Measurement: Fair Value Less Costs to Sell
Chapter Twelve
Syllabus topic 8, "Measurement"
Pages 24 to 26 of 110
The two rules
Paragraph 12, on the biological asset, in bold:
A biological asset shall be measured on initial recognition and at the end of each reporting period at its fair value less costs to sell, except for the case described in paragraph 30 where the fair value cannot be measured reliably.
Paragraph 13, on the produce, in bold:
Agricultural produce harvested from an entity's biological assets shall be measured at its fair value less costs to sell at the point of harvest. Such measurement is the cost at that date when applying Ind AS 2 Inventories or another applicable Standard.
Read them together and the difference is the frequency.
| Biological asset | Agricultural produce | |
|---|---|---|
| Measured | On initial recognition and at the end of every reporting period | Once, at the point of harvest |
| At | Fair value less costs to sell | Fair value less costs to sell |
| Then | Remeasured again next period | Becomes the cost for Ind AS 2 |
| Exception | Paragraph 30, where fair value cannot be measured reliably | None. Paragraph 32 says it can always be measured reliably |
The last row of that table is the one to remember. There is no cost model for agricultural produce.
Fair value less costs to sell, computed
Fair value is defined in paragraph 8 by reference to Ind AS 113. Costs to sell are defined in paragraph 5.
Fair value less costs to sell = the market price of the asset in its present condition and location, less the incremental costs directly attributable to selling it.
Sunehra Farms holds 400 quintals of standing wheat at 31 March 2027, three weeks from harvest.
| Rs. | |
|---|---|
| Market price of standing wheat, 400 quintals at Rs. 2,150 | 8,60,000 |
| Less: commission to the mandi agent, 2 per cent | 17,200 |
| Less: mandi cess and levies, 1 per cent | 8,600 |
| Fair value less costs to sell | 8,34,200 |
Note what is not deducted. Not the transport to the mandi, which is part of arriving at the price for the asset in its present location. Not the remaining three weeks of irrigation, because paragraph 22 excludes the cost of getting the asset to its future condition. Not interest on the crop loan, because finance costs are outside the paragraph 5 definition. Not income tax, for the same reason.
Paragraph 15: group by attribute
The fair value measurement of a biological asset or agricultural produce may be facilitated by grouping biological assets or agricultural produce according to significant attributes; for example, by age or quality. An entity selects the attributes corresponding to the attributes used in the market as a basis for pricing.
The grouping must follow the market, not the farm's convenience. If the cattle market prices by age and weight, the herd is grouped by age and weight.
Measurement: Fair Value Less Costs to Sell
Paragraph 16: a contract price is not fair value
Entities often enter into contracts to sell their biological assets or agricultural produce at a future date. Contract prices are not necessarily relevant in measuring fair value, because fair value reflects the current market conditions in which market participant buyers and sellers would enter into a transaction. As a result, the fair value of a biological asset or agricultural produce is not adjusted because of the existence of a contract.
This is examinable and it is counter-intuitive. A farm that has contracted to sell its wheat at Rs. 2,400 still measures the wheat at the current market Rs. 2,150. The contract does not change what the asset is worth today.
Paragraph 16 adds the consequence:
In some cases, a contract for the sale of a biological asset or agricultural produce may be an onerous contract, as defined in Ind AS 37 Provisions, Contingent Liabilities and Contingent Assets. Ind AS 37 applies to onerous contracts.
So a contract at Rs. 1,900 when the market is Rs. 2,150 does not reduce the asset. It may create a provision under Ind AS 37 instead.
Paragraph 22: three things the cash flows exclude
An entity does not include any cash flows for financing the assets, taxation, or re-establishing biological assets after harvest (for example, the cost of replanting trees in a plantation forest after harvest).
Financing, taxation and replanting. The third is the one people miss: a forestry company measuring its standing timber does not deduct what it will cost to replant the felled area.
Paragraph 24: when cost approximates fair value
Cost may sometimes approximate fair value, particularly when:
(a) little biological transformation has taken place since initial cost incurrence (for example, for seedlings planted immediately prior to the end of a reporting period or newly acquired livestock); or
(b) the impact of the biological transformation on price is not expected to be material (for example, for the initial growth in a 30-year pine plantation production cycle).
This is not a cost model. The measurement basis is still fair value less costs to sell. Paragraph 24 says only that in these two situations the recent cost is good evidence of it. Seedlings planted in the last week of March and cattle bought in the last week of March are the standard examples.
Paragraph 25: assets attached to land
Biological assets are often physically attached to land (for example, trees in a plantation forest). There may be no separate market for biological assets that are attached to the land but an active market may exist for the combined assets, that is, the biological assets, raw land, and land improvements, as a package. An entity may use information regarding the combined assets to measure the fair value of the biological assets. For example, the fair value of raw land and land improvements may be deducted from the fair value of the combined assets to arrive at the fair value of biological assets.
Measurement: Fair Value Less Costs to Sell
A subtraction, and it is worth a worked line. A forest holding sells as a package for Rs. 90,00,000. Comparable raw land with the same improvements and no trees sells for Rs. 34,00,000. The fair value of the standing timber is Rs. 56,00,000.
This paragraph matters because land is outside Ind AS 41 by paragraph 2(a) but is inseparable from the trees in the market. The package gives the price; the subtraction gives the biological asset.
The one-line summary
Fair value less costs to sell, at every reporting date for the living asset, once at harvest for the produce, using the market's own grouping, ignoring the contract the farm has signed, and excluding financing, tax and replanting.
The rest of this subject
These notes are cut from the University's printed syllabus. Open the syllabus itself, or the past papers, for the same subject.