New accounting for bearer plants costs

SUITS THE C-SUITE By Reginaldo B. Mundo

Business World (11/03/2014 – p.S1/4)

(Second of two parts)

IN LAST WEEK’S article we explained how agricultural companies have to account for the costs of bearer plants or the aggregate of planting costs prior to harvest. We also explained how these costs are currently accounted for in the financial statements. However, concerns about accuracy and complexity prompted the International Accounting Standards Board to amend International Accounting Standard (IAS) 16, Plant, Property and Equipment, and IAS 41, Agriculture. Specifically, bearer plants will be accounted for just like any other plant, property and equipment (PPE). We now continue the discussion on the specifics on how IAS 16 will be applied to bearer plants.

IAS 16 requires elements of cost of PPE to be measured at cost at initial recognition. As such, all costs incurred before maturity of bearer plants are accumulated, just like a self-constructed PPE, until the bearer plants become available for use. Subsequent to initial recognition, an entity has the option to measure bearer plants under either the cost or revaluation model. Under the cost model of IAS 16, the progressive decline in the earnings potential of a bearer plant is similar to other depreciable assets (e.g. buildings, machinery and equipment, etc.).

Annual crops and other plants held solely for harvesting as agricultural produce are not expected to meet the definition of bearer plants. Plants that have dual use, that is, both bearing produce and the plant itself being sold as either a living plant or agricultural produce, also are not expected to meet the definition of a bearer plant. Moreover, bearer animals are excluded in the amendments to IAS 16. This means that the accounting for bearer animals is still under IAS 41.

What are the implications of the amendments to IAS 16 on an entity’s financial statements?

First, if an entity carries the bearer plants at fair value less costs to sell under IAS 41 and uses the cost model of IAS 16, the net assets are likely to decrease. Moreover, the income statements will no longer be as volatile as fair value changes are eliminated. It must be noted, though, that the impact of the fair value model under IAS 41 to income statements is variable, while IAS 16’s cost model is consistent or systematic.

Another implication is that assuming the entity uses the revaluation model of IAS 16 instead of the fair value less costs to sell of IAS 41, then the impact is only the classification, meaning the movement in fair value less costs to sell under IAS 41 affects income statements while IAS 16 affects other comprehensive income. Also, splitting bearer plants from agricultural produce affects classification. Bearer plants are expected to be non-current, while agricultural produce is current — unless the biological transformation of agricultural produce takes more than one reporting period to complete.

What are the benefits of these amendments to the users of financial statements, including investors and analysts?

• Concerns on the reliability of, and inherent risks, surrounding fair value measurement of bearer plants are eliminated, increasing comparability of financial statements among industry players. The ability to compare financial statements among industry players is relevant as it is expected that companies will adopt the cost model of IAS 16.

• Accounting for similar assets (even if they are dissimilar in form) in a similar manner enhances the usefulness of the financial information. In other words, the land where the bearer plants are growing, the related structures and machinery supporting their growth are all accounted for under IAS 16. Under current accounting, bearer plants may be carried at fair value less costs to sell while the related property and equipment, accounted for in IAS 16, is carried at cost (assuming cost model is used). The usefulness of the fair value of bearer plants is reduced in the absence of the related fair value of the similar assets used in operations (e.g. land, related structures and machinery, etc.).

• Investors, analysts and other users of the financial statements normally eliminate the effects of changes in fair value less costs to sell of bearer plants in their analysis of the financial statements. The relevant information to these users in their forecasting and analysis are the operating performance and cash flows. The distinction between bearer plants and its agricultural produce is key to promoting understandability of the financial statements. It must be noted that bearer plants are not sold, and thus will not directly affect the future cash flow potential of an entity.

The amended IAS 16 becomes effective on Jan. 1, 2016, but allows for early application as there may be a strong need to do so. As a practical consideration, the fair value less costs to sell under IAS 41 can be the ‘deemed’ cost under IAS 16. As with other items of PPE, the fair value of assets carried at cost is not a required disclosure. Finally, the requirement of IAS 8, Accounting Policies, Changes in Accounting Estimates and Errors, paragraph 28 (f) on the amount of the current period adjustment is not mandatory because requiring so would mean companies have to keep dual records (i.e. at fair value less costs to sell and at cost) in the year of adoption.

It may therefore be prudent for agricultural companies to consider transitioning to IAS 16 at the earliest possible time to mitigate any significant adjustments that may arise. Affected stakeholders may consider the costs of early adoption well worth it when considering how accounting for bearer plants will become much less complex in the future, resulting in more relevant, comparable and useful financial statements.

Reginaldo B. Mundo is a Senior Director of SGV & Co.