International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards
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IFRS 16.
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2.3.5.A
Leases of biological assets under IFRS 16
As discussed at 2.3 above, IFRS 16 is effective for periods beginning on or after
1 January 2019, with early adoption permitted in certain circumstances. IFRS 16
replaces IAS 17 and related Interpretations.
IFRS 16 excludes from its scope the lessee accounting for leases of biological assets that
are within the scope of IAS 41. [IFRS 16.3(b)]. The scope exemption in IFRS 16 does not
specify whether the asset would be recognised in accordance with IAS 41; only that it is
an asset that would be within the scope of IAS 41. Nor does it explain how an entity
would account for its lease liability since it is outside the scope of IFRS 16. Entities
affected by this scope exemption will need to use judgement to develop and appropriate
accounting policy.
It is important to note that leases of bearer plants that are within the scope of IAS 16 are
not excluded from the scope of IFRS 16. ‘Consequently, leases of bearer plants such as
orchards and vineyards held by a lessee are within the scope of IFRS 16’. [IFRS 16.BC68(b)].
For lessors, leases of biological assets, including those within the scope of IAS 41, are
within the scope of IFRS 16. A lessor would account for its leases as either operating or
finance leases in accordance with IFRS 16. [IFRS 16.67-97]
See Chapter 24 for a discussion of lessor accounting. When a lease of biological assets
within the scope of IAS 41 is accounted for as an operating lease, the lessor continues
to account for such biological assets under IAS 41.
2.3.5.B
Leases of biological assets under IAS 17
Before IFRS 16 became effective, the classification of such leases as either a finance
lease or operating lease was a key determinant under IAS 17 for both lessees and lessors
(see Chapter 23 for a discussion regarding lease accounting under IAS 17).
For finance leases of biological assets (excluding bearer plants):
• The lessee would initially recognise the leased biological asset under IAS 17.
Subsequently, the lessee measured and presented it under IAS 41 (for measurement
purposes the leased biological asset is outside the scope of IAS 17). The lessee
accounted for the lease liability in accordance with IAS 17. The lessee made
disclosures both under IAS 41 and IAS 17. [IAS 41.B82(n)].
• The lessor accounted for the net investment in the lease (i.e. the lease receivable,
not the biological asset) in accordance with IAS 17.
For operating leases of biological assets (excluding bearer plants):
• The lessee accounted for the lease (i.e. the expensed lease payments, not the
biological asset) in accordance with IAS 17.
• The lessor measured and presented the leased biological asset under IAS 41 (for
measurement purposes the leased biological asset was outside the scope of IAS 17).
The lessor accounted for other rights and obligations under the lease (e.g. lease
income) in accordance with IAS 17. The lessor made disclosures both under IAS 41
and IAS 17. [IAS 41.B82(n)].
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Such lease arrangements may include the land to which the asset is attached. Any leased
land would need to be separately accounted for under the relevant standard, for example
IAS 16 or IAS 40, as it is explicitly excluded from the scope of IAS 41 (see 2.3 above).
In the example above, where the sheep are leased under an operating lease, the
arrangement would be within the scope of IAS 41. Therefore, under IAS 17, the lessor
recognised lease revenue and accounted for the leased sheep (excluding any related
land and other assets) under IAS 41 – both upon initial recognition and subsequently –
at fair value less costs to sell. It is worth noting that, unless specifically excluded from
its scope, IAS 41 applies to all biological assets when they relate to agricultural activity.
[IAS 41.1]. In this case, the wool is the agricultural produce. The sheep are being managed
to produce that wool, albeit by the lessee and not the lessor. Since IAS 41 does not
specify who must do the managing, the definition of agricultural activity is met.
2.3.6 Concessions
A concession typically involves a government, or other controlling authority, granting
land to an entity, but requiring that the land be used for a specific purpose, for example,
growing certain crops for a minimum period of time.
The treatment of each concession will be dependent on the specific facts and
circumstances. However, if the concession requires an entity to undertake agricultural
activity, as defined in IAS 41 (see 2.2.1 above), the biological assets (other than bearer
plants) and agriculture produce will be within the scope of IAS 41. The grant received
may also be within the scope of the standard. However, the land granted would be
within the scope of IAS 16 or IAS 40 (see Chapters 18 and 19, respectively). The
discussion at 3.3 below addresses the treatment of government grants related to
biological assets (other than bearer plants).
3
RECOGNITION AND MEASUREMENT PRINCIPLES
3.1 Recognition
An entity recognises a biological asset (including produce growing on a bearer plant) or
agricultural produce that is within the scope of IAS 41 only when: [IAS 41.10]
(a) it controls the asset as a result of past events;
(b) it is probable that future economic benefits associated with the asset will flow to
the entity; and
(c) the fair value or cost of the asset can be measured reliably.
Considerations for the recognition of produce growing on a bearer plant are discussed
at 3.2.3.B below.
3.1.1 Control
In agricultural activity, an entity may evidence control by, for example, ‘legal ownership
of cattle and the branding or otherwise marking of the cattle on acquisition, birth, or
weaning’. [IAS 41.11].
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3.2 Measurement
3.2.1
Biological assets within the scope of IAS 41
3.2.1.A
Initial and subsequent measurement
A biological asset that is within the scope of IAS 41 (i.e. excluding bearer plants, but
including produce growing on a bearer plant) is measured on initial recognition and at
the end of each reporting period at its fair value less costs to sell, unless an entity can
demonstrate at initial recognition that fair value cannot be measured reliably. [IAS 41.12].
In the latter case, the entity measures the biological asset at historic cost less any
accumulated depreciation and any accumulated impairment losses (see 3.2.5 below),
unless fair value becomes reliably measureable.
3.2.1.B Subsequent
expenditure
IAS 41 does not prescribe how an entity should account for subsequent expenditure in
relation to biological assets, because the (then) IASC believed this to be unnecessary
with a fair-value-based measurement approach. [IAS 41.B62].
Such expenditure may be expensed as incurred or capitalised as additions to the related
biological asset. However, under the fair value model, the biological asset will be re-
measured at the end of each reporting period. As such, any amounts capitalised will only
&nbs
p; result in a reallocation between expenses and the fair value gain or loss for the biological
asset. Therefore, an entity’s policy in relation to subsequent expenditure will have no
effect on its equity or net profit or loss, although it will affect:
• the reconciliation of changes in the carrying amount of biological assets;
• the classification of the expenditure in the income statement as either an expense
or as part of the net gain or loss on biological assets; and
• the presentation of investments in biological assets in the statement of cash flows.
In our view, an entity should select an accounting policy for subsequent expenditure
that is broadly consistent with the principles in other standards, such as IAS 16 and
IAS 38. For example, in the case of livestock, an entity may expense maintenance costs,
such as routine vaccinations, while treating costs that increase the originally expected
yield of the asset as capital expenditure. For example, an entity must consider whether
it is appropriate to add costs that improve initially anticipated yields (such as additional
vaccinations or feed supplements) to the carrying value of the asset. However, such
additions would be adjusted at each period end when the biological asset concerned is
revalued to its new fair value. Judgement may be required to determine whether costs
that take place after maturity (e.g. vaccinations or feed supplements) would be
maintenance costs or improvements. Furthermore, care will be needed when costs are
related to both bearer plants and produce growing on a bearer plant or when it is not
clear to which of those assets it relates. This is discussed further at 3.2.3 below.
3.2.2 Agricultural
produce
Agricultural produce harvested from an entity’s biological assets should initially ‘be
measured at its fair value less costs to sell at the point of harvest’. [IAS 41.13]. The standard
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presumes that an entity can always reliably measure this amount and hence does not
permit valuation at historical cost. [IAS 41.32, B43].
The value resulting from initial measurement is subsequently used as cost in applying
IAS 2 (if the agricultural produce is to be sold, see Chapter 22), IAS 16 (if harvested logs
are used for the construction of a building, see Chapter 18) or other applicable IFRSs.
[IAS 41.13, B8].
An important reason for requiring agricultural produce at the point of harvest to be
measured at fair value was to ensure that the basis of measurement would be consistent
with that of biological assets and to avoid inconsistent and distorted reporting of current
period performance upon harvest of agricultural produce. [IAS 41.B42].
3.2.3
Requirements for produce growing on a bearer plant
3.2.3.A
Requirements for bearer plants in the scope of IAS 16
Bearer plants are subject to all of the recognition and measurement requirements in
IAS 16 (see Chapter 18), including the following (see Figure 38.2 below):
• before maturity, bearer plants must be measured at their accumulated cost, similar
to the accounting treatment for a self-constructed item of plant and equipment
before it is available for use; [IAS 16.22A] and
• after the bearer plant is mature, entities have a policy choice to measure the bearer
plants using either the cost model or the revaluation model. [IAS 16.29]. It is
important to note that:
• if the revaluation model is selected, revaluations need to take place with
sufficient regularity to ensure the carrying amount does not differ materially
from the asset’s fair value had it been measured at the end of the reporting
period; [IAS 16.22A]
• entities following either model need to determine the useful life of the bearer
plant in order to depreciate it. The useful life needs to be re-evaluated each
year; [IAS 16.51] and
• unlike biological assets within the scope of IAS 41, items of property, plant
and equipment within the scope of IAS 16 are not scoped out of IAS 36 –
Impairment of Assets. Entities, therefore, need to assess whether there are
indicators that a bearer plant is impaired at the end of each reporting period.
If such indicators exist, the bearer plant will be subject to an impairment test
in accordance with IAS 36. [IAS 16.63, IAS 36.8-9]. An impairment loss will be
recognised if the carrying value is higher than the bearer asset’s recoverable
amount (being the higher of the asset’s fair value less costs of disposal and its
value in use). [IAS 36.60]. The requirements of IAS 36 are discussed in
Chapter 20.
The requirements for bearer plants do not completely eliminate volatility in profit or
loss, as entities still need to recognise any changes in the fair value of agricultural
produce growing on the bearer plant, as discussed at 3.2.3.B below.
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Figure 38.2:
Measurement requirements for bearer plants (assuming fair value
can be reliably measured)
At initial
• Measured separately from any related agricultural produce (i.e. two units of
recognition
account).
• Measured at cost, accumulated until maturity.
Subsequent
• Measured separately from any related agricultural produce
measurement
(i.e. two units of account).
requirements
• Measured at:
• cost, less any subsequent accumulated depreciation and impairment, with
changes recognised in profit or loss; or
• fair value at each revaluation date, less any subsequent accumulated
depreciation and impairment. Revaluation adjustments (and impairment, to
the extent it reverses previous revaluation increases) recognised in other
comprehensive income; all other changes recognised in profit or loss.
IAS 16 is written with property, plant and equipment in mind. As such, entities may need
to use judgement to apply its requirement to bearer plants and we note the following
areas for consideration.
(a) Unit of account for bearer plants
IAS 16 does not specify the unit of account for bearer plants. Therefore, entities need
to use judgement in light of the general requirements of IAS 16 (see Chapter 18) and may
need to consider that IAS 41 applies to each item of produce growing on a bearer plant.
The Basis for Conclusions to IAS 16 notes that ‘IAS 16 does not prescribe the unit of
measure, or the extent to which items can be aggregated and treated as a single item of
property, plant and equipment. Consequently, applying the recognition criteria in
IAS 16 to bearer plants will require judgement. This would give an entity flexibility,
depending on its circumstances, to decide how to aggregate individual plants for the
purpose of determining a measurable unit of bearer plants’. [IAS 16.BC81].
(b) Determining when a bearer plant is mature
IAS 16 requires an entity to determine when a bearer plant reaches maturity – that is,
when it is in the ‘location and condition necessary for it to be capable of operating in
the manner intended by management’. [IAS 16.16(b)]. This determination is important
because it is when an entity must cease capitalising cos
ts as part of the initial cost of the
asset. The requirements for bearer plants seem to assume that the point in time when a
plant is capable of producing (which is referred to as ‘maturity’) marks a distinct end to
all bearer plants’ biological transformation. However, the life cycles of plants can vary
widely and it may be difficult, in practice, to identify when maturity has been reached.
Determining at what stage during biological transformation a bearer plant would be
considered mature could, therefore, be challenging. Alternatives could include: when
the bearer plant is capable of producing its first crop; when the produce is expected to
be of sufficient quality to be sold (e.g. macadamia trees start producing fruit after
3-4 years, but only reach commercial levels when the trees are 7 years old); or when the
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growth phase of biological transformation is complete for the bearer plant (and is
thereafter expected to degenerate or for its productive capacity to decline).
The Board decided not to provide specific application guidance for bearer plants. As
such, entities need to apply judgement to determine when a bearer plant is mature for
accounting purposes. In reaching its decision not to provide additional guidance, the
IASB noted that options, such as those listed above, would have needed further defining
and could have led to interpretive issues. Furthermore, ‘a similar scenario arises for a
factory or retail outlet that is not yet capable of operating at full capacity and did not
think that this was a major issue in practice’. [IAS 16.BC82]. Entities should, therefore,
carefully consider the requirements of IAS 16, including those related to sales prior to
an item of property, plant and equipment being available for use (see Chapter 18).
(c) Determining initial cost for bearer plants (prior to maturity)
IAS 16 requires that bearer plants be ‘accounted for in the same way as self-constructed
items of property, plant and equipment before they are in the location and condition
necessary to be capable of operating in the manner intended by management.
Consequently, references to “construction” should be read as covering activities that are
necessary to cultivate the bearer plants before they are in the location and condition