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Arguments For And Against Fair Value Measures For Biological Assets

Arguments for and against the use of fair value as the measurement basis for biological assets and agricultural produce:The IASB decided that fair value provided more relevant information and that this information was more comparable and understandable. It also decided that fair value could usually be reliably determined but made an exception for cases where this was not possible as per IAS 41 paragraph 30.

The exception recognized that fair value may not be able to be measured reliably where market prices are not available and alternative estimates of fair value are determined to be clearly unreliable. However, this exception can only be applied on initial recognition of the biological asset.

The arguments for and against the use of fair value for measuring biological assets are summarized as follows. The arguments for the use of fair value for measuring biological assets include that:

  • many biological assets are traded in active markets and active markets provide relevant and reliable information;
  • long production cycles mean that the change in asset value is more relevant than a period-end measure of costs incurred;
  • valuation based on costs is arbitrary when there are joint products and joint costs;
  • different sources of animals and plants (e.g. home-grown or purchased) should not be measured differently which would occur if the historic cost valuation model were used rather than the fair value model.

How is the risk that future cash flows pertaining to biological assets may not eventuate as predicted, taken into account when determining the fair value of a biological asset using the present value of net cash flows method?

The risk that future cash flows from biological assets may not eventuate as predicted is taken into account when determining the fair value from such assets, by either using reduced cash flows or a higher discount rate, but not both (otherwise the effect of possible variations in anticipated cash flows would be double-counted).

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