The Agriculture Advisory Group’s purpose is to advise the Accounting Standards Board (AcSB) on the development of authoritative guidance related to the accounting for biological assets and agricultural produce in Part II of the CPA Canada Handbook – Accounting. The Group provides advice to the AcSB but is not authorized to interpret or provide authoritative guidance on accounting standards for private enterprises (ASPE).
This document has been prepared by the staff of the AcSB and is based on discussions during the Group’s meeting. The meeting notes do not necessarily represent the views of the AcSB and nothing in them constitutes authoritative guidance on acceptable or unacceptable application of ASPE. Only the AcSB can make such a determination.
Conditions to Measure Agricultural Inventories at Net Realizable Value (NRV)
The Group discussed current practice for measuring biological assets at NRV, and the conditions that should be provided in the Board’s proposals for measuring agricultural inventories at NRV, including whether criteria similar to U.S. GAAP would be fit for purpose in Canada.
Under current practice, Group members noted that agricultural producers use a wide range of sources to determine NRV, including marketing boards, government sources, auction houses and commodity-trading houses. Overall, Group members agreed that the most appropriate are third-party, verifiable and publically available sources of prices that are regularly updated and published close to the period-end. However, Group members thought that the Board’s agriculture proposals should not be overly restrictive and should allow agricultural producers to apply professional judgment in determining where to get prices.
Regarding the proposed criteria for measuring agricultural inventories at NRV, Group members agreed that some changes to the criteria would be necessary to make the conditions fit for purpose and more consistently applied in Canada. Consequently, the majority of Group members recommended that the Board consider including the following criteria in the agriculture proposals:
- The product has a readily available, reliable and realizable market price.
- The product has predictable costs of disposal.
- The product is in a saleable condition.
In discussing these conditions, Group members thought that a long-term contract to deliver products would provide evidence of a readily available, reliable and realizable market price for that inventory. Similarly, futures markets would provide evidence of a robust market for a product. However, future contracts provide a market price for an item at a later date but would not be a realizable market price at the balance-sheet date. Further, Group members recommended applying professional judgment to determine whether inventory (e.g., an unharvested crop) is in a saleable condition.
When the conditions for measurement at NRV are no longer met, Group members agreed that the inventory should be measured at cost. In this case, they recommended that the inventory’s NRV should be its deemed cost at the date the criteria are no longer met. Some Group members thought that this scenario would be rare, because it would likely only occur if a market for the product disappeared.
The Group discussed the composition of the cost of biological assets, including the ability of agricultural producers to allocate the costs of conversion, and whether a practical expedient should be given to agricultural producers in limited circumstances to assist in determining cost.
Group members noted that there is diversity in practice regarding which costs are considered direct versus indirect, and the composition of cost can vary depending on the type of biological assets and the producer’s accounting systems and processes. One Group member noted that for crops, input costs typically include seed, fertilizer and chemicals, and for animals, input costs include the cost of the animals, feed, vaccinations and other vet costs. Another Group member noted that for poultry, input costs typically only include the cost of the chicks and feed, as vaccination costs are typically insignificant.
Some Group members noted that some costs of conversion, such as labour, fuel and fertilizer can be more difficult to allocate. However, most Group members agreed that it would be possible to allocate all costs of conversion on a rational basis. Group members observed that when agricultural guidance is first applied, entities would incur additional costs to develop a methodology for allocating costs. However, once the methodology was developed, it could be carried forward in subsequent years at little extra cost to preparers.
Group members discussed methodologies that agricultural producers could use to determine the cost of biological assets. Group members agreed agricultural producers should not be permitted to use published standard costs, because such costs would not reflect the producer’s actual costs. Further, some Group members did not support producers using the retail method, because price volatility in the agriculture industry would result in meaningless or unreliable information.
Overall, the Group did not identify any reasons why agricultural producers should be different from other entities that apply Section 3031, Inventories, such as manufacturers. Further, the Group thought guidance that allowed for the allocation of costs of conversion on a rational basis would provide agricultural producers with sufficient flexibility in determining an allocation methodology. Accordingly, Group members agreed that no practical expedient should be provided in the Board’s agriculture proposals. In support of this view, some Group members observed that full allocation of costs by agricultural producers would provide useful information to assist with the management of farm operations.
Change in Use
Group members were asked whether they had any concerns with the Board’s tentative decision regarding the guidance for change in use, including:
- providing a rebuttable presumption that assets are agriculture inventory unless they are being used in a productive capacity for more than one period;
- allowing producers to use the carrying value of assets on the date that they are transferred to a productive capacity as deemed cost; and
- making the classification of items as productive biological assets irrevocable.
Group members agreed with the Board’s tentative decisions regarding change in use. Some Group members noted that the rebuttable presumption would allow entities to choose how to account for assets at initial recognition and, therefore, would remain consistent with existing practice. Further, some Group members noted that while this rebuttable presumption would apply to the initial recognition of the costs of unborn animals, such costs are typically immaterial, and the accounting treatment would ultimately depend on how an agricultural producer groups biological assets for accounting purposes.
Group members suggested that, in order to assist stakeholders, it would be helpful to include examples following biological assets’ full life cycles in the agriculture standard to illustrate this change in use guidance.
The Group was provided with an update on the tentative decisions made by the Board to date, and was asked for feedback on those decisions. One Group member questioned the Board’s decision not to provide guidance on the presentation of unrealized gains and losses on the face of the income statement, noting that this would result in continued diversity in this area. The Board tentatively decided not to provide this guidance to be consistent with other guidance in Accounting Standards for Private Enterprises, which does not specify the presentation of similar unrealized gains and losses. However, the Board will consider adding disclosure regarding these changes when developing the disclosure requirements in the agriculture proposals.