Financial Accounting, Natural Capital, & Palm Oil
April 29, 2022
Ensuring global food system stability requires companies use consistent and accurate approaches to their financial accounting of agriculture, so that reported values are reliable. Firms are subject to various accounting regulations under International Financial Reporting Standards (IFRS) and their national accounting standards equivalents.
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Markets, analysts, and portfolio managers rely on audited financial information to better understand the financial valuation and overall investment thesis in the palm oil sector. Crucial then to this understanding is accurate information. Yet, market participants may receive inaccurate, and potentially misleading information about the economic benefits and consequences of palm oil production.
Ensuring global food system stability requires companies use consistent, transparent and accurate approaches to their financial accounting of agriculture, so that reported values are reliable.
Yet frequently market participants receive inaccurate, and potentially misleading information about the economic benefits and consequences of using natural capital.
As an example, we conducted a review of the financial disclosures of selected palm oil companies.
Our forensic financial accounting analysis indicates that companies operating in the palm oil sector may be disclosing potentially false and misleading accounting information to market participants. These firms likely require additional analytical scrutiny to understand the robustness of their accounting disclosures and their uses of natural capital.
Questions financial accountants and analysts ask frequently:
Are biological assets – the oil palm tree – and agricultural produce – the fresh fruit bunch (palm oil fruit) – consistently and accurately reported on, and in compliance to accounting standards, so that natural capital is valued accurately?
Are companies consistently and accurately valuing their agriculture businesses based on a transparent and accurate analysis of their value underpinning their businesses, and their related assets and liabilities?
In answer to these questions, our examination focused on firms operating in the global palm oil industry. We checked to ensure that their implementation of key accounting regulations relating to their production of palm oil is compliant with these standards.