Comments from ACCA to the International Accounting Standards Board (IASB), 21 October 2013.
ACCA agrees with the ED’s main proposal that bearer plants should be recognised at cost in accordance with IAS 16, rather than fair value as currently. We concur with the view that the mature plants or trees are not produce (as they are not themselves harvested, or grown to be sold), but are a means of creating produce over more than one accounting period.
We also concur that it is appropriate to apply the principles of IAS 16 ‘Property, Plant and Equipment’ to bearer plants, including the option of adopting either a cost or revaluation model. Before bearer plants reach maturity, they will therefore be measured at accumulated cost (as is the case with self-constructed manufacturing plant).
As mentioned in our specific comments below, ACCA does, however, believe that further guidance is required on the measurement of the additional costs of bearer plants. Notwithstanding the applicability of its principles to bearer plants, IAS 16 was not produced with these in mind, and consequently needs additional content.
In particular, the guidance needs to cover costs incurred as the plants undergo biological transformation in the process of growing to maturity. The potential complications in measuring these costs have hitherto mainly been avoided through the recognition of the plants at fair value.
We note that two members of the IASB disagree with the proposals in the ED. They believe that the preparers and users of the financial statements need fair value information on bearer plants, in order to gauge future cash flows. As set out in our responses to Questions 6 and 7 below, ACCA agrees that proportionate additional disclosures, particularly around fair values, are important for the users of the financial statements. However, we do not agree that the disclosure requirements should extend as far as undertaking the task of establishing fair values for bearer plants.
Finally, in our response to Question 10 below, we comment on the applicability of the proposals to animals as well as plants. The IASB might wish to consider this matter during a further project in the future.
We now comment on the specific questions raised in the ED, as follows:
The IASB proposes to restrict the scope of the proposed amendments to bearer plants. The proposals define a bearer plant as a plant that is used in the production or supply of agricultural produce, that is expected to bear produce for more than one period and that is not intended to be sold as a living plant or harvested as agricultural produce, except for incidental scrap sales.
Under the proposals, if an entity grows plants both to bear produce and for sale as living plants or agricultural produce, apart from incidental scrap sales, it must continue to account for those plants within the scope of IAS 41 at fair value less costs to sell in their entirety (for example, trees that are cultivated for their lumber as well as their fruit).
Do you agree with the scope of the amendments? If not, why and how would you define the scope?
We agree with the scope of the amendments with respect to plants. The IASB is making a distinction between those plants which are themselves sold to generate revenue (and so represent produce), and those which are not, and are grown solely because over more than one period they bear produce which generates the revenue.
Please also see our response to Question 10 below concerning animals.
The IASB proposes that before bearer plants are placed into production (ie before they reach maturity and bear fruit) they should be measured at accumulated cost. This would mean that bearer plants are accounted for in the same way as self-constructed items of machinery.
Do you agree with this accounting treatment for bearer plants before they reach maturity? If not, why and what alternative approach do you recommend?
ACCA agrees with the principle that during the period to maturity, bearer plants should be accounted for at accumulated cost. This is the case for self-constructed plant and machinery, which have similarities with bearer plants, and we also note the reasons of usefulness and practicality with regard to the cost basis, as opposed to fair value, set out in the Basis for Conclusions (paras BC23 – BC25).
Some crops, such as sugar cane, are perennial plants because their roots remain in the ground to sprout for the next period’s crop. Under the proposals, if an entity retains the roots to bear produce for more than one period, the roots would meet the definition of a bearer plant.
The IASB believes that in most cases the effect of accounting for the roots separately under IAS 16 would not be material and the IASB does not therefore believe that specific guidance is required.
Do you think any additional guidance is required to apply the proposals to such perennial crops? If so, what additional guidance should be provided and why?
ACCA agrees with the proposals in respect of crops whose roots are left, as they can bear produce in more than one period. They contrast with annual crops, which require seeding each season.
For crops whose roots are left to generate produce in future seasons, the bearer plant is represented by the roots below ground, whilst the growth above ground is removed each year as produce. We do not see a need for additional guidance to establish or explain this principle (but please see our comments on the need for guidance on bearer plants generally, in our response to Question 5 below).
The impact of accounting for the roots separately under IAS 16 depends on the costs incurred to maturity of the roots. These costs may be material, especially where the plants take several years to establish themselves and bear produce. It would consequently be helpful for the IASB to explain why it considers that the effect of the proposed change would mostly not be material.
The IASB proposes to include bearer plants within the scope of IAS 16. Consequently, entities would be permitted to choose either the cost model or the revaluation model for mature bearer plants subject to the requirements in IAS 16. All other biological assets related to agricultural activity will remain under the fair value model in IAS 41.
Do you agree that bearer plants should be accounted for in accordance with IAS 16? Why or why not? If not, what alternative approach do you recommend?
In concurring with the proposal to account for bearer plants in accordance with IAS 16, ACCA also agrees that holders of bearer plant should have the option to adopt, for the entire class of assets, either the cost or revaluation model, as can be done for plant and equipment.
We acknowledge that, as mentioned in para BC48 of the ED, the revaluation model is much less likely to be used than the cost model.
The IASB proposes that the recognition and measurement requirements of IAS 16 can be applied to bearer plants without modification.
Are there any requirements in IAS 16 that require additional guidance in order to be applied to bearer plants? If so, in what way is the current guidance in IAS 16 insufficient and why?
The intention to adopt IAS 16 without modification indicates that the cost elements for plant set out in IAS 16 are considered to be suitable for bearer plants as well.
As set out in our response to Question 2 above, ACCA agrees with the principle that during the period to maturity, bearer plants should be accounted for at accumulated cost, as for standard plant and machinery. However, we do view the guidance in paras 17 and 19 of IAS 16 as being more appropriate to the acquisition and setting-up of standard plant and equipment than to bearer plants, which are of a different physical nature, and usually take longer to reach the point of productiveness.
The initial costs of seeds or seedlings will be clearly identifiable. During the period to maturity, an entity would recognise ‘directly attributable costs’, of which examples are given in para 17 of IAS 16. Other than labour costs, these examples are more relevant to standard plant and equipment than to bearer plants. This issue becomes of particular importance where subsequent costs to maturity of the plant are high, due to a long maturity period.
Rent and business taxes on the land occupied by the asset are overheads not included in the cost of standard plant. However, these could be viewed, at least in part, as costs to be capitalised during the period to maturity of a bearer plant, as the land both nurtures the plants and cannot be used for another purpose whilst the plants are on it. Consequently, its costs can be considered directly attributable to the bearer plants.
At the same time, the subsequent costs attributable to bearer plants can have an element of wastage, or may vary in their impact. An example of the former is irrigation, where not all of the water used benefits the bearer plants. An example of the latter is where the topography of the land results in varying plant productivity.
Consequently, we believe that the IASB needs to provide additional guidance regarding the capitalisation of costs incurred during the period to maturity of bearer plants, for example:
Finally, bearer plants recognised at cost are not excluded from the scope of IAS 36 ‘Impairment of Assets’. ACCA therefore recommends that the IASB also considers whether the provisions of IAS 36 adequately cover bearer plants.
Do you think either of the following types of disclosures about bearer plants should be required if they are accounted for under the cost model in IAS 16 - why or why not:
a) disclosure of the total fair value of the bearer plants, including information about the valuation techniques and the key inputs/assumptions used; or
b) disclosure of the significant inputs that would be required to determine the fair value of bearer plants, but without the need to measure or disclose the fair value of them?
We do not agree that entities adopting IAS 16 for bearer plants should be required to disclose fair value information for those assets in accordance with a) above. If it is considered more relevant to adopt the cost model under IAS 16 for bearer plants, it is likely to be burdensome to require, in addition, the establishment and disclosure of the fair value information. This would especially be the case for the level of detail indicated by a) above.
In any event, an entity adopting IAS16 for bearer plants will have the option of revaluing the plants (and making the associated disclosures), if this treatment is considered to be more useful, and the information is available.
ACCA does see relevance in making disclosures in a reduced form, as set out in b) above. We have amplified this view in our response to Question 7 below.
Many investors and analysts consulted during the user outreach said that instead of using the fair value information about bearer plants they use other information, for example, disclosures about productivity, including age profiles, estimates of the physical quantities of bearer plants and output of agricultural produce. They currently acquire this information via presentations made to analysts, from additional information provided by management in annual reports (for example, in the Management Commentary) or directly from companies.
Do you think any disclosures for bearer plants, apart from those covered in Question 6, should be required in addition to those in IAS 16? If so, what and why?
ACCA supports the making of disclosures in a reduced form (compared to full fair value disclosures), if they accord with the objectives of providing information relevant to a large number of users of financial statements, without unduly increasing time or costs for preparers. For example, information related to values over the life cycle of the plants will indicate the timing of future income and cash flows, and fluctuations in these.
Furthermore, we believe that when considering the needs of users, the IASB should have particular regard to those users identified in paragraph OB2 of Chapter 1 of the Conceptual Framework. We would hope that the IASB will be able, from the responses which it has received, to identify which additional disclosures meet these criteria, and which conversely, are unlikely to do so.
The IASB has been examining the quantity and relevance of disclosure generally, and its work is currently at an early stage, as reported in its document issued in May 2013: “Discussion Forum – Financial Reporting Disclosure: Feedback Statement”. We believe that pending the outcome of further work on this project on disclosure, it would be advisable for the IASB to consider limiting the additional disclosures to the principal needs identified, whilst also bearing in mind the additional compliance costs for preparers.
The IASB proposes to permit an entity to use the fair value of an item of bearer plants as its deemed cost at the start of the earliest comparative period presented in the first financial statements in which the entity applies the amendments to IAS 16. The election would be available on an item-by-item basis. The IASB also plans to permit early application of the amendments to IAS 16 and IAS 41.
Do you agree with the proposed transition provisions? If not, why and what alternative do you propose?
ACCA supports permitting the early adoption of the proposals, and also the retrospective application of new or amended Standards (as is also proposed by the ED), wherever it is practicable to do so.
An entity may have a range of bearer plants, with widely differing periods between planting and maturity, depending on the nature of the plant. For plants which take many years to reach maturity, it may be very difficult to establish accurate original cost data after years of applying the fair value provisions of IAS 41. Consequently, if the term ‘item’ refers to a type of bearer plant, such as trees producing a particular variety of apple, we would support the option for the use of fair value as deemed cost on transition on an item-by–item basis, as set out above.
The IASB proposes that the deemed cost exemption provided for an item of property, plant and equipment in IFRS 1 First-time Adoption of International Financial Reporting Standards should also be available for an item of bearer plants.
Do you agree with the proposed transition provisions for first-time adopters? If not, why and what alternative do you propose?
We agree with the above proposal for first-time adopters, for the same reasons of practicality as in our response to Question 8 above. Furthermore, there appears to be no reason why this exemption in respect of assets should apply to the property, plant and equipment currently covered by IAS 16, but not to bearer plants as well.
Do you have any other comments on the proposals?
The ED is restricted to plants. However, it appears that it would also be relevant to animals which have similar characteristics to bearer plants, such as laying hens and horses held for breeding. We hope that the IASB will consider this matter in the future, but acknowledge that this would preferably be done as a separate process, in order to avoid delaying the finalisation of the current ED.