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IAS 41 and IFRS 13 — Valuation of biological assets using a residual method

Date recorded:

At the May 2012 meeting, the Committee discussed a request seeking clarification on paragraph 25 of IAS 41 Agriculture. This paragraph permits the use of a residual method to arrive at the fair value of biological assets that are physically attached to land, if the biological assets have no separate market but an active market exists for the combined assets. The Committee considered the staff analysis and proposal, as well as comment letters received from the International Forum of Accounting Standard-Setters (IFASS) and two separate comments to the staff paper and these were orally introduced to the Committee at the May meeting. The tentative conclusion at this meeting was that the use of the residual method would not be appropriate when it results in a minimal or nil fair value for the biological asset.

There is a potential conflict between the use of the residual method under paragraph 25 of IAS 41 and the highest and best use approach of paragraph 27 of IFRS 13 Fair Value Measurements when fair valuing biological assets attached to land. Under IFRS 13, the fair value of a non-financial asset must take into account its highest and best use, and under IAS 41 (which specifically addresses the fair value measurement of biological assets attached to land), a residual method valuation technique is suggested where the total fair value of the combined biological assets and land are split between a land component and a residual (biological assets) component. When applying both IAS 41 and IFRS 13 criteria together, there is tension when using the highest and best use criteria to fair value the land. This may result in a minimal or nil fair value for the biological assets when the highest and best use is different from its current use.

Two comments were received to the May staff paper. One mentioned that the residual method would only be appropriate where the highest and best use equalled the current use. The second comment suggested an amendment to the wording of IFRS 13 to provide clarity on how to allocate fair value of a group of assets to individual assets within a group.

The staff performed further research and analysis on this issue and presented their findings at the September 2012 meeting. This identified that there were a number of valuation techniques being used to measure the fair value of biological assets attached to land in addition to the residual method and generally supported the findings from the May 2012 meeting.

The staff commented that recognising a minimal or nil fair value of biological assets under the residual method would provide useful information to investors (although not meeting IAS 41 objectives) and presented this view and a secondary view that there is a separate fair value that can be attributed to the biological assets even where the highest and best use results in an alternative use for the land.

  • View 1 — Using the residual method, the deduction that is made for the land would reflect its highest and best use resulting in a minimal or nil fair value being attributed to the biological assets. This would be because the forecast future cash flows from the use of the biological assets in their current use minus a charge for the use of the land in its highest and best use could lead to minimal cash flows generated solely by the biological assets.
  • View 2 — It was suggested that the biological assets have a fair value independently of the group of assets even where the land has a significantly higher value in an alternative use. It was suggested that IAS 41 requires the fair value of the biological assets to be presented in the statement of financial position and changes in the fair value as a result of biological transformation to be presented in the statement of comprehensive income. If a minimal or nil fair value was recognised this would distort the measurement objectives of IAS 41.

The staff agreed with view 2, the biological assets will have a fair value independent of the asset group. Fair value would be the value that the entity can obtain from selling the biological assets in the marketplace (less any selling costs). The staff were not in agreement with view 1 as this method, although applying the requirements of IFRS 13 highest and best use for the land, did not meet the requirements of IAS 41 as the fair value of the biological assets will not be presented fairly in the financial statements.

The staff identified that IFRS 13 was merely a practical expedient. It was observed that it was unlikely that the residual value would be appropriate to use if it returns a minimal or nil fair value for the biological assets, and if it does, an entity should revisit its valuation techniques, as the use of the residual method is not mandatory but optional. The objective of IAS 41 is, after all, to measure the fair value of biological assets and applying IFRS 13 should not affect the objective of IAS 41.

The staff asked that this issue not be added to the Committee agenda and proposed wording for a tentative agenda decision for the Committee to comment on.

One Committee member noted that the paper did not address the fact that a biological asset can have a nil value and the paper assumes that a biological asset cannot have a nil value. This may be where, for example the highest and best use for the land is not for growing purposes but for building. If the owner of the land is using it to grow crops, then they are doing so in an uneconomic fashion as the land can be used for something better. Hence the fair value of the biological asset is nil as the value of the land will be much higher than the combined and the land and crop are linked. The member also commented that the paper also implied that IAS 41 states that you have to have a value for a biological asset which is incorrect.

One other Committee member suggested that the tentative agenda decision should be amended and that the agenda decision is saying that you cannot always use the residual method but look at the biological asset that you are trying to value and use the most appropriate methodology to value it and residual value is only one of these valuation techniques.

One Committee member questioned that when you are valuing the biological asset, are we looking at the highest and best use for the combined group of assets or just the biological assets themselves. If combined then the biological assets could conceivably have a nil value but the answer would be different if we are looking at the highest and best use of the biological asset only.

The majority of Committee members agreed that this topic would be revisited at the next Committee meeting in November 2012 as a decision on the wording and agreement on the tentative agenda decision could not be reached. It was suggested that the interaction between IAS 41 and IFRS 13 had not been resolved and there were a number of further options that should be explored before a tentative agenda decision could be agreed upon.

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