Second Glance: Your Guide to Agriculture Sector's Financial Accounting Misstatements
- Gabriel Thoumi
- 1 day ago
- 4 min read
Financial accounting is a discretionary sport.
Read our full report here: Counting in Plain Sight: Natural Capital and Biodiversity in Financial Statements for Accountants
Managers are given a level of flexibility under generally accepted accounting principles (GAAP), as reflected in financial statements globally. More than 140 countries globally use the International Accounting Standards Board (IASB) GAAP to value their economic capital, based on its underlying natural capital, across a cascading set of accounting standards.
In the agricultural sector, which in 2023, contributed $4.36 trillion to the global economy – 4.0% of global GDP and about 13% of carbon dioxide (CO2), 44% of methane (CH4), and 81% of nitrous oxide (N2O) we observe this trend. Specifically, we see this in the palm oil sector where natural capital risks such as forest loss, soil depletion, water purity, and biodiversity loss impact the financial statements of corporations in the industry.
Why This Matters:
Losses to Investors: Many investors have experienced financial losses due to misstatements.
Misrepresentation: Displaying unintentionally or intentionally inaccurate financial information may cause a company to appear more sustainable or profitable than actuality.
Inaccurate Communication: Stakeholders may unknowingly support corporations with inaccurate reports, not aware of the whole picture.
Financial Misstatements: The Agriculture Sector - Summaries
Seeking to understand the financial discrepancies between reported values and natural capital realities in the palm oil industry, Responsible Alpha conducted an investigative study assessing the accuracy of five companies’ financial statements across 9 different financial accounting rules.
IAS 1: Presentation of Financial Statements (section 1.69: Liability Prescription). It prescribes conditions under which liabilities are to be classified as current; that is, owed in the near term.
IAS 17: Leases. It prescribes the accounting policies and disclosures applicable to leases, both for lessees and lessors. Leases are required to be classified as either finance/capital leases or operating leases. Finance leases transfer substantially all the risks and rewards of ownership and give rise to asset and liability recognition by the lessee and a receivable by the lessor. Whereas operating leases result in expense recognition by the lessee, with the asset remaining recognized by the lessor.
IAS 39: Financial Instruments: Recognition and Measurement. This section provides that guarantors of liabilities shall report the portion of the liabilities secured as their own liabilities even though affiliates will make repayments – similar to IFRS 4 for insurance contracts.
IAS 41: Agriculture. It details the conditions to be present for assets to be classified as agricultural or biological and how to measure. IAS 41 can inform if a company is valuing its biological assets and agricultural produce accurately given the natural capital risks faced. Specifically, IAS 41 requires companies to reassess the fair value of these assets given changes in their natural capital risks including:
“climatic, disease and other natural risks … If an event occurs that gives rise to a material item of income or expense, the nature and amount of that item are disclosed in accordance with IAS 1 Presentation of Financial Statements”.
IFRS 4: Insurance Contracts. This section applies, with limited exceptions, to all insurance contracts that an entity issues and even to reinsurance contracts that it holds.
IFRS 7: Financial Instruments. It requires disclosure of information about the significance of financial instruments to an entity, and the nature and extent of risk arising from those financial instruments, both in qualitative and quantitative terms.
IFRS 9: Financial Instruments. This is IASB's replacement of IAS 39 Financial Instruments: Recognition and Measurement. The Standard includes requirements for the recognition of and measurement of impairment, derecognition and general hedge accounting for financial instruments.
IFRS 13: Fair Value Measurement. It covers biological assets (including agricultural assets and livestock). Both standards require that Fair Value Measurement be the result of an exit price, make use of a fair value hierarchy (level 1,2 and 3 inputs), resulting in a market-based value, rather than entity-specific.
IFRS 16: Lease Disclosures. It specifies how leases will be recognized, measured, presented, and disclosed.
As reported by KPMG and others, each company was found to have potentially inflated or manipulated their financial statements in the pursuit of appearing more attractive to investors.
Noble Group: Financial Accounting Misstatements on its Way to Bankruptcy
To dive into the specifics, let’s examine the company Noble Group, which subsequently went bankrupt after in 2013 being the top 100 company globally by revenue.
Noble Group used to own NAL Group, a business that specializes in the processing of palm oil.
In 2014, Noble Group announced its plan to sell NAL Group, reporting its palm oil assets to be worth $224 million. However, Noble Group remained in possession of some of these assets, agreeing to pay back NAL through a promissory note.
However, in 2017, Noble Group ran into difficulties after creditors and analysts described its financial misstatements in its application of IFRS 41.
Noble Group did not accurately describe the value of its palm concessions in its property, plant, and equipment (PPE).
As a result, Noble Group issued an impairment and lowered the value of these palm oil assets by $135 million to $62 million.
This decrease occurred after Noble Group’s creditor HSBC, Roundtable of Sustainable Palm Oil, and Chain Reaction Research inquired how had Noble reported its concessions as only 11% forested when they were 90% forested, in violation of their application of High Conservation Values, a process designed to conserve ecological systems and biodiversity.
Singapore Exchange delisted Noble Group’s shares from trading in 2018 because of these accounting irregularities.
Finally, Norwegian pension fund KLP realized these accounting risks early and divested 100% from Noble Group in 2015.
Investors and regulators alike were misled by this transaction, considering this company altered important financial information regarding its palm oil assets.
Action Items: Corporations
Report Accurate Information: Record financial data that aligns with geographic accounting standards, in an honest, reliable manner.
Hold Company Accountable: Update market participants on changes in financial conditions immediately, to maintain transparency
Action Items: Shareholders
Examine Financial Statements: Analyze companies’ reportings with a susceptible eye
Callout Unethical Practices: If any, communicate discrepancies within financial statements to news outlets, creditors, or sustainable certification bodies.
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