2.2.1.A Definition of bearer plants

A bearer plant is defined as ‘a living plant that:

1. is used in the production or supply of agricultural produce;
2. is expected to bear produce for more than one period; and
3. has a remote likelihood of being sold as agricultural produce, except for incidental scrap sales’. [IAS 41.5].

All of the above criteria need to be met for a plant to be considered a bearer plant.

The definition captures plants that would intuitively be considered to be bearers, for instance, grape vines. Some plants that may appear to be consumable, such as the root systems of perennial plants (e.g. sugar cane, bamboo or asparagus), but due to the perennial nature of their root systems, they are expected to meet the definition of a bearer plant.

Annual crops and other plants that are held solely to be harvested as agricultural produce (e.g. many traditional arable crops such as maize, wheat and soya, as well as trees grown for lumber), are explicitly excluded from the definition of a bearer plant. In addition, plants that have a dual use (i.e. plants cultivated to bear agricultural produce, but for which there is more than a remote likelihood that the plant itself will be harvested and sold as agricultural produce, beyond incidental scrap sales) are not bearer plants. [IAS 41.5A]. This may be the case when, for example, an entity holds rubber trees to sell both the latex as agricultural produce and the trees as lumber.

Bearer animals, like bearer plants, may be held solely for the produce that they bear. However, when IAS 41 was amended to exclude bearer plants from its scope, bearer animals were explicitly excluded from the amendments and continue to be accounted for under IAS 41 on the basis that the measurement model would become more complex if applied to such assets.

Determining whether an asset meets the definition of a bearer plant may not be entirely intuitive. Careful assessment will, therefore, be important. We believe that judgement is needed in the following areas:

• Used in the production or supply of agricultural produce

  Judgement may be needed to determine whether a plant is used in the production or supply of agricultural produce, rather than consumed in the process. For example, some plants that are generally thought of as consumable are harvested twice, but with the first harvest having the principal purpose of improving the yield of the second harvest. It is not clear whether the fact that there are two harvests is sufficient to make these plants bearer assets.

  For certain plants, new produce may be capable of being grown from various parts of the plant (e.g. pineapples). For others, the plant itself may be cut back and re-grown. For example, after a harvest of bananas, the banana plant may be cut down to its base and re-grown the next year to produce more bananas. In such situations, judgement may be needed to determine which part of the plant might be the bearer plant (e.g. the banana palm or the base).

• Expected to bear produce for more than one period

  The definition of a bearer plant requires that a plant be expected to bear produce for more than one period. It would seem appropriate to think of an annual period in this context. However, the standard does not use this term, so an entity needs to consider if an interim period, a season or a production cycle (i.e. through to harvest) might also be appropriate.

• Incidental scrap sales

  Whether the likelihood of the plant being sold as agricultural produce is remote is also a matter of judgement. However, it is intended to be a high hurdle. The standard does allow for the fact that there may be some ‘incidental scrap sales’, but this term is not defined.

  The standard notes that bearer plants might be cut down and sold as scrap, (e.g. for firewood) at the end of their productive life and states that ‘such incidental scrap sales would not prevent the plant from satisfying the definition of a bearer plant’. [IAS 41.5B]. However, in the example given in the standard (i.e. firewood), it is reasonably evident that such sales would be ‘incidental’. Since no further guidance is given in the standard, entities need to apply judgement in determining what constitutes ‘scrap sales’ (e.g. would it include ad-hoc sales before the productive life has ended, such as selling trees removed while thinning?). Furthermore, the standard does not clarify at what level sales cease to be incidental and whether this is a qualitative or quantitative assessment. Therefore, judgement may be needed.

In addition to the considerations above, an entity may also need to reassess whether a plant meets the definition of a bearer plant after initial recognition. If a plant initially meets the definition of a bearer plant, but this subsequently changes, would IAS 41 then apply instead of IAS 16? Neither IAS 16 nor IAS 41 address this question or specify how to transfer such assets between IAS 16 and IAS 41 (or vice versa). Once again, management will need to apply judgement in developing an accounting policy in these situations.

2.3.5.A Leases of biological assets (excluding bearer plants) – lessee accounting

IFRS 16 excludes from its scope the lessee accounting for leases of biological assets that are within the scope of IAS 41. [IFRS 16.3(b)]. The scope exemption in IFRS 16 does not specify whether the asset would be recognised in accordance with IAS 41; only that it is an asset that would be within the scope of IAS 41. Nor does it explain how an entity would account for its lease liability since it is outside the scope of IFRS 16. Entities affected by this scope exemption will need to use judgement to develop an appropriate accounting policy, considering the requirements of IAS 8 – Accounting Policies, Changes in Accounting Estimates and Errors (see Chapter 3), especially paragraphs 10‑13.

It is important to note that leases of bearer plants that are within the scope of IAS 16 are not excluded from the scope of IFRS 16. ‘Consequently, leases of bearer plants such as orchards and vineyards held by a lessee are within the scope of IFRS 16’. [IFRS 16.BC68(b)].

2.3.5.B Leases of biological assets (excluding bearer plants) – lessor accounting

Chapter 23 contains a discussion of lessor accounting. For lessors, leases of biological assets, including those within the scope of IAS 41, are within the scope of IFRS 16. A lessor would account for its leases as either operating or finance leases in accordance with IFRS 16. [IFRS 16.67‑97].

For finance leases of biological assets:

• Account for the net investment in the lease (i.e. the lease receivable, not the biological asset) in accordance with IFRS 16.

For operating leases of biological assets:

• Account for the lease payments as income in accordance with IFRS 16.
• Present the leased biological asset in accordance with its nature, consistent with other assets in the scope of IAS 41.
• Account for other rights and obligations under the lease (e.g. lease income) in accordance with IFRS 16.
• Make disclosures both in accordance with IFRS 16, and for the asset subject to the operating lease, in accordance with IAS 41. [IFRS 16.81‑88].

Beyond discussing certain costs, depreciation and impairment, paragraphs 81‑88 of IFRS 16 do not specifically discuss how to recognise and measure the asset subject to an operating lease if it is within the scope of IAS 41. [IFRS 16.81‑88]. Paragraphs BC58-BC66 of IFRS 16 outline the IASB's rationale in retaining the requirements of IAS 17 for lessors, virtually unchanged. [IFRS 16.BC58-BC66]. Furthermore, paragraph B82(n) of the Basis for Conclusions on IAS 41, which outlined the interaction between IAS 41 and IAS 17, was not amended on the issuance of IFRS 16. [IAS 41.B82(n)]. Therefore, it is likely that lessors will continue to measure a biological asset in accordance with IAS 41.

Such lease arrangements may include the land to which the asset is attached. Any leased land would need to be separately accounted for under the relevant standard, for example IAS 16 or IAS 40, as it is explicitly excluded from the scope of IAS 41 (see 2.3 above). [IAS 41.2(e)].

It is worth noting that, unless specifically excluded from its scope, IAS 41 applies to all biological assets when they relate to agricultural activity. [IAS 41.1]. In the example above, where the sheep are leased under an operating lease, the wool is the agricultural produce. The sheep are being managed to produce that wool, albeit by the lessee and not the lessor. Since IAS 41 does not specify who must do the managing, the definition of agricultural activity is met. Therefore, it would be a lease of a biological asset that is within the scope of IAS 41.

3.2.1.A Initial and subsequent measurement

A biological asset that is within the scope of IAS 41 (i.e. excluding bearer plants, but including produce growing on a bearer plant) is measured on initial recognition and at the end of each reporting period at its fair value less costs to sell, unless an entity can demonstrate at initial recognition that fair value cannot be measured reliably. [IAS 41.12]. In the latter case, the entity measures the biological asset at historic cost less any accumulated depreciation and any accumulated impairment losses (see 3.2.5 below), unless/until fair value becomes reliably measurable.

3.2.1.B Subsequent expenditure

IAS 41 does not prescribe how an entity should account for subsequent expenditure in relation to biological assets, because the (then) IASC believed this to be unnecessary with a fair-value-based measurement approach. [IAS 41.B62].

Such expenditure may be expensed as incurred or capitalised as additions to the related biological asset. However, under the fair value model, the biological asset will be re-measured at the end of each reporting period. As such, any amounts capitalised will only result in a reallocation between expenses and the fair value gain or loss for the biological asset. Therefore, an entity's policy in relation to subsequent expenditure will have no effect on its equity or net profit or loss, although it will affect:

• the reconciliation of changes in the carrying amount of biological assets;
• the classification of the expenditure in the income statement as either an expense or as part of the net gain or loss on biological assets; and
• the presentation of subsequent expenditure on biological assets in the statement of cash flows as either operating or investing activities, as appropriate.

In our view, an entity should select an accounting policy for subsequent expenditure that is broadly consistent with the principles in other standards, such as IAS 16 and IAS 38. For example, in the case of livestock, an entity may expense maintenance costs, such as routine vaccinations, while treating costs that increase the originally expected yield of the asset as capital expenditure. For example, an entity must consider whether it is appropriate to add costs that improve initially anticipated yields (such as additional vaccinations or feed supplements) to the carrying value of the asset. However, such additions would be adjusted at each period end when the biological asset concerned is revalued to its new fair value. Judgement may be required to determine whether costs that take place after maturity (e.g. vaccinations or feed supplements) would be maintenance costs or improvements. Furthermore, care will be needed when costs are related to both bearer plants and produce growing on a bearer plant or when it is not clear to which of those assets it relates. This is discussed further at 3.2.3 below.

In June 2019, the IFRS Interpretations Committee discussed a submission about the accounting for costs related to the biological transformation of biological assets (subsequent expenditure) applying IAS 41. The submitter asked whether an entity; (a) recognises subsequent expenditure as an expense when incurred; or (b) capitalises the subsequent expenditure (i.e. adds it to the carrying amount of the asset).

The Committee tentatively decided not to take the issue onto its standard setting agenda noting that IAS 41 does not specify requirements on the accounting for subsequent expenditure. as it observed that capitalising subsequent expenditure or recognising it as an expense has no effect on the measurement of biological assets nor does it have any effect on profit or loss; however, it affects the presentation of amounts in the statement of profit or loss.

The Committee drew attention to the requirements of paragraph 13 of IAS 8, whereby an entity would apply its accounting policy for subsequent expenditure consistently to each group of biological assets and paragraphs 117‑124 of IAS 1 – Presentation of Financial Statements – whereby an entity would also disclose the selected accounting policy if that disclosure would assist users of financial statements in understanding how those transactions are reflected in reported financial performance. [IAS 1.117‑124; IAS 8.13].¹

3.2.3.A Requirements for bearer plants in the scope of IAS 16

Bearer plants are subject to all of the recognition and measurement requirements in IAS 16 (see Chapter 18), including the following (see Figure 42.2 below):

• before maturity, bearer plants must be measured at their accumulated cost, similar to the accounting treatment for a self-constructed item of plant and equipment before it is available for use; [IAS 16.22A] and
• after the bearer plant is mature, entities have a policy choice to measure the bearer plants using either the cost model or the revaluation model. [IAS 16.29]. It is important to note that:
  • if the revaluation model is selected, revaluations need to take place with sufficient regularity to ensure the carrying amount does not differ materially from the asset's fair value had it been measured at the end of the reporting period; [IAS 16.22A]
  • entities following either model need to determine the useful life of the bearer plant in order to depreciate it. The useful life needs to be re-evaluated each year; [IAS 16.51] and
  • unlike biological assets within the scope of IAS 41, items of property, plant and equipment within the scope of IAS 16 are not scoped out of IAS 36 – Impairment of Assets. Entities, therefore, need to assess whether there are indicators that a bearer plant is impaired at the end of each reporting period. If such indicators exist, the bearer plant will be subject to an impairment test in accordance with IAS 36. [IAS 16.63, IAS 36.8‑9]. An impairment loss will be recognised if the carrying value is higher than the bearer asset's recoverable amount (being the higher of the asset's fair value less costs of disposal and its value in use). [IAS 36.60]. The requirements of IAS 36 are discussed in Chapter 20.

The requirements for bearer plants do not completely eliminate volatility in profit or loss, as entities still need to recognise any changes in the fair value of agricultural produce growing on the bearer plant, as discussed at 3.2.3.B below.

IAS 16 is written with property, plant and equipment in mind. As such, entities may need to use judgement to apply its requirement to bearer plants and we note the following areas for consideration.

• (a) Unit of account for bearer plants

IAS 16 does not specify the unit of account for bearer plants. Therefore, entities need to use the general requirements of IAS 16 (see Chapter 18) and may need to consider that IAS 41 applies to each item of produce growing on a bearer plant.

The Basis for Conclusions to IAS 16 notes that ‘IAS 16 does not prescribe the unit of measure, or the extent to which items can be aggregated and treated as a single item of property, plant and equipment. Consequently, applying the recognition criteria in IAS 16 to bearer plants will require judgement. This gives an entity flexibility, depending on its circumstances, to decide how to aggregate individual plants for the purpose of determining a measurable unit of bearer plants’. [IAS 16.BC81].

• (b) Determining when a bearer plant is mature

IAS 16 requires an entity to determine when a bearer plant reaches maturity – that is, when it is in the ‘location and condition necessary for it to be capable of operating in the manner intended by management’. [IAS 16.16(b)]. This determination is important because it is when an entity must cease capitalising costs as part of the initial cost of the asset. The requirements for bearer plants seem to assume that the point in time when a plant is capable of producing (which is referred to as ‘maturity’) marks a distinct end to all bearer plants' biological transformation. However, the life cycles of plants can vary widely and it may be difficult, in practice, to identify when maturity has been reached.

Determining at what stage during biological transformation a bearer plant would be considered mature could, therefore, be challenging. Alternatives could include: when the bearer plant is capable of producing its first crop; when the produce is expected to be of sufficient quality to be sold (e.g. macadamia trees start producing fruit after 3‑4 years, but only reach commercial levels when the trees are 7 years old); or when the growth phase of biological transformation is complete for the bearer plant (and is thereafter expected to degenerate or for its productive capacity to decline).

The Board decided not to provide specific application guidance for bearer plants. As such, entities need to apply judgement to determine when a bearer plant is mature for accounting purposes. In reaching its decision not to provide additional guidance, the IASB noted that options, such as those listed above, would have needed further defining and could have led to interpretive issues. Furthermore, ‘a similar scenario arises for a factory or retail outlet that is not yet capable of operating at full capacity and did not think that this was a major issue in practice’. [IAS 16.BC82]. Entities should, therefore, carefully consider the requirements of IAS 16, including those related to sales prior to an item of property, plant and equipment being available for use (see Chapter 18).

• (c) Determining initial cost for bearer plants (prior to maturity)

IAS 16 requires that bearer plants be ‘accounted for in the same way as self-constructed items of property, plant and equipment before they are in the location and condition necessary to be capable of operating in the manner intended by management. Consequently, references to “construction” should be read as covering activities that are necessary to cultivate the bearer plants before they are in the location and condition necessary to be capable of operating in the manner intended by management’. [IAS 16.22A].

While IAS 16 provides guidance (see Chapter 18) that entities need to consider for bearer plants, there are differences between traditional plant and equipment and biological assets. As such, entities need to apply judgement in determining which costs can be capitalised. For example, as a plant is growing, an entity will incur costs related to water, fertiliser, greenhouses, etc. The entity needs to assess whether these costs are directly attributable to the bearer plant reaching maturity.

Another example is the cost of abnormal amounts of wasted material, labour and other resources. IAS 16 does not permit these costs to be included in the cost of a self-constructed asset. [IAS 16.22]. Entities need to determine what constitutes a normal level of wastage means for bearer plants. For example, many bearer plants die before maturity (e.g. due to disease or adverse weather) and are subject to planned thinning. Whether either or both of these is normal wastage requires judgement.

• (d) Costs incurred after maturity

A number of costs, such as fertilising, pruning and thinning are incurred after maturity and can improve the quality of the produce or extend the productive life of a bearer plant. Entities need to use judgement to determine whether these costs are maintenance costs or are considered to be improvements.

In addition, after maturity many costs are incurred to benefit both the bearer plant and the produce growing on the bearer plant. Entities need to carefully consider the basis on which to allocate costs between a bearer plant and the produce growing on a bearer plant when the costs are incurred in relation to both assets (e.g. fertilising costs).

• (e) Depreciation and impairment considerations

Entities need to carefully consider an appropriate depreciation rate for their bearer plants. Similar considerations are discussed at 3.2.5.B below in relation to biological assets for which the cost model is used under IAS 41. The model in IAS 16 generally assumes that improvements in productivity and quality of produce do not occur after maturity without additional expenditure to improve the asset. However, many plants mature with age and cultivation. As discussed at 2.2.1 above, biological transformation continues after a bearer plant begins to produce and includes degeneration. [IAS 41.5, 7]. A decline in productivity might, therefore, occur only at the end of a plant's productive life, which differs from wear and tear on an item of machinery.

Applying the requirements of IAS 36 to a bearer plant may also be challenging. For example, an individual bearer plant may not generate its own cash inflows and may, therefore, need to be tested for impairment as part of a cash generating unit. In addition, the produce growing on a bearer plant is treated as a separate asset from the bearer plant and, because it is measured at fair value less costs to sell on an ongoing basis, under IAS 41, it is excluded from the scope of IAS 36. When testing the bearer plant for impairment, entities need to determine whether or not they can include the produce currently growing on the bearer plant in their impairment assessment.

• (f) Revaluation model in IAS 16

IAS 16 permits an entity, after initial recognition to apply the revaluation model. However, this is not the same as applying the fair value model in IAS 41. The former is one that recognises valuation adjustments in other comprehensive income as a form of capital maintenance; the latter is a model that recognises valuation adjustments in the income statement as part of periodic performance. In addition, unlike the model in IAS 41, if the revaluation model is applied under IAS 16 entities are required to:

• depreciate bearer plants between revaluations, with the depreciation expense recognised in profit or loss;
• identify appropriate indicators of impairment for bearer plants in accordance with IAS 36, and assess annually whether indicators exist. If they do, then those bearer plants are tested for impairment (as discussed above); and
• maintain cost records for each bearer plant so as to separately track impairment that is recognised in profit or loss and impairment that is recognised in other comprehensive income.

Furthermore, an entity is unable to recognise increases in fair value that arise from a bearer plant's biological transformation in profit or loss, during the periods in which it is held and used. Since bearer plants are considered property, plant and equipment, the sale of a bearer plant results in a gain or loss on disposal, while revenue is recognised only in relation to sales of agricultural produce.

Despite these challenges, entities may elect to measure their bearer plants using the revaluation model to ensure consistency with the produce growing on them or because the fair value information is useful. That is, a change in the productive capacity of a bearer plant, or a change in the prices for the future output of a bearer plant, can provide useful information.

3.2.3.B Requirements for agricultural produce growing on bearer plants

As noted at 3.2.3.A above, IAS 16 and IAS 41 require an entity to recognise a bearer plant separately from produce growing on it from the time it exists until the point of harvest.

Produce growing on a bearer plant remains within the scope of IAS 41 and is measured at fair value less costs to sell, with changes recognised in profit or loss as the produce grows. In the IASB's view, this requirement ensures that produce growing in the ground as an annual crop (e.g. wheat) and produce growing on a bearer biological asset (e.g. grapes) are accounted for consistently. [IAS 41.BC4D]. As a result, changes in the fair value of such agricultural produce continue to be recognised in profit or loss at the end of each reporting period.

• (a) Determining when agricultural produce exists

As discussed at 3.1 above, paragraph 10 of IAS 41 provides criteria for recognising biological assets and agricultural produce. [IAS 41.10]. However, since produce growing on a plant is not acquired, but grown, it may be difficult to determine when that produce exists and can be recognised for accounting purposes. Would an entity, for example, wait for physical evidence, e.g. blossom on a tree? If so, how would this be done when the produce is within the bearer plant and not visible, such as with maple or rubber trees? Entities may also need to check their procedures for ensuring that sufficient information is gathered, i.e. identify each item of produce growing on a bearer plant when it is at the right stage of development to be recognised. The key question when assessing the recognition criteria (see 3.1 above) may be whether it is probable that future economic benefits will flow to the entity. At such an early stage of development, it may be difficult to determine for each item of produce growing on the bearer plant. However, historical information about similar bearer plants and their produce may be of help.

Determining when produce on a bearer plant exists is important as it affects when an entity should recognise and initially measure fair value less costs to sell. This, in turn, determines when an entity should assess whether it is able to measure produce at fair value reliably (or otherwise apply the measurement exception discussed at 3.2.5 below).

• (b) Applying the requirements for biological assets to produce growing on a bearer plant

IAS 41 does not explicitly address the accounting for produce growing on a bearer plant. Instead, the standard says that ‘produce growing on bearer plants is a biological asset’. [IAS 41.5C]. Therefore, an entity is required to apply the accounting required for other biological assets to such produce. This has a number of consequences, including the following:

• The unit of account is each item of produce, not the produce growing on each plant as a group. However, while the unit of account is the individual item, an entity is permitted to group these together for measurement purposes (see 4.2.2 below).
• Each item of produce growing on a bearer plant must be measured at fair value less costs to sell from the time it is recognised until the point of harvest, unless the measurement exception for biological assets for which the fair value cannot be reliably measured at initial recognition is applicable (see 3.2.5 below, including discussion by the Interpretations Committee in 2017 in relation to applying these requirements to produce growing on a bearer plant).

  The fair value less costs to sell may initially be negligible. That is, a market participant acquiring the bearer plant would only pay a negligible amount for the produce in the early stages of development because they would want to be compensated for the costs they would need to incur to continue growing the produce through to harvest and for the related risks, such as crop failure or price falls during the maturation period. Furthermore, cost to sell needs to be deducted from the fair value of the asset. As discussed at 3.2.3.A above, entities also need to carefully consider which costs relate to a bearer plant and which relate to the produce growing on the bearer plant.

  The different stages of maturity of the produce and the allocation of the costs related to both the bearer plants and to the produce may make valuing the produce on its own challenging. Measuring fair value for produce growing on a bearer plant also presents the same challenges as measuring part-grown biological assets and those that are physically attached to land (as discussed at 4.7 and 4.6.2.A below, respectively).

• The disclosure requirements that apply to biological assets also apply to produce growing on a bearer plant (see 5 below). Some of the required disclosures may be challenging for entities. For example, paragraph 46 of IAS 41 requires an entity to disclose non-financial measures or estimates of physical quantities for each group of biological assets. [IAS 41.46]. While entities may gather such information for management reporting purposes, they need to ensure that information is available for produce growing on bearer plants separately from the bearer plants on which they are growing.

3.2.5.A Rebutting the presumption

Under IAS 41, there is a presumption that the fair value of all biological assets (including produce growing on a bearer plant) can be measured reliably. This presumption can only be rebutted on initial recognition for a biological asset (not agricultural produce). In our view, such a rebuttal will be rare, as to be able to do so, an entity must demonstrate both of the following:

1. quoted market prices for the biological asset (including produce growing on a bearer plant) are not available; and
2. alternative fair value measurements for the biological asset are determined to be clearly unreliable. [IAS 41.30].

Since IAS 41 requires that the fair value of a biological asset (including produce growing on a bearer plant) be measured in accordance with IFRS 13 (see Chapter 14), an entity would need to consider the requirements of that standard in order to determine whether fair value can be reliably measured.

In relation to (a) above, it is important to note that IAS 41 does not restrict the criteria to quoted prices in an active market. Therefore, in order to rebut the presumption, an entity would need to determine that quoted prices in both active and inactive markets are unavailable for the asset.

If an entity is able to determine that quoted prices for the asset are unavailable, it would still need to determine that all other methods for measuring fair value are clearly unreliable before it can rebut the presumption. This is not the same identifying that a fair value measurement is complex and/or subjective. That is, measuring fair value often involves estimation and significant judgement, but this does not mean that it is automatically unreliable. Furthermore, the requirement is for the measurements to be ‘clearly unreliable’, which is arguably a higher hurdle than ‘unreliable’.

Determining that alternative fair value measurements are clearly unreliable is likely to include, but not be limited to, considering the reliability of the following factors:

• Estimates of quantities on hand and the stage of development – while estimates are often required of quantities on hand (including current stage of biological transformation and anticipated yields for future agricultural produce), the mere fact that estimates are used is not sufficient to demonstrate that fair value is unreliable. Rather, an entity would need to demonstrate that their estimates of the quantity and current state of their biological assets are often incorrect. This may be challenging for entities to demonstrate if the underlying information is regularly used by management to make decisions about future operations of the business.
• Prices for the asset in a future state (e.g. for the mature biological asset or the agricultural produce that will ultimately be harvested).
• Price for similar assets that can be used as an input into the fair value measurement – this could include plants and animals that are similar to the asset held by the entity or the ultimate agricultural produce that will result from managing the biological transformation of the asset held by the entity.
• Cash flow projections for the asset.
• The replacement cost of the asset.

Entities may also need to consider whether other entities (within a country or globally) are able to demonstrate that fair value can be reliably measured for the same or similar assets.

In 2017, the IFRS Interpretations Committee received a request to consider whether fruit growing on oil palms is considered an example of a biological asset for which an entity might rebut the fair value presumption applying paragraph 30 of IAS 41. The Committee rejected this request observing that its role is not to conclude upon very specific application questions, particularly when they relate to the application of the judgements required in applying IFRS. In rejecting the request, ‘the Committee concluded that the reference to “clearly unreliable” in paragraph 30 of IAS 41 indicates that, to rebut the presumption, an entity must demonstrate that any fair value measurement is clearly unreliable. Paragraph BC4C of IAS 41 suggests that, when developing the amendments to IAS 41 on bearer plants, the Board's expectation was that 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'.² [IAS 41.30, BC4C]. In addition to these observations, the Committee noted that possible differences in supportable 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 (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.³ [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 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].

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 is unlikely to have a separate market in its current form and is 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 Appendix 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 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 42.4 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 42.2 below. Therefore, entities will need to apply judgement when determining the appropriate allocation.

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 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 16.⁶

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 41.⁷ 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 13.⁸ Most respondents to the IASB's requests for information as part of its PIR of IFRS 13 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.⁹

In considering all of the feedback on the RFI, the Board completed its review of findings and concluded in March 2018 that IFRS 13 is working as it intended. It also decided to:

1. ‘feed the PIR findings regarding the usefulness of disclosures into the Board's work on Better Communication in Financial Reporting, in particular, into the Targeted Standards-level Review of Disclosures and the Primary Financial Statements projects;
2. continue liaising with the valuation profession, monitor new developments in practice and promote knowledge development and sharing; and
3. conduct no other follow-up activities as a result of findings from the PIR.'¹⁰

In relation to education about measuring the fair value of biological assets, ‘the Board concluded that, although there might be inconsistent application in fair value measurement of biological assets, detailed application questions are best addressed by the valuation profession, and not by accounting standard-setters.’¹¹ 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 (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.¹²

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.

4.6.3.A Condition and location

Fair value measured in accordance with IFRS 13 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. 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.

4.6.4.A Cost as an approximation of fair value

IFRS 13 defines fair value as a current exit price, not an 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.

5.1.1.A Current versus non-current classification

IAS 1 requires an asset to be classified as current when: [IAS 1.66]

1. the entity expects to sell, consume or realise the asset in its normal operating cycle;
2. the asset is primarily for trading purposes;
3. the entity expects to realise the asset within 12 months after the reporting period; or
4. the asset is cash or a cash equivalent (as defined in IAS 7 – Statement of Cash Flows, see Chapter 40), 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 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 an operating cycle (e.g. a year) to mature.

5.1.1.B Bearer plants

The disclosure requirements of IAS 16 are applicable to bearer plants (see Chapter 18). Bearer plants are an example of a separate class of property, plant and equipment listed in paragraph 37 of IAS 16, therefore, the disclosure requirements of paragraph 73 of IAS 16 should be provided for bearer plants separately to those of other classes. [IAS 16.37, 73].

The extract below, from the consolidated financial statements of T&G Global Limited, is an example of disclosures provided of bearer plants (trees and vines) under IAS 16 and of the produce growing on the bearer plants (unharvested fruit) under IAS 41.