fair value measurements of produce growing on bearer plants might be clearly
unreliable when an entity encounters significant practical difficulties. However, the
Committee observed that the converse is not necessarily true – i.e. if an entity
encounters significant practical difficulties, this does not necessarily mean that any fair
value measurement of produce is clearly unreliable’.1 [IAS 41.30, BC4C]. In addition to these
observations, the Committee noted that possible differences in supportable
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assumptions, (which might give rise to significantly different measurements) do not
constitute evidence of ‘significant practical difficulties’ as discussed in paragraph BC4C
of IAS 41. This is because these would not, on their own, result in fair value
measurements that are clearly unreliable.
The Committee’s observations indicate that a rebuttal of the presumption that the fair
value can be measured reliably will be rare. If they cannot rebut the presumption,
entities will need to measure fair value and that fair value may be subject to significant
estimation uncertainty. As a result, the Committee also emphasised that entities will
need to comply with the disclosure requirements in paragraph 125 of IAS 1 –
Presentation of Financial Statements (regarding significant assumptions and estimates)
and those in paragraph 91 of IFRS 13 so as to assist users of financial statements
understand the valuation techniques, inputs used and the effect of measurements that
use Level 3 inputs.2 [IAS 1.125, IFRS 13.91].
An entity that previously measured a biological asset at its fair value less costs to sell
cannot revert to a cost-based measurement in a later period, even if a fair value can no
longer be measured reliably. [IAS 41.31]. The standard assumes that reliable estimates of
fair value would rarely, if ever, cease to be available. [IAS 41.B36]. At 4.7 below is a more
detailed discussion of some of the practical problems associated with determining fair
value in the absence of a market price.
If it becomes possible at a later date to measure the fair value of a biological asset
reliably, the entity is required to apply the fair value model to that asset from that date
onwards. [IAS 41.30]. In developing the standard, the (then) IASC noted in this respect that
‘in agricultural activity, it is likely that fair value becomes measurable more reliably as
biological transformation occurs and that fair value measurement is preferable to cost
in those cases’. Therefore, the IASC ‘decided to require fair value measurement once
fair value becomes reliably measurable’. [IAS 41.B35].
IAS 41 presumes that the fair value of a non-current biological asset that ‘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 – Non-current Assets Held for Sale and
Discontinued Operations’ can always be measured reliably. [IAS 41.30].
In situations where the cost model is initially applied and then fair value becomes
reliably measurable, a question that sometimes arises is whether acquisition-related
transaction costs (i.e. those that have been incurred by the entity on purchasing the
asset) that have been capitalised can be taken into account when subsequently
measuring the fair value component of ‘fair value less costs to sell’. Fair value is a
market-based measure and is defined in IFRS 13 as an exit price. The objective is to
measure the price that would be obtained in a transaction between market
participants to sell an asset; not the costs each party would incur in order to transact
– those costs reflect the characteristics of the transaction and not of the asset being
hypothetically sold. It would, therefore, be inappropriate to include acquisition-
related transaction costs, particularly since a seller would not incur such costs. In
addition, as discussed at 4.6.4.A below, IFRS 13 specifically states that transaction
costs that would be incurred in a transaction to sell an asset are not part of fair value
(that is, they are not added to, or deducted from, the exit price used to measure fair
value). [IFRS 13.25]. However, IAS 41 requires ‘costs to sell’ to be deducted from fair
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value, measured in accordance with IFRS 13, before recognition in the financial
statements leading to a lower valuation than a pure IFRS 13 valuation.
3.2.5.B
The cost model
If on initial recognition an entity rebuts the presumption and demonstrates that fair
value cannot be measured reliably, it applies the cost model to the biological asset
(including produce growing on a bearer plant), i.e. the asset is measured at cost less any
accumulated depreciation and any accumulated impairment losses. [IAS 41.30].
When determining cost, accumulated depreciation and accumulated impairment losses
an entity needs to consider the requirements of IAS 2, IAS 16 and IAS 36. [IAS 41.33]. Refer
to Chapter 22, Chapter 18 and Chapter 20, respectively, for discussion on each of these
standards. IAS 41 provides no further guidance on the application of the cost model or
the extent to which entities should consider the requirements of these standards.
Both IAS 2 and IAS 16 establish frameworks within which to determine cost. The nature
of the biological asset may be helpful when determining which approach to use.
Consumable biological assets that are to be harvested as agricultural produce or sold as
biological assets, for example livestock to be slaughtered or held for sale, fish in farms
or crops to be harvested, may be more consistent with inventories accounted for in
accordance with IAS 2. Bearer biological assets, such as dairy cows may be more
consistent with plant and equipment accounted for in accordance with IAS 16. When
the IASB issued the bearer plants amendments, it noted that, although bearer plants are
dissimilar in form to plant and machinery, similarities in how they are used supported
accounting for them in the same way. [IAS 16.BC67].
The nature of the biological asset may also be helpful in determining when to
commence depreciation and the useful life of the asset. Paragraph 53 of IAS 16 requires
depreciation to commence when an asset is available for use. [IAS 16.53]. Determining
when a biological asset is available for use may be more obvious in relation to bearer
biological assets. For example, a cow may be considered available for use as soon as it
is sufficiently mature to produce milk. However, for consumable biological assets
defining when an asset is available for use is less clear because the period between these
assets reaching maturity and being sold or harvested is typically short.
The last component of the cost model is the assessment of impairment in accordance with
IAS 36. That standard requires an entity to determine the recoverable amount of an asset
or cash-generating unit (CGU) and compare it to its carrying amount in order to determine
whether the asset or CGU is impaired. Recoverable amount is defined by IAS 36 as the
higher of either the value in use or fair value less costs of disposal of the asset or CGU
(IAS 36 is discussed in Chapter 20). Entities that have demonstrated that fair value cannot
be reliably determined for a biological asset should be careful to apply a consistent
approach when determining the recoverable amount of an asset. As such, using a value in
use approach to determine recoverable amount will be required, possibly at the CGU level.
Even in this situation, entities may need to carefully consider whether information used to
measure value in use could be used to measure the fair value of the biological asset.
An entity that uses the reliability exception (and, therefore, applies the cost model) is
required to disclose certain additional information in its financial statements. This is
discussed further at 5.3 below. [IAS 41.B37].
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3.3 Government
grants
Government grants involving biological assets that are within the scope of IAS 41
(i.e. excluding bearer plants, which are specifically scoped out of IAS 41) are only
accounted for under IAS 20 if the biological asset is ‘measured at its cost less any
accumulated depreciation and any accumulated impairment losses’ as discussed at 3.2.5
above (see Chapter 25 for a discussion of government grants within the scope of IAS 20).
[IAS 41.37-38]. IAS 41 applies to government grants relating to all other biological assets
(including produce growing on a bearer plant) accounted for at fair value less costs to sell.
What is not clear is whether government grants that relate to both a bearer plant and
the produce growing on that bearer plant would be within the scope of either IAS 20 or
IAS 41. Entities will need to use judgement in relation to such grants.
Under IAS 20, government grants are either:
• recognised as deferred income and then recognised in profit or loss on a systematic
basis over the useful life of the asset; or
• deducted in calculating the carrying amount of the asset and then recognised in
profit or loss over the life of a depreciable asset as a reduced depreciation expense.
Under IAS 41, an unconditional government grant related to a biological asset that is
‘measured at its fair value less costs to sell shall be recognised in profit or loss when, and
only when, the government grant becomes receivable’. [IAS 41.34]. An entity is, therefore,
not permitted under IAS 41 to deduct a government grant from the carrying amount of
the related asset. This would be inconsistent with a ‘fair value model in which an asset
is measured and presented at its fair value’ because the entity would recognise even
conditional government grants in income immediately. [IAS 41.B66].
Any conditional government grant related to a biological asset measured at its fair value
less costs to sell – including government grants that require an entity not to engage in a
specified agricultural activity – are only recognised when the conditions attaching to
the grant are met. [IAS 41.35]. IAS 41 permits an entity to recognise a government grant as
income only to the extent that it: (i) has met the terms and conditions of the grant; and
(ii) has no obligation to return the grant. The following example, which is derived from
IAS 41, illustrates how an entity should apply these requirements. [IAS 41.36].
Example 38.1: Conditional government grants
A government grant requires an entity to farm in a particular location for five years and requires the entity to
return the entire government grant if it farms for less than five years. The government grant is not recognised
as income until the five years have passed.
A government grant allows part of the government grant to be retained based on the passage of time. The
entity recognises the government grant as income on a time proportion basis.
4
MEASURING FAIR VALUE LESS COSTS TO SELL
4.1
The interaction between IAS 41 and IFRS 13
IFRS 13 specifies how to measure fair value. However, it does not specify what must
be measured at fair value or when a fair value measurement must be performed.
Therefore, an entity applies IAS 41 to determine what to measure at fair value less
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costs to sell and when to measure fair value (i.e. the measurement date). The entity
then applies IFRS 13 to measure ‘fair value’, taking into consideration the specific
requirements in IAS 41 (see 4.5 below). ‘Costs to sell’, measured in accordance with
IAS 41, are then deducted.
As discussed at 5 below, disclosures in relation to the fair value measurement will need
to be prepared in accordance with IFRS 13 and also IAS 41, to the extent that it requires
additional agriculture-specific disclosures.
The following sections consider further the interaction between IFRS 13 and IAS 41 and
highlight some of the key requirements of IFRS 13 relating to biological assets and
agricultural produce, comparing them to the previous requirements in IAS 41. See
Chapter 14 for a discussion of the requirements in IFRS 13.
4.2
Establishing what to measure
4.2.1
Unit of account
The unit of account identifies what is being measured for financial reporting purposes,
i.e. the level of aggregation (or disaggregation) for presentation and disclosure purposes.
For example, whether the information presented and disclosed in the financial
statements is for an individual asset or for a group of assets.
The unit of account in IAS 41 is the individual biological asset or agricultural produce.
For example, the standard applies to the individual trees in a forest, not the forest as
a whole. As discussed at 4.2.2 below, the standard does permit grouping of assets.
This is intended to facilitate measuring fair value, but this does not change the unit
of account.
4.2.2
Grouping of assets
IAS 41 states that ‘[t]he fair value measurement of a biological asset or agricultural
produce may be facilitated by grouping biological assets or agricultural produce
according to significant attributes; for example, by age or quality. An entity selects the
attributes corresponding to the attributes used in the market as a basis for pricing’.
[IAS 41.15].
For example, when undertaking a valuation of livestock, an entity may group each of the
animals in the herd based on factors such as species, age, weight and the expected yield.
4.3
When to measure fair value
In order to apply the requirements of IFRS 13, an entity needs to determine when to
measure fair value, i.e. the measurement date. IFRS 13 relies on the standard that
requires, or permits, the fair value measurement to specify this date, i.e. IAS 41 for
biological assets (including produce growing on a bearer plant) and agricultural produce.
As discussed at 3.2.1.A above, biological assets within the scope of IAS 41 are required
to be measured at fair value less costs to sell at initial recognition and subsequently, on
a recurring basis, at the end of each reporting period.
The fair value less costs to sell of agricultural produce is measured on the date that it is
harvested (see 3.2.2 above).
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4.4
Determining costs to sell
Costs to sell are defined in IAS 41 as ‘the incremental costs directly attributable to the
disposal of an asset, ex
cluding finance costs and income taxes’. [IAS 41.5].
Therefore, of all the costs that are necessary for a sale to occur, costs to sell include
those that would otherwise not arise. However, costs already included within the fair
value measurement, such as transportation costs, should be excluded from costs to sell.
Examples of costs to sell could include brokers’ and dealers’ commissions, levies by
regulatory agencies and commodity exchanges, transfer taxes and duties. [IAS 41.BC3, B22].
4.5
Measuring fair value: IAS 41-specific requirements
4.5.1
Use of external independent valuers
IAS 41 does not require an entity to use an external independent valuer to determine
the value of biological assets. In fact, the Board rejected a proposal to require external
independent valuations because they are ‘not commonly used for certain agricultural
activity and it would be burdensome to require an external independent valuation. The
Board believes that it is for entities to decide how to determine fair value reliably,
including the extent to which independent valuers need to be involved’. [IAS 41.B33].
Furthermore, the Board also noted that requiring the disclosure of the extent to which
the carrying amount of biological assets reflects a valuation by an external independent
valuer would not be appropriate for the same reasons. [IAS 41.B81].
4.5.2
Obligation to re-establish a biological asset after harvest
It is common in certain industries, particularly where a biological asset is physically
attached to land, for an entity to have an obligation to re-establish a biological asset after
harvest. The standard gives the example of an entity that has an obligation to replant
the trees in forest after harvest.
IAS 41 does not permit an entity to include the costs of re-establishing a biological asset
after harvest when using estimated future cash flows to measure fair value. [IAS 41.22].
This is consistent with the unit of account being the individual biological asset (see 4.2.1
above). For example, an entity that owns a forest might consider its intention, or
obligation, to replace its trees in the future if it were measuring the fair value of the
forest as a whole. However, the entity would be required by IAS 41 to measure the
individual trees that are actually planted in the forest on the measurement date. It would
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