International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards
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necessary to be capable of operating in the manner intended by management’. [IAS 16.22A].
While IAS 16 provides guidance (see Chapter 18) that entities need to consider for
bearer plants, there are differences between traditional plant and equipment and
biological assets. As such, entities need to apply judgement in determining which costs
can be capitalised. For example, as a plant is growing, an entity will incur costs related
to water, fertiliser, greenhouses, etc. The entity needs to assess whether these costs are
directly attributable to the bearer plant reaching maturity.
Another example is the cost of abnormal amounts of wasted material, labour and other
resources. IAS 16 does not permit these costs to be included in the cost of a self-
constructed asset. [IAS 16.22]. Entities need to determine what constitutes a normal level
of wastage means for bearer plants. For example, many bearer plants die before maturity
(e.g. due to disease or adverse weather) and are subject to planned thinning. Whether
either or both of these is normal wastage requires judgement.
(d) Costs
incurred
after
maturity
A number of costs, such as fertilising, pruning and thinning are incurred after maturity
and can improve the quality of the produce or extend the productive life of a bearer
plant. Entities need to use judgement to determine whether these costs are maintenance
costs or are considered to be improvements.
In addition, after maturity many costs are incurred to benefit both the bearer plant and
the produce growing on the bearer plant. Entities need to carefully consider the basis
on which to allocate costs between a bearer plant and the produce growing on a bearer
plant when the costs are incurred in relation to both assets (e.g. fertilising costs).
(e) Depreciation and impairment considerations
Entities need to carefully consider an appropriate depreciation rate for their bearer
plants. Similar considerations are discussed at 3.2.5.B below in relation to biological
assets for which the cost model is used under IAS 41. The model in IAS 16 generally
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assumes that improvements in productivity and quality of produce do not occur after
maturity without additional expenditure to improve the asset. However, many plants
mature with age and cultivation. As discussed at 2.2.1 above, biological transformation
continues after a bearer plant begins to produce and includes degeneration. [IAS 41.5, 7].
A decline in productivity might, therefore, occur only at the end of a plant’s productive
life, which differs from wear and tear on an item of machinery.
Applying the requirements of IAS 36 to a bearer plant may also be challenging. For
example, an individual bearer plant may not generate its own cash inflows and may,
therefore, need to be tested for impairment as part of a cash generating unit. In addition,
the produce growing on a bearer plant is treated as a separate asset from the bearer
plant and, because it is measured at fair value less costs to sell on an ongoing basis, under
IAS 41, it is excluded from the scope of IAS 36. When testing the bearer plant for
impairment, entities need to determine whether or not they can include the produce
currently growing on the bearer plant in their impairment assessment.
(f) Revaluation model in IAS 16
IAS 16 permits an entity, after initial recognition to apply the revaluation model.
However, this is not the same as applying the fair value model in IAS 41. The former is
one that recognises valuation adjustments in other comprehensive income as a form of
capital maintenance; the latter is a model that recognises valuation adjustments in the
income statement as part of periodic performance. In addition, unlike the model in
IAS 41, if the revaluation model is applied under IAS 16 entities are required to:
• depreciate bearer plants between revaluations, with the depreciation expense
recognised in profit or loss;
• identify appropriate indicators of impairment for bearer plants in accordance with
IAS 36, and assess annually whether indicators exist. If they do, then those bearer
plants are tested for impairment (as discussed above); and
• maintain cost records for each bearer plant so as to separately track impairment
that is recognised in profit or loss and impairment that is recognised in other
comprehensive income.
Furthermore, an entity is unable to recognise increases in fair value that arise from a
bearer plant’s biological transformation in profit or loss, during the periods in which it
is held and used. Since bearer plants are considered property, plant and equipment, the
sale of a bearer plant results in a gain or loss on disposal, while revenue is recognised
only in relation to sales of agricultural produce.
Despite these challenges, entities may elect to measure their bearer plants using the
revaluation model to ensure consistency with the produce growing on them or because
the fair value information is useful. That is, a change in the productive capacity of a
bearer plant, or a change in the prices for the future output of a bearer plant, can provide
useful information.
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3.2.3.B
Requirements for agricultural produce growing on bearer plants
As noted at 3.2.3.A above, IAS 16 and IAS 41 require an entity to recognise a bearer
plant separately from produce growing on it from the time it exists until the point
of harvest.
Produce growing on a bearer plant remains within the scope of IAS 41 and is measured
at fair value less costs to sell, with changes recognised in profit or loss as the produce
grows. In the IASB’s view, this requirement ensures that produce growing in the ground
as an annual crop (e.g. wheat) and produce growing on a bearer biological asset (e.g.
grapes) are accounted for consistently. [IAS 41.BC4D]. As a result, changes in the fair value
of such agricultural produce continue to be recognised in profit or loss at the end of
each reporting period.
Figure 38.3:
Measurement requirements for agricultural produce growing on
bearer plants
At the end of each reporting period
Measured separately from the bearer plant at fair value less
prior to harvest
costs to sell.
At the point of harvest
Measured separately from the bearer plant at fair value less
costs to sell (i.e. no change from previous requirements).
(a) Determining when agricultural produce exists
As discussed at 3.1 above, paragraph 10 of IAS 41 provides criteria for recognising
biological assets and agricultural produce. [IAS 41.10]. However, since produce growing
on a plant is not acquired, but grown, it may be difficult to determine when that produce
exists and can be recognised for accounting purposes. Would an entity, for example,
wait for physical evidence, e.g. blossom on a tree? If so, how would this be done when
the produce is within the bearer plant and not visible, such as with maple or rubber
trees? Entities may also need to check their procedures for ensuring that sufficient
information is gathered, i.e. identify each item of produce growing on a bearer plant
when it is at the right stage of development to be recognised. The key question when
assessing the recognition criteria (see 3.1 above) may be whether it is probable that
future economic benefits will flow to the entity. At such an early stage of development,
it may be difficult to determine for each item of produce growing on the bearer plant.
However, historical information about similar bearer plants and their produce may be
of help.
Determining when produce on a bearer plant exists is important as it affects when an
entity should recognise and initially measure fair value less costs to sell. This, in turn,
determines when an entity should assess whether it is able to measure produce at fair
value reliably (or otherwise apply the measurement exception discussed at 3.2.5 below).
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(b) Applying the requirements for biological assets to produce growing on a bearer
plant
IAS 41 does not explicitly address the accounting for produce growing on a bearer
plant. Instead, the standard says that ‘produce growing on bearer plants is a biological
asset’. [IAS 41.5C]. Therefore, an entity is required to apply the accounting required for
other biological assets to such produce. This has a number of consequences, including
the following:
• The unit of account is each item of produce, not the produce growing on each plant
as a group. However, while the unit of account is the individual item, an entity is
permitted to group these together for measurement purposes (see 4.2.2 below).
• Each item of produce growing on a bearer plant must be measured at fair value less
costs to sell from the time it is recognised until the point of harvest, unless the
measurement exception for biological assets for which the fair value cannot be
reliably measured at initial recognition is applicable (see 3.2.5 below, including
discussion by the Interpretations Committee in 2017 in relation to applying these
requirements to produce growing on a bearer plant).
The fair value less costs to sell may initially be negligible. That is, a market
participant acquiring the bearer plant would only pay a negligible amount for the
produce in the early stages of development because they would want to be
compensated for the costs they would need to incur to continue growing the
produce through to harvest and for risks, such as crop failure or price falls during
the maturation period. Furthermore, cost to sell needs to be deducted from the fair
value of the asset. As discussed at 3.2.3.A above, entities also need to carefully
consider which costs relate to a bearer plant and which relate to the produce
growing on the bearer plant.
The different stages of maturity of the produce and the allocation of the costs
related to both the bearer plants and to the produce may make valuing the produce
on its own challenging. Measuring fair value for produce growing on a bearer plant
also presents the same challenges as measuring part-grown biological assets and
those that are physically attached to land (as discussed at 4.7 and 4.6.2.A below,
respectively).
• The disclosure requirements that apply to biological assets also apply to produce
growing on a bearer plant (see 5 below). Some of the required disclosures may be
challenging for entities. For example, paragraph 46 of IAS 41 requires an entity to
disclose non-financial measures or estimates of physical quantities for each group
of biological assets. [IAS 41.46]. While entities may gather such information for
management reporting purposes, entities need to ensure that information is
available for produce growing on bearer plants separately from the bearer plants
on which they are growing.
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3.2.4
Gains and losses
IAS 41 requires gains and losses arising on the initial recognition of a biological asset
(including produce growing on a bearer plant) at fair value less costs to sell to be included
in profit or loss for the period in which they arise. [IAS 41.26]. The standard warns that ‘[a]
loss may arise on initial recognition of a biological asset, because costs to sell are deducted
in determining fair value less costs to sell of a biological asset.’ On the other hand, a gain
may arise on the initial recognition of a biological asset (e.g. when a calf is born). [IAS 41.27].
Subsequent to initial recognition, reported gains or losses essentially represent the difference
between two fair values. As such, the standard effectively decouples profit recognition from
a sales transaction. One consequence of this approach is to anticipate some of the profit that
will be realised, often by a matter of years for long-term crops, such as trees.
The implications for initial recognition of agricultural produce are similar – an entity
may need to recognise a gain or loss on agricultural produce upon harvesting, if the fair
value of the harvested produce is different from the pre-harvest valuation. [IAS 41.29].
The standard requires that ‘[a] gain or loss arising on initial recognition of agricultural
produce at fair value less costs to sell ... be included in profit or loss for the period in
which it arises’. [IAS 41.28].
3.2.5
Inability to measure fair value reliably
3.2.5.A
Rebutting the presumption
Under IAS 41, there is a presumption that the fair value of all biological assets (including
produce growing on a bearer plant) can be measured reliably. This presumption can
only be rebutted on initial recognition for a biological asset (not agricultural produce).
In our view, such a rebuttal will be rare, as to be able to do so, an entity must
demonstrate both of the following:
(a) quoted market prices for the biological asset (including produce growing on a
bearer plant) are not available; and
(b) alternative fair value measurements for the biological asset are determined to be
clearly unreliable. [IAS 41.30].
Since IAS 41 requires that the fair value of a biological asset (including produce growing
on a bearer plant) be measured in accordance with IFRS 13 (see Chapter 14), an entity
would need to consider the requirements of that standard in order to determine whether
fair value can be reliably measured.
In relation to (a) above, it is important to note that IAS 41 does not restrict the criteria
to quoted prices in an active market. Therefore, in order to rebut the presumption, an
entity would need to determine that quoted prices in both active and inactive markets
are unavailable for the asset.
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If an entity is able to determine that quoted prices for the asset are unavailable, it
would still need to determine that all other methods for measuring fair value are
clearly unreliable before it can rebut the presumption. This is not the same
identifying that a fair value measurement is complex and/or subjective. That is,
measuring fair value often involves estimation and significant judgement, but this
does not mean that it is automatically unreliable. Furthermore, the requirement is
for the measurements to be ‘clearly unreliable’, which is arguably a higher hurdle
than ‘unreliable’.
Determining that alternative fair valu
e measurements are clearly unreliable is likely to
include, but not be limited to, considering the reliability of the following factors:
• Estimates of quantities on hand and the stage of development – while estimates
are often required of quantities on hand (including current stage of biological
transformation and anticipated yields for future agricultural produce), the mere
fact that estimates are used is not sufficient to demonstrate that fair value is
unreliable. Rather, an entity would need to demonstrate that their estimates of the
quantity and current state of their biological assets are often incorrect. This may
be challenging for entities to demonstrate if the underlying information is regularly
used by management to make decisions about future operations of the business.
• Prices for the asset in a future state (e.g. for the mature biological asset or the
agricultural produce that will ultimately be harvested);
• Price for similar assets that can be used as an input into the fair value measurement
– this could include plants and animals that are similar to the asset held by the
entity or the ultimate agricultural produce that will result from managing the
biological transformation of the asset held by the entity.
• Cash flow projections for the asset.
• The replacement cost of the asset.
Entities may also need to consider whether other entities (within a country or globally) are
able to demonstrate that fair value can be reliably measured for the same or similar assets.
In 2017, the IFRS Interpretations Committee received a request to consider whether
fruit growing on oil palms is considered an example of a biological asset for which an
entity might rebut the fair value presumption applying paragraph 30 of IAS 41. The
Committee rejected this request observing that its role is not to conclude upon very
specific application questions, particularly when they relate to the application of the
judgements required in applying IFRS. In rejecting the request, ‘the Committee
concluded that the reference to “clearly unreliable” in paragraph 30 of IAS 41 indicates
that, to rebut the presumption, an entity must demonstrate that any fair value
measurement is clearly unreliable. Paragraph BC4C of IAS 41 suggests that, when
developing the amendments to IAS 41 on bearer plants, the Board’s expectation was that