Why Bearer Plants was taken out from the scope of IAS 41 ?

Prior to the 2014 amendments, IAS 41 required all biological assets related to agricultural activity to be measured at fair value less costs to sell (read also : Biological Assets and Bearer Plants, what is the difference between them ?).

Later, in June 2014 the IASB board issued Agriculture : Bearer Plants (Amendments to IAS 16 and IAS 41) which amended the scope of IAS 16 to include bearer plants. While IAS 41 Agriculture applies to the produce growing on the bearer plants. The amendments define a bearer plant and require bearer plants to be accounted for as property, plant and equipment in accordance with IAS 16.

As discussed in the amendments to the Basis for Conclusions on IAS 16 Property, Plant and Equipment, stakeholders told the Board that they think the fair value measurement is not appropriate for mature bearer biological assets such as oil palms and rubber trees because they are no longer undergoing significant biological transformation as defined in IAS 41 for the biological assets in relation to the agricultural activity. The use of mature bearer biological assets such as those is seen by many as similar to that of manufacturing. Consequently, they said that a cost model should be permitted for those bearer biological assets (bearer plants such as oil palms and rubber trees), because it is permitted for property, plant and equipment. Further, they also said that they had concerns about the cost, complexity and practical difficulties of fair value measurements of bearer biological assets in the absence of markets for those assets, and about the volatility from recognising  changes in the fair value less costs to sell in profit or loss. Furthermore, they asserted that investors, analysts and other users of financial statements adjust the reported profit or loss to eliminate the effects of changes in the fair values of these bearer biological assets.

Most respondents who cited agriculture in their responses to the Board’s 2011 Agenda Consultation raised concerns in relation to fair value measurement of plantations, for example oil palm and rubber trees plantation, and favoured a limited-scope project for these bearer biological assets to address the concerns as mentioned above. Only a small number of respondents favoured a broader consideration of IAS 41 or a Post-implementation Review, or said that there is no need to amend IAS 41.

Before the limited-scope project for bearer biological assets was added to its work programme, the Board was monitoring the work undertaken by the Asian-Oceanian Standard-Setters Group (AOSSG), primarily by the Malaysian Accounting Standards Board (MASB), on a proposal to remove some bearer biological assets from the scope of IAS 41 and account for them in accordance with IAS 16. Those proposals were discussed several times by national standard-setters, the Board’s Emerging Economies Group (EEG) and the IFRS Advisory Council. Feedback from these meetings indicated strong support for the AOSSG/MASB proposals and for the Board to start a limited-scope project for bearer biological assets.

In September 2012, the Board decided to add to its agenda a limited-scope project for bearer biological assets, with the aim of considering whether the account for some or all of them as property, plant and equipment, thereby permitting use of  a cost model.  Later, the Board decided that it had received sufficient information to develop an ED from work performed by the MASB, meetings of national standard-setters, feedback from preparers on the 2011 Agenda Consultation and user outreach performed by staff. Furthermore, the project was expected to result in limited changes that were sought by both users and preparers of financial statements. Consequently, the Board decided that the project could proceed without a Discussion Paper and developed and ED that was issued in June 2013, and finally, in June 2014 the accounting standard of Agriculture : Bearer Plants (Amendments to IAS 16 and IAS 41) was published by the IASB. Entities are required to apply the amendments for annual periods beginning on or after 1 January 2016. Earlier application is permitted (HRD).

Definition of Agricultural Activity based on IAS 41

IAS 41 Agriculture governs the accounting treatment, financial statement presentation and disclosures related to AGRICULTURE ACTIVITY.

IAS 41 defines Agriculture Activity as the management by an entity of the BIOLOGICAL TRANSFORMATION and harvest of biological assets for sale or for conversion into agricultural produce or into additional biological assets.

Biological Transformation comprises the process of growth, degeneration, production, and procreation that cause qualitative or quantitative changes in a biological asset. A biological asset is a living animal or plant.

Agriculture activity covers a diverse range of activities; for example, raising livestock, forestry, annual or perennial cropping, cultivating orchards and plantations, floriculture and aquaculture (including fish farming)

The above stated agriculture activities have certain common features :

1. Capability to change. Living animals and plants are capable of biological transformation;
2. Management of change. Management facilities biological transformation by enhancing, or at least stabilising, conditions necessary for the process to take place (for example, nutrient levels, moisture, temperature, fertility, and light). Such management distinguishes agricultural activity from other activities. For example, harvesting from unmanaged sources (such as ocean fishing and deforestation) is not agricultural activity; and
3. Measurement of change. The change in quality (for example, genetic merit, density, ripeness, fat cover, protein content, and fibre strength) or quantity (for example, progeny, weight, cubic metres, fibre length or diameter, and number of buds) brought about by biological transformation or harvest is measured and monitored as a routine management function.

Biological transformation results in the following types of outcomes :

1. asset changes through (i) growth (an increase in quantity or improvement in quality of an animal or plant), (ii) degeneration (a decrease in the quantity or deterioration in quality of an animal or plant), or (iii) procreation (creation of additional living animals or plants); or
2. production of agricultural produce such as latex, tea leaf, wool, and milk.

Agriculture activities are distinguished by the fact that management facilitates and manages biological transformation and is capable of measuring the change in the quality and quantity of biological assets (HRD).

Biological Assets and Bearer Plants, what is the difference between them ?

IAS 41 Agriculture regulates the accounting treatment for biological assets, except for bearer plants, and for agricultural produce at the point of harvest.

Based on IAS 41, a biological asset is a living animal or plant controlled by the entity as a result of past events. Control may be through ownership or through another type of legal arrangement. Further, IAS 41 also defines biological transformation as the processes of growth, degeneration, production, and procreation that cause qualitative or quantitative changes in a biological asset.

Biological assets are the principal assets of agricultural activities, and they are held for their transformative potential. This results in two major types of outcomes; the first may involve asset changes – as through growth or quality improvement, degeneration or procreation. The second involves the creation of separable products initially qualifying as agricultural produce.

A biological asset shall be measured on initial recognition and at the end of each reporting period at its FAIR VALUE LESS COSTS TO SELL. Agricultural produce harvested from an entity’s biological assets shall be measured at its FAIR VALUE LESS COSTS TO SELL AT THE POINT OF HARVEST. Such measurements is the cost at that date when applying IAS 2 Inventories or another applicable standard. A gain or loss arising on initial recognition of a biological asset at fair value less costs to sell and from a change in fair value less costs to sell of a biological asset shall be included in profit or loss for the period in which it arises.

On 30 June 2014, the IASB issued Agriculture : Bearer Plants (Amendments to IAS 16 and IAS 41) which changed the accounting treatment for biological assets that meet the definition of BEARER PLANTS. Based on the amendments, bearer plants will now be within the scope of the IAS 16 and will be subject to all of the requirements therein. This includes the ability to choose between the COST MODEL and the REVALUATION MODEL for the subsequent measurement. Agricultural produce growing on bearer plants will remain within the scope of the IAS 41 Agriculture, i.e as a biological asset.

All of the following criteria as defined in the standard need to be met for a biological asset to be considered as a bearer plant. A bearer plant is defined as a living plant that : (a) is used in the production or supply of agricultural produce; (b) is expected to bear produce for more than one period; and (c) has a remote likelihood of being sold as agricultural produce, except for incidental scrap sales.

The following are not bearer plants :

• plants cultivated to be harvested as agricultural produce (for example, trees grown for use as lumber);
• plants cultivated to produce agricultural produce when there is more than a remote likelihood that the entity will also harvest and sell the plant as agricultural produce, other than as incidental scrap sales (for example, trees that are cultivated both for their fruit and their lumber); and
• annual crops (for example, maize and wheat)

When bearer plants are no longer used to bear produce they might be cut down and sold as scrap, for example, for use as firewood. Such incidental scrap would not prevent the plant from satisfying the definition of a bearer plant.

The measurement requirements for bearer plants should be as follows :

• 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; 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

(HRD)

Recognition and Measurement of Biological Asset and Agricultural Produce

The main objective of IAS 41, Agriculture is to prescribe the accounting treatment and disclosures related to agricultural activity. This Standard applies to biological assets, agricultural produce at the point of harvest, and government grants. The Standard does not apply to land related to agricultural activity, which is covered by  IAS 16, Property, Plant and Equipment, and IAS 40, Investment Property, or to intangible assets related to agricultural activity, which are covered by IAS 38, Intangible Assets.

IAS 41 defines Agricultural Activity as the management by an entity of the biological transformation and harvest of biological assets for sale or for conversion into agricultural produce or into additional biological assets. It covers a diverse range of activities, for example : raising livestock, forestry, annual or perennial cropping, cultivating orchards and plantations, floriculture and aquaculture (including fish farming).

Agricultural Produce is the harvested product of the entity’s biological assets. A Biological Asset is a living animal or plant. For examples, Sheep is the biological assets and wool is the agricultural produce. Trees in a plantation forest and plants are biological assets, while felled trees, cotton, harvested cane are the agricultural produce. Dairy cattle is a biological assets, and milk is the agricultural produce.

An entity shall recognize a biological asset or agricultural produce when, and only when :

1. the entity controls the asset as as result of past events;
2. it is probable that future economic benefits associated with the asset will flow to the entity; and
3. the fair value or cost of the asset can be measured reliably.

A biological asset shall be measured on initial recognition and at the end of each reporting period at its FAIR VALUE LESS COSTS TO SELL. The only exception to this requirement is where the fair value cannot be measured reliably. While agricultural produce harvested from an entity’s biological assets shall be measured at its FAIR VALUE LESS COSTS TO SELL AT THE POINT OF HARVEST. Unlike a biological asset, there is no exception in case in which fair value cannot be measured reliably. According to IAS 41, agricultural produce can always be measured reliably.

IAS 41 defines Cost to Sell as the incremental costs directly attributable to the disposal of an asset, excluding finance costs and income taxes. And Harvest is the detachment of produce from a biological asset or the cessation of a biological asset’s life processes.

Entities often enter into contracts to sell their biological assets or agricultural produce at a future date. Contract prices are not necessarily relevant in determining fair value, because fair value reflects the current market in which a willing buyer and seller would enter into a transaction. As a result, the fair value of a biological asset or agricultural produce is not adjusted because of the existence of a contract.

A gain or loss arising on initial recognition of a biological asset and agricultural produce at fair value less costs to sell and also from a change in fair value less costs to sell of a biological asset shall be included in profit or loss for the period in which it arises (Hrd).