New rules could affect agriculture firms

Have clients with agricultural assets? If so, they should be aware of recent International Accounting Standards Board (IASB) proposals that may affect their bottom line. These proposals are open for comment until October 28, 2013.

The IASB wants to amend IAS 16 and IAS 41. In its present form, IAS 41 sets out a wide-ranging definition of a biological asset (“a living animal or plant”) and requires measuring these assets at the end of each reporting period at fair value, less costs to sell. Changes go through profit or loss, except for rare cases when value can’t be measured reliably.

The IASB wants to introduce the concept of a “bearer plant,” defined as “a plant that is: (a) used in the production or supply of agricultural produce; (b) expected to bear produce for more than one period; and (c) not intended to be sold as a living plant or harvested as agricultural produce, except for incidental scrap sales.”

Further, IASB wants to exclude bearer plants from the scope of IAS 41 and bring them under IAS 16, allowing them to be measured using the same cost model applying to property, manufacturing plants and equipment (with the choice of a revaluation model, although that’s rarely used).

As an example, Canadian wineries with grapevine assets would have the option of measuring them at their accumulated cost before they reach maturity, and at cost less depreciation from that point on. But the agricultural produce generated from the vines (harvested grapes) would continue to fall under IAS 41 and be measured at fair value less costs to sell at harvest.

A welcome change?

The proposals seem to give people what they want. Says the IASB: “The operation of mature bearer biological assets is seen by many as similar to that of manufacturing and, consequently, they believe that such assets should be accounted for in accordance with IAS 16.”

The proposal document also cites concerns “about the cost, complexity and reliability of fair value valuations of bearer plants in the absence of markets for those assets and about the volatility from recognizing changes in the fair value less costs to sell of the bearer plants in profit or loss.” It adds that nearly all interested investors and analysts contacted on the matter said “the IAS 41 fair value information about bearer plants has either limited or no use to them…[I]nformation about operating performance and cash flows are more relevant to their forecasting and analysis.”

Cattle producers need to beef up in emerging markets

In the face of rising feed costs and flat demand in developed markets such as the U.S., Canadian beef producers need to focus on exports to emerging economies to maintain growth, says BMO Economics.

“Canada’s beef industry will struggle to expand production and sales if it focuses exclusively on traditional markets, such as North America, for its products,” says Aaron Goertzen, economist, BMO Capital Markets. “It will become increasingly important for the Canadian beef industry to go where the growth is, and that growth […] is taking place in emerging market economies.”

But something like this could be said for various other aspects of financial statements (depreciation, stock option expense, impairment losses, etc.) commonly downplayed by companies and analysts when they focus on EBITDA or other adjusted performance measures.

Not everyone agrees

Two members of the IASB dissented from the proposals. They suggested that even if bearer assets have some similarity to manufacturing plants, it’s not as great as their commonalities with other biological assets. So the board, they argue, should have left well enough alone.

The dissenters “accept the view that the use of fair value for bearer assets makes the analysis of profit or loss and financial position more difficult. At the same time, they note that price volatility is an indicator of risk, and risk assessment is part of an analyst’s job. […] Sound financial statement analysis will always adjust reported profit or loss and financial position for the effects of unusual or non-recurring changes in reported information. However, if critical information about changes in the economic benefits arising in an agricultural operation is not reported, such analysis is impaired or not possible at all.”

They continue: “[A]t a minimum, the fair value of the bearer plants should be a required disclosure, including information about the valuation techniques and key inputs/assumptions used.”

The exposure draft doesn’t currently propose such a disclosure requirement, consistent with the current requirements for property, plant and equipment valued using the cost model. However, the IASB specifically asks for comment on this point, and about whether other disclosures should be required (e.g., yield, acreage, or age of the plants).

Ultimately, the proposals won’t affect many companies. The main application of IAS 41 in Canada is likely in the forestry industry, but trees in a timber plantation wouldn’t usually be bearer assets.

John Hughes, CPA, CA, is an IFRS consultant in MNP LLP’s Toronto West office.