IAS 41 and IFRS 13 — Valuation of biological assets using a residual method
The Committee received a request seeking clarification on IAS 41.25. The staff sent out a request for information to the International Forum of Accounting Standard Setters (IFASS) to help assess the Committee’s agenda criteria.
The staff was of the view that the concern raised by the submitter arose because the example in the last sentence of IAS 41.25 refers to the fair value of the land and other assets. Although it is debatable whether the previous definition of fair value (i.e., before the IASB issued IFRS 13) reflected an asset’s highest and best use, IFRS 13 is clear that it does when that asset is required to be measured at fair value by another IFRS. As such, the staff was of the view that the question is whether the example in the last sentence of IAS 41.25 requires the use of fair value (which assumes the highest and best use of a non-financial asset) for the raw land and land improvements when using the residual method.
The staff noted that it is important to note that the objective in IAS 41 is to measure the fair value of the biological assets, not all the assets in the group. When using the residual method in IAS 41.25, the land is an input into the fair value measurement of the biological assets. Therefore, if the highest and best use of the biological assets is its current use, for internal consistency the other assets in the combined assets would generally also reflect their values in their current use.
However, the staff also noted that the conclusion depends on how an entity measures its land in the statement of financial position. That is, it depends on whether it uses the cost model or the revaluation model in accordance with IAS 16. IAS 16.29 states that an entity shall choose either the cost model or the revaluation model as its accounting policy and shall apply that policy to an entire class of property, plant and equipment. IAS 41 does not apply to land related to agricultural activity that should be covered by IAS 16. Therefore, the IAS 16 valuation model an entity has chosen for land in general would be applied to the measurement of land that is a part of the combined assets. The staff noted that a distinction needs to be made between entities that are using the cost model in IAS 16 to value the land associated with the biological assets and those that use the revaluation model.
The Committee Chair informed the Committee that the staff is intending to recommend to the Board to take on a limited project on bearer biological assets and that the staff is intending to speak to emerging markets about biological assets issues. This may resolve this short-term live issue.
The Committee tentatively disagreed with the staff’s proposal to recommend to the Board an annual improvement to IAS 41 to clarify that when using the residual method in IAS 41.25: (a) if the entity uses the cost model to measure the land, the value of the land (and other assets in the combined assets) used as an input into the fair value measurement of the biological assets would reflect its current use; and if the entity uses the revaluation model to measure the land, the value of the land (and the other assets in the combined assets) used as an input into the fair value measurement of the biological assets would reflect its highest and best use (i.e., its fair value).
Several Committee members agreed that the fair value of the biological assets should remain the same irrespective of whether the cost model or the revaluation model is used to value the land. In addition, several Committee members also agreed that the use of a residual method is voluntary and not mandatory, and therefore, if the application of the residual method results in a nil fair value of biological assets, then that may indicate that the residual method is not the appropriate method of valuation and the entity should revisit its valuation techniques.
The Committee tentatively agreed to recommend that the Board take on a limited project on bearer biological assets to resolve this live issue. In the interim, to address this live issue, the Committee tentatively agreed to issue an agenda rejection notice along the lines of noting that an answer that produces a fair value of zero for biological assets indicates that the wrong approach or valuation technique has been used. The issue lies with the selection of the valuation technique and not the mandatory application of IFRS 13.
The Committee Chair noted that the Committee will receive an update on the Board’s decision on the biological assets project and outcome of the emerging markets discussions at the next meeting as well as a draft tentative agenda decision for the Committee’s review.