Biological assets, including produce growing on a bearer plant, should be measured, both at initial recognition and at each subsequent reporting date, at fair value less costs to sell, except where fair value cannot be reliably measured. The fair value model accrues the additional value related to the biological asset as biological transformation takes place, rather than at the time of harvest.

How is the fair value of bearer produce ascertained? A cash flow model is the most likely valuation method for bearer produce. The cash flow model should include all directly attributable cash inflows and outflows. The inflows will be the expected price in the market of the harvested produce. The outflows will be those incurred in growing the asset and getting it to market (For example, direct labour, fertiliser and transport to market). Contributory asset charges will be included for both the land and the bearer plant if they are owned by the entity. This ‘notional’ rent removes cash flows attributable to those assets, so the remaining value relates solely to the produce. On day 1 after the previous harvest, the next harvest is likely to have a fair value close to zero.

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Tax cash flows in fair value model Agriculture In May 2019, the Board issued an Exposure Draft to amend paragraph 22 of IAS 41. The amendment will remove the requirement to exclude taxation cash flows when measuring fair value. The timing of an exposure draft depends on the identification of other matters to include in an annual improvements cycle.

At the point of harvest, agricultural produce should be measured at fair value less costs to sell. This amount will then represent cost for the purposes of IAS 2 or another applicable standard.

Costs to sell are the incremental costs incurred in selling the asset, and they exclude finance costs and income tax expense.

Costs to sell Costs to sell are the incremental costs incurred in selling the asset and include: ·        commissions to brokers and dealers; ·        levies by regulatory agencies and commodity exchanges; and ·        transfer taxes and duties. The word ‘incremental’ in the definition of ‘costs to sell’ excludes costs that are included in the fair value measurement of a biological asset, such as transport costs. The relevant costs to sell is those that would be incurred when selling the biological asset in its current state. If fair value is determined based on a cash flow model, costs to sell the final produce would also be included as a cash outflow. When measuring agricultural produce, there will only be one ‘costs to sell’.

Fair value, in the context of IAS 41, has the same meaning as in IFRS 13 – that is, “the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date”.

Gains or losses that arise on measuring biological assets or agricultural produce at fair value less costs to sell are recognised in the income statement in the period in which they arise.

Recognition of valuation gains and losses This FAQ illustrates that gains and losses can arise on initial recognition of both biological assets and agricultural produce. An entity purchased 100 beef cattle at an auction for C100,000 on 30 June 20X7. Subsequent transportation costs were C1,000. The entity would have to incur the same transportation costs if it had sold its cattle in this auction. In addition, there would be a 2% auctioneer’s fee on the market price of the cattle payable by the seller. The entity also incurred C500 on veterinary expenses. On 31 December 20X7, the market value of the cattle in the most relevant market increases to C110,000. Transportation costs of C1,000 would have to be incurred by the seller to get the cattle to the relevant market. An auctioneer’s fee of 2% on the market price of the cattle would be payable by the seller. On 1 March 20X8, the entity sold 18 cattle at auction for C20,000 and incurred transportation charges of C150. In addition, there was a 2% auctioneer’s fee on the market price of the cattle paid by the seller. On 15 June 20X8, the fair value of the 82 cattle was C82,820. 42 cattle were slaughtered on that day, with a total slaughter cost of C4,200. The total market price of the carcasses on that day was C48,300, and the estimated transportation cost to sell the carcasses is C420. No other selling costs are expected. On 30 June 20X8, the market price of the remaining 40 cattle was C44,800. The estimated transportation cost is C400. In addition, there would be a 2% auctioneer’s fee on the market price of the cattle payable by the seller. The entity adopts the fair value model to recognise biological assets, as required by the standard, and reports on 30 June and 31 December each year and determines fair value on these dates. Initial recognition of cattle at 30 June 20X7 C C Dr Biological asset (cattle) 97,000 Dr Loss on initial recognition 4,000                Cr Cash (purchase and transport to farm) 101,000 Initial recognition of the cattle at fair value less costs to sell The fair value less costs to sell at initial recognition is: C Fair value in the most relevant market 100,000 Transport costs (1,000) Auctioneer’s fee (2,000) 97,000 C C Dr Veterinary expenses 500                Cr Cash 500 Recognition of veterinary expenses at 30 June 20X7 (such expenses do not, in themselves, affect the fair value) Subsequent measurement of cattle at 31 December 20X7 Dr Biological asset (cattle) 9,800                Cr Gain on change in fair value less costs to sell (106,800 − 97,000) 9,800 Subsequent measurement of biological assets at fair value less costs to sell at 31 December 20X7 reporting date The fair value less costs to sell at 31 December 20X7 is: C Fair value in the most relevant market 110,000 Transport costs (1,000) Auctioneer’s fee (2,200) 106,800 Sale of cattle on 1 March 20X8 C C Dr Cash 19,450 Dr Selling expenses (150 + 400) 550                Cr Revenue 20,000 Recognition of the revenue from the sale of cattle Transfer of biological assets to inventory on 15 June 20X8 C C Dr Inventory 47,880 Dr Fair value loss on cattle 1,176                Cr Biological asset (cattle) (The proportion of cattle sold using the fair value at the previous reporting period, 31 Dec 20X7) (106,800 × 42/100) 44,856                Cr Cash (cost of slaughtering cattle) 4,200 Transfer of cattle slaughtered to inventory The fair value less estimated costs to sell of the carcasses on 15 June 20X8: C Market value of carcasses 48,300 Transport costs (420) 47,880 Initial cost of the carcasses at the date of transfer to inventory is measured at the fair value less costs to sell of the carcasses. Subsequent measurement of cattle at 30 June 20X8 C C Dr Loss on change in fair value less costs to sell 18,440                Cr Biological asset (cattle) (Fair value of cattle at last reporting date less transfer to inventory) (43,504 − (106,800 − 44,856)) 18,440 Subsequent measurement of biological assets at fair value less costs to sell at 30 June 20X8 reporting date The fair value less costs to sell at 30 June 20X8 is: C Fair value in most relevant market 44,800 Transport costs (400) Auctioneer’s fee (896) 43,504 The reduction in the herd due to the sale of cattle at 1 March 20X8 is included in the fair value adjustment at 30 June 20X8. An alternative to the above presentation is to remeasure the beef cattle to fair value just prior to the point at which they are sold, and record a cost of sales figure separately with a corresponding reduction in the value of the biological assets. This will result in the same net profit for the period, but the presentation of cost of sales and net fair value re-measurements on biological assets will be different.

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Subsequent expenditure IAS 41 does not explicitly prescribe how to account for subsequent expenditure related to biological assets. Such costs could include feeding, veterinary services, planting, weeding, irrigation, fertiliser, and harvesting and slaughtering costs. The Board did not prescribe the accounting for subsequent expenditure as it was seen as unnecessary with a fair value measurement approach. Costs incurred affect the fair value and, ordinarily, costs and fair value changes are both taken to profit or loss. Many agricultural businesses followed a policy of capitalising some of these costs, particularly those relating to the development of immature plants or livestock up to the point at which they were productive. Also, immature bearer plants are accounted for under IAS 16 similar to an item of property, plant and equipment being constructed before its intended use and are measure at accumulated costs using the principles of IAS 16. The treatment of subsequent expenditure, capitalising costs to biological assets is permissible under IAS 41. However, difficulties might be encountered in defining what should be capitalised and what should be expensed. Therefore, many entities now adopt a policy of treating all such expenditure as a ‘cost of production’. An entity should establish a policy and carefully consider individual subsequent costs either for capitalisation to biological assets or for expensing directly to the income statement. IAS 16 can be used by analogy if the entity adopts the policy of capitalising such costs. Therefore, those costs that relate to the development of biological assets are capitalised by using the criteria in IAS 16, and they are adjusted periodically by the remeasurement of the biological assets at their fair value. Management should use judgement to determine which costs would be eligible for capitalisation (For example, labour costs of those employees directly involved with the management of biological assets and other similar direct costs are likely to be capitalised, whilst labour costs related to selling staff and other similar indirect costs are unlikely to be capitalised). The policy choice applied will directly affect disclosures such as the reconciliation of changes in carrying amounts of biological assets, expenditure classification in the profit and loss as well as cash flow information, so the accounting policy for the treatment of subsequent expenditure should be disclosed. The following table illustrates the impact of the accounting policy choice on subsequent expenditure: Capitalising costs Expensing costs Direct labour costs incurred C C Direct labour costs incurred C C Dr Biological assets 100 Dr Cost of production 100 Cr Cash 100 Cr Cash 100 Fair value adjustments at year end Fair value adjustments at year end Dr Biological assets 50 Dr Biological assets 150 Cr Gain on remeasurement 50 Cr Gain on remeasurement 150   Net impact in the income statement C Net impact in the income statement C Gain on remeasurement 50 Gain on remeasurement 150 Cost of production Nil Cost of production nil Net impact 50 Net impact 150

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Emission trading schemes A number of jurisdictions have introduced emission trading schemes relating to agricultural activities, particularly forestry. In the forestry industry, emission trading schemes typically involve the forester receiving credits from a government agency as carbon is sequestered by the growing trees. The forester is liable to surrender credits when the trees are harvested or otherwise lost (For example, through fire). Participation in an emissions trading scheme alters the economics of forestry. It is, therefore, inevitable that this will be reflected in the forest’s fair value. Frequently, the fair value of forest assets is estimated using a discounted cash flow methodology. The difference in cash flows between a forest participating in an emissions trading scheme and one that does not, is essentially that cash inflows will need to be adjusted for the fair value of carbon credits as they are earned and cash outflows for the fair value of carbon credits when they need to be surrendered. In addition, there will be some outflows to cover the costs of administering participation in the scheme. These additional cash flows, and their timing, will affect the forest’s fair value.

Biological assets

Biological assets generally to be measured at fair value less costs to sell

IAS 41 requires that biological assets be measured on initial recognition and at the end of each reporting period at fair value less costs to sell, unless fair value cannot be measured reliably.

Fair value is defined as “the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. (See IFRS 13 Fair Value Measurement.)”

IAS 41 notes that the measurement of fair value for a biological asset or agricultural produce may be facilitated by grouping biological assets or agricultural produce according to significant attributes (e.g., by age or quality). Entities should select the attributes corresponding to the attributes used in the market as a basis for pricing.

When measuring fair value, the following cash flows should be excluded:

• financing cash flows; and
• cash flows related to re-establishing biological assets after harvest (e.g., the cost of planting replacement crops).

In May 2020, the Board issued Annual Improvements to IFRS Standards 2018-2020 which includes an amendment to IAS 41 removing the requirement to exclude cash flows for taxation when measuring fair value. This aligns the fair value measurement in IAS 41 with the requirements of IFRS 13 to use internally consistent cash flows and discount rates and enables preparers to determine whether to use pre-tax or post-tax cash flows and discount rates to obtain the most appropriate fair value measurement.

The amendment is effective for annual periods beginning on or after 1 January 2022 with earlier application permitted. If an entity applies the amendment for an earlier period, it should disclose that fact.

Subsequent expenditure on biological assets As noted in IAS 41,”…the [IASC] Board decided not to explicitly prescribe the accounting for subsequent expenditure related to biological assets in the Standard, because it believes to do so is unnecessary with a fair value measurement approach“. Accordingly, applying IAS 41, an entity may elect as an accounting policy to either capitalise subsequent expenditure (i.e., add it to the carrying amount of the biological asset) or recognise it as an expense when incurred. Capitalising subsequent expenditure or recognising it as an expense has no effect on either the fair value measurement of biological assets or on profit or loss. However, it does affect the presentation of amounts in the statement of profit or loss. In assessing how to present such subsequent expenditure in the statement of profit or loss, an entity should apply the requirements in IAS 1. In particular, the entity should: present additional line items (including the disaggregation of the line items listed in IAS 1), headings and subtotals in the statement(s) presenting profit or loss and other comprehensive income when such presentation is relevant to an understanding of the entity’s financial performance; and present either in the statement(s) presenting profit or loss and other comprehensive income, or in the notes, an analysis of expenses recognised in profit or loss using a classification based on either their nature or function within the entity, whichever provides information that is reliable and more relevant. Whichever accounting policy is selected, it must be applied consistently to each group of biological assets and should be disclosed if this would assist users of financial statements in understanding how those transactions are reflected in reported financial performance. This conclusion was confirmed by the IFRS Interpretations Committee in the September 2019 IFRIC Update.

Cost as an approximation for fair value

IAS 41 recognises that, in limited circumstances, cost is an appropriate indicator of fair value. This will be particularly so when little biological transformation has taken place since the cost was incurred (e.g., seedlings planted immediately prior to the end of the reporting period or newly acquired livestock), or when the impact of biological transformation on price is not expected to be material (e.g., in the very early stages of a 30-year plantation growth cycle).

Biological assets physically attached to land

Although agricultural land is excluded from the scope of IAS 41, as discussed, biological assets (other than bearer plants) that are physically attached to land (e.g., trees in a timber plantation) are accounted for under the Standard. There may be no separate market for biological assets that are attached to land, but an active market may exist for the combined assets (i.e., for the biological assets, raw land and land improvements as a package.) IAS 41 allows the entity to use information regarding the combined assets to measure the fair value of the biological assets. For example, the fair value of raw land and land improvements may be deducted from the fair value of the combined assets to arrive at the fair value of the biological assets.

The following example considers whether land rental costs should be included when determining the fair value of biological assets attached to land using the income approach. Although the specific example deals with an immature biological asset with a relatively long growth period, this issue may also be relevant to a crop with a much shorter life cycle (e.g., wheat) if the reporting date falls part-way through that life cycle.

Inclusion of land rental costs when determining the fair value of an immature biological asset using the income approach – example Entity A grows spruce trees for use in the production of pulp for the paper industry. As at the end of Entity A’s reporting period, many of these trees have not reached maturity and no market-determined prices are available for the trees in their current condition. Accordingly, having considered the relative merits of various valuation techniques (see 8.3 in chapter A6), Entity A concludes that an income approach converting future income from the sale of the trees and the expenses necessary to bring the trees to the point of sale to a single current (i.e., discounted) amount is the most appropriate method to determine the fair value of the immature trees. Entity A owns the land on which the trees are grown and, accordingly, does not pay rent for its use. When measuring the value of immature biological assets using the income approach, in all cases a market-level rental expense in respect of land (being the rent for use of the land for agricultural purposes) should be included in the expenses necessary to bring the immature biological assets to the point of sale. This methodology results in the trees being measured at the same value regardless of whether the entity owns the land to which they are attached, rents the land at a market rate, or rents the land at an off-market rate (because, for example, the land is owned by a related party). IAS 41 makes clear that, for the purpose of measuring the fair value of biological assets, the unit of account does not include the land to which the assets are attached. IFRS 13 states that, in applying a present value technique, “only the factors attributable to the asset or liability being measured” should be taken into account. In the circumstances under consideration, Entity A’s ownership of land is a characteristic of the entity, not of the assets being measured (i.e., the trees) and, therefore, does not affect the price that a third-party market participant would pay for the trees. Accordingly, it is clear that the ownership of the land upon which the trees are grown (and, consequently, the payment or non-payment of rent) is not a relevant factor in their valuation, which is based on the trees alone being sold. If an estimate of market rent levels is significant to the measurement of the trees and is less observable than other inputs to the present value calculation, it may affect their categorisation within the fair value hierarchy.

Assets subject to sale contracts

IAS 41 highlights that, when an entity has entered into sales contracts for the disposal of biological assets at a future date, those contract prices are not necessarily taken into account in measuring fair value. Fair value is not an entity-specific measure, and it is required to reflect the current market conditions in which market participant buyers and sellers would enter into a transaction. Sales contracts entered into in the past may not reflect the price that market participant buyers and sellers would otherwise have agreed at the date of measurement. Therefore, the fair value at any point in time is not adjusted because of the existence of guaranteed sales contracts.

In some circumstances, a contract for the sale of biological assets may be an onerous contract within the meaning of IAS 37 and that Standard should be applied to such onerous contracts.

Inability to measure fair value reliably

IAS 41 presumes that fair value can be measured reliably for most biological assets. That presumption can be rebutted, however, when the following conditions are met at the time the biological asset is initially recognised in the financial statements:

• quoted market prices are not available for the biological asset; and
• alternative fair value measurements are determined to be clearly unreliable.

Rebuttal of the presumption that fair value can be measured reliably for produce growing on bearer plants – example Entity A operates in the agriculture sector and owns a number of bearer plants which, at its reporting date, have produce growing on them. The bearer plants themselves are measured at cost less accumulated depreciation in accordance with IAS 16 while the produce growing on the bearer plants is, as required by IAS 41, classified as a biological asset. Biological assets are required to be measured at fair value less costs to sell unless fair value cannot be measured reliably. IAS 41 establishes a presumption that fair value can be measured reliably for biological assets, which can be rebutted in limited circumstances. There are a number of possible supportable assumptions that could be used in assessing the fair value of the produce growing on the bearer plants which can result in significant variations in the resultant valuations. To rebut the presumption that the fair value of biological assets can be measured reliably, it is necessary to demonstrate that any fair value measurement is ‘clearly unreliable’. IAS 41 notes that entities encountering significant practical difficulties in measuring produce should consider whether rebuttal is appropriate. This indicates that identification of significant practical difficulties is necessary to a consideration of rebuttal, but not that such difficulties necessarily mean that any fair value measurement is clearly unreliable. The existence of a range of supportable assumptions (which might result in significantly different valuations) is not evidence of ‘significant practical difficulties’ and would not, in and of itself, result in fair value measurements that are clearly unreliable. In addition to the specific disclosure requirements set out in IAS 41, the following disclosure requirements are relevant in the circumstances under consideration: IAS 1, which requires disclosure of information about assumptions and estimates that have a significant risk of a material adjustment to the carrying amounts of assets and liabilities within the next financial year; and IFRS 13, which requires an entity to disclose information that helps users of its financial statements understand the valuation techniques and inputs used to develop fair value measurements, and the effect of measurements that use Level 3 inputs. Reference: IFRIC Update, June 2017.

When conditions for rebuttal are met, the biological asset is measured at cost less accumulated depreciation and any accumulated impairment losses. IAS 41 directs preparers to IAS 2, IAS 16 and IAS 36 for guidance in these circumstances.

If circumstances change, and fair value becomes reliably measurable, a switch to fair value less costs to sell is required. This is likely to occur as biological transformation progresses.

Once a non-current biological asset meets the criteria to be classified as held for sale (or is included in a disposal group that is classified as held for sale) in accordance with IFRS 5, it is presumed that fair value can be measured reliably.

The presumption that fair value can be measured reliably can be rebutted only on initial recognition. An entity that has previously measured a biological asset at its fair value less costs to sell continues to measure that biological asset at its fair value less costs to sell until disposal. Therefore, IAS 41 does not permit the use of the measurement reliability exception in circumstances when an entity has previously measured a particular biological asset at fair value, and market transactions become less frequent or market prices become less readily available, so that it becomes more difficult to determine the fair value of the asset. This prohibition on changing the measurement basis from fair value to cost is designed to prevent entities from using the reliability exception as an excuse to discontinue fair value accounting in a falling market.

Leased biological assets (entities that have adopted IFRS 16) Leases of biological assets within the scope of IAS 41 (e.g., leases of breeding stock) held by a lessee are specifically excluded from the scope of IFRS 16. A lessee’s asset held under such a lease should be initially recognised and subsequently measured in accordance with the measurement requirements of IAS 41 (i.e., at fair value less costs to sell except when the fair value cannot be measured reliably). Due to the nature of biological assets, it is unlikely that fair value could not be measured reliably for leased assets. The presentation and disclosure requirements of IAS 41 should also be applied to such leased assets; because they are excluded from the scope of IFRS 16 entirely, the disclosure requirements of that Standard do not apply. The following should be accounted for in accordance with IFRS 16 rather than IAS 41: right-of-use assets arising from a lease of land related to agricultural activity (specifically excluded from the scope of IAS 41); leases of bearer plants (such as apple trees in an orchard or grape vines in a vineyard), both from the lessee and lessor perspectives, because bearer plants are accounted for under IAS 16 rather than IAS 41; and leases of biological assets within the scope of IAS 41 from a lessor’s perspective. For entities engaged in agricultural activities, leases of assets other than biological assets (farm machinery etc.) should be accounted for in accordance with IFRS 16, both from the lessee and lessor perspectives.

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Leased biological assets (entities that have not yet adopted IFRS 16) IAS 17 applies to accounting for leases of biological assets, but does not apply to the measurement of biological assets within the scope of IAS 41 held by lessees under finance leases or provided by lessors under operating leases. Therefore, a lessee’s rights under a finance lease of biological assets within the scope of IAS 41 should be initially recognised and subsequently measured in accordance with the measurement requirements of IAS 41 (i.e., at fair value less costs to sell except when the fair value cannot be measured reliably). Due to the nature of biological assets, it is unlikely that fair value could not be measured reliably for leased assets. Because the scope exclusion under IAS 17 applies only to measurement, the presentation and disclosure requirements of both IAS 41 and IAS 17 should be applied to such leased biological assets. The following should be accounted for in accordance with IAS 17 rather than IAS 41: leases of bearer plants (such as apple trees in an orchard or grape vines in an vineyard), both from the lessee and lessor perspectives, because bearer plants are accounted for under IAS 16 rather than IAS 41; and biological assets within the scope of IAS 41 held by lessees under operating leases or provided by lessors under finance leases. For entities engaged in agricultural activities, leases of assets other than biological assets (farm machinery etc.) should be accounted for in accordance with IAS 17, both from the lessee and lessor perspectives.

Agricultural produce

IAS 41 requires that agricultural produce be measured at fair value less costs to sell at the point that it is harvested from the entity’s biological assets. The guidance outlined as regards the measurement of fair value less costs to sell generally applies equally to agricultural produce.

However, there is no measurement reliability exception for agricultural produce. Because harvested produce is a marketable commodity, the Standard reflects the view that the fair value of agricultural produce at the point of harvest can always be measured reliably. Therefore, in all cases, such produce is required to be measured at fair value less costs to sell.

The fair value measurement of agricultural produce at the point of harvest is the cost of that produce for subsequent accounting under IAS 2 or other applicable IFRS Standards.

Measurement of harvested agricultural produce For example, corn that has not yet been harvested should be remeasured at the end of each reporting period, reflecting changes in market prices, because it meets the definition of a biological asset. Once it has been harvested, however, that remeasurement will generally cease, and it will be carried under IAS 2 at the lower of cost (defined as the fair value less costs to sell at the point of harvest) and net realisable value.

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Determination of net realisable value applied to harvested agricultural produce Net realisable value (NRV) is defined as the estimated selling price in the ordinary course of business, less the estimated costs of completion and the estimated costs necessary to make the sale. NRV is an entity-specific value; fair value is not. NRV for inventories may not equal fair value less costs to sell. Contracted sales prices should be taken into account in determining entity-specific NRV in terms of IAS 2, but those contract prices are not necessarily taken into account in measuring fair value. This may give rise to differences between NRV and fair value less costs to sell in terms of IAS 41.

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