RESULTS AND DISCUSSIONS
Situations where the fair value cannot be reliably measured
It is assumed that the fair value cannot be reliably measured for a biological asset. This hypothesis can be ignored only at the initial recognition of a biological asset, for which there are not available prices or values determined on the market and for which the alternative estimations of the fair value are not clearly reliable. In these cases, the biological assets will be evaluated at cost less any cumulated depreciation and any loss from cumulated depreciation. Once the fair value for such a biological asset can be measured reliably, an entity will measure it at the fair less the estimated point –of-sale costs. When as asset meets the classification conditions as detained for sale according to IFRS 5, it is assumed that the fair value can be reliably measured. In all cases, an entity measures the agriculture products at the date of harvest at the fair value less the estimated at point-of sale costs. Reflecting in this way the idea that the agriculture products measured at the date of harvest can be always measured reliably. A government unconditional grant is relation to an measured biological asset at the fair value less the estimated point –of-sale costs will be recognized as income when and only when the government grant becomes debt. When a government grant in relation to a biological asset measures at the fair value less the estimated point-of-sale costs is conditional, including also the case when this government grant is conditional by the non-engagement in the specified agriculture activities, an entity will recognize the grant as income when and only when the imposed conditions for the receiving the grant are fulfilled.
Evaluating biological assets
At the annual accounts or at the beginning of the year, the biological assets must be evaluated at their fair value minus point-of-sale expenses. Although, if on the initial estimation , the fair value cannot be estimated realistically, the biological asset must be estimated at its costs, minus collected amortization and any depreciation collected loss. Once the fair value becomes realistic, the asset must be estimated at its fair value, minus the point-of-sale costs. If there is an active market for a certain asset or agricultural produce, the quote on that market is actually an appropriate basis for estimating the assets’ fair value. If there is no such market, the following criteria are used for the fair value estimation:
- The most recent market transaction price
- Market price of similar assets
- Sector standards
The third step in determining the fair value is using the purchase and production costs as parameters for estimating the fair value. This implies that on the purchase or production date,
The asset already suffered a reduced biological transformation, or it had an insignificant influence on the assets’ value. In these 2 cases, the purchase and production costs are approximate to the fair value. The purchase and production costs of assets are determined as purchase price minus purchase price cuttings. The production costs of assets that are produced by the entity include all production costs as well as indirect costs. IAS 41 stipulates that in order to determinate the fair value, one must calculate the updated value of net cash flows resulted from the assets’ usage. This procedure is available only if the fair value of the asset cannot be realistically determined, neither it can be determined using an active market, nor the purchase and production costs are eliminated. The asset’s net cash flows will be updated using the update rate determined by the market’s variations, assuming the asset will remain the same and in the same place. The net cash flows cannot include financial or fiscal payments, or cash flows used for reproducing biological assets after the harvest. In this case, the company can conduct an independent external evaluation for determining the value using planned cash flows.
Value estimation based on market prices
In the circumstances where there is no active market for the evaluated asset, one must check for prices determined by market variations. The market prices are the most recent transaction prices, and the market prices for similar products or sector prices are transferred to production capacity. The biological assets and agricultural produce are often sold through future goods contracts. According to IASB, the buying prices established by these contracts don’t necessarily reflect the real market price, that is why is doesn’t correspond to an evaluation criterion for biological assets and agricultural produce.
Purchase or production costs and determining the updated value
Estimated point –of-sale costs
The estimated point-of-sale costs will be subtracted from the fair value, and added to commercial factorages, public payments or taxes for goods exchange markets. These costs do not include transportation expenses or similar expenses. They must be considered when calculating the asset’s fair value.
Taking the fair value minus point-of-sale costs as standard, IASB advanced the idea that the asset’s fair value outbalances the point-of-sale costs. If this idea is rejected, and the point-of-sale costs are higher than the fair value, then then the difference between the two is negative. Whereas the balance sheet does not allow negative values, the biological asset will be registered in the balance sheet as null – only if the company has no onerous contract. If the asset comes with an onerous contract, one will need to check for provisions, such as provisions for imminent losses according to IAS 37 – “Provisions, Contingent Liabilities and Contingent Assets”.
The entity must present distinctively the biological assets in its balance sheet, and must indicate the global result of its biological assets during the current period. Furthermore, the entity must present for each biological activity group, the following: description of the group, active quantities at the closure and harvests obtained during the current period, as well as fair value indicators.
Moreover, one must present the net fair value of an agricultural produce during the current period, during harvest, the financial commitments and property restrictions, a variation table of the biological assets and additional information, in case the fair value could not be realistically estimated.
IAS41 is treating the management of biological assets: increasing the agricultural output, logging, plant cultivation; horticulture and aquaculture.
The biological alteration is the process of growing, ageing, production and procreation of biological assets; these alteration lead to new agricultural produce, or transformation of other biological assets.
In addition , IAS 41 does not contain any specific information referring how often one should estimate the biological assets. we can conclude that that the estimation must be conducted on each closure, because the standard does not state any information on how frequent the estimation must be run. As explanation, IASB stated that availability of fair values on relative expected costs, and the consistent progress of biological transformation.
The fair value estimation for agricultural produce at the harvesting point is strictly controlled compared to biological assets (according to IAS 41). Therefore, harvested cereal, animal sacrifice, picked fruits will be estimated at fair value minus point-of-sale costs, even if
they cannot be realistically estimated; the estimation at production costs, due to exceptional
circumstances, is not possible, as compared to biological assets. IASB states its premises,
which states that there is an active market and a suited price for agricultural produce.
Therefore, for agricultural harvested produce held as inventories, the fair value (minus pointof-sale costs) is actually the initial value correspondent to the acquisition costs or production
costs (according to IAS 20).
The profits or losses that result from the initial recognition of agricultural produce are
shown in the profit and loss account, and they will influence the end result.
In the case of biological assets or agricultural produce that are similar, IAS 41 allows
grouping them in order to simplify the fair value estimation. The relevant characteristics for
grouping the assets are: nature, naturalness, consumption.