IRFS Proposes Amendments to IAS 16 and IAS 41 for Agriculture Bearer Plants

IRFS published the Exposure Draft 2013/8 Agriculture: Bearer Plants about the amendments of IAS 16 and IAS 41. The Exposure Draft has changed the definition and accounting standards of Bearer Plants. This report will focus on outline the main changes, the advantages & disadvantage and the impact on Treasury Win Estate Ltd. Part B: Amendments of IAS 16 and IAS 41 and the main changes on Agriculture: Bearer Plants. The Bearer Plant definition

The amendment of IAS 16 has changed the definition of biological assets to the class of Property, plant, equipment that is use in an entity’s operation.

IRFS Foundation, (2013, p.12 ED) in IAS 41 analyses Bearer Plant is plant that used in agriculture process, could produce at least for one period could not be sold except for scrap sales. The definition for Bearer Plant is now changing from “livestock” to be more “properties” meaning. IAS 41 also adds Agriculture that related to bearer biological assets or also understands as “held only to bear produce” such as grape vines, bushes are accountable in IAS 16 as PPE.

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On the other hand, IAS 41 biological assets which are livestock that could be consumable such as fish, pigs are considered to be Agriculture Activity. Furthermore, IRFS Foundation, (2013, p.8 ED) highlights that Biological transformation (IAS 41) is defined as the process to growth, production and harvest that make the change in the quality and quantity of the assets. However, when considering the definition of Bearer Plant into Biological assets, it is not similar. The operation Bearer Plant is considered to be the “process of manufacturing”.

Application of IAS 16 to Bearer Plants

As Bearer Plant is removed from IAS 41 to adapt IAS 16, the fair value method is no longer used. IRFS Foundation, (2013, p.22 ED) notes that entities will use accumulate cost for bearer plant before they reach the stage of maturity or which means that bearer plants are not in the location for plant and not having the ability to bear products. The reason because the fair value method of IAS 41 is not useful to measure the bearer plants at the early years before transformation (IRFS 2013, p.22 ED). During the production stage, IAS 16 states the bearer can be accounted under the cost method or revaluation method. The adoption of the method depends on entities policies and judgements. Part C: Advantages and Disadvantages from the Amendments.

Advantages
The Expose Draft has redefined and changed the accounting treatments of Bearer Plants to be more accurate. The first reason is because the Bearer Plants usually sold for scraps after life cycle so these assets have no real markets. According to IRFS Foundation, (2013, p.17, ED) notes that the use of fair value method for Bearer Plants is complex and hard to evaluate as most Bearer Plants rarely have an active market to estimate. Moreover, the change in fair value of Bearer Plant is recorded in profit or loss account. Nevertheless, most users of the financial reports often eliminate the fair value change in profit or loss account as it is lack or relevance due to absence of market and information (IRFS Foundation, 2013, p.17, ED). Therefore, the Bearer Plant should be scope out from the Biological Assets Disadvantages

The Expose Draft is limited to cover some terms of Bearer Plant. IRFS Foundation, (2013, p.5 ED) wrote a case that a Bear Plant is growth to bear products and also could be sold as living plants such as lumber, which is separately from scrap sale. The Expose Draft accounts the bear plant in this case to be in the range of IAS 41. However, IAS 16 and IAS 41 of the Expose Draft do not cover any case from this. Ghani, et.al (2013, p.1) explain that in such case, the Expose Draft should defined a new term “Consumable bearer biological assets”. The definition would support users and entities to be more accurate and not confused users in making decision. Another disadvantage is the Expose Draft defined the Bear Plant before the stage of mature is “self-constructed” in IAS 16, paragraph 22A. The reason is the difference between the nature of bearer plant and other assets.

First, the machine could be fixed and upgradeable in their life cycle while the bearer life may take more than 20 years in the growing stage and production stage (Ghani, et.al 2013, p.2). Therefore, it is inappropriate to defined immature Bearer Plant as “self-constructed” because of uncertainty from the nature. Finally, it is difficult to use the depreciation method for Bearer Plant. EFRAG (2013, p.8) examines that bearer plant productivity base on the life cycle as it increase when it grow and decrease as it life reached. Therefore, the depreciate method of useful life or straight line method could be difficult to apply. Part D: Treasury Wine Estate and the impact of the Exposure Draft. Treasury Wine Estate has 10,511 hectares of grape vine among Australia (Treasury Wine Estate, p.98).

As the amendment of IAS 16 and 41, Treasury Wine Estate has to change the basis standard to account for bearer plants (grape vines and olives trees). Therefore, bearer plant will be included in PPE account of non-current asset. First, for the immature bearer plant, it will be classified as “in construction”, the entity need to record a new account for accumulated the cost. This account will depreciate directly to PPE account in the non-current assets of the statement of financial position. Nevertheless, the expense such as fertilise, water used for growth will be recorded in expense account in statement of comprehensive income. With this change, non- current asset will be increase and company need to accumulate depreciate for bear plants.

For mature vines and grapes, the entity will need to eliminate the fair value model of IAS 41 to adapt IAS 16.Treasury Wine could choose between the revaluation models or cost model. If Treasury Wine Estate chose the cost model, the bearer plants account will be recorded base on the cost less accumulated depreciation and impairment. The application of this method would be simple and inexpensive but it is not accurate compare to revaluation model. IASB Agenda (p.4, 2014) states that Revaluation model will ensure the carrying amount of assets not to be different from fair value at the reporting date. In addition, it is possible to apply revaluation model as there would be enough relevance information. However, the fair value of products (grapes) and entire plant are separately, accountants need to notice because there is no such market for an entire plant except crap market. Part E: Conclusion

The adaption of Exposure Draft is necessary as it improve the quality of information in financial measurement. However, as it is the first time adoption, it still have some difficult to apply. Treasury Wine Ltd will need to research and train in order to adapt the new standards.

Part F: Reference List.
European Financial Reporting Advisory Group 2013, Feedback statement on ED/2013/8 Bearer Plants, viewed May 12, . Ghani, E & Muhammad, K 2013, COMMENT ON EXPOSURE DRAFT: AGRICULTURE: BEARER PLANTS (PROPOSED AMENDMENTS TO IAS 16 AND IAS 41), viewed May 13 2014, IFRS database. International Financial Reporting Standards 2013, Agriculture: Bearer Plants Proposed amendments to IAS 16 and IAS 41, IBSN 978-1-907877-83-4, IFRS Foundation Publication Department, London. International Financial Reporting Standard 2013,

Remaining issues raised by respondents to the Exposure Draft, No. 13A, IFRS Foundation Publication Department Treasury Wine Estate 2013, Annual Report 2013, TWE, Victoria.