The Board discussed three issues identified by staff as fundamental to the IASB’s initial discussion on the limited scope project on bearer biological assets (BBAs):
- What definition of BBAs should be used in the scope of the amendment to IAS 41 Agriculture (i.e., identify the subset of biological assets for which biological transformation is not significant in generating future economic benefits — meaning they are not supported by the main principle in IAS 41 outlined in paragraph 6)?
- How should BBAs be measured before being placed into production (i.e., before the BBAs reach maturity)?
- How should the produce growing on the BBAs be accounted for (e.g., fruit growing on a fruit tree)?
On the first issue of what definition of BBAs should be used in the scope of the amendment to IAS 41, the staff believed the definition should describe the subset of biological assets that are not supported by the main principle in IAS 41 (i.e., those biological assets for which biological transformation is not significant in generating future economic benefits), and the staff considered the issue of whether to include livestock in the scope of the amendment as one of the more significant issues to consider.
The staff identified four alternative views for defining BBAs. These alternatives included:
- View (1): No alternative use — BBAs would be defined as biological assets that are cultivated for use in the production or supply of agricultural produce to others; are expected to be used for more than one period; and are not agricultural produce themselves. The definition aims to define BBAs to be those biological assets that have no consumable attributes — they can only be used as bearer assets (i.e., they have no alternative use).
- View (2): Predominant use — BBAs would be defined as biological assets predominantly used in the production or supply of agricultural produce to others and are expected to be used for more than one period. Under View 2, classification of biological assets that embody both consumable and bearer attributes would depend on the “predominant use” of the biological asset at the reporting date (a business-model test).
- View (3): No alternative use — Plants only (same as View 1 but only includes plants, not livestock).
- View (4): Predominant use — Plants only (same as View 2 but only includes plants, not livestock).
Many Board members expressed support for a ‘no alternative use’ model — either View 1 or 3. The primary reasons for this support related to the fact that the definition was considered easier to apply and more conceptually sound because it removed the need for decisions based on a business-model test and management intention. However, other Board members supported a ‘predominant use’ model — either View 2 or 4. Reasons for this support generally related to a view that Views 1 and 3 failed to capture practical reality that many biological assets have both consumable and bearer attributes.
Looking at whether the scope should be limited to plants (i.e., View 3 or 4) or should include plants and livestock (i.e., View 1 or 2), many Board members expressed concern with including livestock within the scope of the amendment. They noted that use of a cost model becomes more complex when applied to livestock. While it was considered theoretically possible to determine the cost of a newly born animal, for example, Board members noted that almost all the costs involved are indirect costs and must be allocated on an inherently arbitrary basis. However, others believed the practical concerns could be overcome and preferred either View 1 or 2.
When put to a vote on initial preference, the Board was split; four supported View 1, four supported View 2, seven supported View 3 and one supported View 1. The IASB Chair then asked who could ‘live with’ View 3, in which fourteen Board members were accepting. Therefore, the IASB tentatively decided the scope of the amendment to IAS 41 should be restricted to BBAs that are plants. Plants would be defined as bearer biological assets if they have no consumable attribute (i.e., can only be used in the production or supply of agricultural produce).
Application of a cost-based model
The IASB then considered how to account for BBAs before they are “placed into production” (i.e., before they reach maturity and bear produce).
Upon maturity, BBAs are no longer undergoing biological transformation. Some constituents therefore argue that the IAS 41 fair value model, which is based on the principle that biological transformation is best reflected by fair value measurement, is not appropriate for mature BBAs
The same argument is not true for immature BBAs. Until maturity, BBAs are in a growth phase (i.e., they are undergoing biological transformation).
The staff have identified four alternative views for accounting for immature BBAs:
- View (1) — Cost accumulation: similar to accounting for a self-constructed item of property, plant and equipment;
- View (2) — Fair value through profit or loss: the current approach in IAS 41 for BBAs over their entire life;
- View (3) — Fair value through other comprehensive income; and
- View (4) — Accounting policy choice between cost accumulation approach and fair value approach.
A few Board members believed that a fair value approach should be applied until maturity, consistent with the underlying principle in IAS 41. They also noted that in some cases, fair value is easier to apply than an accumulated cost model (citing an example of a tree plantation replaced in sections (instead of individual trees) where significant levels of indirect costs are incurred). However, others were concerned with the practical complexity in applying a fair value model. They noted that a cost accumulation approach would be easier to apply to immature BBAs than a fair value approach, as they noted the lack of an active market for immature BBAs which would result in subjective measurements. They also noted that constituent feedback which suggested that users want cost-based information and application of IAS 41 does not currently work.
When put to a vote, the IASB tentatively decided to develop a cost-based model for BBAs within the scope of this project. Before being placed into production, such assets should be measured at accumulated cost (i.e., View 1). This approach is similar to the accounting treatment for a self-constructed item of machinery before it is placed into production.
Accounting for produce growing on BBAs
The Board then discussed how to account for the produce growing on the BBAs (e.g., fruit growing on a tree). IAS 41 requires that while the produce is attached to the BBA, its value forms part of the fair value of the entire biological asset (e.g., the fair value of the tree includes the fruit growing on it). When the produce is detached from the BBA (harvested), it meets IAS 41’s definition of agricultural produce. IAS 41 requires agricultural produce to be measured at fair value less costs to sell at the point of harvest. This is the deemed cost of the item when applying IAS 2 Inventories (or another Standard if appropriate). However, if a cost model is applied to BBAs, the biological transformation of the produce will not ‘automatically’ be incorporated into the carrying amount of the BBA (as it is under IAS 41).
The staff identified three alternative views for accounting for the produce growing on the BBA:
- View (1) — Recognise the produce at fair value less costs to sell at the point of harvest.
- View (2) — Measure the produce at fair value less costs to sell from the date it starts to grow.
- View (3) — Account for the produce under IAS 2 from the date it starts to grow.
Many Board members expressed support for View 2 — the produce would be measured at fair value less costs to sell with changes recognised in profit and loss as the produce grows. View 2 was seen as consistent with the principle underlying IAS 41 that biological transformation is best reflected by fair value measurement.
However, a few Board members expressed support for other views. For example, one Board member supported View 1 because of a perception that the approach was easier to apply. Another Board member supported View 1, but with the addition of a practical expedient based on growing season length. Different accounting would result from produce growing season length.
When put to a vote, the Board tentatively decided the produce growing on BBAs should be measured at fair value less costs to sell with changes recognised in profit and loss as the produce grows. This method would ensure that produce growing in the ground (e.g., carrots) and produce growing on a BBA (e.g., apples) would be accounted for consistently.