Professional Documents
Culture Documents
Why?
Here, we are dealing with life. Animals, plants, biological transformation, you name it.
While doing so, there are many burning questions and troubles because of life’s specifics. I tried
to respond some of them in this article.
Yet still I receive questions related to valuation of agricultural assets – how to measure them?
How to set their fair value?
Let’s see.
It is very similar as with financial instruments – classify it first, apply appropriate standard and
then measure it accordingly.
I find this definition vague, because not all living animals and plants automatically fall within the
scope of IAS 41.
If yes, then OK, the biological asset falls within the scope of IAS 41. For example, fish
that you are growing on a farm.
If not, then the asset is outside of IAS 41 scope. For example, fish that you pick from the
sea (you did not manage the biological transformation of wild ocean fish, did you?).
Another example is dog – holding a dog for breeding puppies is agricultural activity (IAS 41
applies), but holding a guard dog for security purposes is not (IAS 41 does not apply).
Harvested as agricultural produce; for example farmed fish, hogs for meat, trees grown
for lumber etc.; or
Sold as biological assets; for example seedlings of apple trees, young puppies, etc.
Consumable assets fall within the scope of IAS 41 and shall be measured at fair value less cost
to sell.
Bearer biological assets are other than consumable biological assets, for example apple tree
held for harvesting apple, or cattle for milk production.
Here, IFRS makes a distinction between bearer plants and bearer animals:
Therefore, you need to measure them at fair value less cost to sell as well.
With plants, you need to differentiate and correctly assess what they are. And, as this question
requires special attention, I will make up a Q&A session soon on this point.
Bearer plants fall within the scope of IAS 16 and therefore they are measured either applying
cost model or revaluation model.
Be careful – products made from agricultural produce are NOT agricultural produce anymore;
rather they are inventories, for example apple juice, cheese, salami, etc.
Imagine you have a chicken farm and raise young chicks for further sale.
These young chicks are NOT an agricultural produce. Instead, they are biological assets, because
they are living animals (thus meet the definition of a biological asset).
Agricultural produce shall be measured at fair value less cost to sell at the point of harvest.
After this point, agricultural produce becomes inventories and you need to apply the standard
IAS 2.
Agricultural land that you use for agricultural activity is definitely within the scope of IAS
16 and measured using cost or revaluation model.
It is NOT an investment property under IAS 41, because you are using it for agriculture (own
revenue-generating activity).
Special For You! Have you already checked out the IFRS Kit ? It’s a full IFRS learning
package with more than 40 hours of private video tutorials, more than 140 IFRS case studies
solved in Excel, more than 180 pages of handouts and many bonuses included. If you take action
today and subscribe to the IFRS Kit, you’ll get it at discount! Click here to check it out!
The following table sums up the measurement of agricultural assets:
What? Example Measurement
Consumable biological Seedlings of apple tree, chicken Fair value less cost to sell at the
asset for sale, etc. reporting date
IFRS 13 contains fair value hierarchy that classifies inputs to use for setting the fair value and
sets priorities of these inputs:
Level 1 inputs: Quoted prices in active markets for identical assets on the measurement
date. This is by far the most preferred and accepted method of measurement.
However, you can apply this only for assets with active market for similar assets with the
same condition.
No problem for agricultural produce like raw milk, eggs or meat – usually there is a
strong active market to derive the fair value of these assets.
Also, no problem for consumable biological assets close to their sale or harvest date.
Level 2 inputs: Other than quoted market prices within Level 1 that are directly or
indirectly observable for the asset.
Basically we are talking about market-determined prices where active market does not
exist. Imagine that some asset would be so rarely traded that the last trade happened some
time ago. You can use most recent price as the input to fair valuation – that’s basically
level 2 input.
Level 3 inputs: Unobservable inputs for the asset.
In agriculture, Level 3 is used when there is no active market for the asset in its present
condition (e.g. age, height, weight). In practice, companies use present value of cash
flows generated by the asset as Level 3 input to valuation technique.
1. Market price for the identical asset in an active market at the reporting date (or at the
harvest date, based on the type of an asset) – that’s Level 1.
2. Recent transaction prices for the identical assets when no active market exists – that’s
Level 2.
3. Market price for similar assets in an active market – that’s Level 2.
4. Present value of future cash flows from the assets – that’s Level 3.
5. Cost as an approximation of fair value – that’s Level 3, too and it can be used only in
some situations as described below.
For harvested agricultural produce and some consumable biological assets, there is an active
market with exactly the same assets in the same condition and you can take the market price
as level 1 input into your valuation.
For most biological assets that take longer time to produce, to mature and will not be harvested
or sold until some distant time in the future, active market does NOT exist and you need to
apply discounted cash flow technique.
In 20X1, ABC planted 1 000 trees. Eucalyptus trees are mature and ready for harvest after 7
years.
At the end of 20X3, the market price of one mature eucalyptus tree is CU 3 000.
Each year, ABC incurs costs to grow the trees amounting to CU 100 per tree.
The fair value of ABC’s trees was CU 1 850 000 at the end of 20X2.
For the sake of simplicity, we will ignore inflation and other economic parameters here. I want to
show the basic mechanics to you.
ABC’s 1 000 trees will be ready in 20X8, so at the end of 20X3, we need to list all the cash flows
in the years 20X4 to 20X8 as I have done here:
Year Expenses Income Net cash flow Discount factor Present value
Total 1 920,00
This is the fair value of one tree; ABC has 1 000 trees, so the fair value of all eucalyptus trees is
1 920 000 CU – pardon for rounding involved here.
The total change in FV of the trees is therefore CU 70 000 (1 920 000 less 1 850 000).
1. Don’t forget to deduct the cost to sell from this fair value. In the table, we included cash
outflows related to cost to grow the trees, but not cost to sell, so just bear in mind that
once you have your fair values, you need do take cost to sell into account.
2. IAS 41 encourages you to disclose the fair value change over the year and to split this
change into:
o Change in FV due to physical change (trees grow and thus their FV increases);
and
o Change in FV due to change in prices (market prices can change over time).
This disclosure is especially important for biological assets with production cycle longer
than one year (e.g. eucalyptus trees in this example).
Which ones?
This strongly depends on the specific activity you are doing, specific biological assets that you
are measuring and yes, it requires some judgment from you.
Cash inflows from sale of an asset or agricultural produce in the future. You might
estimate it based on:
o assumed asset’s weight, age, volume, etc.; and
o market prices of a specific biological asset or agricultural produce.
For example, let’s say you take care of forest with trees that will be chopped for wood
after some time. You can estimate future cash inflow from the forestry assets (trees)
based on assumed volume (cubic meters) of wood harvested from the forest and market
price of wood from similar trees.
One big NO: do NOT determine the fair value based on future prices in your contracts.
Examples are numerous here: animal food, vaccination of animals, fertilizers, herbicides,
labor cost and other.
Two big NOs: Do not include income tax and financing cash outflows.
You can use cost instead of fair value, but only when either:
o Little biological transformation happened since initial costs were incurred – for
example, you plant seedlings of trees very short time before the end of the
reporting period.
o The biological transformation does not have a material impact on price, for
example the trees with long production cycle right after planting.
2. The fair value cannot be reliably measured.
This is extremely rare because you can almost always measure the fair value for
biological assets, either based on Level 1, Level 2 or Level 3 inputs.