(245)
(250)
Grapes growing on the vines
30
50
Valuer 1 and Valuer 2 make a virtually identical assessment of the market values of the vineyard, the land,
vineyard improvements and the grape vines. Nevertheless, because the value of grapes growing on the vines
is calculated by subtracting all the other known elements from the total value of the vineyard, a noticeable
difference arises in the valuation of the grapes growing on the vines. In a similar vein, entities that use only
one valuer need to be aware that even small changes in assumptions from period-to-period could have a
significant impact on the valuation of biological assets or plants growing on a bearer plant and, therefore,
reported profits or losses. For this reason, IFRS 13 requires extensive disclosures about assumptions used in
determining fair value.
In April 2012, the Interpretations Committee received a request to clarify the use of the
residual approach, as discussed in paragraph 25 of IAS 41 (in light of the requirement in
IFRS 13 to measure the fair value of non-financial assets based on their highest and best
use). Specifically, the Committee was asked to consider the situation where a biological
asset was physically attached to land and no separate market for the biological asset existed
in its current condition and location. The submitter of the request assumed entities would
apply paragraph 25 of IAS 41, measure the biological asset and land on a combined basis
and use the residual approach to derive a fair value for the biological asset. The submitter
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was concerned about situations where the highest and best use of the biological asset is in
combination with the land, but the value of the land could be higher if measured assuming
some alternative use (such as property development). In these circumstances, the allocated
fair value of the biological asset might be nil or negligible. The fact pattern was further
complicated because it was assumed the land to which the biological asset was attached
was measured using the cost model in accordance with IAS 16.3
The Committee elected not to take the issue onto its agenda, but noted that, in the
development of IFRS 13, the IASB had considered the situation where the highest and
best use of an asset in a group of assets is different from its current use. However, ‘IFRS 13
does not explicitly address the accounting implications if those circumstances arise and
the fair value measurement of the asset based on its highest and best use assumes that
other assets in the group need to be converted or destroyed’. The Committee also
observed that this issue may affect non-financial assets within the scope of other
standards, not just those within the scope of IAS 41.4 The Committee asked the IASB to
provide clarification of the accounting requirements for the issues it had considered.
However, as outreach indicated the issue was not widespread, in May 2013, the IASB
decided it could, instead, be considered for review in the Post-Implementation Review
(PIR) of IFRS 13.5 As part of its PIR of IFRS 13, the IASB issued a Request for Information
in May 2017 specifically asking constituents to comment on their experience in applying
IFRS 13 to the fair value measurement of biological assets and whether additional help
(e.g. educational material) would be useful.6 The IASB discussed the feedback from
constituents at its March 2018 meeting. Most respondents that had experience with
biological assets said that fair value measurement of biological assets was challenging
(highlighting specific aspects that are challenging) and asked for additional guidance
(particularly in relation to measuring the fair value of growing produce) and/or changes to
IAS 41. However, there were different views about how the Board could help.7
In considering all of the feedback on the RFI, the Board concluded that IFRS 13 is
working as it intended. It also decided to:
‘a. feed the PIR findings regarding the usefulness of disclosures into the work on
Better Communications in Financial Reporting, in particular, the projects on
Principles of Disclosure and Primary Financial Statements. ... ;
b. continue liaising with the valuation profession, monitor new developments in
practice and promote knowledge development and sharing. ... ; and
c. conduct no other follow-up activities as a result of findings from the PIR, for
example not to perform any work in the area of prioritising the unit of account or
Level 1 inputs because the costs of such work would exceed its benefits..’8
At the time of writing, the Report and Feedback Statement on the PIR was expected to
be released in the last quarter of the 2018 calendar year-end.9
Determining the highest and best use of an asset requires judgement (see 4.6.2 above), but
an entity should start with the presumption that the highest and best use is an asset’s
current use. As discussed above, paragraph 25 of IAS 41 is only relevant where there is no
separate market for a biological asset or produce growing on a bearer plant in its current
form and it (or the bearer plant on which it grows) is physically attached to land. In
addition, that paragraph suggests an active market may exists for the combined assets
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(e.g. land and biological asset) and, therefore, that an observable price in that market for
the assets (on a combined basis) could be used to derive fair value for the biological asset.
[IAS 41.25]. Selecting appropriate valuation techniques with which to measure fair value in
accordance with IFRS 13 requires judgement. Some might use the residual approach to do
this, as indicated in the submission. However, paragraph 25 of IAS 41 does not require the
use of the residual approach; it is only mentioned as an example. The IASB reaffirmed this
when they considered this matter in May 2013. They also noted that IFRS 13 encourages
the use of multiple valuation techniques, where appropriate.10
The outcome from a fact pattern, such as the one the Committee discussed, may be
somewhat counterintuitive. However, the fact that the fair value of the land, in that
situation, would not be recognised in the financial statements is, in our view, irrelevant
to the measurement of fair value. The objective of a fair value measurement does not
change regardless of whether it is recognised or unrecognised.
Figure 38.4:
Applying paragraph 25 of IAS 41 to measure the fair value of a
biological asset
Measure fair value of the
assets on a combined basis
(IFRS 13)
Biological asset
Land
Allocate fair value (to measure fair
Allocate fair value (to measure fair
value consistent with its unit of
value consistent with its unit of
account in accordance with IFRS 13)
account in accordance with IFRS 13)
Account for the land in accordance
Deduct ‘costs to sell’ and recognise in
with the relevant IFRS
accordance with IAS 41
(e.g. IAS 16, IAS 40)
4.6.3
Selecting appropriate assumptions
Selecting the appropriate assumption with which to measure the fair value of biological
assets and agricultural produce can often be difficult. According to IFRS 13, an entity
should select assumptions that:
• market participants would use, i.e. they are not entity-specific;
• are consistent with the unit of account and characteristics of the asset, including
an asset’s condition and location and any restrictions on the use or sale of the asset;
• are consistent with an orderly transaction to sell the asset in the principal market,
or in the absence of a principal market, the most advantageous market; and
• maximise the use of observable inputs and minimise the use of unobservable inputs
(based on the fair value hierarchy, see Chapter 14).
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Focusing on market participant assumptions is consistent with the previous
requirements in IAS 41. However, IFRS 13 clarifies that the transaction to sell the asset
would be between market participants, not between the entity and a market
participant. In addition, assumptions should reflect those that market participants
generally would assume, not those of a particular market participant. In order to select
the appropriate assumptions, an entity would identify characteristics of market
participants. At a minimum, IFRS 13 assumes that market participants will be
independent of each other, knowledgeable about the asset, able and willing to enter
into a transaction for the asset. [IFRS 13 Appendix A]. An entity need not identify specific
market participants, but needs to identify the distinguishing characteristics of market
participants. [IFRS 13.23].
Identifying the appropriate market participants (or their characteristics) depends on the
principal market for the asset or, in the absence of a principal market, the most
advantageous market (see Chapter 14 for further discussion). [IFRS 13.23]. IAS 41
previously referred to the most relevant market, typically the market in which the entity
would normally transact. There is a general presumption in IFRS 13 that the principal
market is the one in which the entity would normally enter into a transaction to sell the
asset, unless there is evidence to the contrary. [IFRS 13.17].
4.6.3.A
Condition and location
IAS 41 previously required an entity to take the present location and condition of a
biological asset into account when determining its fair value. Fair value measured in
accordance with IFRS 13 also takes into consideration an asset’s condition and location,
provided they are a characteristic of the asset being measured that a market participant
would consider when pricing the asset. [IFRS 13.11].
This will have a direct impact on what is being measured. For example, entities
measuring partly grown crops may also need to consider the fair value of the land in
which they are planted (see 4.6.2.A above). It may also require an entity to consider
alternative markets. For example, an entity that rears chickens may have to consider
whether there is a market for immature chicks.
It is possible for a market to exist in one geographical area, but not in another area. For
example, transportation costs may limit the geographical size of the market for
agricultural produce significantly, possibly to the point where a local cooperative or
factory is the only buyer.
If no market exists for an asset in its current form, but there is a market for the converted
or transformed asset, an entity adjusts the fair value 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.
If the location of a biological asset or agricultural produce would require it to be
transported to the market in order to sell it, transportation costs would be deducted
from the market price in order to measure fair value, consistent with the previous
requirements in IAS 41. Given the logistical problems and generally high costs of
transporting living animals and plants, there could be many different fair values for
identical biological assets depending on their location.
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4.6.4
Valuation techniques in IFRS 13
IFRS 13 does not limit the types of valuation techniques an entity might use to measure
fair value. However, it does require the valuation techniques to be consistent with one
of three approaches: the market approach, the income approach or the cost approach.
[IFRS 13.62].
Unlike the previous requirements in IAS 41, IFRS 13 does not prioritise the use of one
valuation technique over another, or require the use of only one technique. Instead,
IFRS 13 establishes a hierarchy for the inputs used in those valuation techniques,
requiring an entity to maximise observable inputs and minimise the use of unobservable
inputs (this is discussed further in Chapter 14 at 16). [IFRS 13.74].
Previously, IAS 41 provided a hierarchy of valuation techniques for determining the fair
value of a biological asset or agricultural produce:
(a) An active market existed – the quoted price in that market was the appropriate
basis for determining the fair value of that asset.
(b) No active market existed – if an active market did not exist an entity used one or
more of the following market-determined prices or values to estimate fair value:
[IAS 41(2012).18]
(i) the most recent market transaction price, provided the economic
circumstances had not significantly changed;
(ii) market prices for similar assets with adjustments to reflect differences; and
(iii) sector benchmarks.
Where no active market existed, an entity was required by IAS 41 to use all available
market-determined prices or values since otherwise there was ‘a possibility that
entities may opt to use present value of expected net cash flows from the asset even
when useful market-determined prices or values are available’; [IAS 41.B30]
(c) No active market existed and no market-based information was available – only if
an active market did not exist and there was no market-based information
available on which to base an estimate of fair value, could an entity estimate fair
value using a discounted cash flows method or cost as an approximation of fair
value. [IAS 41(2012).20, 24].
The approach in IFRS 13 is generally consistent with previous requirements in IAS 41.
For example, the best indication of fair value is still a quoted price in an active market.
In addition, the use of techniques previously required by IAS 41 would be consistent
with the approaches permitted by IFRS 13. However, since multiple techniques should
be used, when applicable, under IFRS 13, judgement is needed to select the techniques
that are appropriate in the circumstances. [IFRS 13.63]. Selecting appropriate valuation
techniques is discussed further in Chapter 14 at 14.
4.6.4.A
Cost as an approximation of fair value
The definition of fair value in IFRS 13 is not significantly different from the previous
definition in IAS 41, which was, ‘the amount for which an asset could be exchanged, or
a liability settled, between knowledgeable, willing parties in an arm’s length transaction’.
[IAS 41(2012).8]. However, IFRS 13 clarifies that fair value
is a current exit price, not an
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entry price. Therefore, while exit and entry prices may be identical in many situations,
the transaction price (an entry price) is not presumed to represent the fair value of an
asset or liability measured in accordance with IFRS 13 on its initial recognition.
[IFRS 13.57-59].
IAS 41 indicates that cost may sometimes approximate fair value. The standard gives
two situations where this might occur: [IAS 41.24]
• when little biological transformation has taken place since cost was initially
incurred – seedlings planted immediately prior to the end of a reporting period
and newly acquired livestock are given as examples; or
• when the impact of the biological transformation on price is not expected to be
material – for example, during the initial phase of growth for a pine plantation with
a 30-year production cycle.
Even in such situations, the objective is still to measure fair value in accordance with
IFRS 13. Therefore, as with an entry price on initial recognition, an entity cannot
presume that cost approximates fair value. Instead, it should ensure cost is materially
consistent with a current exit price for the asset. For example, entities would need to
carefully consider which costs could be included in the entry price. IFRS 13 specifically
states that transaction costs are not part of fair value (that is, they are not added to or
deducted from the exit price), [IFRS 13.25], therefore, we would not expect an entity to
deduct such costs from the entry price – particularly as ‘costs to sell’ are deducted from
fair value before being recognised in the financial statements. Nor would we expect
entities applying a fair value model to include acquisition-related transaction costs
within an entry price used to approximate fair value.
4.7
The problem of measuring fair value for part-grown biological
assets
Entities may be required to measure their biological assets part way through the
transformation process, particularly when the time to harvest is greater than 12 months.
In these circumstances, there may not be an active market for the asset in its current
condition and location. In the absence of an active market, preparers often use a
discounted cash flow model to estimate fair value.
International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards Page 625
