ACCOUNTING CHANGES FOR BEARER PLANTS IN THE AGRICULTURAL SECTOR

Bearer plants related to agricultural activity are classified as property, plant and equipment
under MFRS116 in the current financial period. (Effective date: For annual periods beginning
on or after 1 January 2016). Previously, these would have been classified as biological
assets along with the produce they bear, and valued at fair value per MFRS141. Produce
continues to be classified as biological assets.

What is a bearer plant?

MFRS141 defines a bearer plant as a living plant that:

 is used in the production or supply of agricultural produce;

 is expected to bear produce for more than one period; and

 has a remote likelihood of being sold as agricultural produce, except for incidental
scrap sales.

Specific items that will not qualify as bearer plants include:

 trees grown for use as lumber, or other plants cultivated to be harvested as

agricultural produce;

 trees cultivated for both fruit and lumber, therefore having more than a remote
likelihood of being sold; and

 annual crops such as maize and wheat.

Note that incidental scrap sales are allowed, for example, when trees no longer bear produce
and are sold as firewood.

Produce growing on bearer plants is still required to be fair valued under MFRS141.
Effect of changes

According to MFRS141, biological assets are measured at fair value. Classifying the bearer
plants as property, plant and equipment (PPE) per MFRS116 allows the preparer to value
the bearer plants at cost, less subsequent depreciation or impairment or at a revalued
amount.

Effect Fair value model in Cost model in Effect

MFRS141 MFRS116

Financial Measured at fair value Measured at cost less Net asset amounts are likely to
position less costs to sell any accumulated be lower for the cost model
(together with the depreciation and any than the fair value model during
produce). accumulated impairment the earlier part of the productive
losses. (Produce life of a bearer plant. This is
measured separately at because the future cash flows
fair value less costs to that can be generated by the
sell) bearer plant, and reflected in a
fair value measurement, will
likely be higher than the cost on
initial recognition. Over time,
the carrying amounts measured
in accordance with the two
models are expected to
converge as the asset
approaches the end of its
productive life.

Profit or Changes in fair value The depreciation charge Over the life of the bearer
loss less costs to sell are for each period, and any plants, the net amount
recognised in profit or impairment loss, will be recognised in profit or loss will
loss. Costs may be recognised in profit or likely be the same, whether
recognised as an loss. applying the fair value model or
expense immediately the cost model. However, if an
or capitalised. If they entity applies the fair value
are capitalised, there is model, the effect on profit or
an equal reduction in loss will be variable (changes in
the change in the fair fair value). If an entity applies
value, less costs to the cost model, the effect on
sell. profit or loss is likely to be more
systematic (depreciation, with
possible impairment).

Source: ifrs.org - IAS 16: Property, Plant and Equipment: Basis for conclusion
No additional disclosure requirements were added specifically for bearer plants. MFRS116
disclosure is, therefore, applicable.

MFRS116 requires the recoverable amount of an item of PPE or cash generating unit to be
estimated only if there are indicators of impairment at the reporting date. In general, the
bearer plants do not generate cash flows independently of the land, and may therefore be
seen together with the land as a cash-generating unit. The impairment test would then also
take place at the level of the cash-generating unit (thus bearer plants and land it is situated
on).

Transitional provisions

Fair value less cost to sell can be used as deemed cost for items of bearer plants at the
beginning of the earliest comparative period presented in the financial statements. Therefore,
the fair value must be measured at that date. Any difference between the previous carrying
amount and that fair value shall be recognised in opening retained earnings at the beginning
of the earliest period presented.

In the reporting period when Agriculture: Bearer Plants (Amendments to MFRS116 and
MFRS141) is first applied an entity need not disclose, for the current period, the amount of
the adjustment for each financial statement line item due to initial application of the IFRS.
This must, however, be disclosed for each prior period presented.
Why the change?

Biological assets are measured at fair value to correctly reflect the future economic benefits
that will be received from the biological transformation. Mature bearer plants are, however,
fully grown and biological transformation is no longer significant in generating future
economic benefits. Bearer plants are solely used to grow produce over several periods and
then usually scrapped.

This is similar to the use of machinery to manufacture goods. The progressive decline in the
future earning potential of a bearer plant over its life is also similar to other depreciable
assets. Land upon which bearer plants are growing, the structures used to support their
growth are measured under PPE.

Cost and effort implications

By permitting a cost model, the amendments are expected to significantly reduce the costs
for preparers of financial statements. Produce still needs to be measured at fair value.
However, it is expected that the fair value of produce is more easily attainable due to the
nature thereof than that of bearer plants that are never sold other than incidental scrap sales.

Entities will now determine the useful life of the bearer plant in order to calculate
depreciation, as well as test for impairment as described earlier when indicators exist.
Despite these additional efforts required, overall there will be a cost and effort saving when
using the cost model.

A study that was done by the standards board indicated that investors and other users of
financial statement rarely used the fair value of bearer plants when making decisions.
Instead, additional information given in accompanying documents such as the directors’
report were of more assistance, including information such as the yield, acreage and age of
bearer plants.

Challenges with implementation

The biggest uncertainty with the new approach relates to the costing of the bearer plants.
This should be approached similarly to the approach for self-constructed PPE, before they
are in the location and condition necessary to be capable of operating in the manner
intended by management. Consequently, references to construction in the standard should
be read as covering activities that are necessary to cultivate the bearer plants before they
are in the location and condition necessary to be capable of operating in the manner
intended by management (i.e. reaches maturity).

Before maturity, bearer plants will be measured at their accumulated cost, similar to the
accounting treatment for a self-constructed item of plant and equipment before it is “available
for use”.

Subsequent costs would need to be considered under the ordinary capitalisation

requirements of MFRS116, and should be expensed unless they enhance the future
economic benefits of the asset.

Entities are likely to have to determine their own accounting policies for determining when a
bearer plant reaches maturity, as judgement will be required to determine for each type of
bearer plant.

The standard (MFRS116) includes the following in the accumulated cost of the bearer
plant:

 its purchase price, including import duties and non-refundable purchase taxes, after
deducting trade discounts and rebates.

 any costs directly attributable to bringing the asset to the location and condition
necessary for it to be capable of operating in the manner intended by management.

 the initial estimate of the costs of dismantling and removing the item and restoring the
site on which it is located.

There is no guidance specifically addressing which costs should be capitalised in the case of
a bearer plant, so all costs need to be measured against the above criteria and the
capitalisation or expense thereof will depend on the facts and circumstances. Apart from the
purchase price, as mentioned at point (a), consideration should be given to irrigation,
fertilisation and soil preparation. Furthermore, one may consider including labour costs
directly attributable to the planting of the bearer plants, and possibly even the cost of
installing an irrigation system, if the system is used solely for the bearer plants. A word of
caution must be made, however, that professional judgement, on a case-by-case basis, will
be needed to determine specifically which costs qualify for inclusion in capital.