence.

The indicative Market Value in this example using the cost approach is therefore:

Gross replacement cost of improvements: 3,250,000

Less depreciation: (0)
Value of Land: 625,000
CU 3,875,000

Wherever possible it is advisable to cross check the value indicated by the cost approach with
another method, for example a discounted cash flow, in order to check that the conclusion falls
within the range that would provide an investor with the returns expected in the market. As
discussed in para 52 the cost approach becomes more difficult to apply as the tree crop
matures and other approaches may become more relevant.

A5