Accounting Changes for Bearer Plants in The Agricultural Sector

Bearer plants related to agricultural activity are classified as property, plant and equipment under IAS 12 in the current financial period. (Effective date: For annual periods beginning on or after 1 January 2016). Previously, these would have been classified as biological assets along with the produce they bear, and valued at fair value per IAS 41. Produce continues to be classified as biological assets.
 
What is a bearer plant?
 
IAS 41 defines a bearer plant as a living plant that:

  • is used in the production or supply of agricultural produce;
  • is expected to bear produce for more than one period; and
  • has a remote likelihood of being sold as agricultural produce, except for incidental scrap sales.


Examples of bearer plants would be tea bushes and grape vines.
 
Specific items that will not qualify as bearer plants include:

  • trees grown for use as lumber, or other plants cultivated to be harvested as agricultural produce;
  • trees cultivated for both fruit and lumber, therefore having more than a remote likelihood of being sold; and
  • annual crops such as maize and wheat.

 
Note that incidental scrap sales are allowed, for example, when trees no longer bear produce and are sold as firewood.
 
Produce growing on bearer plants is still required to be fair valued under IAS 41.

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Effect of change
 
According to IAS 41, biological assets are measured at fair value. Classifying the bearer plants as property, plant and equipment (PPE) per IAS16 allows the preparer to value the bearer plants at cost, less subsequent depreciation or impairment or at a revalued amount.
 

Effect

Fair value model in
IAS 41

Cost model in IAS 16

Effect

Financial position

Measured at fair value less costs to sell (together with the produce).

Measured at cost less any accumulated depreciation and any accumulated impairment losses. (Produce measured separately at fair value less costs to sell.)

Net asset amounts are likely to be lower for the cost model than the fair value model during the earlier part of the productive life of a bearer plant. This is because the future cash flows that can be generated by the bearer plant, and reflected in a fair value measurement, will likely be higher than the cost on initial recognition. Over time, the carrying amounts measured in accordance with the two models are expected to converge as the asset approaches the end of its productive life.

Profit or loss

Changes in fair value less costs to sell are recognised in profit or loss. Costs may be recognised as an expense immediately or capitalised. If they are capitalised, there is an equal reduction in the change in the fair value, less costs to sell.

The depreciation charge for each period, and any impairment loss, will be recognised in profit or loss.

Over the life of the bearer plants, the net amount recognised in profit or loss will likely be the same, whether applying the fair value model or the cost model. However, if an entity applies the fair value model, the effect on profit or loss will be variable (changes in fair value). If an entity applies the cost model, the effect on profit or loss is likely to be more systematic (depreciation, with possible impairment).

Source: ifrs.org - IAS 16: Property, plant and Equipment: Basis for conclusion
 
No additional disclosure requirements were added specifically for bearer plants. IAS 16 disclosure is, therefore, applicable.
 
IAS 16 requires the recoverable amount of an item of PPE or cash generating unit to be estimated only if there are indicators of impairment at the reporting date. In general, the bearer plants do not generate cash flows independently of the land, and may therefore be seen together with the land as a cash-generating unit. The impairment test would then also take place at the level of the cash-generating unit (thus bearer plants and land it is situated on).
 
Transitional provisions
 
Fair value less cost to sell can be used as deemed cost for items of bearer plants at the beginning of the earliest comparative period presented in the financial statements. Therefore, the fair value must be measured at that date. Any difference between the previous carrying amount and that fair value shall be recognised in opening retained earnings at the beginning of the earliest period presented.
 
In the reporting period when Agriculture: Bearer Plants (Amendments to IAS 16 and IAS 41) is first applied an entity need not disclose, for the current period, the amount of the adjustment for each financial statement line item due to initial application of the IFRS. This must, however, be disclosed for each prior period presented.
Why the change?
 
Biological assets are measured at fair value to correctly reflect the future economic benefits that will be received from the biological transformation. Mature bearer plants are, however, fully grown and biological transformation is no longer significant in generating future economic benefits. Bearer plants are solely used to grow produce over several periods and then usually scrapped.
 
This is similar to the use of machinery to manufacture goods. The progressive decline in the future earning potential of a bearer plant over its life is also similar to other depreciable assets. Land upon which bearer plants are growing, the structures used to support their growth are measured under PPE.
 
Cost and effort implications
 
By permitting a cost model, the amendments are expected to significantly reduce the costs for preparers of financial statements. Produce still needs to be measured at fair value. However, it is expected that the fair value of produce is more easily attainable due to the nature thereof than that of bearer plants that are never sold other than incidental scrap sales.
 
Entities will now determine the useful life of the bearer plant in order to calculate depreciation, as well as test for impairment as described earlier when indicators exist. Despite these additional efforts required, overall there will be a cost and effort saving when using the cost model.
 
A study that was done by the standards board indicated that investors and other users of financial statement rarely used the fair value of bearer plants when making decisions. Instead, additional information given in accompanying documents such as the directors’ report were of more assistance, including information such as the yield, acreage and age of bearer plants.
 
Challenges with implementation
 
The biggest uncertainty with the new approach relates to the costing of the bearer plants. This should be approached similarly to the approach for self-constructed PP&E, before they are in the location and condition necessary to be capable of operating in the manner intended by management. Consequently, references to construction in the standard should be read as covering activities that are necessary to cultivate the bearer plants before they are in the location and condition necessary to be capable of operating in the manner intended by management (i.e. reaches maturity).
 
Before maturity, bearer plants will be measured at their accumulated cost, similar to the accounting treatment for a self-constructed item of plant and equipment before it is “available for use”.
 
Subsequent costs would need to be considered under the ordinary capitalisation requirements of IAS 16, and should be expensed unless they enhance the future economic benefits of the asset.
 
Entities are likely to have to determine their own accounting policies for determining when a bearer plant reaches maturity, as judgement will be required to determine for each type of bearer plant.
 
The standard (IAS16) includes the following in the accumulated cost of the bearer plant:

  • its purchase price, including import duties and non-refundable purchase taxes, after deducting trade discounts and rebates.
  • any costs directly attributable to bringing the asset to the location and condition necessary for it to be capable of operating in the manner intended by management.
  • the initial estimate of the costs of dismantling and removing the item and restoring the site on which it is located.

 
There is no guidance specifically addressing which costs should be capitalised in the case of a bearer plant, so all costs need to be measured against the above criteria and the capitalisation or expense thereof will depend on the facts and circumstances. Apart from the purchase price, as mentioned at point (a), consideration should be given to irrigation, fertilisation and soil preparation. Furthermore, one may consider including labour costs directly attributable to the planting of the bearer plants, and possibly even the cost of installing an irrigation system, if the system is used solely for the bearer plants. A word of caution must be made, however, that professional judgement, on a case-by-case basis, will be needed to determine specifically which costs qualify for inclusion in capital.