Financial Analysis:
Income Statement Account Defintions
Revenues
A Standing Timber Charges: Wood harvested directly by Tembec. Tembec cuts and hauls their own wood, therefore they are not charged for this service by the AFA. Tembec still pay stumpage fees to the crown plus a service charge to the AFA.
B Forest Renewal Activity: The amount customers have paid for forest renewal which is the cost of replacing the forest after it is harvested (ie tending, planting, purchase of trees) This figure reflects what the AFA billed to the customers. This equals "Y" on the AR-11
C Direct Program Costs: The cost the AFA incurs to havest the wood. This includes employing contractors to cut wood, haul it by truck to the mill, build roads, road maintenance.
D Forest Renewal Activities: The amount of money the AFA actually spent on renewing the forest. Note this figure exceeds the amount billed (B).
E Crown Timber Stumpage Charges: Stumpage fees: This fee is determined by the Ministry, and is not negotiable. It is broken out into three costs:
1. Fixed Minimum or Residual value: This is the rate set by the Government which every customer in the Province must pay. This fee is paid by the customer as consideration for receipt of the crowns assets (wood).
2. Forest Renewal Funds: This is the fee charged by the MNR to the customer to grow the forest (after it has been harvested). This money is used to pay for things such as tree marking, tree planting, forest tending, buying trees. IT is NOT USED FOR ROADS! It is calculated by species, by volume.
3. Forest Future Trust Funds: This is a trust fund, managed by the board (presume AFA board) which each customer must pay in to, based on formulas pre-determined by the MNR. Money sits in trust in a central "pot", and in the event of a natural disaster (wind storm, ice storm, fire, insect damage etc) the customer may apply to the trust fund for renumeration to recover the forest.
1. Fixed Minimum or Residual value: This is the rate set by the Government which every customer in the Province must pay. This fee is paid by the customer as consideration for receipt of the crowns assets (wood).
2. Forest Renewal Funds: This is the fee charged by the MNR to the customer to grow the forest (after it has been harvested). This money is used to pay for things such as tree marking, tree planting, forest tending, buying trees. IT is NOT USED FOR ROADS! It is calculated by species, by volume.
3. Forest Future Trust Funds: This is a trust fund, managed by the board (presume AFA board) which each customer must pay in to, based on formulas pre-determined by the MNR. Money sits in trust in a central "pot", and in the event of a natural disaster (wind storm, ice storm, fire, insect damage etc) the customer may apply to the trust fund for renumeration to recover the forest.
At first blush, the Revenue vs Expenditure labelling used in these reports doesn't make sense when compared to the Income Statements issued by the Ontario Government . However, the confusion is sorted out when one realizes two financial measures are being tracked:
- the price paid as stumpage fees by the mill and the price sold as lumber.
The reports by species by volume below reflect revenues and expenditures from a harvest point of view, ie. the sale of logs to a sawmill and the associated costs by the sawmill owner which are monies spent by the logging service provider for forest renewal.
Therefore, from a crown point of view, revenues to a mill are actually expenses to the crown, so it's reversed which means:
What is immediately evident is that white pine is being harvested at 86% of Plan which is significantly higher than the 56% of plan forest renewal. The mills therefore are harvesting without paying the equivalent amount to replenish what they take.
Below is the process for harvesting wood. First, some definitions.
Customer: This is the Mill. So, McCrae, Murry Brothers, Tembec and all the other mills that receive wood from APP are considered "customers" of the AFA.
AFA: This is a Crown agency, which is managed separately from the park, has a board of directors, and reports into the Minister of Natural Resources. The AFA's mandate is to deliver wood to the customer based on prior authorization received from the MNR. The AFA is responsible for contracting out the cutting, storage, and hauling of wood to the customer. These roles are contracted out, the AFA does not employ staff to do the work. The AFA is ultimately responsible for invoicing the customer for wood delivered which is reported as Product Revenues on the Income Statement.
The AFA negotiate the price the Mill will pay for fibre (ie pulp, saw logs etc). This is done on an annual basis. The AFA's ability to negotiate fibre revenues is a form of protectionism - the mills are not forced to compete on the world market economy therefore.
MNR: This is the ministry that controls the wood supply decisions (ie how much wood in a specific geographical region of APP is approved for cutting, and where it should be delivered to). The MNR decide the wood commitments each mill will receive (ie m3). The jurisdiction for all of this is NOT in the park, rather, it would be controlled through Sault St Marie office of the MNR. The MNR is responsible for invoicing the customer for stumpage fees and control of customer contracts that determine how much a customer must pay (for stumpage only) based on the species of wood, volume etc. The MNR is also involved in the sale of lumber after the customer has milled it but this is outside the scope of my inquiry.
Process of harvesting wood delivery in APP:
1. MNR issues an approval # (a document) to the AFA providing authorization to harvest wood in a specific geographical area of APP. This is not a monetary instrument (ie it is not an order) The approval number is unique and tracks the wood through the entire process. All approvals for all customers may be issued once in advance by the MNR on April 1 for the next AFA fiscal year (April 1-Mar 31).
2. The AFA is accountable for determining WHO cuts the wood, WHO hauls the wood, WHEN the wood should be cut, IF the wood should be delivered directly to the customer or if it should be put in a holding yard as inventory. The logistics of all of this depend on supply and demand (ie if a customer cannot mill the wood because there is no demand, or the mill is backed up etc). Practically this means the approval to cut the wood from the MNR may not immediately trigger cutting the wood by the AFA. It could be delayed, weather conditions, wood rot, etc factor into this. The AFA may decide to cut the wood and have it hauled to storage called a yard, which means it is inventoried until the customer can receive it. The AFA collaborates with the customer to work out the best plan for both parties.
3. Once the decision to cut wood is made, the AFA hires a contractor to harvest it and to haul it out on a truck. This could be one contractor or two sub-contractors. The AFA track each load by the original approval number. When the wood is delivered to the customer, a Bill of Lading is created by the AFA driver at the Landing (FOB) point to document delivery.
4. The customer (mill) is equipped with approved weighing facilities. The truckload is weighed by the mill, and the mill creates a mass slip. The mass slip tracks volume/weight by species. Four copies of the mass slip are created:
- one copy to the mill or customer
- one copy for the AFA
- one copy for the MNR
- one copy for the contractor (Trucker)
5. Upon Receipt of the Mass slip, the MNR invoice the AFA, or in some cases the customer directly for Stumpage fees. The AR11 Excel Report of AFA Revenues is actually a record of the stumpage fees paid by the AFA back to the Crown (The MNR) in consideration of wood delivered to the customer. The Stumpage fees are recorded on the AFA Income Statement as an Expense (Crown Timber stumpage fees).
REVENUES FROM AR-11 REPORTED ON THE INCOME STATEMENT: HOW TO READ
For the 2007 Fiscal period, the AR-11 reported $2.15M in stumpage fees which is E of the Income Statement and X + Y + Z on the AR-11 ($1002M+$.948M+$.204M = $2,215,520). This is reflected as Stumpage Fee expense on the Income statement.
The MNR records the expense (Stumpage fees) on the Income Statement based on the date the wood was cut.
The AFA records the revenue on the AR-11 based on the date the wood was delivered to the customer.
Accruals or Revenue Recognition principles would minimize the delta between the two.
N of the AR-4 Report ($1.34M) is the amount SPENT By the AFA to regenerate the forest (tending, planting, trees, etc).
The Income statement reports N in two places:
D which is $1.03M + the total administration expense of the AFA which for 2007 was $323,117 - the total of $1.03M +$.3 = $1.348 which equals N
Y of the AR-11 Report ($.958M) is the amount COLLECTED by the AFA from the customers for forest regeneration
For 2008 period, the AFA spent $300K more than what it collected on the forest ($1.34-..95M)
6. Upon Receipt of the Mass Slip, the AFA invoice the customer for Product sales based on a pre-determined price which is currently guaranteed to the mill. The Product sales are recorded as Revenues on the Income Statement. Therefore, for the same 2008 period, the AFA recorded $20M in Product sales. This is A on the Income Statement
Customer: This is the Mill. So, McCrae, Murry Brothers, Tembec and all the other mills that receive wood from APP are considered "customers" of the AFA.
AFA: This is a Crown agency, which is managed separately from the park, has a board of directors, and reports into the Minister of Natural Resources. The AFA's mandate is to deliver wood to the customer based on prior authorization received from the MNR. The AFA is responsible for contracting out the cutting, storage, and hauling of wood to the customer. These roles are contracted out, the AFA does not employ staff to do the work. The AFA is ultimately responsible for invoicing the customer for wood delivered which is reported as Product Revenues on the Income Statement.
The AFA negotiate the price the Mill will pay for fibre (ie pulp, saw logs etc). This is done on an annual basis. The AFA's ability to negotiate fibre revenues is a form of protectionism - the mills are not forced to compete on the world market economy therefore.
MNR: This is the ministry that controls the wood supply decisions (ie how much wood in a specific geographical region of APP is approved for cutting, and where it should be delivered to). The MNR decide the wood commitments each mill will receive (ie m3). The jurisdiction for all of this is NOT in the park, rather, it would be controlled through Sault St Marie office of the MNR. The MNR is responsible for invoicing the customer for stumpage fees and control of customer contracts that determine how much a customer must pay (for stumpage only) based on the species of wood, volume etc. The MNR is also involved in the sale of lumber after the customer has milled it but this is outside the scope of my inquiry.
Process of harvesting wood delivery in APP:
1. MNR issues an approval # (a document) to the AFA providing authorization to harvest wood in a specific geographical area of APP. This is not a monetary instrument (ie it is not an order) The approval number is unique and tracks the wood through the entire process. All approvals for all customers may be issued once in advance by the MNR on April 1 for the next AFA fiscal year (April 1-Mar 31).
2. The AFA is accountable for determining WHO cuts the wood, WHO hauls the wood, WHEN the wood should be cut, IF the wood should be delivered directly to the customer or if it should be put in a holding yard as inventory. The logistics of all of this depend on supply and demand (ie if a customer cannot mill the wood because there is no demand, or the mill is backed up etc). Practically this means the approval to cut the wood from the MNR may not immediately trigger cutting the wood by the AFA. It could be delayed, weather conditions, wood rot, etc factor into this. The AFA may decide to cut the wood and have it hauled to storage called a yard, which means it is inventoried until the customer can receive it. The AFA collaborates with the customer to work out the best plan for both parties.
3. Once the decision to cut wood is made, the AFA hires a contractor to harvest it and to haul it out on a truck. This could be one contractor or two sub-contractors. The AFA track each load by the original approval number. When the wood is delivered to the customer, a Bill of Lading is created by the AFA driver at the Landing (FOB) point to document delivery.
4. The customer (mill) is equipped with approved weighing facilities. The truckload is weighed by the mill, and the mill creates a mass slip. The mass slip tracks volume/weight by species. Four copies of the mass slip are created:
- one copy to the mill or customer
- one copy for the AFA
- one copy for the MNR
- one copy for the contractor (Trucker)
5. Upon Receipt of the Mass slip, the MNR invoice the AFA, or in some cases the customer directly for Stumpage fees. The AR11 Excel Report of AFA Revenues is actually a record of the stumpage fees paid by the AFA back to the Crown (The MNR) in consideration of wood delivered to the customer. The Stumpage fees are recorded on the AFA Income Statement as an Expense (Crown Timber stumpage fees).
For the 2007 Fiscal period, the AR-11 reported $2.15M in stumpage fees which is E of the Income Statement and X + Y + Z on the AR-11 ($1002M+$.948M+$.204M = $2,215,520). This is reflected as Stumpage Fee expense on the Income statement.
The MNR records the expense (Stumpage fees) on the Income Statement based on the date the wood was cut.
The AFA records the revenue on the AR-11 based on the date the wood was delivered to the customer.
Accruals or Revenue Recognition principles would minimize the delta between the two.
N of the AR-4 Report ($1.34M) is the amount SPENT By the AFA to regenerate the forest (tending, planting, trees, etc).
The Income statement reports N in two places:
D which is $1.03M + the total administration expense of the AFA which for 2007 was $323,117 - the total of $1.03M +$.3 = $1.348 which equals N
Y of the AR-11 Report ($.958M) is the amount COLLECTED by the AFA from the customers for forest regeneration
For 2008 period, the AFA spent $300K more than what it collected on the forest ($1.34-..95M)
6. Upon Receipt of the Mass Slip, the AFA invoice the customer for Product sales based on a pre-determined price which is currently guaranteed to the mill. The Product sales are recorded as Revenues on the Income Statement. Therefore, for the same 2008 period, the AFA recorded $20M in Product sales. This is A on the Income Statement
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