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IAS 41 — Bearer biological assets (IASB only)

Date recorded:

The IASB was asked to consider remaining issues in the limited scope project on bearer biological assets (BBAs).

Requirements for the bare BBAs

The staff outlined remaining issues on how to apply a cost model to BBAs. The staff also discussed use of a revaluation model for BBAs. The general question considered by the staff is whether the current requirements in IAS 16 Property, Plant and Equipment need to be modified to cater for BBAs. These issues were considered in the context of bare BBAs only, as opposed to considering the produce growing on the BBAs (discussed later).

The specific questions considered by the staff included:

  • What is the appropriate unit of account? Specifically, the staff asked whether it is the individual plant or some larger aggregation (perhaps a field or a planting cycle). The staff noted that agricultural activity is often continuous, meaning that older plants are removed from service and replaced on a continual basis. If BBAs are accounted for under a cost model, then this continuous process must be made discrete. Therefore, the staff noted that questions may arise, such as what the fixed-asset register would look like, how to assess impairment and how to determine residual value.
  • Is there sufficient guidance in IAS 16 on self-constructed assets to deal with accounting for the unique costs associated with planting and caring for the BBAs before they reach maturity (e.g., land preparation, planting costs and nursing seedlings)? This question follows from the previous Board decision that before being placed into production (reaching maturity and bearing fruit), BBAs should be measured at accumulated cost in a similar way to self-constructed PPE.
  • Is there sufficient guidance in IAS 16 related to the accounting for the unique costs of caring for the mature BBAs? Such costs would include fertilizing, irrigation and protecting the plants from animals or other hazards.

The staff prepared its analysis on the current requirements included in IAS 16, covering unit of measure, initial costs and subsequent costs. Based on its analysis, the staff believed the recognition requirements in IAS 16 should be applied to BBAs without modification.

Board members generally agreed with the staff recommendations. However, a few Board members sought clarifications to the recommendations. Specifically, one Board member, attempting to differentiate the staff’s analysis between the accounting for costs incurred prior to reaching maturity and costs incurred subsequent to reaching maturity, requested that further clarification be provided on the point of maturity. The staff’s analysis referenced paragraph 20 of IAS 16 which refers to the item being in the ‘location and condition necessary for [an item of property, plant and equipment] to be capable of operating in the manner intended by management’, and expanded it to say this is the point where they start to bear fruit. However, this Board member believed that simply bearing fruit was not necessarily the maturation point given that bearing fruit was not always indicative of commercial viability. He believed the maturation point was the point in which BBAs are in the location and condition necessary to be capable of operating in the manner intended by management. Other more minor clarifications were raised, such as defining normal and abnormal amounts of wasted material for purposes of cost capitalisation of BBAs. The staff noted they will consider these points in drafting, while also asking constituents a more general question regarding the sufficiency of guidance provided in the exposure draft.

Subject to the above consideration, all Board members tentatively agreed with the staff recommendations.

The Boards were then asked to consider any necessary additions to IAS 16 disclosure requirements for BBAs accounted for under a cost model.

The staff recommended that the only modification to the disclosure requirements under the cost model in IAS 16 should be to add paragraph 46(b) of IAS 41 Agriculture (to require disclosure of non-financial measures or estimates of the physical quantities of: (i) each group of the entity's biological assets at the end of the period; and (ii) output of agricultural produce during the period) and modify paragraph 74(b) and (c) of IAS 16 to make it more relevant to BBAs.

Board members expressed concern with potential unintended consequences of the staff proposals. Specifically, they feared the staff proposal was not appropriately ring-fenced to biological assets, and therefore, would be seen as an amendment to the general property, plant and equipment disclosure requirements (for property, plant and equipment with development costs).

Other Board members believed additional fair value disclosure requirements should be mandated for BBAs under the cost model. They believed fair value information is decision-useful information for users (acknowledging that it is subjective) and is not too costly to prepare for users (particularly since fair value information is being provided today for biological assets under IAS 41). In response, the staff noted that fair value information about BBAs on its own has limited use because the land upon which the BBAs are growing, the structures used to support their growth and the agricultural machinery are at cost. Put another way, BBAs are a fairly insignificant part of the production cycle, so BBA fair value information provides an incomplete/unreliable picture of fair valuation for financial statement users. Responding to the staff feedback, some Board members preferred that the Board look into fair value disclosure as part of its Conceptual Framework project to see if there are cases where a fair value disclosure (or building blocks to fair valuation, whereby disclosures about the significant inputs that would be required to determine the fair value of BBAs would be required) provides the most relevant information, while others preferred that the exposure draft on the BBA project raise the question of fair valuation disclosure (or building blocks to fair valuation) to ensure the Board is responding to the needs of constituents.

After a lengthy debate, the IASB tentatively decided that the disclosure requirements of IAS 16 could be applied to BBAs without modification. However, the Board will ask a question in the exposure draft seeking feedback on whether the following disclosures are important to investors:

  • disclosures about the fair values of the BBAs (including assumptions and inputs used);
  • disclosures about the significant inputs that would be required to determine the fair value of BBAs (but without the need to disclose the fair value of the BBAs); and
  • other disclosures about productivity.

The staff then asked whether the revaluation model in IAS 16 should be permitted for BBAs and whether BBAs should be in the scope of IAS 16 or IAS 41.

With little debate, Board members tentatively agreed with the staff recommendation that the revaluation model should be permitted for BBAs. On the latter topic of scope inclusion in IAS 16 or IAS 41, Board members expressed practical concerns with both alternatives. Specifically, some Board members, noting the limited relevance of BBAs to the broader IFRS community, preferred that BBAs be included in the scope of IAS 41 so as not to confuse constituents applying IAS 16 more broadly. However, other Board members feared the unintended consequences of including BBAs in the scope of IAS 41. Many noted that the amendments to IAS 41 would generally be an importation of the requirements in IAS 16, and they expressed fear that people would inappropriately read into requirements not carried from IAS 16 to IAS 41. After a lengthy debate, the Board tentatively decided that BBAs should be included within the scope of IAS 16 rather than adding requirements to IAS 41.

Requirements for the produce growing on the BBAs

The IASB then considered the accounting for the produce growing on the BBAs. At a previous Board meeting, the IASB decided the produce is essentially a consumable biological asset growing on a BBA and should be measured at fair value through profit or loss. The staff asked the IASB whether the current requirements in IAS 41 need to be modified if they are applied to the produce separately. Currently the requirements in IAS 41 are applied to the total biological asset (i.e., the BBA plus the produce).

The staff first asked whether the current reliability exception in paragraph 30 of IAS 41 is sufficient to deal with measurement of the produce growing on the BBAs or whether further relief from fair value measurement should be available. The staff noted that several plantation companies have noted that measuring the produce growing on the BBAs at fair value would be difficult to apply in practice. However, the staff noted the difficulties of measuring produce growing on the BBAs are equally applicable to produce growing in the ground. Therefore, the staff believed it would be inappropriate to provide additional relief for produce growing on a BBA when it is not equally available to produce growing on the ground. For this reason, the staff recommended that the exception in paragraph 30 of IAS 41 is not modified for produce growing on BBAs. Without debate, the Board agreed with the staff recommendation.

The staff then asked the Board whether the produce growing on the BBAs should be in the scope of IAS 16 or IAS 41. The staff believed that apart from changing the definition of a biological asset (to say ‘a biological asset is a living animal or plant, including produce growing on a bearer biological asset’), no modifications were necessary to the requirements in IAS 41 to apply them to the produce growing on the BBA. Therefore, the staff recommended that produce remains within the scope of IAS 41. The Board tentatively agreed with the staff recommendation without debate.

Transition requirements

The Board was finally asked to consider transition requirements for the amendments to IAS 16 and IAS 41. Specifically, the staff asked the IASB whether the transition requirements should provide relief from retrospective application (given the long life cycle for many BBAs), whether early application should be permitted and whether a deemed cost exemption should be available for BBAs on first time adoption of IFRSs.

Without debate, the Board agreed with the recommendations outlined by the staff. Those recommendations included:

  • The amendments to IAS 16 should permit use of fair value as deemed cost for items of BBAs at the start of the earliest comparative period presented in the financial statements to avoid the need to reconstruct cost information.
  • The amendments to IAS 16 and IAS 41 should be available for early adoption.
  • The deemed cost exemptions provided for PPE in IFRS 1 First-time Adoption of International Financial Reporting Standards should also be available for items of BBAs.

Next steps

The staff noted that the Board has now completed the technical discussion in the limited scope project on BBAs. The staff intends to present to the IASB a summary of the due process steps undertaken at a future meeting before preparing an exposure draft of proposed amendments.

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