Introduction

Searchmore Satimburwa wrote to me with the following interesting information and questions:

We run a large scale crocodile farm. Basically the crocodiles are meant to be culled when they get to 18 months. The skins and the meat are the key agricultural produces. besides keeping these crocodiles  for culling, we also have breeding crocodiles. Furthermore we collect crocodile eggs from the wild and procure some from third parties for incubation. The crocodile skins and meat are sold to the Far East and Europe ...
 
Now if we are to adopt IAS 41:
 
a) - How best can we get a fair value for the breeding stock (bearer biological assets) and eggs collected?
 
b) - How best can we value our live crocodile stock (consumer biological assets) which will later be culled for meat and skin exports?
 
Here are my responses to Searchmore's questions:

Firstly, IAS 41: Agriculture seems to be quite clear on a number of issues; but I have to admit that it sometimes takes a bit of practice to understand fully what its rule are saying.

Main and By Products

We need to point out that a simple search on the internet of the valuation of biological assets such as Crocodiles turned up the idea that the skins will be the main product and the meat will be a by product. The concept of main, joint and by products is not an unusual one and we would need to consider whether it's important here.

Searchmore might consider having the skins and the meat as joint products in his case, rather than main and by products as my research suggests.

The main, joint and by products argument is important since it will have a significant impact on valuation: from a cost and management accounting point of view, and therefore internal control, this is vital, too.

Paragraph 4 of IAS 41 gives us a very useful table that we have given part of that table and added to it by providing examples from Crocodile farming:

Biological Assets	Agricultural Produce	Products that are the result of processing after harvest
Crocodiles	Skin; meat	Handbags, Shoes; Croc Burgers
Sheep	Wool	Yarn, carpet
Trees in a plantation forest	Logs	Lumber
Plants	Cotton; harvested cane	Thread, clothing; sugar
Dairy Cattle	Milk	Cheese
Pigs	...	...
Bushes	...	...
Vines	...	...
Fruit Trees	...	...

(From IAS 41 paragraph 4 apart from the Crocodile information)

Fair Values

IAS 41 lays down very strict rules as to how we ought to value biological assets: fair value is the key word that we need to get to grips with in the context of valuing such assets.

Fair value is the amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm’s length transaction.
(IAS 41: Agriculture paragraph 8)

Not a difficult definition to deal with: however, it does give rise to a number of issues that we can explore by referring to other paragraphs from IAS 41:

An active market is a market where all the following conditions exist:

(a) the items traded within the market are homogeneous;
(b) willing buyers and sellers can normally be found at any time; and
(c) prices are available to the public.
(IAS 41: Agriculture paragraph 8)

IAS 41: Agriculture paragraph 17 says:

If an active market exists for a biological asset or agricultural produce, the quoted price in that market is the appropriate basis for determining the fair value of that asset. If an enterprise has access to different active markets, the enterprise uses the most relevant one. For example, if an enterprise has access to two active markets, it would use the price existing in the market expected to be used.

What does IAS 41: Agriculture say we must do when arriving at fair values when an active market does not exist? Paragraph 18 of IAS 41: Agriculture gives us clear guidance on what to do when there is no active market for the biological assets or agricultural produce we may be dealing in:

If an active market does not exist, an enterprise uses one or more of the following, when available, in determining fair value:

(a) the most recent market transaction price, provided that there has not been a significant change in economic circumstances between the date of that transaction and the balance sheet date;
(b) market prices for similar assets with adjustment to reflect differences; and
(c) sector benchmarks such as the value of an orchard expressed per export tray, bushel, or hectare, and the value of cattle expressed per kilogram of meat.

IAS 41 also spells out how and where these fair values are to be applied in the context of the valuation of biological assets.

A biological asset should be measured on initial recognition and at each balance sheet date at its fair value less estimated point of sale costs, except for the case described in paragraph 30 where the fair value cannot be measured reliably.
(IAS 41: Agriculture paragraph 12)
Agricultural produce harvested from an enterprise’s biological assets should be measured at its fair value less estimated point of sale costs at the point of harvest. Such measurement is the cost at that date when applying IAS 2, Inventories, or another applicable International Accounting Standard.
(IAS 41: Agriculture paragraph 13)

This doesn't give us all of the answers we need; but it does give us the basic groundwork. We now know the difference between biological assets, aggricultural produce and products that are the result of processing after harvest; we now know what fair value is; and we know about active markets, and what to do when there are no active markets, that would help us to value biological assets.

How to Value Crocodiles then?

The outcome of the above is that we now have a framework for valuing our crocodiles; and here is a checklist of how to go about it.

decide on the main, joint and by product issues
determine fair values for the assets

these values will arise from active market values
these values will not relate to active market values

if there is no active market for the assets:

look for the most recent transaction prices providing those prices are still relevant
look for prices for similar assets ... antelope or giraffe ... Searchmore must determine which assets are similar

if we have still failed to determine a fair value then we need to calculate the present value of expected cash flows from the asset discounted at a current market determine pre tax rate.

Conclusions

The valuation of biological assets is well documented in IAS 41: Agriculture. However, there is not a lot of direct help in the Standard, or elsewhere for that matter, for people such as Searchmore as to how to implement the Standard. This page has, we can but hope, given sufficient guidance on how to begin to implement IAS 41.

What we have tried to do here is to identify the major issues that someone such as Searchmore will face and then we have provided a step by step analysis of what needs to be done to value biological assets such as Crocodiles.

What we need to do now is to research the relevant markets and find the fair values we need: in accordance with the checklist we have provided.

© Duncan Williamson
7 November 2002