be inconsistent to consider replanting, since removal of an existing tree (in order to plant
a new tree) would be the end of that asset’s useful life.
The Interpretations Committee considered such obligations in May 2004 and
confirmed its previous decisions that if an entity has an obligation to re-establish a
biological asset after harvest, that obligation is attached to the land and does not affect
the fair value of the biological assets currently growing on the land.
The problem of how to account for an obligation to replant was considered by the Board
in 2007. Circumstances can arise where an entity is legally obliged (whether by law or
contract) to replant a biological asset after harvest. The interaction of the fair value
measurement basis of IAS 41, the prohibition on including the replanting costs in
determining that fair value in paragraph 22 of IAS 41 and the potential recognition of a
3154 Chapter 38
provision for the cost of replanting in accordance with IAS 37 – Provisions, Contingent
Liabilities and Contingent Assets – when the biological asset is harvested, could lead to
a net expense being recognised at the point of harvest.
Even in situations where there is a legal obligation to replant, an entity cannot consider
replanting when measuring the fair value of a biological asset.
4.5.3
Forward sales contracts
When an entity enters into a contract to sell its biological assets (including produce
growing on a bearer plant) or agricultural produce at a future date, the standard does
not permit it to measure those assets at the contracted price, stating that ‘the fair value
... is not adjusted because of the existence of a contract’. [IAS 41.16].
The (then) IASC considered whether it should require sales contracts to be measured
at fair value, but concluded that no solution would be practicable without a complete
review of the accounting for commodity contracts that are not in the scope of IAS 39
– Financial Instruments: Recognition and Measurement, which was the applicable
financial instruments at the time (IFRS 9 – Financial Instruments – has replaced
IAS 39 and applies to all items that were previously within the scope of IAS 39).
[IAS 41.B50-B54].
It follows from this that if an entity engaged in agricultural activity enters into forward
sales contracts for its produce it will need to consider whether such contracts are within
the scope of IFRS 9. Paragraph 2.4 of IFRS 9 states ‘this standard shall be applied to
those contracts to buy or sell a non-financial item that can be settled net in cash or
another financial instrument, or by exchanging financial instruments, as if the contracts
were financial instruments, with the exception of contracts that were entered into and
continue to be held for the purpose of receipt or delivery of a non-financial item in
accordance with the entity’s expected purchase, sale or usage requirements’. [IFRS 9.2.4,
IAS 39.5]. Accordingly, an agricultural commodity sales contract will be accounted for
under IFRS 9 by an entity which intends to net settle that contract even if it is also a
producer of the underlying agricultural produce. Conversely, a farmer who intends to
settle a forward sales contract for barley by physical delivery would not account for the
contract under IFRS 9, but would treat it as an executory contract. However, IFRS 9 is
applied to such contracts if an entity designates them as measured at fair value through
profit or loss in accordance with paragraph 2.5 of IFRS 9. [IFRS 9.2.4]. This issue is
discussed further in Chapter 41.
4.5.4 Onerous
contracts
Although a forward sales contract scoped out of IFRS 9 is treated as an executory
contract, IAS 41 notes that if the contracted price is lower than the fair value of the
assets, the contract for the sale of a biological asset (including produce growing on a
bearer plant) or agricultural produce may be an onerous contract, as defined in IAS 37,
and if so, should be accounted for under that standard [IAS 41.16] (the accounting for
onerous contracts is dealt with in Chapter 27).
However, IAS 41 provides no further guidance on the subject of when such a contract
becomes onerous. The standard is also silent on what this might mean, given the fact
that IAS 37 defines an onerous contract as ‘a contract in which the unavoidable costs
Agriculture
3155
of meeting the obligations under the contract exceed the economic benefits expected
to be received under it’. [IAS 41.B50-B54]. In other words, a contract that is not loss-
making, but that has a contract price lower than the fair value of the produce
concerned, is not automatically defined as onerous by IAS 37, yet seems to be
regarded as onerous under IAS 41.
Nevertheless, it is our view that a contract to sell a biological asset at an amount that is
below its fair value less costs to sell (and, therefore, its carrying amount) should be
regarded as onerous under IAS 37.
4.5.5
Financing cash flows and taxation
IAS 41 does not permit an entity to include any cash flows for financing an asset or tax
cash flows when using estimated future cash flows to measure fair value. [IAS 41.22].
The exclusion of taxation is likely to be practically challenging if an entity uses an
income approach to measure fair value. Valuers typically prepare post-tax calculations,
discounting post-tax cash flows using a post-tax discount rate. If this approach is used
to derive a pre-tax equivalent fair value, entities will need to ensure the assumptions
related to tax are not entity-specific. As discussed at 4.6 below, IFRS 13 requires that
assumptions used to measure fair value reflect what market participants would consider.
4.6
Measuring fair value: overview of IFRS 13’s requirements
4.6.1
The fair value measurement framework
The objective of a fair value measurement is ‘to estimate the price at which an orderly
transaction to sell the asset or to transfer the liability would take place between market
participants at the measurement date under current market conditions’. [IFRS 13.B2]. In
order to measure the fair value of a biological asset or agricultural produce, an entity
needs to determine all of the following:
(a) the particular asset that is the subject of the measurement (consistent with its unit
of account – see 4.2 above);
(b) the valuation premise that is appropriate for the measurement (consistent with its
highest and best use – see 4.6.2 below);
(c) the principal market (or in the absence of a principal market, the most
advantageous market) for the asset or liability (see 4.6.3 below); and
(d) the valuation technique(s) appropriate for the measurement, considering the
availability of data with which to develop inputs that represent the assumptions
that market participants would use when pricing the asset and the level of the fair
value hierarchy within which the inputs are categorised (see 4.6.3 and 4.6.4 below).
[IFRS 13.B2].
4.6.2
Highest and best use and valuation premise
IFRS 13 requires that the fair value of non-financial assets, such as biological assets and
agricult
ural produce, take into account ‘a market participant’s ability to generate
economic benefits by using the asset in its highest and best use or by selling it to another
market participant that would use the asset in its highest and best use’. [IFRS 13.27].
3156 Chapter 38
The objective in determining highest and best use is to identify the use by market
participants that would maximise the value of the asset, either on its own or with other
assets and/or liabilities. Therefore, in order to determine the highest and best use of a
non-financial asset, an entity needs to make the assessment from the perspective of
market participants (see 4.6.3 below).
Importantly, IFRS 13 starts with the presumption that the highest and best use is an asset’s
current use. Alternative uses are not considered unless market or other factors suggest
that market participants would use that asset differently to maximise the value of that
asset. [IFRS 13.29]. If such factors exist, an entity would only consider those alternative uses
that are physically possible, legally permissible and financially feasible. [IFRS 13.28].
Appropriately determining an asset’s highest and best use is a critical step and can have
significant implications on the measurement of fair value. Therefore, this assessment
should be based on the weight of evidence available. Careful consideration will be needed
to ensure consistent assumptions regarding the principal market (or in the absence of a
principal market, the most advantageous market) and the participants in that market, since
highest and best use is determined from the market participants’ perspective.
Determining highest and best use is discussed further in Chapter 14. As discussed at 5.2
below, additional disclosures are required if an entity determines that the highest and
best use of a non-financial asset is different from its current use.
Dependent on its highest and best use, the fair value of the non-financial asset will either
be measured based on the value it would derive on a stand-alone basis or in combination
with other assets or other assets and liabilities (known as the valuation premise).
[IFRS 13.31]. For example, as discussed at 4.6.2.A below, the highest and best use of a
biological asset might be in combination with the land to which it is physically attached.
Even in situations where the valuation premise of a biological asset (including produce
growing on a bearer plant) is ‘in combination with other assets and/or liabilities’, the
objective of a fair value measurement is still to measure the price to sell the biological
asset, not the combined group. IFRS 13 assumes that the market participants that would
purchase the biological asset would use it in combination with those other assets and/or
liabilities. That is, if the market participants already had those other assets and/or
liabilities, what price would the market participants pay to acquire the biological asset?
In reality, sales are unlikely to be structured in this way. Entities might need to sell the
‘other assets and/or liabilities’ in order to sell the biological asset (particularly if they are
physically attached, as is discussed at 4.6.2.A below). However, regardless of how an
entity might structure an actual sale, IFRS 13 contemplates a hypothetical sale and
specifically states that, when the highest and best use is the use of the asset in
combination with other assets and/or liabilities, a fair value measurement assumes that
the market participant acquiring the asset already holds the complementary assets
and/or the associated liabilities. [IFRS 13.32].
In practice, an entity may need to measure the price to sell the biological asset by
measuring the price for the combined assets and/or liabilities and then allocating that
fair value to the various components. IFRS 13 does not specify which allocation
approaches can or cannot be used. Therefore, an entity must use its judgement to select
the most appropriate technique. Even if this approach is used, the objective is to
measure the fair value of the biological asset assuming it is sold consistent with its unit
Agriculture
3157
of account, which for a biological asset is the individual asset. [IFRS 13.32]. This is
discussed further at 4.6.2.A below.
4.6.2.A Biological
assets attached to land
IAS 41 observes that biological assets are often physically attached to land, for example,
crops growing in a field. In many cases, there will be no separate market for biological
assets in their current condition and location. The objective of a fair value measurement
is to determine the price for the asset in its current form. However, as discussed at 4.7
below (see also Chapter 14 at 5.2), if no market exists for an biological asset in its current
form, but there is a market for the converted or transformed asset, an entity would adjust
the price that would be received for the converted or transformed asset for the costs a
market participant would incur to re-condition the asset (after acquiring the asset in its
current condition) and the compensation they would expect for the effort in order to
measure fair value.
IFRS 13 does not require a market to be observable or active in order to measure fair
value. However, it is clear that, if there is a principal market for the asset, the fair value
measurement represents the price in that market at the measurement date (regardless
of whether that price is directly observable or estimated using another valuation
technique). This price must be used even if a price in a different market is potentially
more advantageous. [IFRS 13.18]. While the price need not be observable to measure fair
value, the standard does require an entity to prioritise observable inputs in the principal
(or in the absence of a principal market, the most advantageous) market over
unobservable inputs. [IFRS 13.67].
If an income approach (such as a discounted cash flow approach) is used to measure the
biological asset (excluding the land) and the land, to which the asset is physically
attached, is owned by the entity, care is needed to ensure that fair value measurement
is not overstated. This is because land owned by the entity would not derive any
expected cash outflows. It is, therefore, common for entities to include a notional rental
charge for the land, reflecting what would be paid to rent the land, using market
participant assumptions.
IAS 41 suggests that where there is no separate market for biological assets in their
current form and they are physically attached to land, an active market might exist for
the combined assets, i.e. for the biological assets, land and land improvements. If this is
the case, an entity could use the information regarding the combined assets to determine
the fair value of the biological assets. [IAS 41.25]. Similar considerations will also be
relevant for produce growing on a bearer plant, which will likely have no separate
market in its current form and are physically attached to the bearer plant and, in turn,
to the land.
IFRS 13 defines an active market as ‘a market in which transactions for the asset or liability
take place with sufficient frequency and volume to provide pricing information on an
ongoing basis’. [IFRS 13 Appe
ndix A]. Whether such a market exists for the combined assets is
a matter of judgement, taking into consideration all the relevant facts and circumstances.
However, an entity should have sufficient evidence to support such an assumption.
Importantly, the unit of account established by IAS 41 is an individual asset (see 4.2.1
above). Therefore, if fair value is measured for the combined assets, the total fair value
3158 Chapter 38
would need to be allocated to each component in order to derive the fair value for the
biological asset or produce growing on a bearer plant (as is illustrated by Figure 38.4
below). As discussed at 4.6.2 above, IFRS 13 does not provide guidance on how to
perform such an allocation. IAS 41 suggests the use of the residual method as one
possible way to allocate the fair value between the biological assets and the land.
However, this might be difficult to apply in practice, as illustrated in Example 38.2
below. Therefore, entities will need to apply judgement when determining the
appropriate allocation.
Example 38.2: Assets attached to land
Entity A acquired a 10-hectare vineyard on 1 January 2019 for $1,200. The purchase price of the vineyard
was attributed as follows:
1 January 2019
$
Purchase price
1,200
Land (780)
Vineyard improvements
(130)
Grape vines
(255)
Grapes growing on the vines
35
At the end of its financial year Entity A needs to determine the fair value of the grapes growing on the vines
in accordance with IAS 41 and invites two equally skilled professional valuers to determine their value.
Valuer 1
Valuer 2
31 December 2019
$
$
Fair value of an average 10-hectare vineyard
1,105
1,100
Adjustment for soil and climatic conditions
135
150
Estimated fair value of Entity A’s vineyard
1,240
1,250
Fair value of the land
(830)
(825)
Fair value of vineyard improvements
(135)
(125)
Fair value of grape vines
International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards Page 624
