Fair Value of Agricultural Assets – A Chat About IFRS 13

Let’s dive into the world of fair value and agriculture, but we’re keeping it conversational this time. Remember our previous talk about biological assets? Quick recap: biological assets are measured at fair value minus the cost to sell, except for bearer plants, which stick to IAS 16’s cost or revaluation model.

Once the agricultural produce is harvested, they switch teams and become inventory (measured under IAS 2 inventories). And agricultural land? That’s under IAS 16 Property, plant and equipment too, using cost or revaluation models. Today, though, we’re zeroing in on the fair value of biological assets. Let’s break it down.

The Fair Value Hierarchy – IFRS 13

Think of the fair value hierarchy as a ranking system for how we figure out value.

1. Level 1 – The “Obvious Price”

   Straight-up quoted prices for identical assets in active markets. Think raw milk, eggs, or meat sold in bustling marketplaces.

2.  Level 2 – “Close Enough” Pricing
   Not quoted, but still observable. For example, the value of the sheep or cattle is determined by independent valuation with reference to prices received from representative sales of breeding cattle like your herd. Factors like class, age, quality and location of the herd come together to ensure valuation reflects the true worth of your herd.

3. Level 3 – The “Unobservable Price”
   No market price? No problem. Use future cash flows (like preparing land for crops) and discount them to today’s value. This approach works for assets that are still developing.

The fair value hierarchy in IAS 41 are:

✋ Market price for the identical asset in an active market at the reporting date (or at the harvest date, based on the type of an asset) – that’s Level 1.

✋ Recent transaction prices for the identical assets when no active market exists – that’s Level 2.

✋ Market price for similar assets in an active market – that’s Level 2.

✋ Present value of future cash flows from the assets – that’s Level 3.

Exceptions to Fair Value

Not everything needs fair value straight away.

1. Early Days: If a biological asset is just getting started (like fruit tree seedlings planted immediately before the balance sheet date), cost might be good enough.

2. Can’t Measure: If fair value cannot be measured reliably, measure the asset at cost minus depreciation or impairment losses [IAS 41 para 30].

What Changes Fair Value?

The value of biological assets can change over time. These changes—called fair value adjustments—show the difference in value from one period to the next, usually summed up as a whole.

Value can go up for reasons like growth, animals reproducing, or market prices climbing. But it can also drop if there’s degeneration, sickness, death, or a dip in prices.

Under IAS 18 fair value gains are treated as income and fair value losses are logged as expenses.

1. Price Swings
   Market prices go up? Fair value increases, and you recognize income. Prices drop? That’s an expense.

2. Biological Events
   Biological events include birth, ageing (maturing), and death. Animals are born (yay, gain!) or die (oops, loss). Aging will play different role if fair value is tracked by age groups. All these events—births, aging, and deaths—combine to create an overall fair value gain or loss

3. Market Moves
   Market events, like buying and selling biological assets, also play a big role in fair value.

   Purchases can include initial acquisitions or adding assets to maintain a stable production group. If you buy at a price higher or lower than the fair value on the reporting date, it can lead to a fair value gain or loss.

   When you sell assets, it’s about quantity changes, not cost levels. Any gain or loss from these sales gets recognized in net sales, as there’s no adjustment to fair value itself. It’s all about keeping the financial picture clear and accurate!

Subsequent Expenses

When it comes to agricultural activities, subsequent expenses can include things like feeding, Labor costs, veterinary care, seeds, planting, weeding, fertilizer, power and irrigation, as well as harvesting and slaughtering costs.

Now, IAS 41 doesn’t make it crystal clear whether these costs should be capitalized or expensed. So, you’ve got two options:

1. Expense them directly in the profit and loss.

2. Capitalize them as part of the biological asset’s carrying value.

Both methods will give you the same end result, but they look different on the financial statements.

• Expensing costs directly in the profit and loss will show a large expense, but it will also bump up the fair value of your biological assets, since those expenses are included in the value.

• Capitalizing the costs will keep your profit and loss looking cleaner, showing smaller expenses, and lead to a smaller increase in the fair value of your biological assets.

Accounting Policy Guide for Subsequent Expenses

Here’s a general rule for setting your accounting policy:

• Expenses that maintain the asset—like regular feeding or vet costs—should be expensed directly.

• Expenses that help increase the yield or outcome of the biological assets, such as costs for young stock or embryos, should be capitalized.

For example, on a dairy farm:

• Feeding cows, veterinary supplies, Labor costs, and other operational expenses related to milking would be expensed.

• Costs related to young stock, like feeding, Labor, veterinary supplies, and embryo costs, would be capitalized.

It all comes down to how you want to present the costs and the impact on your financials, but either way, you’re staying true to the agricultural cycle.

 Disclosure Checklist

IAS 41 wants transparency, so don’t forget to report:

• Gains or losses from fair value changes.

• Births, purchases, sales, deaths, or reclassifications.

• Harvest decreases and business combination increases.

• Exchange rate impacts and “other” changes.

Wrapping It Up

To wrap things up, understanding how to measure fair value and the impact of biological events is key to keeping your agricultural accounting on point. Whether it’s determining fair value through different levels, managing market events, or handling subsequent expenses, getting it right ensures your financials are accurate and your decisions are based on solid data.

Remember, this isn’t just about crunching numbers—it's about making sure your financials reflect the real-world value of your assets. So, next time you’re assessing livestock or crops, keep these principles in mind.