This Basis for Conclusions accompanies, but is not part of, IAS 41. It was prepared by the IASC Staff in 2000 but was not approved by the IASC Board. It summarises the Board’s reasons for:
(a) | initiating and proposing an International Accounting Standard on agriculture; and |
(b) | accepting or rejecting certain alternative views. |
Individual Board members gave greater weight to some factors than to others.
This Basis has not been revised by the IASB and the terminology has not been amended to reflect the changes made by Improvements to IFRSs issued in May 2008.
B1 | In 1994, the IASC Board (the ‘Board’) decided to develop an International Accounting Standard on agriculture and appointed a Steering Committee to help define the issues and develop possible solutions. In 1996, the Steering Committee published a Draft Statement of Principles (‘DSOP’) setting out the issues, alternatives, and the Steering Committee’s proposals for resolving the issues and inviting public comment. In response, 42 comment letters were received. The Steering Committee reviewed the comments, revised certain of its recommendations, and submitted them to the Board. |
B2 | In July 1999, the Board approved Exposure Draft E65 Agriculture with a comment deadline of 31 January 2000. The Board received 62 comment letters on E65. They came from various international organisations, as well as from 28 individual countries. In April 2000, the IASC Staff sent a questionnaire to entities that undertake agricultural activity in an attempt to determine the reliability of the fair value measurement proposed in E65 and received 20 responses from 11 countries. In December 2000, after considering the comments on E65 and responses to the questionnaire, the Board approved IAS 41 Agriculture (the Standard). Paragraph B82 below summarises the changes that the Board made to E65 in finalising the Standard. |
B3 | A main objective of the IASC is to develop International Accounting Standards that are relevant in the general purpose financial statements of all businesses. While most International Accounting Standards apply to entities in all activities, some International Accounting Standards, for example IAS 30 Disclosures in the Financial Statements of Banks and Similar Financial Institutions1 and IAS 40 Investment Property, deal with issues that arise in particular activities. IASC has also undertaken industry‑specific projects on insurance and extractive industries. |
B4 | Diversity in accounting for agricultural activity has occurred because:
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B5 | Most business organisations involved in agricultural activity are small, independent, cash and tax focused, family‑operated business units, often perceived as not being required to produce general purpose financial statements. Some believe that because of this an International Accounting Standard on agriculture would not have widespread application. However, even small agricultural entities seek outside capital and subsidies, particularly from banks or government agencies, and these capital providers increasingly request financial statements. Moreover, an international trend towards deregulation, an increasing number of cross‑border listings and more investment have resulted in increasing scale, scope, and commercialism of agricultural activity. This has created a greater need for financial statements based on sound and generally accepted accounting principles. For the above reasons, in 1994 the Board added to its agenda a project on agriculture. |
B6 | The DSOP specifically asked for views on the feasibility of developing a comprehensive International Accounting Standard on agriculture. Some commentators felt that the diversity of agricultural activity prevents the development of a single International Accounting Standard on accounting for all agricultural activities. Others said that different principles should attach to agricultural activity with short and long production cycles. Some cited the need to develop International Accounting Standards that are simple to apply and broad in application. Commentators on the DSOP also noted that agriculture is a significant industry in many countries, particularly in developing and newly industrialised countries. In many such countries it is the most important industry. |
B7 | After considering the comments on the DSOP, the Board reaffirmed its conclusion that an International Accounting Standard is needed. The Board believes that the principles set forth in the Standard have wide application and provide a clear set of principles. |
B8 | The Standard prescribes, among other things, the accounting treatment for biological assets and for the initial measurement of agricultural produce harvested from an entity’s biological assets at the point of harvest. [Refer:paragraph 1] However, the Standard does not deal with the processing of agricultural produce after harvest, since the Board did not consider it appropriate to undertake a partial revision of IAS 2 Inventories which deals with the accounting treatment for inventories under the historical cost system.3 The processing after harvest is accounted for under IAS 2 or another applicable International Accounting Standard (for example, if an entity harvests logs4 and decides to use them for constructing its own building, IAS 16 Property, Plant and Equipment is applied in accounting for the logs). [Refer:paragraph 3] |
B9 | Some may think of such processing as agricultural activity, particularly if it is done by the same entity that developed the agricultural produce (for example, the processing of grapes into wine by a vintner who has grown the grapes). While such processing may be a logical and natural extension of agricultural activity, and the events taking place may bear some similarity to biological transformation, such processing is not included within the definition of agricultural activity in the Standard. |
B10 | In particular, the Board considered whether to include circumstances where there is a long ageing or maturation process after harvest (for example, for wine production from grapes and cheese production from milk) in the scope of the Standard. Those who believe that the Standard should cover such processing argue that:
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B11 | The Board decided not to include such circumstances in the scope of the Standard because of concerns about difficulties in differentiating them from other manufacturing processes (such as conversion of raw materials into marketable inventories as defined in IAS 2). The Board concluded that the requirements in IAS 2 or another applicable International Accounting Standard would be suited to accounting for such processes. |
B12 | The Board also considered whether to deal with contracts for the sale of a biological asset or agricultural produce and government grants [Refer:paragraph 1] related to agricultural activity in the Standard. These issues are discussed below (see paragraphs B47–54 and B63–73). |
B13 | The Standard requires an entity to use a fair value approach in measuring its biological assets related to agricultural activity as proposed in the DSOP and E65, except for cases where the fair value cannot be measured reliably on initial recognition. [Refer:paragraph 12]
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B14 | Those who support fair value measurement argue that the effects of changes brought about by biological transformation are best reflected by reference to the fair value changes in biological assets. They believe that fair value changes in biological assets have a direct relationship to changes in expectations of future economic benefits to the entity. |
B15 | Those who support fair value measurement also note that the transactions entered into to effect biological transformation often have only a weak relationship with the biological transformation itself and, thus, a more distant relationship to expected future economic benefits. For example, patterns of growth in a plantation forest directly affect expectations of future economic benefits but differ markedly, in timing, from patterns of cost incurrence. No income might be reported until first harvest and sale (perhaps 30 years) in a plantation forestry entity using a transaction‑based, historical cost accounting model. On the other hand, income is measured and reported throughout the period until initial harvest if an accounting model is used that recognises and measures biological growth using current fair values. |
B16 | Further, those who support fair value measurement cite reasons for concluding that fair value has greater relevance, reliability, comparability, and understandability as a measurement of future economic benefits expected from biological assets than historical cost, including:
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B17 | Those who oppose measuring biological assets at fair value believe there is superior reliability in cost measurement because historical cost is the result of arm’s length transactions, and therefore provides evidence of an open‑market value at that point in time, and is independently verifiable. More importantly, they believe fair value is sometimes not reliably measurable and that users of financial statements may be misled by presentation of numbers that are indicated as being fair value but are based on subjective and unverifiable assumptions. Information regarding fair value can be provided other than in a single number in the financial statements. They believe the scope of the Standard is too broad. They also argue that:
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B18 | The Framework is neutral with respect to the choice of measurement basis, identifying that a number of different bases are employed to different degrees and in varying combinations, though noting that historical cost is most commonly adopted. The alternatives specifically identified are historical cost, current cost, realisable value, and present value. Precedents for fair value measurement exist in other International Accounting Standards. |
B19 | The Board concluded that the Standard should require a fair value model for biological assets related to agricultural activity because of the unique nature and characteristics of agricultural activity. However, the Board also concluded that, in some cases, fair value cannot be measured reliably. Some respondents to the questionnaire, as well as some commentators on E65, expressed significant concern about the reliability of fair value measurement for some biological assets, arguing that:
Some commentators on E65 suggested that the Standard should include a reliability exception for cases where no active market exists. |
B20 | The Board decided there was a need to include a reliability exception for cases where market‑determined prices or values are not available and alternative estimates of fair value are determined to be clearly unreliable. In those cases, biological assets should be measured at their cost less any accumulated depreciation and any accumulated impairment losses. In determining cost, accumulated depreciation and accumulated impairment losses, an entity considers IAS 2 Inventories, IAS 16 Property, Plant and Equipment and IAS 36 Impairment of Assets. |
B21 | The Board rejected a benchmark treatment of fair value and an allowed alternative treatment of historical cost because of the greater comparability and understandability achieved by a mandatory fair value approach in the presence of active markets. The Board is also uncomfortable with options in International Accounting Standards. |
B22 | The Standard requires that a biological asset should be measured at its fair value less estimated point‑of‑sale costs. [Refer:paragraphs 12 and 13] Point‑of‑sale costs include commissions to brokers and dealers, levies by regulatory agencies and commodity exchanges, and transfer taxes and duties. Point‑of‑sale costs exclude transport and other costs necessary to get assets to a market. Such transport and other costs are deducted in determining fair value (that is, fair value is a market price less transport and other costs necessary to get an asset to a market).6 |
B23 | E65 proposed that pre‑sale disposal costs that will be incurred to place an asset on the market (such as transport costs) should be deducted in determining fair value, if a biological asset will be sold in an active market in another location. However, E65 did not specify the treatment of point‑of‑sale costs. Some commentators suggested that the Standard should clarify the treatment of point‑of‑sale costs, as well as pre‑sale disposal costs. |
B24 | Some argue that point‑of‑sale costs should not be deducted in a fair value model. They argue that fair value less estimated point‑of‑sale costs would be a biased estimate of markets’ estimate of future cash flows, because point‑of‑sale costs would in effect be recognised as an expense twice if the acquirer pays point‑of‑sale costs on acquisition; once related to the initial acquisition of biological assets and once related to the immediate measurement at fair value less estimated point‑of‑sale costs. This would occur even when point‑of‑sale costs would not be incurred until a future period or would not be paid at all for a bearer biological asset that will not be sold. |
B25 | On the other hand, some believe that point‑of‑sale costs should be deducted in a fair value model. They believe that the carrying amount of an asset should represent the economic benefits that are expected to flow from the asset. They argue that fair value less estimated point‑of‑sale costs would represent the markets’ estimate of the economic benefits that are expected to flow to the entity from that asset at the balance sheet date. They also argue that failure to deduct estimated point‑of‑sale costs could result in a loss being deferred until a sale occurs. |
B26 | The Board concluded that fair value less estimated point‑of‑sale costs is a more relevant measurement of biological assets, acknowledging that, in particular, failure to deduct estimated point‑of‑sale costs could result in a loss being deferred. |
B27 | The Standard requires that, if an active market exists for a biological asset, the quoted price in that market is the appropriate basis for determining the fair value of that asset. If an active market does not exist, an entity uses market‑determined prices or values (such as the most recent market transaction price) when available. However, in some circumstances, market‑determined prices or values may not be available for a biological asset in its present condition. In these circumstances, the Standard indicates that an entity uses the present value of expected net cash flows8 from the asset. |
B28 | E65 proposed that, if an active market exists for a biological asset, an entity should use the market price in the active market. If an active market does not exist, E65 proposed that an entity should consider other measurement bases such as the price of the most recent transaction for the same type of asset, sector benchmarks, and present value of expected net cash flows. E65 did not set a hierarchy in cases where no active market exists; that is, E65 did not indicate which basis is preferable to the other bases. |
B29 | The Board considered setting an explicit hierarchy in cases where no active market exists. Some believe that using market‑determined prices or values; for example, the most recent market transaction price, would always be preferable to present value of expected net cash flows. On the other hand, some believe that market‑determined prices or values would not necessarily be preferable to present value of expected net cash flows, especially when an entity uses market prices for similar assets with adjustment to reflect differences. |
B30 | The Board concluded that a detailed hierarchy would not provide sufficient flexibility to appropriately deal with all the circumstances that may arise and decided not to set a detailed hierarchy in cases where no active market exists. However, the Board decided to indicate that an entity uses all available market‑determined prices or values since otherwise there is 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. Of the 20 companies that responded to the questionnaire, six companies used present value of expected net cash flows as a basis of fair value measurement and, in addition, two companies indicated that it was impossible to measure their biological assets reliably since the present value of expected net cash flows would not be reliable (as they would need to use present value as a basis). |
B31 | When an entity has access to different markets, the Standard indicates that the entity uses the most relevant one. For example, if an entity has access to two active markets, it uses the price existing in the market expected to be used. Some believe that the most advantageous price in the accessible markets should be used. The Standard reflects the view that the most relevant measurement results from using the market expected to be used. |
B32 | Some argue that less frequent measurement of fair value should be permitted because of concerns about burdens on entities. The Board rejected this approach because of the:
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B33 | A significant number of commentators on the DSOP indicated that, if present value of expected net cash flows is used to determine fair value, an external independent valuation should be required. The Board rejected this proposal since it believes that external independent valuations are not commonly used for certain agricultural activity and it would be burdensome to require an external independent valuation. The Board believes that it is for entities to decide how to determine fair value reliably, including the extent to which independent valuers need to be involved. |
B34 | As noted previously, the Board decided to include a reliability exception in the Standard for cases where fair value cannot be measured reliably on initial recognition. The Standard indicates a presumption that fair value can be measured reliably for a biological asset. However, that presumption can be rebutted only on initial recognition for a biological asset for which market‑determined prices or values are not available and for which alternative estimates of fair value are determined to be clearly unreliable. In such a case, that biological asset should be measured at its cost less any accumulated depreciation and any accumulated impairment losses. Once the fair value of such a biological asset becomes reliably measurable, the Standard requires that an entity should start measuring the biological asset at its fair value less estimated point‑of‑sale costs. [Refer:paragraph 30]
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B35 | Some believe that, if an entity was previously using the reliability exception, the entity should not be allowed to start fair value measurement (that is, an entity should continue to use a cost basis). They argue that it could be a subjective decision to determine when fair value has become reliably measurable and that this subjectivity could lead to inconsistent application and, potentially, abuse. The Board noted, however, 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. Thus, the Board decided to require fair value measurement once fair value becomes reliably measurable. |
B36 | If an entity has previously measured a biological asset at its fair value less estimated point‑of‑sale costs, the Standard requires that the entity should continue to measure the biological asset at its fair value less estimated point‑of‑sale costs until disposal. Some argue that reliable estimates may cease to be available. The Board believed that this would rarely, if ever, occur. Accordingly, the Board decided to prohibit entities from changing their measurement basis from fair value to cost, because otherwise an entity might use a reliability exception as an excuse to discontinue fair value accounting in a falling market. [Refer:paragraph 31]
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B37 | If an entity uses the reliability exception, the Standard requires additional disclosures. The additional disclosures include information on biological assets held at the end of the period such as a description of the assets and an explanation of why fair value cannot be measured reliably. The additional disclosures also include the gain or loss recognised for the period on disposal of biological assets measured at cost less any accumulated depreciation and any accumulated impairment losses, even though those biological assets are not held at the end of the period. [Refer:paragraphs 54–56]
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B38 | The Standard requires that a gain or loss arising on initial recognition of a biological asset and from a change in fair value less estimated point‑of‑sale costs of a biological asset should be included in net profit or loss9 for the period in which it arises. Those who support this treatment argue that biological transformation is a significant event that should be included in net profit or loss because:
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B39 | Some commentators on the DSOP and E65 argued that fair value changes should be included directly in equity, through the statement of changes in equity, until realised, arguing that:
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B40 | The Board rejected requiring changes in fair value to be included directly in equity since it is difficult to find any conceptual basis for reporting any portion of the changes in fair value of biological assets related to agricultural activity directly in equity. No distinction is made in the Framework between recognition in the balance sheet and recognition in the income statement. |
B41 | The Standard requires that agricultural produce harvested from an entity’s biological assets should be measured at its fair value less estimated point‑of‑sale costs at the point of harvest. Such measurement is the cost at that date when applying IAS 2 Inventories or another applicable International Accounting Standard. [Refer:paragraph 13]
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B42 | The Board noted that the same basis of measurement should generally be applied to agricultural produce on initial recognition and to the biological asset from which it is harvested. Because the fair value of a biological asset takes into account the condition of the agricultural produce that will be harvested from the biological asset, it would be illogical to measure the agricultural produce at cost when the biological asset is measured at fair value. For example, the fair value of a sheep with half fleece will differ from the fair value of a similar sheep with full fleece. It would be inconsistent and distort reporting of current period performance if, upon shearing, the shorn fleece is measured at its cost when the fair value of the sheep is reduced by the fair value of the fleece. |
B43 | As noted previously, certain biological assets are measured at their cost less any accumulated depreciation and any accumulated impairment losses, if the reliability exception is applied. Some argue that a reliability exception should exist for measurement of agricultural produce. The Board rejected this view because many of the arguments for a reliability exception do not apply to agricultural produce. For example, markets more often exist for agricultural produce than for biological assets. The Board also noted that it is generally not practicable to reliably determine the cost of agricultural produce harvested from biological assets. |
B44 | With regard to measurement after harvest, some argue that agricultural produce should be measured at its fair value both at the point of harvest and at each balance sheet date until sold, consumed, or otherwise disposed of. They argue that this approach would ensure that all agricultural produce of a similar type is measured similarly irrespective of date of harvest, thus enhancing comparability and consistency. |
B45 | The Board concluded that fair value less estimated point‑of‑sale costs at the point of harvest should be the cost when applying IAS 2 or another applicable International Accounting Standard, since this is consistent with the historical cost accounting model applied to manufacturing processes in general and other types of inventory. |
B46 | In reaching the above conclusion, the Board noted that entities undertaking agricultural activity sometimes purchase agricultural produce for resale, and other entities often engage in processing purchased agricultural produce into consumable products. If agricultural produce would be measured at its fair value after harvest, a desire for consistency would suggest revaluing purchased inventories as well, and such a treatment would be inconsistent with IAS 2. The Board did not consider it appropriate to undertake a partial revision of IAS 2. |
B47 | Entities often enter into contracts to sell at a future date their biological assets or agricultural produce. The Standard indicates that contract prices are not necessarily relevant in determining fair value and that the fair value of a biological asset or agricultural produce is not adjusted because of the existence of a contract. |
B48 | E65 did not propose how to account for a contract for the sale of a biological asset or agricultural produce. Some commentators suggested prescribing the treatment of sales contracts since such sales contracts are common in certain agricultural activity. Some commentators also pointed out that certain sales contracts are not within the scope of IAS 39 Financial Instruments: Recognition and Measurement10 and that no other International Accounting Standards deal with those contracts. |
B49 | Some argue that contract prices should be used in measuring the related biological assets when an entity expects to settle the contract by delivery and believe this would result in the most relevant carrying amount for the biological asset. Others argue that contract prices are not necessarily relevant in measuring the biological assets at fair value since fair value reflects the current market in which a willing buyer and seller would enter into a transaction.11 |
B50 | The Board concluded that contract prices should not be used in measuring related biological assets, because contract prices do not necessarily reflect the current market in which a willing buyer and seller would enter into a transaction and therefore do not necessarily represent the fair value of assets. The Board wished to maintain a consistent approach to the measurement of assets. The Board instead considered whether it might require that sales contracts be measured at fair value. It is logical to measure a sales contract at fair value to the extent that a related biological asset is also measured at fair value. |
B51 | However, the Board noted that to achieve symmetry between the measurement of a biological asset and a related sales contract the Standard would have to carefully restrict the sales contracts to be measured at fair value. An entity may enter into a contract to sell agricultural produce to be harvested from the entity’s biological assets. The Board concluded that it would not be appropriate to require fair value measurement for a contract to sell agricultural produce that does not yet exist (for example, milk to be harvested from a cow), since no related asset has yet been recognised or measured at fair value and to do so would be beyond the scope of the project on agriculture. |
B52 | Thus, the Board considered restricting the sales contracts to be measured at fair value to those for the sale of an entity’s existing biological assets and agricultural produce. However, the Board noted that it is difficult to differentiate existing agricultural produce from agricultural produce that does not exist. For example:
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B53 | The Board also noted that the Standard would have to require an entity to stop fair value measurement for sales contracts once agricultural produce to be sold under the contract is harvested from an entity’s biological assets, since accounting for agricultural produce is not dealt with in the Standard except for initial measurement and IAS 2 Inventories or another applicable International Accounting Standard applies after harvest. It would be illogical to continue fair value measurement when the agricultural produce is measured at historical cost. The Board noted that it would be anomalous to require an entity to start measuring a contract at fair value once the related asset exists and to stop doing that at a later date. |
B54 | The Board concluded that no solution is practicable without a complete review of the accounting for commodity contracts that are not within the scope of IAS 39.12 Because of the above difficulties, the Board concluded that the Standard should not deal with the measurement of sales contracts that are not within the scope of IAS 39. Instead, the Board decided to include an observation that those sales contracts may be onerous contracts under IAS 37 Provisions, Contingent Liabilities and Contingent Assets. |
B55 | The Standard does not establish any new principles for land related to agricultural activity. Rather, an entity follows IAS 16 Property, Plant and Equipment or IAS 40 Investment Property depending on which standard is appropriate in the circumstances. IAS 16 requires land to be measured either at its cost less any accumulated impairment losses, or at a revalued amount. IAS 40 requires land that is investment property to be measured at its fair value, or cost less any accumulated impairment losses. |
B56 | Some argue that land attached to biological assets related to agricultural activity should also be measured at its fair value. They argue that fair value measurement of land results in consistency of measurement with the fair value measurement of biological assets. They also argue that it is sometimes difficult to measure the fair value of such biological assets separately from the land since an active market often exists for the combined assets (that is, land and biological assets; for example, trees in a plantation forest). |
B57 | The Board rejected this approach, primarily because requiring the fair value measurement of land related to agricultural activity would be inconsistent with IAS 16. |
B58 | The Standard does not establish any new principles for intangible assets related to agricultural activity. Rather, an entity follows IAS 38 Intangible Assets. IAS 38 requires an intangible asset, after initial recognition, to be measured at its cost less any accumulated amortisation and impairment losses, or at a revalued amount. |
B59 | E65 proposed that an entity should be encouraged to follow the revaluation alternative in IAS 38 for intangible assets related to agricultural activity, to enhance consistency of measurement with the fair value measurement of biological assets. Some commentators on E65 disagreed with having the encouragement. They argued that a unique treatment for intangible assets related to agricultural activity is not warranted. |
B60 | The Board did not include the encouragement in E65 in the Standard. The Board concluded that IAS 38 should be applied to intangible assets related to agricultural activity, as it is to intangible assets related to other activities. |
B61 | The Standard does not explicitly prescribe how to account for subsequent expenditure related to biological assets. E65 proposed that costs of producing and harvesting biological assets should be charged to expense when incurred and that costs that increase the number of units of biological assets owned or controlled by the entity should be added to the carrying amount of the asset. |
B62 | Some believe that there is no need to capitalise subsequent expenditure in a fair value model and that all subsequent expenditure should be recognised as an expense. Some also argue that it would sometimes be difficult to prescribe which costs should be recognised as expenses and which costs should be capitalised; for example, in the case of vet fees paid for delivering a calf. The Board decided not to explicitly prescribe the accounting for subsequent expenditure related to biological assets in the Standard, because it believes to do so is unnecessary with a fair value measurement approach. |
B63 | The Standard requires that an unconditional government grant related to a biological asset measured at its fair value less estimated point‑of‑sale costs should be recognised as income when, and only when, the government grant becomes receivable. [Refer:paragraph 34] If a government grant is conditional, including where a government grant requires an entity not to engage in specified agricultural activity, an entity should recognise the government grant as income when, and only when, the conditions attaching to the government grant are met. [Refer:paragraph 35] |
B64 | The Standard requires a different treatment from IAS 20 Accounting for Government Grants and Disclosure of Government Assistance in the circumstances described above. IAS 20 is to be applied only to government grants related to biological assets measured at cost less any accumulated depreciation and any accumulated impairment losses. |
B65 | IAS 20 requires that government grants should not be recognised until there is reasonable assurance that:
IAS 20 also requires that government grants should be recognised as income over the periods necessary to match them with the related costs that they are intended to compensate, on a systematic basis. In relation to the presentation of government grants related to assets, IAS 20 permits two methods—setting up a government grant as deferred income or deducting the government grant from the carrying amount of the asset. |
B66 | The latter method of presentation—deducting a government grant from the carrying amount of the related asset—is inconsistent with a fair value model in which an asset is measured and presented at its fair value. Using the deduction from carrying value approach, an entity would first deduct the government grant from the carrying amount of the related asset and then measure that asset at its fair value. In effect, an entity would recognise a government grant as income immediately, even for a conditional government grant. This conflicts with the requirement in IAS 20 that government grants should not be recognised until there is reasonable assurance that the entity will comply with the conditions attaching to them. |
B67 | Because of the above, the Board concluded that there was a need to deal with government grants related to biological assets measured at their fair value. Some argued that IASC should begin a wider review of IAS 20 rather than provide special rules in individual International Accounting Standards. The Board acknowledged that this might be a more appropriate approach, but concluded that such a review would be beyond the scope of the project on agriculture. Instead, the Board decided to deal with government grants in the Standard, since the Board noted that government grants related to agricultural activity are common in some countries. |
B68 | E65 proposed that, if an entity receives a government grant in respect of a biological asset that is measured at its fair value and the grant is unconditional, the entity should recognise the grant as income when the government grant becomes receivable. E65 also proposed that, if a government grant is conditional, the entity should recognise it as income when there is reasonable assurance that the conditions are met. |
B69 | The Board noted that, if a government grant is conditional, an entity is likely to have costs and ongoing obligations associated with satisfying the conditions attaching to the government grant. It may be possible that the inflow of economic benefits is much less than the amount of the government grant. Given that possibility, the Board acknowledged that the criterion for recognising income from a conditional government grant in E65, when there is reasonable assurance that the conditions are met, may give rise to income recognition that is inconsistent with the Framework. The Framework indicates that income is recognised in the income statement when an increase in future economic benefits related to an increase in an asset or a decrease in a liability has arisen that can be measured reliably. The Board also noted that it would inevitably be a subjective decision as to when there is reasonable assurance that the conditions are met and that this subjectivity could lead to inconsistent income recognition. |
B70 | The Board considered two alternative approaches:
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B71 | Proponents of approach (a) argue that this approach is generally consistent with the revenue recognition requirements in IAS 18 Revenue.13 IAS 18 requires that revenue should be recognised, among other things, when it is probable that the economic benefits associated with the transaction will flow to the entity. |
B72 | Proponents of approach (b) believe that, until the conditions attaching to the government grant are met, a liability should be recognised under the Framework rather than income since an entity has a present obligation to satisfy the conditions arising from past events. They also argue that income recognition under approach (a) would still be subjective and inconsistent with the recognition criteria indicated in the Framework. |
B73 | The Board concluded that approach (b) is more appropriate. The Board also decided that a government grant that requires an entity not to engage in specified agricultural activity should also be accounted for in the same way as a conditional government grant related to a biological asset measured at its fair value less estimated point‑of‑sale costs. |
B74 | The Standard encourages, but does not require, separate disclosure of the effects of the factors resulting in changes to the carrying amount of biological assets, physical change and price change, when there is a production cycle of more than one year. Physical change is attributable to changes in the assets themselves while price change is attributable to changes in unit fair values. [Refer:paragraphs 51–53]
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B75 | Some argue that the separate disclosure should be required since it is useful in appraising current period performance and future prospects in relation to production from, and maintenance and renewal of, biological assets. Others argue that it may be impracticable to separate these elements and the two components cannot be separated reliably. |
B76 | The Board concluded that the separate disclosure should not be required because of practicability concerns. However, the Board decided to encourage the separate disclosure, given that such disclosure may be useful and practically determinable in some circumstances. The separate disclosure is not encouraged when the production cycle is less than one year (for example, when raising broiler chickens or growing cereal crops) since that information is less useful in that circumstance. |
B77 | Some argue that physical changes should be included in net profit or loss and that price changes should be included directly in equity, through the statement of changes in equity. The Board rejected this approach because both components are indicative of management’s performance. |
B78 | The Standard requires that an entity should 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 estimated point‑of‑sale costs of biological assets. [Refer:paragraph 40] The Standard does not require or encourage disaggregating the gain or loss, except that the Standard encourages separate disclosure of physical changes and price changes as discussed above. [Refer:paragraph 51] |
B79 | The Board considered requiring, or encouraging, disclosure of the gain or loss on a disaggregated basis; for example, requiring separate disclosure of the gain or loss related to biological assets and the gain or loss related to agricultural produce. Those who supported disaggregating the gain or loss believe that such information is useful in appraising current period performance in relation to biological transformation. Others argued that disaggregation would be impracticable and require a subjective procedure. |
B80 | E65 proposed disclosing the:
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B81 | The Board did not include the above disclosures in the Standard. The Board noted that requiring item (a) above would not be appropriate since external independent valuations are not commonly used for assets related to agricultural activity, unlike for certain other assets such as investment property. The Board also noted that item (b) is not required in other International Accounting Standards and a unique disclosure requirement is not warranted for agricultural activity. Items (c) and (d) would be outside the scope of the Standard and covered by other International Accounting Standards (IAS 16 or IAS 2 Inventories). |
B82 | The Standard made the following principal changes to the proposals in E65:
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DO1 | Mr Finnegan and Ms McConnell voted against the publication of Agriculture: Bearer Plants (Amendments to IAS 16 and IAS 41) issued in June 2014 (the ‘June 2014 Amendment’) because they believe that including bearer plants within the scope of IAS 16 Property, Plant and Equipment instead of IAS 41 Agriculture will eliminate information about the fair value changes in bearer plants and the underlying assumptions used to estimate those changes. Information about the fair values of all biological assets including bearer plants is critical both to managing agricultural activities and to investing in entities that engage in those activities. Without such information, investors are unable to assess changes in expectations of future net cash inflows for an entity engaged in agricultural activity. The fact that published price quotations have developed throughout the world for orchards and plantations that include bearer plants demonstrates the importance of fair value information to those who invest in agricultural activities. |
DO2 | IAS 41 prescribes the accounting for agricultural activity, that is, the management by an entity of the biological transformation of living animals or plants (biological assets) for sale, into agricultural produce or into additional biological assets. The underlying principle of IAS 41 is that fair value measurement best reflects the biological transformation of biological assets. It requires measurement at fair value less costs to sell (referred to hereafter as fair value) from initial recognition of biological assets up to and including the point of harvest, other than when fair value cannot be measured reliably on initial recognition. |
DO3 | The June 2014 Amendment changes the measurement for one subset of biological assets, bearer plants, from fair value to a cost-based measure. Bearer plants are plants that are used only in the production or supply of agricultural produce and are expected to bear produce for more than one period. The June 2014 Amendment includes bearer plants within the scope of IAS 16. Consequently, entities would be permitted to choose either the cost model or the revaluation model for bearer plants. All other biological assets related to agricultural activity will remain under the fair value model in IAS 41, including bearer animals. |
DO4 | Fundamentally, IAS 41 is a Standard on accounting for biological transformation. Biological transformation of bearer assets occurs both prior to maturity and after maturity. A cost model ignores biological transformation when it occurs. That is why IAS 41 requires fair value measurement. The Basis for Conclusions of IAS 41 states:
Mr Finnegan and Ms McConnell see no reason to abandon that principle with respect to bearer plants. Consequently, they do not agree that prior to maturity, bearer plants should be measured at accumulated cost. They do not believe that accounting for bearer plants in the same way as for self-constructed items of property, plant and equipment will provide users of financial statements with information that is useful to an understanding of the agricultural entity’s performance for the period or of its productive capacity at a point in time. |
DO5 | While maturing, bearer plants are undergoing biological transformation. Mr Finnegan and Ms McConnell continue to believe that fair value measurement for the biological transformation process provides the best information about bearer assets’ quality and quantitative changes during their growth period. They also believe that the fair value of bearer plants at maturity provides the best measure of an entity’s resources being placed into the production of produce at maturity. Investors need that information to assess management’s stewardship of the resources invested in the production process and the performance of the entity using those resources. Consequently, they believe that bearer plants must be measured at fair value while maturing because fair value provides users of financial statements with the best information about an important aspect of an agricultural entity’s performance and management stewardship. |
DO6 | They also reject the view that biological transformation of bearer assets is no longer a key element for understanding the future net cash flows to an entity once such assets reach maturity. By definition, biological transformation is not limited to merely the growth process to maturity, but also includes the cycles of production and degeneration, which are critical phases in the life cycle of bearer assets. Fair value measurements of bearer assets throughout their lives provide information about the effectiveness and efficiency of the production process, and about the capability of such assets to generate net cash inflows into the future. In contrast, depreciation of the cost of a mature bearer asset only approximates the biological transformation of a bearer asset throughout its productive life and has only an indirect relationship, at best, to changes in future net cash inflows. |
DO7 | Mr Finnegan and Ms McConnell acknowledge that measuring bearer plants at fair value may sometimes be difficult. In particular, the Board has been told that the fair value of bearer plants is particularly subjective during the early years of their life cycle. However, Mr Finnegan and Ms McConnell note that IAS 41 contains an exception from fair value for biological assets for which quoted market prices are not available and for which alternative fair value measurements are determined to be clearly unreliable on initial recognition. They believe that this exception is sufficient to deal with the concerns about the reliability of fair value measures of bearer plants during the early years of their life cycle. They also note that entities throughout the world have been applying IAS 41 in a wide variety of agricultural activities since 2003. In fact, some national accounting standards required or recommended measurement of bearer assets at fair values even before IAS 41 was issued. They do not believe that measuring fair value of bearer plants, in general, is any more difficult than measuring fair value for other biological assets such as bearer animals. Furthermore, they believe that applying a cost measure to bearer plants may be equally as difficult in some situations. Fair value measurements are required in assessing bearer plants for impairment, and surely those who are urging a reversion to a cost model for bearer assets would not suggest that impairment should be ignored because fair value measurement may sometimes be difficult. Moreover, the June 2014 Amendment would permit fair value measurements as a pure accounting policy choice. Mr Finnegan and Ms McConnell believe that accounting should reflect underlying economic circumstances and should not merely be left to choice. The existing fair value exception in IAS 41 is based on circumstances (measurement reliability), and is not an accounting policy choice. |
DO8 | In addition to concerns about the reliability of fair value measures, entities with bearer assets expressed concern about the volatility that arises from recognising changes in the fair value of the bearer plants in profit or loss and said that users of financial statements adjust reported profit or loss to eliminate the effects of changes in fair values of bearer biological assets. Mr Finnegan and Ms McConnell accept the view that the use of fair value for bearer assets makes the analysis of profit or loss and financial position more difficult. At the same time, they note that price volatility is an indicator of risk, and risk assessment is part of an analyst’s job. Mr Finnegan and Ms McConnell note that sound financial statement analysis will always adjust reported profit or loss and financial position for the effects of unusual or non-recurring changes in reported information. However, if critical information about changes in the economic benefits arising in an agricultural operation is not reported, such analysis is impaired or not possible at all. |
DO9 | Mr Finnegan and Ms McConnell believe that instead of ignoring the fair value volatility, which a cost model does, volatility should be addressed as a matter of financial statement presentation—such as by putting the fair value changes in other comprehensive income. They note that under the June 2014 Amendment, the bearer assets will be within the scope of IAS 16 and revaluation will be permitted. If an entity were to choose revaluation, the change in the revaluation amount (which approximates fair value) would be reported in other comprehensive income. Consequently, they believe that requiring fair value measurement during the entirety of the bearer plant’s life cycle with the fair value changes reported in other comprehensive income would be consistent with permitting revaluation of the bearer asset. Furthermore, Mr Finnegan and Ms McConnell believe that such a change would preserve relevant information for investors through prominent display in the primary financial statements, while addressing the concerns of those who believe that fair value changes distort profit or loss. |
DO10 | Mr Finnegan and Ms McConnell believe that if bearer assets are measured at accumulated cost, then at a minimum, the fair value of the bearer plants should be a required disclosure, including information about the valuation techniques and key inputs/assumptions used. However, the 2014 Amendment is not requiring disclosure of fair value. Consequently, critical information is being eliminated from the financial statements of entities engaged in agricultural activities using bearer assets. Mr Finnegan and Ms McConnell do not believe that this is an improvement to financial reporting. In January 2013, the Trustees of the IFRS Foundation approved a new Due Process Handbook that specifies, among other things, the criteria for new Standards or major improvements. The main criteria (in addition to pervasiveness of the issue) are (a) whether there is a deficiency in the way particular types of transactions or activities are reported in financial reports, and (b) the importance of the matter to those who use financial reports. Mr Finnegan and Ms McConnell believe that, from a user perspective, there is no deficiency in the accounting for, and disclosures about, bearer assets in IAS 41 and that fair value information is important (indeed essential) to those who use the financial reports of entities engaged in agricultural activity. |
DO11 | In the user outreach performed by the staff, most investors and analysts said that fair value information about bearer plants is of either limited or no use to them without fair value information about the related land, agricultural machinery, etc. Instead of meeting the needs of users by providing this additional fair value information to make the fair value of bearer plants more useful, the Board has chosen to withdraw the requirement to provide the fair value of bearer plants. In the view of Mr Finnegan and Ms McConnell this solution does not adequately address the needs of users of financial statements. |
DO12 | A better solution would have been for the Board to require the fair value of bearer plants in combination with the fair value of the land to which such plants are attached. One of the weaknesses in IAS 41 is that it does not require the use of fair value to measure land to which bearer plants are attached. This is a weakness because the value of bearer plants is inextricably tied to the value of the land. By understanding the value of the bearer plants and the land, investors know the true potential of an entity’s future net cash inflows. A historical cost model for either or both is incapable of providing such information. |
DO13 | As just discussed, Mr Finnegan and Ms McConnell do not believe the June 2014 Amendment represents an improvement to IFRS and, in fact, represents a step towards lowering the quality of the information available in the financial statements of entities engaged in agricultural activities. The June 2014 Amendment therefore fails to meet the Board’s own criteria for a new or amended Standard. |
| 1 | In August 2005, IFRS 7 Financial Instruments: Disclosures superseded IAS 30. (back) |
| 2 | IFRS 15 Revenue from Contracts with Customers, issued in May 2014, replaced IAS 18 Revenue. IFRS 15 also does not address revenue arising from ‘natural increases in herds, and agricultural and forest products’. (back) |
| 3 | The term ‘historical cost system’ is no longer applicable owing to revisions made to IAS 2 in December 2003. (back) |
| 4 | As the result of an amendment by the IASB, contained in Improvements to IFRSs issued in May 2008, ‘logs’ is an example of produce that has been processed rather than an example of unprocessed produce. (back) |
| 5 | References to the Framework in this Basis for Conclusions are to the IASC’s Framework for the Preparation and Presentation of Financial Statements, adopted by the Board in 2001 and in effect when the Standard was developed. (back) |
| 6 | IFRS 13, issued in May 2011, describes how transport costs [Refer:IFRS 13 paragraph 26] are factored into a fair value measurement. (back) |
| 7 | IFRS 13, issued in May 2011, defines an active market [Refer:IFRS 13 Appendix A] and contains a three‑level fair value hierarchy [Refer:IFRS 13 paragraph 72] for the inputs [Refer:IFRS 13 paragraph 67] used in the valuation techniques [Refer:IFRS 13 paragraph 61] used to measure fair value. (back) |
| 8 | Paragraph 20 of the previous version of IAS 41 required entities to use a pre‑tax discount rate when measuring fair value. The IASB decided to maintain the requirement to use a current market‑based discount rate but removed the reference to a pre‑tax discount rate by Improvements to IFRSs issued in May 2008. (back) |
| 9 | IAS 1 Presentation of Financial Statements (revised in 2003) replaced the term ‘net profit or loss’ with ‘profit or loss’. (back) |
| 10 | IFRS 9 Financial Instruments replaced IAS 39. IFRS 9 applies to all items that were previously within the scope of IAS 39. (back) |
| 11 | IFRS 13, issued in May 2011, contains the requirements for measuring fair value. (back) |
| 12 | IFRS 9 Financial Instruments replaced IAS 39. IFRS 9 applies to all items that were previously within the scope of IAS 39. (back) |
| 13 | IFRS 15 Revenue from Contracts with Customers, issued in May 2014, replaced IAS 18 Revenue. (back) |
| 14 | Paragraph 170(b) of IAS 39 was replaced by paragraph 90 of IAS 32 Financial Instruments: Disclosure and Presentation when the IASB revised those standards in 2003. In 2005, the IASB relocated all disclosures relating to financial instruments to IFRS 7 Financial Instruments: Disclosures. (back) |
| 15 | Paragraph 68 of IAS 40 was replaced by paragraph 78 when the IASB revised IAS 40 in 2003. (back) |
| 16 | Paragraph 60 of IAS 16 was replaced by paragraph 73 when IAS 16 was revised in 2003. (back) |
| 17 | IAS 1 Presentation of Financial Statements (revised in 2003) replaced the term ‘net profit or loss’ with ‘profit or loss’. (back) |