Phaunos Timber Fund Limited – Final Results

CORPORATE GOVERNANCE

The Board has considered the principles and recommendations set out in the UK Corporate Governance Code (the “UK Code”) issued by the Financial Reporting Council (the “FRC”). The UK Code is available in the Financial Reporting Council's website, www.frc.org.uk and the Company has made its corporate governance practices publicly available and these can be found at www.phaunostimber.com. 

Throughout the year ended 31 December 2017, the Group has complied with the recommendations of the UK Code and Guernsey Financial Services Code of Corporate Governance (“GFSC Code”), except as set out below.

The UK Code includes provisions relating to:

•     The role of the Chief Executive;

•     Executive Directors' remuneration; and

•     Nomination Committee

•     Senior independent non-executive director

•     Diversity policy

The Board considers these provisions are not relevant to the position of the Group as it is a self-managed timber company. The Group has therefore not reported further in respect of these provisions. The Directors are all independent and the Group does not have employees, hence no Chief Executive is required for the Group. The Board is satisfied that any relevant issues can be properly considered by the Board.

There have been no other instances of non-compliance, other than those noted above.

AIFM DIRECTIVE

The Alternative Investment Fund Managers Directive seeks to regulate alternative investment fund managers and imposes obligations on managers who manage alternative investment funds in the EU or who market shares in such funds to EU investors. The Company is now self-managed and, due to its wind-down status, is no longer marketing its shares and thus falls outside the scope of AIFMD and no longer has any AIFMD reporting obligations to the FCA.

GUERNSEY REGULATORY ENVIRONMENT

The Guernsey Financial Services Commission has issued a Finance Sector Code of Corporate Governance. The Code comprises Principles and Guidance and provides a formal expression of good corporate practice against which shareholders, boards and the Commission can better assess the governance exercised over companies in Guernsey's finance sector.

NON-MAINSTREAM POOLED INVESTMENTS

On 1 January 2014, certain changes to the FCA rules relating to restrictions on the retail distribution of unregulated collective investment schemes and close substitutes came into effect.

Due to the current portfolio realisation process, the Company believes its shares are no longer suitable for retail investors.

BOARD OF DIRECTORS

The Board consists of three independent Directors. In accordance with the UK Code, all Directors are independent of the previous Investment Manager, which resigned with effect from 16 February 2018. The Chairman, Richard Boléat , met the independence criteria of the Code upon appointment and has continued to meet this condition throughout his term of service. Being independent, none of the Directors have a service contract with the Company.

The current independent Directors, namely Brendan Hawthorne, Richard Boléat and Jonathan Bridel, were appointed on 28 July 2017, 31 August 2017 and 13 September, respectively.

Brendan Hawthorne was appointed by shareholders and confirmed at the EGM, while an executive search was undertaken to appoint Richard Boléat and Jonathan Bridel, who will be submitting themselves for re-election at the upcoming AGM, in accordance with the UK Code

An executive search firm, Trust Associates, was engaged to procure the right skills to oversee the managed wind-down of the Group. The firm has no other connection to the Company.

Independent directors are appointed on a contract basis.

The Board benefited from an extensive six-month hand-over period from the previous Manager, Stafford.

William Vanderfelt, formerly a Senior Independent Director with the Company, resigned during 2017. It was decided a replacement was not needed for this role, as it was adequately covered by the current independent Board.

Given the wind-down status of the Group, the Board has not considered a diversity policy, believing that the balance of skills, experience and knowledge of the current Board is appropriate for the wind-up of the Company.

The Board regularly reviews its structure, size and composition, including its skills, knowledge and experience. The Board prepares a description of the role and capabilities required for a particular appointment and engages with external advisers to facilitate the search. Appointments to the Board are made on merit, against objective criteria in line with its current and future requirements, reflect the international activity of the Group and with due regard for the benefits of diversity on the Board. Any new Director appointed to the Board will undergo an induction process.

Under the Articles of Incorporation, one third of the Board is subject to retirement by rotation each year, such that all Directors are required to submit themselves for re-appointment at least every three years. Directors who have served for nine years or more will be subject to annual re-appointment.

Richard Boléat and Jonathan Bridel will be submitting themselves for election at the forthcoming AGM.

Members of the Board engage regularly with major shareholders, through face-to-face meetings and presence at the annual AGM, to develop an understanding of shareholders views in the context of the managed wind-down of the Group.

The Board meets at least monthly and there is weekly contact with external finance, operations and forestry teams, the Company Secretary and the Company's Brokers, consistent with a wind-down process. The Directors are kept fully informed of investment and financial controls, and other matters that are relevant to the business of the Company that should be brought to the attention of the Directors.

The Directors also have access, where necessary in the furtherance of their duties, to independent professional advice at the expense of the Company. Such professionals have no connection to the Company other than through these business relationships.

Attendance at each committee below.

Director	Board Meetings	Audit & Valuation Committee	Management Engagement Committee	Remuneration Committee
Richard Boléat	4	1	1	2
Jonathan Bridel	4	1	1	2
Brendan Hawthorne	5	2	1	2
Sir Henry Studholme Bt	6	3	–	–
Ian Burns	7	3	–	–
William Vanderfelt	6	3	–	–
Jane Lewis	6	3	–	–

All Directors attended all required board meetings and committees during the year.

PERFORMANCE EVALUATION

The directors of the Company were all appointed during the year under review. As a result, no formal evaluation process has been undertaken during 2017. The board intends to conduct a self-assessment process during the course of 2018.

The Board continues to monitor training for Directors. The Directors consider and report regularly their training needs and their continuing professional development and training carried out. The Board receives regular feedback from investors and sector analysts. The Board continues to have a focus on risk management and controls.

The independence of each Director has been considered and each has been confirmed as being independent

The members of the Board strive to challenge each other constructively to make sure all issues are examined from different angles.

DIRECTORS' REMUNERATION

A schedule detailing director's remuneration paid during the year is listed below.

Director	Base fee	Base fee pro-rata for the year	Additional fees	Total
Richard Boléat (Chairman)	80,000	26,740	15,146	£41,886
Jonathan Bridel	65,000	19,411	18,885	£38,296
Brendan Hawthorne	55,000	23,959	–	£26,137
Sir Henry Studholme Bt	55,000	36,466	–	£36,466
Ian Burns	30,000	20,959	–	£20,959
William Vanderfelt	30,000	19,890	–	£19,890
Jane Lewis	30,000	19,890	–	£19,890

 

Included in the base fee above, Richard Boléat receives a fee of £5,000 per annum for serving as Chairman of the Remuneration Committee, Jonathan Bridel receives a fee of £10,000 per annum as Chairman of the Audit and Valuation Committee and Brendan Hawthorne £5,000 as Chairman of the Management Engagement Committee and Remuneration Committee.

The current Board is appointed on an independent basis. Hours incurred above an agreed maximum are paid on a time-spent basis.

The aggregate remuneration of the Directors in respect of the year ended 31 December 2017, did not exceed £350,000 (2016 – £350,000).

DELEGATION OF RESPONSIBILITIES

Vistra Fund Services provides accounting, administration and Company Secretarial Services as required.

BOARD COMMITTEES

Due to the size of the Board, the Company currently does not have a separate Nomination Committee. The roles and responsibilities of Nomination Committee are currently undertaken by the full Board.

The Board has established the following Committees and approved their Terms of Reference, copies of which can be obtained from the Administrator.

Audit and Valuation Committee

The Audit and Valuation Committee comprises all of the Directors of the Company, with Jonathan Bridel serving as Chairman. All members are independent of the external auditors and the former Investment Manager.

The purpose of the Audit and Valuation Committee is to ensure that the Group maintains high standards of integrity, financial reporting and internal controls. The Audit and Valuation Committee reviews the Interim Reports, the Annual Report and Consolidated Financial Statements of the Group, the internal controls pertinent to the preparation of accurate financial statements and the management of the Group, the Auditors' remuneration and engagement, as well as the Auditors' independence and any non-audit services provided by them.

The Audit and Valuation Committee also receives information from the Auditors as to the objectivity of their audit and their independence.

The Audit and Valuation Committee met on four occasions during the year and the Auditors attended two of the meetings. It is intended that the Committee will continue to meet on a quarterly basis.

Management Engagement Committee

The Management Engagement Committee comprises all of the Directors of the Company with Brendan Hawthorne being the Chairman.

The purpose of the Management Engagement Committee was to ensure that the terms of engagement with the Company's service providers are operating satisfactorily to ensure the safe and accurate management and administration of the Company's affairs and business, that the terms of their appointment are competitive and reasonable for the Shareholders and to make appropriate recommendations to the Board. The board does not intend to appoint a manager to replace Stafford Capital Partners, and thus the mandate of the Management Engagement Committee ceased on 17 February 2018.

Poyry Capital were appointed as selling agents for the portfolio on 28 November 2017.

The Management Engagement Committee met on one occasion in 2017.

Remuneration Committee

The Remuneration Committee comprises all of the Directors of the Company with Richard Boléat being the Chairman. The role of the Committee is to evaluate and set the levels of remuneration and benefits of the Directors. The Company has no employees.

Details of director's remuneration can be found on Page 27 to 28.

The Terms of Reference of all committees are available on request from the Company Secretary.

INTERNAL CONTROLS

The Board is ultimately responsible for establishing and maintaining the Group's system of internal financial and operating control and for maintaining and reviewing its effectiveness. The Group's risk matrix continues to be the core element of the Group's risk management process in establishing the Group's system of internal financial and reporting control. The risk matrix is reviewed regularly by the Board, which initially identifies the risks facing the Group and then collectively assesses the likelihood of each risk, the impact of those risks and the strength of the controls operating over each risk. The system of internal financial and operating control is designed to manage rather than to eliminate the risk of failure to achieve business objectives and by their nature the controls can only provide reasonable and not absolute assurance against misstatement and loss.

These controls aim to ensure that assets of the Group are safeguarded, proper accounting records are maintained and the financial information for publication is reliable. The Board confirms that there is an ongoing process for identifying, evaluating and managing the significant risks faced by the Group.

This process has been in place for the year under review and up to the date of approval of this Annual Report and Consolidated Financial Statements and is reviewed by the Board and is in accordance with the internal controls: Guidance on Risk Management, Internal Control and Related Financial and Business Reporting.

The Board has evaluated the systems of internal controls of the Group. In particular, it has prepared a process for identifying and evaluating the significant risks affecting the Group and the policies by which these risks are managed. 

The Board has delegated the day to day responsibilities for the provision of administration, registrar and corporate secretarial functions including the independent calculation of the Group's NAV and the production of the Annual Report and Consolidated Financial Statements which are independently audited.

Formal contractual agreements have been put in place between the Group and providers of these services.

Even though the Board has delegated responsibility for these functions, it retains accountability for these functions and is responsible for the systems of internal control. At each quarterly Board meeting, compliance reports are provided by the Administrator, Company Secretary and Portfolio Manager. The Board also receives confirmation from the Administrator of its accreditation under its Service Organisation Controls 1 report.

The Group's risk exposure and the effectiveness of its risk management and internal control systems are reviewed by the Audit and Valuation Committee at its quarterly meetings and annually by the Board.

The Board believes that the Group has adequate and effective systems in place to identify, mitigate and manage the risks to which it is exposed.

The Group does not have an internal audit department as most of its day-to-day operations are delegated to third parties, all of whom have their own internal control procedures. However, the creation of an internal audit department is considered regularly by the Audit and Valuation Committee under its Terms of Reference.

VIABILITY STATEMENT

Assessment of prospects

In accordance with provision C.2.2 of the UK Code, the Directors have assessed the prospects of the Group over its expected realisation timeframe.

Given the outcome of the 2017 Continuation Vote, the Board has prepared the viability statement under the assumption that the assets will be realised and the Company wound down within a period of twenty-four months from the date of this report.

Consequently, financial forecasts have been prepared for the two year period to 31 December 2019, representing a reasonable period for the realisation of the Group's illiquid assets. The first year of the annual financial forecast forms the Group's operating budget and is subject to quarterly re-forecasting. The second year has a similar level of detail and is flexed based on the actual results in year one.

The key assumptions in the financial forecasts, reflecting the overall strategy, include:

·     Asset disposals, including value and timing

·     The current expense burden of the Group alongside contracted timber revenues

·     Continued Shareholder support notwithstanding an economic or natural event reducing the liquidity or solvency of the Group

Assessment of viability

Although the strategic plan reflects the Directors' best estimate of the future prospects of the business, they have also tested the potential impact on the Group of a number of scenarios over and above those included in the plan. 

These scenarios, which are based on aspects of principal risks (pages 20 to 21), represent 'severe but plausible' circumstances that the Group could experience, individually or combined.

The Company and its wholly owned subsidiaries do not have any external debt and the scenarios tested mainly represent those which would pose serious threats to the Group's solvency and liquidity which include:

–     A significant increase in operational expenditure to cover sales, legal fees and liquidation costs

–     Forecasting a cashflow position with no further investment income earned over a twenty-four month period

–     Delayed asset sales

In assessing the viability of the Company, the Directors have considered each of the Company's principal risks and uncertainties which are set out on pages 20 to 21.

Liquidity needs, at holding company and operating company level, have been assessed and found to be adequate, with the Group being able to fund all costs as they become due over a twenty-four month period, even in a stressed scenario.

The results of this stress testing showed that, due to the available cash and in the absence of any debt, the Group would be able to withstand the impact of these scenarios occurring over the period of the financial forecast by making adjustments to its operating plans.

Viability statement

The Directors confirm that they have a reasonable expectation that the Group will be able to continue in operation and meet its liabilities as they fall due over the two year period ending 31 December 2019, subject to earlier liquidation should the Company have exited its investments sooner than anticipated.

SOCIAL AND ENVIRONMENT POLICY

As a result of the realisation process being conducted by the Directors, the operational aspects of the Group's social and environmental policies have been suspended.

Phaunos does not tolerate bribery or corruption in relation to its business, anywhere or in any form and complies with anti-bribery and anti-corruption laws in the countries in which it operates. As such, this policy is consistent with legislation and, in particular, the UK Bribery Act.

By order of the Board:

 

 

Richard Boléat                                               Jonathan Bridel 

Director                                                            Director

27 April 2018

The Audit and Valuation Committee (the “Committee”) has been in operation since the inception of the Company. Chaired by Jonathan Bridel, it operates within clearly defined terms of reference and comprises all of the Directors. It is also the formal forum through which the auditor reports to the Board of Directors and it met four times in 2017 (it meets at least three times annually).

 ROLES AND RESPONSIBILITIES

The main duties of the Committee are:

·     giving full consideration and recommending to the Board for approval the contents of the half year and annual Consolidated Financial Statements and reviewing the external auditor's report thereon including consideration of whether the Consolidated Financial Statements are overall fair, balanced and understandable;

·     agreeing with the auditor the external audit plan including discussing with the external auditor the key risk areas within the Consolidated Financial Statements;

·     considering and understanding the key risks of misstatement of the Consolidated Financial Statements and formulating an appropriate plan to review and manage these risk areas;

·     reviewing the Viability and Going Concern Statements;

·     reviewing the draft valuation of the Company's investments prepared and making a recommendation to the Board on valuation;

·     reviewing the scope, results, cost effectiveness, independence and objectivity of the external auditor as well as reviewing the effectiveness of the external audit process and making any recommendations to the Board for improvement of the audit process;

·     reviewing and recommending to the Board for approval the audit, audit-related and non-audit fees payable to the external auditor or their affiliated firms overseas and the terms of their engagement;

·     reviewing the appropriateness of the Company's accounting policies;

·     ensuring the standards and adequacy of the internal control systems;

·     to consider any reports or information received in respect of whistleblowing; and

·     reporting to the Board on how it has discharged its duties.

None of the members of the Audit Committee have any involvement in the preparation of the Consolidated Financial Statements of the Group, as this has been contracted to the Investment Manager initially and the external finance team latterly.

The Audit Committee meets the external auditor before and on substantial completion of their audit and has discussed with the auditor the scope of their annual audit work and also their audit findings.

The auditor attends the Audit Committee meetings at which the annual Consolidated Financial Statements are considered and at which they have the opportunity to meet with the Committee. The Committee has direct access to the auditor and to key senior staff of the Group and it reports its findings and recommendations to the Board which retains the ultimate responsibility for the Consolidated Financial Statements of the Company.

MEMBERSHIP

The Chair of the Committee, Jonathan Bridel, is a fellow of the Institute of Chartered Accountants in England and Wales and in addition serves as chairman of the audit committee for other listed investment companies. Previously Jonathan worked in senior positions in investment, corporate finance and commercial banking and was CFO of two private multinational businesses. The Board is satisfied that Jonathan has recent and relevant financial experience as required under the UK Corporate Governance Code. The other members of the Committee are Richard Boléat and Brendan Hawthorne. The qualifications of the Committee members are outlined in the Director's Biographies.

SIGNIFICANT ISSUES CONSIDERED

The Committee assesses whether suitable accounting policies have been adopted and whether estimates and judgements used have been appropriate. The Committee also reviews reports by the external auditors which highlight any issues with respect to the work undertaken on the audit.

The principal issues considered by the Committee in relation to the Consolidated Financial Statements were:

·     The effect of the result of the Continuation Vote on the application of the going concern basis. It is the Committee's view that the Consolidated Financial Statements be prepared on a 'break-up' basis, entailing carrying all assets at their net realisable value and providing for all expected liquidation and tax charges.

·     Market quotations are not available for the Group's biological assets, land and financial assets, and as such, their valuation is undertaken using the methodologies outlined on page 7. This requires a series of material judgements to be made as further explained in note 14 to the financial statements. The valuation process and methodology were discussed by the Committee prior to the year-end valuation process. The Committee met with the auditors when it reviewed and agreed the audit plan and also at the conclusion of the audit of the Consolidated Financial Statements, in particular discussing the valuation process. The Company engaged third party valuation experts to provide net realisable value appraisals.

·     The Company owns assets in a number of jurisdictions around the world often with unique legal frameworks which increases the risk that the Company does not have legal title to all biological assets, investments or land and could be a potential obstacle to and delaying the wind-down process. The Committee also reviewed actions taken to control and monitor the titles held by the Group with the Manager and the external auditors.

Following a review of the presentations and reports from the Administrator and consulting where necessary with the external auditor and appraisers, the Committee is satisfied that the Consolidated Financial Statements appropriately address the critical judgements and key estimates (both in respect to the amounts reported and the disclosures). The Committee is also satisfied that the significant assumptions used for determining the value of assets have been appropriately scrutinised, challenged and are sufficiently robust.

RISK MANAGEMENT AND INTERNAL CONTROL

The Board considers the nature and extent of the Group's risk management framework and the risk profile that is acceptable in order to achieve the Group's strategic objectives. As a result, it is considered that the Board has fulfilled its obligations under the Code.

The Committee continues to be responsible for reviewing the adequacy and effectiveness of the Group's ongoing risk management systems and processes. Its system of internal controls, along with its design and operating effectiveness, is subject to review by the Audit and Valuation Committee.

In the event of any deficiencies or breaches reported, the Board would consider the actions required to remedy and prevent significant failings or weaknesses.

Given the scale and nature of the Group's activities, the Committee has determined that a separate internal audit function is unnecessary.

FRAUD, BRIBERY AND CORRUPTION

The Committee continues to monitor the fraud, bribery and corruption policies of the Company. The Board receives a confirmation from its key service providers that there have been no instances of fraud, bribery or corruption.

The Committee considered the adequacy and security of its arrangements for its independent contractors and service providers to raise concerns, in confidence, about possible wrongdoing in financial reporting or other matters. The Committee is satisfied it has the ability and resources to investigate any such matters which may arise and to follow up on any conclusion reached by such investigation.

The Committee has also reviewed the Company's whistleblowing policy and confirmed that the correct communication channels are in place.

CRIMINAL FINANCES ACT

The Board of the Company has a zero tolerance commitment to preventing persons associated with it from engaging in criminal facilitation of tax evasion. The Board has satisfied itself in relation to its key service providers that they have reasonable provisions in place to prevent the criminal facilitation of tax evasion by their own associated persons and will not work with service providers who do not demonstrate the same zero tolerance commitment to preventing persons associated with it from engaging in criminal facilitation of tax evasion.

EXTERNAL AUDITORS 

 

The Committee has responsibility for making a recommendation on the appointment, re-appointment and removal of the external auditors. EY has been the external auditor from the date of the initial listing on the London Stock Exchange in 2006 and were reappointed Auditors of the Company at the Annual General Meeting held in 2017.

The objectivity of the external auditor is reviewed by the Committee which also reviews the terms under which the external auditor may be appointed to perform non-audit services. The Committee reviews the scope and results of the audit, its cost effectiveness and the independence and objectivity of the auditor, with particular regard to any non-audit work that the auditor may undertake.

In order to safeguard auditor independence and objectivity, the Committee ensures that any other advisory and/or consulting services provided by the external auditor does not conflict with their statutory audit responsibilities.

Advisory and/or consulting services generally only cover reviews of interim financial statements and tax compliance. Any non-audit services conducted by the external auditor outside of these areas which are above US$50,000 in aggregate in any period require the consent of the Audit Committee before being initiated. The external auditor may not undertake any work for the Company or the Group in respect of the following matters – preparation of the Consolidated Financial Statements, valuations used in Consolidated Financial Statements, provision of investment advice, taking management decisions or advocacy work in adversarial situations.

The Committee reviews the scope and results of the audit, its cost effectiveness and the independence and objectivity of the audit-related services, with particular regard to the level of non-audit fees. Total fees paid amounted to US$258,626 for the period ended 31 December 2017 of which US$184,020 related to audit services provided by EY Guernsey, US$67,726 related to other EY offices in respect of group audit services and US$6,881 related to non-audit services to the Company and its subsidiaries.

Notwithstanding such services the Committee considers EY to be independent of the Company and its subsidiaries and that the provision of such non-audit services is not a threat to the objectivity and independence of the conduct of the audit.

To fulfil its responsibility regarding the independence of the external auditor, the Committee considered:

·   changes in audit personnel in the audit plan for the current period;

·   a report from the external auditor describing their arrangements to identify, report and manage any conflicts of interest; and

·   the extent of non-audit services provided by the external auditor.

To assess the effectiveness of the external audit process, the Committee reviewed:

·   the external auditor's fulfilment of the agreed audit plan and variations from it;

·   reports highlighting the major issues that arose during the course of the audit; and

·   the effectiveness and independence of the external auditor having considered the degree of diligence and professional scepticism demonstrated by them.

The Committee is satisfied with EY's effectiveness and independence as auditor having considered the degree of diligence and professional scepticism demonstrated by them. As such, and given the Company is in wind down, the Committee has not considered it necessary during this period to conduct a tender process for the appointment of its auditor for the year ended 31 December 2018.

The Committee intends to conduct a full review of EY following the issue of these Consolidated Financial Statements as it did in 2017 to ensure that the Committee considers all aspects of the auditor's service and performance. The outcome of the review in 2017 was positive and led to no material concerns over the performance of the auditor.

Having satisfied itself that the external auditor remains independent and effective, the Audit Committee has recommended to the Board that EY be reappointed as auditor for the period ending 31 December 2018.

AUDIT COMMITTEE PERFORMANCE EVALUATION

Due to the appointment of the board in late 2017, no evaluation was held during the year; an evaluation will be held during 2018

The external auditor reported to the Committee that no material misstatements were found in the course of their work. The Committee confirms that it is satisfied that the external auditor has fulfilled its responsibilities with diligence and professional scepticism.

 

Jonathan Bridel

Chairman, Audit and Valuation Committee

27 April 2018

 

Opinion

We have audited the consolidated financial statements (“financial statements”) of Phaunos Timber Fund Limited (the 'Company') and its subsidiaries (together the 'Group') for the year ended 31 December 2017, which comprise the Consolidated Statement of Comprehensive Income, the Consolidated Statement of Financial Position, the Consolidated Statement of Changes in Equity, the Consolidated Statement of Cash Flows and the related notes 1 to 27, including a summary of significant accounting policies. The financial reporting framework that has been applied in their preparation is applicable law and International Financial Reporting Standards as adopted by the European Union (“IFRS”). The financial statements have been prepared on a break-up basis as as disclosed in note 2.

In our opinion the financial statements: 

•    give a true and fair view of the state of the Group's affairs as at 31 December 2017 and of its loss for the year then ended;

•    have been properly prepared in accordance with IFRS; and

•    have been properly prepared in accordance with the requirements of the Companies (Guernsey) Law, 2008.

Basis for Opinion

We conducted our audit in accordance with International Standards on Auditing (UK) ('ISAs (UK)') and applicable law. Our responsibilities under those standards are further described in the “Auditor's responsibilities for the audit of the financial statements” section of our report below. We are independent of the Group in accordance with the ethical requirements that are relevant to our audit of the financial statements in the UK, including the FRC's Ethical Standard as applied to listed entities, and we have fulfilled our other ethical responsibilities in accordance with these requirements.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.

Emphasis of matter – basis of accounting

We draw attention to note 2 which describes the basis of accounting. Our opinion is not modified in respect of this matter.

Use of our report

This report is made solely to the Company's members, as a body, in accordance with Section 262 of the Companies (Guernsey) Law, 2008. Our audit work has been undertaken so that we might state to the Company's members those matters we are required to state to them in an auditor's report and for no other purpose.  To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company and the Company's members as a body, for our audit work, for this report, or for the opinions we have formed.

Conclusions relating to principal risks, going concern and viability statement

We have nothing to report, other than that set out in the 'Emphasis of matter – basis of accounting' section above, in respect of the following information in the annual report, in respect of the following information in the annual report, in relation to which the ISAs (UK) require us to report to you whether we have anything material to add or draw attention to:

•    the disclosures in the annual report set out on pages 20 to 21 that describe the principal risks and explain how they are being managed or mitigated;

•    the directors' confirmation set out on pages 20 in the annual report that they have carried out a robust assessment of the principal risks facing the entity, including those that would threaten its business model, future performance, solvency or liquidity;

•    the directors' statement set out on pages 21 in the financial statements about whether they considered it appropriate to adopt the going concern basis of accounting in preparing them, and their identification of any material uncertainties to the entity's ability to continue to do so over a period of at least twelve months from the date of approval of the financial statements;

•    whether the directors' statement in relation to going concern required under the Listing Rules is materially inconsistent with our knowledge obtained in the audit; or

•    the directors' explanation set out on pages 30 in the annual report as to how they have assessed the prospects of the entity, over what period they have done so and why they consider that period to be appropriate, and their statement as to whether they have a reasonable expectation that the entity will be able to continue in operation and meet its liabilities as they fall due over the period of their assessment, including any related disclosures drawing attention to any necessary qualifications or assumptions.

Overview of our audit approach

Key audit matters	•    Valuation of biological assets, land and financial assets at fair value through profit or loss •    Existence and ownership of biological assets and land
Audit scope	•    We have performed an audit of the complete financial information of two components, which represent 69% of the Group's total equity, and audit procedures on specific balances, where we considered the risk of material misstatement to be higher, for a further four components of the Group.
Materiality	•    Overall materiality of $5.6 million (2016: $6.0 million) which represents 2% (2016: 2%) of total equity.

Key audit matters

Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the financial statements of the current period and include the most significant assessed risks of material misstatement (whether or not due to fraud) that we identified. These matters included those which had the greatest effect on: the overall audit strategy, the allocation of resources in the audit; and directing the efforts of the engagement team. These matters were addressed in the context of our audit of the financial statements as a whole, and in our opinion thereon, and we do not provide a separate opinion on these matters.

Risk	Our response to the risk	Key observations communicated to the Audit and Valuation Committee
Risk that the carrying value of biological assets and land might be misstated due to application of inappropriate methodologies or inputs to the valuations and/or inappropriate judgemental factors. ($46 million; 2016 – $70 million) The valuation of biological assets and land requires specialist expertise and the use of significant estimates and judgements giving rise to a higher risk of misstatement. Refer to the Audit and Valuation Committee Report (page 32); Accounting policies (page 50); and Note 14 of the Group Financial Statements (pages 64 to 69).	We have performed audit procedures over this risk area in two locations, Brazil (Vale and Eucateca) and Uruguay (Pradera Roja), which covers 100% of the Group's biological assets and land. Audit procedures performed were: •   We documented our understanding of the processes, policies and methodologies used by management for valuing biological assets and land, and performed walkthrough tests to confirm our understanding of the systems and controls implemented; •   We agreed the values reported by the Group's independent valuation experts (“Specialists”) as an input to the directors valuations; •   We agreed a sample of the significant inputs used by the Specialists to value biological assets and land, to the Group's records. The most significant inputs include growth stage of plantations, land acreage and amounts of merchantable and pre-merchantable timber. •   We agreed the acreage amounts recorded in the Group's records relating to biological assets and land, to relevant records of title, on a sample basis; •   We physically inspected samples of merchantable and pre-merchantable timber; •   We tested the arithmetical accuracy of the calculations performed by Specialists by re-performing a sample of their calculations; •   We engaged our internal valuation specialist to: o  use their knowledge of the market to assess and corroborate the market related judgements and valuation inputs (including timber prices, discount rates, EBITDA and cash flow forecasts and assessment of terminal value) used by the Specialists by reference to our specialist's knowledge of comparable transactions and independently compiled databases; o  assist us to determine whether the methodologies used by the Specialist to value biological assets and land were in accordance with methods usually used by market participants for these types of assets; o  assist us in determining whether the Specialists were appropriately qualified and independent; and o  search for corroborating market observable transaction pricing in the relevant markets to support the level of discounts applied by the directors to the valuations provided by the Specialists. •   We engaged our internal tax specialists to use their knowledge of the tax legislation in the respective jurisdictions to determine: o  whether the estimated taxes on realisation of assets included in the recoverable amounts are reasonable; and o  whether management had properly taken account of the tax effects of disposing of investments. •   We assessed whether management's assumptions in respect of costs of realisation and other factors affecting the carrying amount as a result of applying the break-up basis of accounting were appropriate and properly calculated.	We confirmed that there were no material matters arising from our audit work on the inputs used and the judgments made by the Specialists that we wished to bring to the attention of the Audit and Valuation Committee. We confirmed that there were no material instances of use of inappropriate policies or methodologies and that the valuation of biological assets and land was not materially misstated.
Risk that the carrying value of investment in associates and other financial assets at fair value through profit or loss might be misstated due to the application of inappropriate methodologies or inputs to the valuations and/or inappropriate judgemental factors. ($185 million; 2016 – $181 million) The valuation of associates and other financial assets at fair value through profit or loss requires Specialist expertise and the use of significant estimates and judgements giving rise to a higher risk of misstatement. Refer to the Audit and Valuation Committee Report (page 32); Accounting policies (page 50); and Note 14 of the Group Financial Statements (pages 64 to 69).	We have performed audit procedures over this risk area relating to GTFF, Aurora and Matariki (full scope audit) which covered 100% of the land and biological assets of Aurora, Matariki and GTFF as these balances are the main driver of the fair value of these investments. These procedures were: •   We documented our understanding of the processes, policies and methodologies used by management and performed walkthrough tests to confirm our understanding of the systems and controls implemented; •   We instructed our component teams to perform the same procedures on valuation of biological assets and land owned by associates as described in the key audit matter above; •   Matariki engaged a Specialist to value the biological assets and land owned. EY New Zealand engaged their internal valuation specialist and performed the same procedures as listed below. The results of the procedures performed by the component team were communicated to the primary audit team as part of the group audit reporting and were used to support the directors' assumption that the Group's share of Matariki's net asset value less cost of realisation approximates to the recoverable amount of the Group's investment; •   The Board of Directors engaged a Specialist to value the biological assets and land, and, (as a business) certain plant and equipment owned by Aurora. The results of the procedures performed by the Primary team as set out below were used to support the directors' assumption that the Group's share of Aurora's net asset value approximates to the fair value of the Group's investment; •   GTFF engaged a Specialist to value the biological assets and land owned. The Primary team performed the same audit procedures as for biological assets and land owned by the Group as described in the key audit matter above; •   We engaged our internal valuation specialist to: o  assist us in determining whether management's Specialists were appropriately qualified and independent; o  use their knowledge of the market to assess and corroborate the directors' market related judgements and valuation inputs (including timber prices, discount rates, EBITDA and cash flow forecasts and assessment of terminal value) by reference to our specialist's knowledge of the market and independently compiled databases; o  assist us to determine whether the methodologies used by the Specialists to value the plant and equipment were in accordance with methods usually used by market participants for these types of assets; and o  search for corroborating market observable transaction pricing in the relevant markets to support the level of discounts applied by the directors to the valuations provided by the Specialists. •   We agreed a sample of the significant inputs used by the Specialists to the Group's records. The most significant inputs included sales, operating expenses, discount rates, EBITDA, timber prices, discount rates, cash flow forecasts and assessment of terminal value which formed the basis for the forecasts used in the valuation; •   We engaged our internal tax specialists to use their knowledge of the tax legislation in the respective jurisdictions to determine: o  whether the estimated taxes on realisation of the assets included in the recoverable amounts are reasonable; and o  whether management had properly taken account of the tax effects of disposing of investments; •   We assessed whether management's assumptions in respect of costs of realisation and other factors affecting the carrying amount as a result of applying the break-up basis of accounting were appropriate and properly calculated.	We confirmed that there were no material matters arising from our audit work on the inputs used and the judgments made by the Specialists that we wished to bring to the attention of the Audit and Valuation Committee. We confirmed that there were no material instances of use of inappropriate policies or methodologies and that the valuation of associates and other financial assets at fair value through profit or loss was not materially misstated.
Risk that the Group does not have legal title to biological assets and land. ($46 million; 2016 – $70 million) Due to the significance of the carrying value of these assets, and the uncertainties associated with obtaining legal title in some jurisdictions, there is a risk that if the Group does not have the title and right of ownership of these assets, and hence the carrying value of investments in the financial statements could be materially overstated. Refer to the Audit and Valuation Committee Report (page 32); Accounting policies (page 50); and Note 14 of the Group Financial Statements (pages 64 to 69).	•   We documented our understanding of the processes, policies and methodologies used by management with respect to existence and ownership of assets and performed walkthrough tests to confirm our understanding of the systems and controls implemented. •   For a sample of land, including land owned by associates, we obtained copies of title documents or agreed the Group's title to government or local authority land registers to confirm the Group's ownership of land; and •   For a sample of biological assets we physically inspected the assets and agreed the amounts to the Group's records.	We confirmed that, other than pending title updates awaiting local government geo-referencing approvals for certain assets with a combined carrying amount of US21 million, there were no matters identified during our audit work on existence and ownership of biological assets and land that we wished to bring to the attention of the Audit and Valuation Committee.

In the prior year, our auditor's report included a key audit matter in relation to a material uncertainty over going concern. In the current year, there is no material uncertainty with regards to going concern and as the Company is in a managed wind down, the consolidated financial statements have been prepared on a break-up basis, therefore going concern is not deemed to be a key audit matter.

An overview of the scope of our audit

Tailoring the scope

Our assessment of audit risk, our evaluation of materiality and our allocation of performance materiality determine our scope for the Group audit. This enables us to form an opinion on the financial statements. We take into account size, risk profile, the organisation of the Group and effectiveness of controls, including controls and changes in the business environment, when assessing the level of work to be performed.

In assessing the risk of material misstatement to the financial statements of the components of the Group, and to ensure we had adequate quantitative coverage of significant accounts in the financial statements, we selected entities within Guernsey, New Zealand, Brazil and Uruguay (comprising six components), which represent the principal business units and risks within the Group. The Primary audit team also engaged with internal timber valuation Specialists to assess the valuation of biological assets and land for the same components. In the current year we have also engaged with internal tax specialists to assess whether management had properly taken account of the tax effects of disposing of investments in deriving the recoverable amount of these assets.

Of the six components selected, which includes the parent company, we performed an audit of the complete financial information of two components (“full scope components”) which were selected based on their size and risk characteristics.

For the remaining four components (“specific scope components”), we performed specific audit procedures on specific accounts within those components that we considered had the potential for the greatest impact on the significant accounts in the consolidated financial statements, either because of the size of the accounts or their risk profile. For those specific accounts selected, as part of our specific scope components, the extent of our audit work on those accounts was the same as that for a full scope audit.

The components selected, in addition to the parent company which is a full scope component, together with the allocated performance materiality, were as follows:

Component Name	Location	Investment type	Scope	Performance materiality $ million
Phaunos Guernsey	Guernsey	Parent	Full	1.2
Matariki	New Zealand	Associate	Full	2.9
Vale	Brazil	Wholly owned subsidiary	Specific audit procedures	1.8
Eucateca	Brazil	Wholly owned subsidiary	Specific audit procedures	1.2
Pradera Roja	Uruguay	Wholly owned subsidiary	Specific audit procedures	1.2
Aurora Forestal	Uruguay	Associate	Specific audit procedures	1.2

The reporting components where we performed audit procedures accounted for 95% (2016: 95%) of the Group's total equity, 100% (2016: 100%) of the Group's revenue and 99% (2016: 99%) of the Group's total assets. For the current year, the full scope components contributed 69% (2016: 58%) of the Group's net asset value. The specific scope components contributed 26% (2016: 37%) of the Group's net asset value and 100% (2016: 100%) of the Group's revenue.

Of the remaining components that together represent 5% of total equity, there was only one component greater than 1% of the Group's total equity on which the Primary audit team performed specific audit procedures on specific accounts within that component and that we considered had the potential for the greatest impact on the significant accounts in the consolidated financial statements, either because of the size of the accounts or their risk profile. For those specific accounts selected, the extent of our audit work on those accounts was the same as that for a full scope audit.

For the remaining components we only performed analytical procedures as there were no additional risks identified that could indicate the consolidated financial statements might be materially misstated.

Involvement with component teams

Team structure

The overall audit strategy is determined by the signatory, Chris Matthews, who is based in the Channel Islands. Since the majority of the Group's operations are based in Brazil, New Zealand and Uruguay, the audit team includes EY teams from Brazil and New Zealand, and non-EY firms (Deloitte and Grant Thornton) in Uruguay. We focused our time on the significant risks and judgemental areas for these components.

Involvement with component teams

In establishing our overall approach to the Group audit, we determined the type of work required to be performed at each component by the Primary audit team, or by component auditors from other EY global network firms and non-EY firms operating under our instruction. For the specific scope components, where the work was performed by component auditors, the Primary audit team determined the appropriate level of involvement to enable us to be satisfied that sufficient audit evidence had been obtained as a basis for our opinion on the Group as a whole. The Primary audit team, assisted by internal valuation and tax specialists, performed procedures on the valuations of land, biological assets and associates at fair value through profit or loss.

The Primary audit team has historically undertaken visits to ensure that locations which are deemed to be significant are visited by the Primary audit team on a rotational basis. The most recent visit was to Brazil during the 2015 audit cycle.

No visits were undertaken during the 2017 cycle due to the reduced risk profile of the Group assets and operations following the disposal of the higher risk assets and the significant reduction in revenues from 2015 to 2017. Also the Primary audit team perform the audit procedures on all key audit areas to address the associated risk.

However, the Primary audit team participated in key discussions, via conference calls and correspondence with all full and specific scope locations. The Primary audit team interacted regularly with the component teams, where appropriate, during various stages of the audit, reviewed key working papers and were responsible for the scope and direction of the audit process. This, together with the additional procedures performed at Group level, supports our opinion on the Financial Statements.

Our application of materiality

We apply the concept of materiality in planning and performing the audit, in evaluating the effect of identified misstatements on the audit and in forming our audit opinion. 

Materiality

Materiality is the magnitude of omissions or misstatements that, individually or in the aggregate, could reasonably be expected to influence the economic decisions of the users of the financial statements. Materiality provides a basis for determining the nature and extent of our audit procedures.

We determined materiality for the Group to be $5.6 million (2016: $6.0 million), which is approximately 2% (2016: 2%) of total equity. We believe that total equity provides us with an appropriate basis for audit materiality as it is a key published performance measure and is a key metric used by management in assessing and reporting on overall performance.

Performance materiality

Performance materiality is the application of materiality at the individual account or balance level.  It is set at an amount to reduce to an appropriately low level the probability that the aggregate of uncorrected and undetected misstatements exceeds materiality.

On the basis of our risk assessments, together with our assessment of the Group's overall control environment, our judgement was that performance materiality was 75% (2016: 75%) of our planning materiality, namely $4.2 million (2016: $4.5 million). We set performance materiality at this percentage due to limited identification of audit findings in the previous period.

Audit work at component locations for the purpose of obtaining audit coverage over significant financial statement accounts is undertaken based on a percentage of total performance materiality. With regards to the Group audit, the performance materiality set for each component is based on the relative scale and risk of the component to the Group as a whole and our assessment of the risk of misstatement at that component.  In the current year, the range of performance materiality allocated to components was $1.2 million to $2.9 million (2016: $1.0 million to $3.0 million). This is set out in more detail in the section above.

Reporting threshold

The reporting threshold is an amount below which identified misstatements are considered as being clearly trivial.

We agreed with the Audit Committee that we would report to them all uncorrected audit differences in excess of $0.28 million (2016: $0.30 million), which is set at 5% of planning materiality, as well as differences below that threshold that, in our view, warranted reporting on qualitative grounds.

We evaluate any uncorrected misstatements against both the quantitative measures of materiality discussed above and in light of other relevant qualitative considerations in forming our opinion.

Other information

The other information comprises the information included in the annual report set out on pages 1 to 35 and pages 80 to 81 other than the financial statements and our auditor's report thereon.  The directors are responsible for the other information.

Our opinion on the financial statements does not cover the other information and, except to the extent otherwise explicitly stated in this report, we do not express any form of assurance conclusion thereon. 

In connection with our audit of the financial statements, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the financial statements or our knowledge obtained in the audit or otherwise appears to be materially misstated. If we identify such material inconsistencies or apparent material misstatements, we are required to determine whether there is a material misstatement in the financial statements or a material misstatement of the other information. If, based on the work we have performed, we conclude that there is a material misstatement of the other information, we are required to report that fact.

We have nothing to report in this regard.

In this context, we have nothing additional to report in regard to our responsibility to specifically address the following items in the other information and to report as uncorrected material misstatements of the other information where we conclude that those items meet the following conditions:

•    Fair, balanced and understandable [set out on page 23 – the statement given by the directors that they consider the annual report and financial statements taken as a whole is fair, balanced and understandable and provides the information necessary for shareholders to assess the Group's performance, business model and strategy, is materially inconsistent with our knowledge obtained in the audit; or

•    Audit committee reporting set out on page 32-35 – the section describing the work of the audit and valuation committee does not appropriately address matters communicated by us to the audit committee is materially inconsistent with our knowledge obtained in the audit; or

•    Directors' statement of compliance with the UK Corporate Governance Code set out on page 25 – the parts of the directors' statement required under the Listing Rules relating to the Company's compliance with the UK Corporate Governance Code containing provisions specified for review by the auditor in accordance with Listing Rule 9.8.10R(2) do not properly disclose a departure from a relevant provision of the UK Corporate Governance Code.

Matters on which we are required to report by exception

We have nothing to report in respect of the following matters in relation to which the Companies (Guernsey) Law, 2008 requires us to report to you if, in our opinion:

•    proper accounting records have not been kept; or

•    the financial statements are not in agreement with the accounting records; or

•    we have not received all the information and explanations we require for our audit.

Responsibilities of directors

As explained more fully in the directors' responsibilities statement set out on page 23, the directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view, and for such internal control as the directors determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error.

In preparing the financial statements, the directors are responsible for assessing the Group's ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the directors either intend to liquidate the Company or to cease operations, or have no realistic alternative but to do so.

Auditor's responsibilities for the audit of the financial statements

Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor's report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs (UK) will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements. 

A further description of our responsibilities for the audit of the financial statements is located on the Financial Reporting Council's website at https://www.frc.org.uk/auditorsresponsibilities. This description forms part of our auditor's report.

 

 

Christopher James Matthews, FCA

For and on behalf of Ernst & Young LLP

Guernsey, Channel Islands

27 April 2018

Notes:

1.          The maintenance and integrity of the Phaunos Timber Fund Limited web site is the responsibility of the directors; the work carried out by the auditors does not involve consideration of these matters and, accordingly, the auditors accept no responsibility for any changes that may have occurred to the financial statements since they were initially presented on the web site.

2.          Legislation in Guernsey governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.

Consolidated Statement of Comprehensive Income

				31 Dec 2017		31 Dec 2016
	Notes			US$'000		US$'000
Revenue from timber operations	6			6,948		2,479
Cost of sales	7			(5,506)		(1,703)
Gross profit				1,442		776
Other operating income				52		313
Timber operating expenses	8			(2,451)		(3,312)
Timber operating loss				(958)		(2,223)
Investment income	9			7,424		7,029
Investment operating expenses	10			(8,335)		(4,007)
Operating (loss)/profit				(1,868)		799
Net gain on financial assets at fair value through profit or loss	14			14,390		8,280
Revaluation and impairment of biological assets and land	14			(11,863)		1,849
Net realised (loss)/gain on disposal of assets	11			(1,442)		7,840
Finance costs				(5)		(1)
(Loss)/profit before tax				(789)		18,767
Income tax expense	12			(3,464)		(439)
(Loss)/profit for the year				(4,254)		18,328
Other comprehensive income/(loss)
Other comprehensive income/(loss) to be reclassified to profit or loss in subsequent years (net of tax):
Exchange differences on translation of foreign operations				(90)		11,237
Other comprehensive (loss)/income not to be reclassified to profit or loss in subsequent years (net of tax):
Revaluation/(reversal) of revaluation of land	14			(4,549)		2,303
Other comprehensive (loss)/income, net of tax				(4,638)		13,540
Total comprehensive (loss)/income, net of tax				(8,892)		31,868
Basic and diluted (loss)/earnings per Ordinary Share for the year	13		Cents (0.78)				Cents 3.29

The notes on pages 50 to 77 form an integral part of these Consolidated Financial Statements.
 

Consolidated Statement of Financial Position

					31 Dec 2017		31 Dec 2016
				Notes	US$'000			US$'000
Assets
Non-Current Assets
Financial assets at fair value through profit or loss				14	–			180,579
Biological assets				14	–			29,298
Land				14	–			40,739
Other assets					–			172
Trade and other receivables				19	–			615
					–			251,403
Current Assets
Financial assets at fair value through profit or loss				14	185,323			–
Biological assets				14	15,254			–
Land				14	30,713			–
Cash and cash equivalents				18	47,448			45,582
Trade and other receivables				19	7,261			5,812
Other assets					67			–
Inventories					8			17
					286,074			51,411
TOTAL ASSETS					286,074			302,814
Equity and Liabilities
Equity
Issued capital				22	443,866			443,866
Treasury shares				pg 47	(11,397)			(10,707)
Retained earnings				pg 47	(209,343)			(196,362)
Other components of equity				pg 47	57,197			64,520
TOTAL EQUITY					280,323			301,317
Current Liabilities
Trade and other payables				20	1,823			1,497
Provisions				21	3,928			–
					5,751			1,497
TOTAL LIABILITIES					5,751			1,497
TOTAL EQUITY AND LIABILITIES					286,074			302,814
Ordinary Shares in Issue				22	545,529,832			547,024,832
					US cents			US cents
Net Asset Value Per Ordinary Share					51			55

The Consolidated Financial Statements on pages 45 to 77 were approved by the Board of Directors on 27 April 2018 and signed on its behalf by:

Richard Boléat Director		Jonathan Bridel Director

The notes on pages 50 to 77 form an integral part of these Consolidated Financial Statements.