Some observations on the IASB’s recent amendments to the existing requirements for biological assets, including a new concept of “bearer plants”
The IASB has issued Agriculture: Bearer Plants, amendments to IAS 16 and IAS 41, effective for annual periods beginning on or after January 1, 2016. Prior to the amendments, IAS 41 sets out a wide-ranging definition of a biological asset (“a living animal or plant”) and requires measuring such an asset at the end of each reporting period at its fair value less costs to sell, with changes going through profit or loss, except for rare cases when this can’t be measured reliably. The amendments modify this concept by introducing a concept of a “bearer plant,” defined as follows: “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 amendments exclude bearer plants from the scope of IAS 41 and bring them into the scope of IAS 16, allowing them to be measured using the same cost model applying to property, plant and equipment (with the choice of a revaluation model, although that’s rarely used). So, for example, Canadian entities that have grape vines as assets, and that must currently evolve a method for measuring those vines at their fair value on an ongoing basis, whatever their state of development, will now have the option of measuring them instead at their accumulated cost before they reach maturity, and at cost less depreciation from that point onward. However, the agricultural produce generated from the vines – picked grapes in this instance –continues to fall under IAS 41 and to be measured at its fair value less costs to sell at the point of harvest.
The amendments seem to be an instance of giving the people (if only a small group of them) what they want. The IASB says it heard that: “The use of mature bearer biological assets…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, because it is permitted for property, plant and equipment.” The board also cites 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 recognizing changes in the fair value less costs to sell in profit or loss.” and states that “nearly all investors and analysts consulted during the outreach performed by the staff said that the IAS 41 fair value information about bearer plants has limited use to them… information about operating performance and cash flows is more relevant to their forecasting and analysis. Consequently, they eliminate changes in the fair value less costs to sell of bearer plants from the figures used for their analysis.”
Something like this could be said though for various other aspects of the financial statements – that is, all of those aspects (depreciation, stock option expense, impairment losses, etc.) commonly downplayed by entities and analysts when they focus on EBITDA or other adjusted performance measures. Two members of the IASB dissented from the amendments, saying in effect that even if bearer assets have some similarity to manufacturing plants, it’s not as great as their similarity to other biological assets (a plant is a plant is a plant, you might say) and so the board should have left well enough alone.
The dissenters “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….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.”
The two dissenters believe “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.” The amendments don’t actually include such a disclosure requirement though, consistent with the current requirements for property, plant and equipment valued using the cost model. In its request for comment on the proposed amendments, the IASB had specifically asked for comment on this point, and about whether other disclosures should be required (for example, about yield, acreage, age of the plants, or suchlike), but it ultimately didn’t end up adding anything to IAS 16 in this respect.
Plainly, these amendments don’t affect many Canadian entities – the biggest application of IAS 41 in this country is likely within the forestry industry, but trees in a timber plantation won’t usually be bearer assets. The amendments are still interesting though for how they constitute a microcosm of the tension between concepts and practicality, and how easily the conceptual tree can start to become flexible, if enough pressure gets placed on the branches.
The opinions expressed are solely those of the author