Biological assets at fair value

What is fair value less costs to sell?

Fair value is the price that would be received to sell the asset in an orderly transaction between market participants at the measurement date, under IFRS 13. For biological assets, it is the value in the asset's present location and condition, so a farm deducts the cost of getting animals to the market where the price is quoted. Costs to sell are then deducted: the incremental costs directly attributable to disposal, such as auctioneer's commission, levies and transfer duties, excluding finance costs and income taxes. The result is what the farm would expect to net from selling the asset now.

How is fair value measured for different assets?

Livestock with regular auctions or meat processor price grids usually have observable prices, adjusted for weight, breed, age and condition, often Level 2 inputs. Growing crops, timber and young plantations rarely have markets in their current state, so fair value is estimated with a discounted cash flow model: expected harvest value, less the remaining costs to grow and harvest, less a return on contributory assets such as the land the crop grows on, discounted at a rate that reflects the risks. These are Level 3 measurements with extensive disclosure. Where little biological transformation has happened since the costs were incurred, such as seedlings just planted, cost may approximate fair value. See crops and the point of harvest.

Why is there a gain or loss on day one?

A gain or loss can arise when a biological asset is first recognised, because it is measured at fair value less costs to sell rather than at its purchase price. A steer bought at auction for US$ 900 is immediately worth only 870 to the farm on a fair value less costs to sell basis, after a 3% selling commission and a 3 levy, so the farm recognises a loss of 30. A calf born on the farm is recognised at its fair value less costs to sell when born, a gain, because nothing was paid for it.

Biological assets at fair value: a year in a beef herd

A cattle farm's herd was valued at US$ 400 thousand at the start of the year. During the year it bought animals for 45 thousand, sold animals carried at 100 thousand, the animals grew, and beef prices fell at the year end.

The net gain of 55 thousand is recognised in profit or loss. IAS 41 requires a reconciliation like this and encourages splitting the change between physical change and price change, which shows whether the farm grew its herd or simply rode prices. The split is made by valuing the closing herd at opening prices to isolate the physical change, with the remainder due to prices.

What if fair value cannot be measured reliably?

IAS 41 presumes fair value can be measured reliably. The presumption can be rebutted only when the asset is first recognised, and only if quoted prices are not available and other valuation methods are clearly unreliable. Then the asset is measured at cost less accumulated depreciation and impairment until fair value becomes reliably measurable, at which point the fair value model applies. Once an entity has measured an asset at fair value, it cannot go back to cost. In practice, the exception is used rarely, for example for unusual species with no markets.

How are biological assets presented?

Biological assets are shown separately in the balance sheet, split between current, such as livestock for slaughter and annual crops, and non-current, such as breeding stock and forests. Gains and losses from changes in fair value less costs to sell are shown in profit or loss, often on a separate line, and many companies present an operating result before fair value changes. Disclosures include the valuation techniques, the significant inputs and their sensitivity, and the physical quantities, such as head of cattle or hectares planted. See agriculture accounting and dairy and livestock. Under US GAAP, ASC 905 generally measures growing crops and animals at cost.

This guide is general information. It is not tax or legal advice for your situation.