In these situations, a common question is whether an entity can take into consideration
the future biological transformation when estimating the fair value of a biological asset.
As discussed at 4.6.3.A above, IFRS 13 makes it clear that the fair value of an asset
considers characteristics of an asset, such as its current condition and location. An entity
must consider this objective in determining an appropriate discount rate and estimating
its future cash flows, which must be based on assumptions market participants would
use. Therefore, if a market participant would consider the potential for future growth,
the related cash flows and risks from additional biological transformation should be
included in determining the appropriate fair value.
IFRS 13 is clear that, if there is a principal market for the asset or liability, the fair value
measurement shall represent the price in that market at the measurement date
(regardless of whether that price is directly observable or estimated using another
valuation technique). The price in the principal market must be used even if the price
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in a different market is potentially more advantageous. [IFRS 13.18]. Since an entity can
consider the expected cash flows the asset can generate in its principal market, the
entity is not permitted to use available prices in other active markets for part-grown
biological assets. Even in situations where there is no principal market, once the most
advantageous market has been selected, an entity would not look to other markets for
available prices or use prices in the most advantageous market if market participants
would not consider them.
The original version of IAS 41 had caused confusion in this area, as it had required that
the estimation of future cash flows ‘exclude any increases in value from additional
biological transformation and future activities of the entity’. [IAS 41(2008).21]. This seemed
to suggest that the value of immature biological assets should be based on values in their
current condition, rather than recognising that part of the value must logically lie in their
potential, given appropriate husbandry, to grow to full size. The IASB amended IAS 41
to clarify that entities should consider the risks associated with cash flows from
additional biological transformation in determining the cash flows, the discount rate or
some combination of the two provided a market participant would take the additional
biological transformation into consideration.
While paragraph 21 of IAS 41 was subsequently deleted by the introduction of IFRS 13,
this clarification is consistent with the requirements in that standard and is helpful in
understanding its requirements in situations where prices are available in an active
market for part-grown biological assets, but that market is not the principal market (or
in the absence of a principal market, the most advantageous market).
This issue is illustrated by an extract from (the former) CESR’s database of
enforcement decisions published in April 2007 (Decision ref. EECS/0407-11) in
relation to the fair value measurement requirements in IAS 41 (prior to the issuance
of IFRS 13). Norwegian fish farmers had developed a practice of recording live
immature fish at cost on the basis that they were unable to value them reliably in
accordance with paragraph 30 of IAS 41. The Norwegian regulator took the view that
slaughtered fish sold whole and gutted should be considered the same as live salmon
under paragraph 18(b) of the 2012 version of IAS 41 (IAS 41(2012)) and that it was
possible to value the live immature fish based on the market price for slaughtered
fish of the same size. Smaller fish are sold on the market because they are harvested
with mature fish, however their value per kilo is significantly below that of mature
fish and the Norwegian fish farming entities did not, therefore, believe that it was
appropriate to use their market price as a basis for fair value. The regulator’s decision
was appealed to the Norwegian Ministry of Finance and the database reports the
conclusion as follows:
‘The Ministry of Finance upheld the decision of the enforcer, with some
adjustments and additions. Most significantly, the final ruling upholds the
enforcer’s decision that slaughtered salmon which is sold whole and gutted is in
an accounting sense to be considered as a similar asset of live salmon, according
to IAS 41.18(b) and that this also applies to so-called immature farmed salmon.
Hence, the observable prices of slaughtered salmon shall be used as a basis for
determining the fair value of live immature salmon. The key amendment to the
decision made by the Ministry of Finance is that it added certain comments
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relating to how the term “adjustments to reflect differences” in IAS 41.18(b) was
to be applied. The adjustments should reflect the differences between the price
of an immature salmon and the hypothetical market price in an active market for
live immature salmon.’
As a result of this decision, the Norwegian entities were required to record immature
salmon at fair value, rather than at cost, by making appropriate adjustments to available
market prices for similar sized slaughtered fish.
While IFRS 13 has now replaced the requirements in paragraph 18(b) of IAS 41(2012)
to which this decision related, the same approach could be used when measuring fair
value in accordance with that standard. IFRS 13 prioritises the use of observable
inputs for identical or similar items when measuring fair value. Therefore, in situations
where an active market does not exist for the asset in its current form, entities might
use prices for similar assets, for which observable prices do exist, as an input into the
fair value measurement.
As discussed in the Norwegian salmon example above and in Chapter 14 at 5.2.1, an
entity would need to identify any differences between the asset being measured at
fair value and similar asset (e.g. a converted or transformed asset), for which
observable market prices are available. The entity would then adjust the similar
asset’s market price for the costs a market participant would incur (after acquiring
the asset in its current condition) and the compensation they would expect for the
effort. Such adjustments could affect the categorisation of the fair value
measurement as a whole within the fair value hierarchy. Categorisation within the
hierarchy is done for disclosure purposes as it affects how much information must
be disclosed about the fair value measurement (see 5.2 below). IFRS 13 requires that,
‘[i]f an observable input requires an adjustment using an unobservable input and that
adjustment results in a significantly higher or lower fair value measurement, the
resulting measurement would be categorised within Level 3 of the fair value
hierarchy’. [IFRS 13.75]. Categorisation within IFRS 13’s fair value hierarchy is
discussed further in Chapter 14 at 16.
5 DISCLOSURE
5.1 General
5.1.1
Statement of financial position
IAS 1 requires biological assets (including produce growing on a bearer plant) to be
presented separately on the face of an e
ntity’s statement of financial position (see
Chapter 3). [IAS 1.54]. Agricultural produce after the point of harvest should be accounted
for under IAS 2. That standard does not require agricultural produce to be disclosed
separately on the face of the statement of financial position (see Chapter 22). The
following example, which is derived from the Illustrative Examples to IAS 41, illustrates
the requirement to disclose biological assets in the statement of financial position.
[IAS 41.IE1].
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Example 38.3:
Presentation of biological assets in the statement of financial position
The statement of financial position below illustrates how a dairy farming business might present biological
assets in its statement of financial position.
XYZ Dairy Ltd.
Statement of financial position
31 December
31 December
ASSETS
20X1
20X0
Non-current assets
Dairy livestock – immature *
52,060
47,730
Dairy livestock – mature *
372,990
411,840
Subtotal – biological assets
425,050
459,570
Property, plant and equipment
1,462,650
1,409,800
Total non-current assets
1,887,700
1,869,370
Current assets
Inventories 82,950
70,650
Trade and other receivables
88,000
65,000
Cash 10,000
10,000
Total current assets
180,950
145,650
Total assets
2,068,650
2,015,020
EQUITY AND LIABILITIES
Equity
Issued capital
1,000,000
1,000,000
Retained earnings
902,828
865,000
Total equity
1,902,828
1,865,000
Current liabilities
Trade and other payables
165,822
150,020
Total current liabilities
165,822
150,020
Total equity and liabilities
2,068,650
2,015,020
*
An entity is encouraged, but not required, to provide a quantified description of each group of biological
assets, distinguishing between consumable and bearer biological assets or between mature and immature
biological assets, as appropriate. An entity discloses the basis for making any such distinctions. (Bearer
biological assets are those assets that self-regenerate, e.g. cows that bear calves).
5.1.1.A
Current versus non-current classification
IAS 1 requires an asset to be classified as current when: [IAS 1.66]
(a) the entity expects to sell, consume or realise the asset in its normal operating cycle;
(b) the asset is primarily for trading purposes;
(c) the entity expects to realise the asset within 12 months after the reporting period; or
(d) the asset is cash or a cash equivalent (as defined in IAS 7 – Statement of Cash
Flows, see Chapter 36), unless it is restricted from being exchanged or used to
settle a liability for at least twelve months after the reporting period.
If these criteria are not met, the asset is classified as non-current.
The classification of agricultural produce is usually consistent with an entity’s assessment
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for its inventories, i.e. typically classified as a current asset because it will be sold,
consumed or realised as part of the normal operating cycle.
The classification of biological assets (including produce growing on a bearer plant)
typically varies based on the nature of the biological asset and the time it takes to mature.
For consumable biological assets that only have one harvest, classification will depend
on when the asset will be harvested and sold. For example, livestock held for slaughter
would likely be realised within 12 months after the end of the reporting period or as part
of the normal operating cycle, and therefore would be classified as a current asset. Pine
trees in a forest usually take more than 20 years to mature. Therefore, pine forests are
usually classified as non-current.
Bearer biological assets, such as dairy cows or animals used for breeding, are often
classified as non-current. Such assets usually provide multiple harvests, which may extend
beyond one accounting period. Therefore, in order to classify the asset appropriately, an
entity would need to consider the period over which it will derive future economic
benefits from the asset, which is likely to be when the biological asset will be sold,
replaced or removed. This is essentially consistent with determining the useful life of an
item of property, plant and equipment in accordance with IAS 16.
In situations where biological assets are classified as non-current, there is some debate
about whether a portion should be classified as current. Some believe that, particularly
for bearer biological assets, the asset should be classified as non-current, consistent with
the classification of property, plant and equipment under IAS 16. In this situation, an entity
would probably only classify the asset as current when it is held for sale in accordance
with IFRS 5 (see Chapter 4). Others argue that, since the unit of account in IAS 41 is the
individual asset (see 4.2.1 above), a portion of a group of biological assets could be
classified as current. The current portion would be comprised of biological assets that will
be removed permanently (e.g. sold, up-rooted or otherwise removed) within 12 months
after the end of the reporting period. Determining such a split may be more obvious for
consumable biological assets with only one harvest, for example, the trees in a forest an
entity expects to harvest within 12 months of the end of the reporting period. For other
biological assets, care is needed to ensure that it is the final removal of the biological asset
itself that is considered and not its agricultural produce. An example of the final removal
of such biological assets include dairy cows in a herd that an entity sells for slaughter.
Regardless of which approach is used, an entity should be consistent from period to period
across all similar types of biological assets. An entity should also assess whether its policy
for classifying, or not classifying, a portion of its biological assets as current should be
disclosed (see Chapter 3 for further discussion).
Produce growing on a bearer plant (e.g. grapes on a vine) is accounted for in accordance
with IAS 41, separately from the bearer plant (which is within the scope of IAS 16,
see 3.2.3 above). As a result, entities need to consider the appropriate classification of
any produce growing on a bearer plant. Produce growing on a bearer plant will likely be
a current asset, unless it takes more than a year to mature.
5.1.2 Income
statement
IAS 1 is silent on the presentation of gains and losses on biological assets (including
produce growing on a bearer plant) and agricultural produce in the income statement.
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IAS 41 r
equires that an entity disclose ‘the aggregate gain or loss arising during the
current period on initial recognition of biological assets and agricultural produce and
from the change in fair value less costs to sell of biological assets’. [IAS 41.40]. The standard
only requires disclosure of the aggregate gain or loss; it does not require or encourage
disaggregating the gain or loss. [IAS 41.B78-B79]. Example 1 of the Illustrative Examples to
IAS 41 illustrates gains on biological assets and agricultural produce presented near the
top of the income statement, although it is not entirely clear from the example whether
losses on biological assets should be presented in the same position or elsewhere in the
income statement. [IAS 41.IE1].
The extract below is from the combined and consolidated financial statements of Mondi
Limited. The Mondi Limited group recognised changes in fair value less costs to sell in
profit or loss, but did not separately disclose that amount on the face of the financial
statements. Instead, as is illustrated below, the change in the fair value less costs to sell
of biological assets was separately disclosed in the notes to the financial statements.
Extract 38.1: Mondi plc and Mondi Limited (2017)
Notes to the combined and consolidated financial statements
for the year ended 31 December 2017 [Extract]
33 Accounting policies [Extract]
Non-current non-financial assets excluding goodwill, deferred tax and net retirement benefits asset [extract]
Agriculture – owned forestry assets (note 13)
Owned forestry assets are measured at fair value less costs to sell, calculated by applying the expected selling price, less costs to harvest and deliver, to the estimated volume of timber on hand at each reporting date. The fair value less costs to sell is determined using a market approach. The estimated volume of timber on hand is determined based on the maturity
profile of the area under afforestation, the species, the geographic location and other environmental considerations and
excludes future growth. The product of these is then adjusted for risks associated with forestry assets.
Changes in fair value are recognised in the combined and consolidated income statement within other net operating
expenses. At point of felling, the carrying value of forestry assets is transferred to inventory.
Directly attributable costs incurred during the year of biological growth and investments in standing timber are
International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards Page 626
